Exhibit 10.5
TAX LIABILITY LETTER AGREEMENT
This Tax Liability Letter Agreement ("Tax Agreement"), effective
October 19, 2001 (the "Agreement Date"), is entered into by xXxxxx.xxx.
Inc., a Delaware corporation ("eDiets"), XXXXXX X. XXXXX ("Xxxxx") and
XXXXXX X. XXXXX-ONA ("Xxxxx-Ona") (Xxxxx and Xxxxx-Ona are collectively the
"Principal Stockholders"). The parties hereby agree as follows:
Relationship to the Agreement and Plan of Merger. All capitalized terms
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used herein but not defined shall have the meaning set forth in the
AGREEMENT AND PLAN OF MERGER dated as of October 1, 2001 (the "Agreement")
among XXXXXX.XXX, INC., a Delaware corporation ("eDiets"), DIETSMART
ACQUISITION CORP., a Delaware corporation and a wholly-owned subsidiary of
eDiets ("Newco"), XXXXX X. XXXXXX ("Humble"), DIETSMART, INC., a Delaware
corporation ("DietSmart") XXXXXX X. XXXXX ("Xxxxx"), XXXXXX X. XXXXX
("Xxxxx") and XXXXXX X. XXXXX-ONA ("Xxxxx-Ona").
1. Tax Liability Loan; Stock Pledge.
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(a) If for any reason or no reason, the Merger is determined not
to be a tax-free reorganization within the meaning of the Code, and Xxxxx
and Xxxxx-Ona recognize gain or income with respect to the receipt of the
Share Consideration paid in exchange for their DietSmart securities, and
the Cash Consideration has not been paid to the DietSmart Stockholders,
Certain Option Holders and/or the Escrow Agent in accordance with Section
1.6 (c) (i)-(v) of the Agreement, then eDiets will loan to each of Xxxxx
and Xxxxx-Ona, individually, sufficient monies to satisfy their respective
tax liabilities resulting from the receipt of the Share Consideration. Any
loan received by either or both of Xxxxx and Xxxxx-Ona shall be secured by
the foregoing individuals through the pledge to eDiets of a fixed number of
eDiets securities equal to the cash value of the loan when made. Any loan
made will accrue interest at a rate of 6% per annum compounded quarterly
and will be due on the earlier of the third anniversary of the date loan
was made or the sale of any additional eDiets shares held by either or both
of Xxxxx and Xxxxx-Ona or the exercise of any options held by Xxxxx (with
respect to the loan made to her) or Xxxxx-Ona (with respect to the loan
made to him). There will be no penalty for prepayment. In no event shall
eDiets make a loan to Xxxxx and Xxxxx-Ona after the last installment of the
Cash Consideration has been paid to the DietSmart Stockholders, Certain
Option Holders and/or Escrow Agent.
(b) The per share value of eDiets securities for purposes of
determining the number of shares to be pledged in exchange for a loan shall
be determined as follows: (i) if eDiets Common Stock is publicly traded,
then the per share value shall be the closing price in the eDiets stock
trading market on the date that the Internal Revenue Service has assessed a
tax liability that is the subject of the loan; or (ii) if eDiets Common
Stock ceases to trade on the over-the-counter Bulletin Board or any other
nationally recognized stock exchange, the per share value of eDiets
securities shall be determined as follows: (a) by negotiation between
eDiets and Xxxxx and Xxxxx-Ona of a mutually acceptable per share value; or
(b) by an appraisal of the securities made by an
independent appraiser of Xxxxx and Xxxxx-Ona's choosing, at their expense,
provided, however, that the appraiser shall be a person or firm
knowledgeable and experienced in valuations of this type and eDiets will
not unreasonably withhold its consent to the appointment of the appraiser
chosen by the both of Xxxxx and Xxxxx-Ona. In the event that eDiets does
not consent to the appointment of the appraiser chosen by the both of Xxxxx
and Xxxxx-Ona, the parties agree to submit the dispute to arbitration in
accordance with the provision of Section 17.8 of the Agreement, and the
arbitrator will select the appraiser.
(c) If at the time a loan is made pursuant to this Tax Agreement
there has not been a final disposition of the Xxxxxx Litigation, then any
amounts payable by Xxxxx and/or Xxxxx-Ona pursuant to the last sentence of
Section 9.5(a) of the Agreement (the "Xxxxxx Personal Liability
Obligation") may at the option of Xxxxx and/or Xxxxx-Ona, be satisfied, by
(i) the return to eDiets of a proportionate number of shares of eDiets
Common Stock equal in value to the amount to each of Xxxxx and Xxxxx-Ona's
pro-rata share of the Xxxxxx Personal Liability Obligation; or (ii) in
cash. For purposes of this Section 1 (c) should either or both of Xxxxx and
Xxxxx-Ona elect to satisfy the Xxxxxx Personal Liability Obligation through
the surrender of a proportionate share of his or her eDiets Common Stock or
the exercise of his or her eDiets options, the value of eDiets Common Stock
shall be determined as of the date the Xxxxxx Personal Liability Obligation
arises and in the same manner as provided in Section 1(b) above.
(d) In the event that Xxxxx and/or Xxxxx-Ona have pledged all of
the Share Consideration received by each of them to secure the loan
advanced pursuant to Section 1(a), then Xxxxx and/or Xxxxx-Ona shall have
no further Xxxxxx Personal Liability Obligation pursuant to Section 9.5(a)
of the Agreement. In addition, in the event that the aggregate value of the
shares returned to eDiets, pursuant to Section 1(a), is less than the
amount of the Xxxxxx Personal Liability Obligation of Xxxxx and/or Xxxxx-
Ona, she and/or he shall have no further Xxxxxx Personal Liability
Obligation. In the event, however, that the aggregate value of Xxxxx'x
and/or Xxxxx-Ona's shares are insufficient to pay her and/or his Xxxxxx
Personal Liability Obligation because she or he have sold or transferred
eDiets shares, then any excess amounts of the Xxxxxx Personal Liability
Obligation over the value of the shares returned shall be paid by Xxxxx
and/or Xxxxx-Ona in cash.
(e) If either or both of Xxxxx and Xxxxx-Ona shall have sold
shares of eDiets Common Stock, which when received represented Share
Consideration in the Merger, prior to the time that either or both incur a
tax liability as described in Section 1(a) above, then any loan made
hereunder shall be reduced dollar for dollar by the amount of the net
after-tax proceeds realized by either or both of them on the sale(s) of
such eDiets Common Stock.
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IN WITNESS WHEREOF, the parties have caused this Tax Agreement to be executed by
their duly authorized representatives on the dates indicated below.
XXXXXX.XXX, INC. XXXXXX X. XXXXX
By: /s/ Xxxxx X Xxxxxx Sign: /s/ Xxxxxx X. Xxxxx
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Name:______________________ Name:___________________________
(Please print) (Please print)
Title:_____________________ Date:___________________________
Date:______________________
XXXXXX X. XXXXX-ONA
Sign: /s/ Xxxxxx X. Xxxxx-Ona
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Name:___________________________
(Please print)
Date:___________________________
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