Rosens settle Mega Brands suit
By Staff -- Playthings, 11/9/2009 7:56:00 AM
Rose Art's former owners, Lawrence, Jeffrey and Sydney Rosen, filed suit in 2006 claiming earnout payments and damages relating to Mega Brands’ acquisition of Rose Art. Mega Brands countersued claiming the Rosens withheld and misrepresented information about defects in the Magnetix product line purchased as part of the transaction.
The first of several costly safety recalls of Magnetix products followed shortly after Mega Brands' Rose Art purchase was completed.
"This is great news for our company. The settlement validates our long-standing view that serious defects in Magnetix were not disclosed to Mega Brands before it acquired Rose Art. It also justifies the company's decision to dispute the Rosens' claim to an earnout," said Marc Bertrand, President and CEO of Mega Brands. "A settlement of this magnitude mid-trial speaks volumes to the merits of our case."
Under the terms of the settlement, Mega Brands will receive cash of approximately $17.2 million. In addition, the Rosens forego all claims for additional consideration, which totalled $54.8 million. As a result, Mega Brands will record a recovery of $72 million in its results for the third quarter ended Sept. 30, 2009.
UPDATE – 11:35 AM EST:
For their part, the Rosens said that they agreed to drop their earnout claim in the face of “the worsening of Mega Brands’ already bleak financial condition, Moody’s downgrade of the company to a junk rating and the increasing prospects of Mega Brands filing for bankruptcy.” They added that “the collection of such a large judgment against Mega Brands would be impossible and would not justify incurring further legal costs in the litigation.”
This week's settlement will allow the Rosens to recover approximately $20 million in taxes which they prepaid in expectation of Mega Brands’ ability to satisfy a $50 million earnout payment obligation built in to the original Rose Art purchase agreement. In return, Mega Brands’ $200 million counterclaim against the Rosens will be dismissed and the Rosens will withdraw their opposition to Mega Brands’ claims to sums held in escrow, a significant portion of which involved post-sale taxes.
“This settlement allows me to put all my focus and resources on competing with Mega Blocks in the marketplace rather than in the court room,” Lawrence Rosen said.
Rosen’s new craft products company, Cra-Z-Art, a division of Randolph, N.J.-based LaRose LLC, produces art materials, activity and craft kits, cork and wipe off boards, writing instruments, games and puzzles. The company’s first year sales are expected to exceed $50 million, according to Rosen.
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