EXHIBIT 10.37
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT (this "Agreement"), effective as of January 1,
1998, by and among SYLVAN LEARNING SYSTEMS, INC., a Maryland corporation (the
"Purchaser"), ▇▇▇▇▇▇▇ ▇▇▇▇▇▇ (the "Stockholder"), the sole stockholder of ▇▇▇▇▇▇
& ASSOCIATES, INC., a California corporation ("▇▇▇▇▇▇"), and ▇▇▇▇▇▇ EDUCATIONAL
PRODUCTIONS, INC., a California corporation ("▇▇▇▇▇▇ Productions" and, together
with ▇▇▇▇▇▇, the "Companies"), each of which Companies has elected to be treated
as an S Corporation pursuant to Subchapter S of the Internal Revenue Code of
1986, as amended (the "Code"), and joined in by MR. ▇▇▇ ▇▇▇▇▇▇ ("▇▇. ▇▇▇▇▇▇").
W I T N E S S E T H:
- - - - - - - - - -
The Stockholder owns all of the issued and outstanding capital stock of
each of the Companies. The Purchaser and the Stockholder wish to enter into an
agreement for the acquisition of all of the outstanding stock of the Companies
by the Purchaser (the "Stock Purchases"), either directly or through a wholly-
owned subsidiary. The Purchaser, the Stockholder and ▇▇. ▇▇▇▇▇▇ wish to enter
into a definitive agreement setting forth the terms and conditions of the Stock
Purchases.
Accordingly, in consideration of the foregoing and of the covenants,
agreements, representations and warranties hereinafter contained, the Purchaser,
the Companies, the Stockholder and ▇▇. ▇▇▇▇▇▇ hereby agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser hereby
represents and warrants to the Stockholder that the statements contained in this
Section 1 are true and correct, except to the extent otherwise indicated in any
periodic reports, statements and other documents including, without limitation,
all exhibits thereto (collectively the "Purchaser SEC Reports"), filed by the
Purchaser with the U.S. Securities and Exchange Commission (the "Commission")
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") or as
set forth in the disclosure schedule delivered by the Purchaser to the Companies
on or before the date of this Agreement (the "Purchaser Disclosure Schedule").
The Purchaser Disclosure Schedule shall be arranged in sections corresponding to
the number and lettered sections contained in this Section 1. The disclosure in
any section of the Purchaser Disclosure Schedule or in any Purchaser SEC
Reports, however, shall be deemed to constitute disclosure for all sections in
this Article 1.
1.1 Organization and Standing; Subsidiaries.
---------------------------------------
(a) Each of the Purchaser and its subsidiaries whose business or
assets are material to Purchaser, either individually or on a consolidated basis
(collectively, the "Purchaser Subsidiaries," and, together with the Purchaser,
collectively "Purchaser"), is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation and has
all requisite corporate power and authority to own, lease
-1-
and operate its properties and to carry on its businesses as now being
conducted, except where the failure to be so organized, existing and in good
standing or to have such power and authority would not, and reasonably could not
be expected to, individually or in the aggregate, have a material adverse effect
on the business, assets (whether tangible or intangible), financial condition,
results of operations or business prospects ("Material Adverse Effect") of
Purchaser or the transactions contemplated hereby.
(b) Each of the Purchaser and the Purchaser Subsidiaries is duly
qualified or licensed and in good standing to do business in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification or licensing necessary, except
in such jurisdictions where the failure to be so duly qualified or licensed and
in good standing would not, individually or in the aggregate, have a Material
Adverse Effect on Purchaser.
(c) All issued and outstanding shares of capital stock of the
Purchaser and of the Purchaser Subsidiaries have been duly and validly issued
and are fully paid and non-assessable, free of any preemptive rights.
1.2 Financial Statements; Exchange Act Filings.
------------------------------------------
(a) The Purchaser has heretofore delivered to the Stockholder
copies of the Purchaser's: (i) 1996 Annual Report to Stockholders which contains
Purchaser's consolidated financial statements as of and for the years ended
December 31, 1994, 1995 and 1996, which have been audited by Ernst & Young LLP,
independent auditors (the "Purchaser Financial Statements") and, (ii) Quarterly
Report on Form 10-Q as of and for the quarter and nine months ended September
30, 1997, which contains Purchaser's unaudited consolidated financial statements
for such quarter and nine months' period ("Purchaser Interim Financial
Statements"). The Purchaser Financial Statements and the Purchaser Interim
Financial Statements fairly present, in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis (except as may be
indicated in the notes thereto) and in conformity with the Commission's
Regulation S-X, the consolidated financial position of the Purchaser and its
consolidated subsidiaries as of the dates thereof and their consolidated result
of operations and cash flows for the periods then ended (subject in the case of
the unaudited financial statements to normal recurring year-end audit
adjustments, which are not expected to be material in amount). Since January 1,
1996, the Purchaser has not made any material changes in the accounting policies
applied to the Purchaser Financial Statements, and no such changes are
contemplated nor, to the best of the Purchaser's knowledge, required under GAAP
or the Commission's Regulation S-X.
(b) All Purchaser SEC Reports filed during the twenty-four months
preceding the date of this Agreement were filed in a timely manner and complied
in all material respects with the applicable requirements of the Exchange Act
and the rules and regulations promulgated thereunder. At the time filed with
the SEC by the Purchaser and, as of the date of this Agreement, no Purchaser SEC
Report contained any untrue statement of a material fact or
-2-
omitted to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
1.3 No Undisclosed Liabilities. Except as and to the extent
--------------------------
reflected or reserved against in the consolidated balance sheets included within
the Purchaser Financial Statements or the Purchaser Interim Financial
Statements, at the date of such statements, Purchaser had no material
liabilities or obligations (whether accrued, absolute or contingent), of the
character which, under GAAP, should be accrued, shown, disclosed or indicated in
a consolidated balance sheet of the Purchaser or explanatory notes or
information supplementary thereto.
1.4 No Conflict With Other Documents. Neither the execution and
--------------------------------
delivery of this Agreement nor the carrying out of the transactions contemplated
hereby will result in any violation, termination or modification of, or be in
conflict with, the Purchaser's Articles of Incorporation or By-Laws, or, any
terms of any contract or other instrument to which the Purchaser is a party, or
any judgment, decree or order applicable to the Purchaser, or result in the
creation of any lien, charge or encumbrance upon any of its properties or
assets, except where such event or occurrence would not, singly or in the
aggregate, have a Material Adverse Effect on the Purchaser.
1.5 Authority; Validity of Stock; Consents.
--------------------------------------
(a) The Purchaser has all necessary corporate power and authority
to execute and deliver this Agreement and to consummate the transactions
contemplated hereby.
(b) The execution and delivery of the Letter of Intent, dated
November 3, 1997, between Purchaser and Stockholder, this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by the Purchaser's Board of Directors and no other corporate
proceedings on the part of the Purchaser or any of the Purchaser Subsidiaries
are necessary to authorize this Agreement or to consummate the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by the Purchaser and constitutes a valid, legal and binding agreement
of the Purchaser, enforceable against the Purchaser in accordance with its
terms.
(c) The shares of Common Stock, $.01 par value per share, of the
Purchaser ("Purchaser Common Stock") issuable by the Purchaser as Additional
Consideration for the Stock Purchases (the "Earnout Shares") have been duly
authorized for issuance and will, when issued and delivered as provided in this
Agreement, be duly and validly issued, fully paid and non-assessable. The offer
and sale of the Earnout Shares is exempt from registration under the Securities
Act of 1933, as amended (the "Securities Act").
(d) No consent, approval, order or authorization of, or
registration, declaration or filing with (i) any governmental entity or (ii) any
individual, corporation or other entity (including, without limitation, any
holder of any securities issued by Purchaser) is required
-3-
by or with respect to the Purchaser in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby, except for (A) such consents, approvals, orders, authorizations,
registrations, declaration and filings as may be required under applicable state
"blue sky" or securities laws and the securities laws of any foreign country,
(B) those set forth in the Purchaser Disclosure Schedule, and (D) such other
consents, authorizations, filings, approvals and registrations which, if not
obtained or made, would not (1) have a Material Adverse Effect on Purchaser, or
(2) adversely effect the consummation of the transactions contemplated hereby in
accordance with the terms hereof.
1.6 Disclosure. No representation or warranty made by the
----------
Purchaser in this Agreement and no statement contained in a certificate,
schedule, list or other instrument or document specified in or delivered
pursuant to this Agreement, whether heretofore furnished to the Purchaser or
hereafter required to be furnished to the Purchaser, contains or will contain
any untrue statement of a material fact or omits or will omit to state any
material fact necessary to make the statements contained herein or therein not
misleading.
1.7 Availability of Initial Purchase Price. Purchaser has, and
--------------------------------------
at the Closing will have, sufficient immediately available funds to pay the
Initial Purchase Price.
2. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER. The Stockholder
hereby represents and warrants to the Purchaser that the statements contained in
this Section 2 are true and correct, except as set forth in the disclosure
schedules delivered by the Stockholder on or before the date of this Agreement
(the "Stockholder's Disclosure Schedule). The Stockholder's Disclosure Schedule
shall be arranged in sections corresponding to the numbered and lettered
sections contained in this Section 2. The disclosure in any section, however,
shall be deemed to constitute disclosure for all sections in this Article 2.
2.1 Authorized and Issued Shares. The entire authorized capital
----------------------------
stock of ▇▇▇▇▇▇ consists of seventy-five thousand (75,000) shares of Common
Stock, par value $0 per share (the "▇▇▇▇▇▇ Common Stock"), of which twenty-five
thousand five hundred (25,500) shares are issued and outstanding. The entire
authorized capital stock of ▇▇▇▇▇▇ Productions consists of one million
(1,000,000) shares of Common Stock, par value $0 per share (the "▇▇▇▇▇▇
Productions Common Stock"), of which twenty-five thousand (25,000) shares are
issued and outstanding. The ▇▇▇▇▇▇ Common Stock and the ▇▇▇▇▇▇ Productions
Common Stock are sometimes hereinafter referred to collectively as "Company
Common Stock." No shares of Company Common Stock are held as treasury shares
and no shares are reserved for issuance. All outstanding shares of Company
Common Stock have been duly authorized and are validly issued and are fully paid
and non-assessable and are owned of record and beneficially by the Stockholder.
The Stockholder has good and marketable title to the number of issued and
outstanding shares of ▇▇▇▇▇▇ Common Stock and ▇▇▇▇▇▇ Productions Common Stock
set forth opposite her name in Section 2.1 of the Stockholder's Disclosure
Schedule, and, except as set forth in Section 2.1 of the Stockholder's
Disclosure Schedule, each of such shares are owned by her free and clear of any
pledges, liens, restrictions, security interests, options, claims, encumbrances
or rights of any third party ("Liens"). Except as set forth on Section 2.1 of
the
-4-
Stockholder's Disclosure Schedule, neither of the Companies nor the Stockholder
is a party to or bound by any options, warrants, calls, contracts, preemptive
rights or commitments of any character relating to any issued or unissued
capital stock, or any other equity security issued or to be issued by either of
the Companies.
2.2 Organization. Each of the Companies is a corporation duly
------------
organized, validly existing and in good standing under the laws of the State of
California, and has full corporate power and authority to carry on its business
as it is now being conducted and to own or hold under lease the properties or
assets it now owns or holds under lease and to perform the actions contemplated
hereby, except where the failure to be in good standing or to have such power
and authority would not have a Material Adverse Effect on the Companies.
Complete and accurate copies of the current Articles of Incorporation, By-Laws,
minute books and stock transfer books of each of the Companies have been
provided to the Purchaser, and such copies are complete and correct and in full
force and effect. Neither of the Companies owns or has any direct or indirect
interest in any other corporation, firm, partnership, joint venture or other
business entity. Each of the Companies has duly and effectively elected to be
treated as an S Corporation under and has at all times since its respective
election to be so treated, operated in accordance with the provisions of
Subchapter S of the Internal Revenue Code of 1954, except where the failure to
so operate would not have a Material Adverse Effect on the Companies.
2.3 Transactions with Affiliates. Except as set forth in Section 2.3
----------------------------
of the Stockholder's Disclosure Schedule or in any of the Financial Statements
(as hereinafter defined), neither of the Companies is a party to any contract,
agreement or other arrangement with any current or former officer, director or
stockholder or any affiliate of any such persons. Except to the extent set
forth in Section 2.3 of the Stockholder's Disclosure Schedule, each transaction
required to be listed therein and as to which either the Companies or the
Purchaser, as successor-in-interest thereto, have or will have after the Stock
Purchases, any obligations, is on terms no less favorable than terms available
from unrelated parties.
2.4 Financial Statements.
--------------------
(a) The Stockholder has provided to the Purchaser financial
statements as of and for each of the three years ended December 31, 1996 for
each of the Companies, which have been reviewed by ▇▇▇▇▇▇▇▇▇▇, Melvoin and
▇▇▇▇▇▇▇ LLP (the "Companies' Accountants"), independent auditors (collectively,
the "Reviewed Financial Statements").
(b) The Stockholder has provided to the Purchaser unaudited
financial statements as of and for the nine months ended September 30, 1997 for
each of the Companies (collectively, the "Unaudited Financial Statements" and,
together with the Reviewed Financial Statements, the "Financial Statements").
(c) The Financial Statements are complete and correct in all
material respects, present fairly and accurately the financial position and
results of operations of each of the Companies as of and for the periods
indicated, to the best actual knowledge of the Companies
-5-
and the Stockholder, and were prepared in accordance with GAAP, applied on a
consistent basis (except as may be indicated in the notes thereto and except in
the case of the Unaudited Financial Statement for year-end audit adjustments
which will not be material in amount). There are no material liabilities or
obligations of either of the Companies, whether contingent or absolute, as of
the dates of the Financial Statements, including any liability for taxes of any
type, which should have been shown or provided for in the Financial Statements
and which are not so shown or provided for or shown as reserved against. Except
as set forth in Section 2.4(c) of the Stockholder's Disclosure Schedule, since
September 30, 1997, there has been no material adverse change in the condition
(financial or otherwise), assets, liabilities, earnings, net worth, financial
position, business, results of operations, properties or business prospects of
either of the Companies. All of the accounts receivable shown on the Financial
Statements arose, and all accounts receivable that will be outstanding as of the
Closing Date will have arisen, from bona fide transactions in the ordinary
---- ----
course of the Companies' business. Subject to accrued reserves shown on the
Financial Statements and except to the extent it would not have a Material
Adverse Effect, all of the inventory of products held for sale as shown on the
Financial Statements is saleable by one of the Companies in the ordinary course
of business within a reasonable period of time, and none of such inventory is
obsolete.
2.5 Taxes. Each of the Companies and the Stockholder has properly
-----
prepared and filed all federal, state and other tax returns required to be filed
by it or her in connection with the business and operations of each of the
Companies. True and complete copies of all federal and state income tax returns
for each of the Companies for each of the years 1992 through 1996 have been
delivered to the Purchaser and copies of all other tax returns filed by the
Companies will be made available upon request. Except as set forth on Section
2.5 of the Stockholder's Disclosure Schedule, neither of the Companies nor the
Stockholder has any liability for any federal, state, county, local or other
taxes whatsoever that arose or otherwise was incurred in connection with the
business and operations of either of the Companies on or before December 31,
1996, except for those liabilities which alone or in the aggregate would not
have a Material Adverse Effect on the Companies. No proposed taxes, additions
to tax, interest or penalties have been asserted or are pending against either
of the Companies or the Stockholder in connection with the business and
operations of either of the Companies with respect to periods ending on or
before the Closing Date, and no such matters are under discussion with the
applicable authorities. There are no agreements, waivers or other arrangements
providing for extensions of time with respect to the assessment or collection of
any unpaid tax against either of the Companies or the Stockholder in connection
with the business and operations of either of the Companies except to the extent
any such assessment or collection would not have a Material Adverse Effect on
the Companies. Except as set forth in Section 2.5 of the Stockholder's
Disclosure Schedule, each of the Companies and the Stockholder has withheld or
otherwise collected all taxes or amounts it or she was required to withhold or
collect under any applicable federal, state or local law in connection with the
business and operations of either of the Companies, including, without
limitation, any amounts required to be withheld or collected with respect to
employee state and federal income tax withholding, social security, unemployment
compensation, sales or use taxes
-6-
or workmen's compensation, and all such amounts have been timely remitted to the
proper authorities.
2.6 Agreements. Section 2.6 of the Stockholder's Disclosure Schedule
----------
identifies each of the following agreements, contracts, documents and other
items (whether written or oral) as to which either of the Companies is a party
or otherwise is bound (and all such contracts, or summaries thereof, have been
made available to the Purchaser) as of the date of the execution of this
Agreement: (i) all contracts to provide teacher training courses or materials
to universities, schools or other entities (collectively, the "Course
Contracts"); (ii) all agreements relating to licensing and royalty payments for
computer software and programs utilized by either of the Companies to provide
teacher training courses or materials, including any enhancements of the
licensed material owned and/or developed by either of the Companies
(collectively, the "Licensing Agreements"); (iii) all documents relating to
indebtedness for money borrowed, including guarantees; (iv) all agreements or
plans relating to employment, compensation of or benefits for officers,
employees or consultants of either of the Companies, including without
limitation, any collective bargaining arrangements; (v) all contracts for the
purchase of materials, supplies, services, merchandise or equipment involving
consideration of more than $50,000 or involving purchases in excess of normal
operating requirements; (vi) any contract, agreement or instrument not entered
into in the ordinary course of the business of either of the Companies; (vii)
any contract containing material restrictions on the operations of either of the
Companies or any restrictions on either of their right to compete in any
geographic region or in any line of business; (viii) any lease of real property
or personal property calling for annual lease payments in excess of $50,000; and
(ix) each and every other contract which is material to the financial condition,
earnings, operation or business of either of the Companies. Each of the
contracts and agreements so listed, including the Course Contracts and the
Licensing Agreements (collectively, the "Contracts"), is a valid and existing
contract or agreement in full force and effect and there exists no material
default thereunder by any party thereto. Except as set forth in Section 2.6 of
the Stockholder's Disclosure Schedule, none of the Contracts will be violated or
breached and no default or right of termination or modification shall arise
thereunder as a result of the consummation of the transactions contemplated by
this Agreement, except for such violations, breaches and defaults which would
not alone or in the aggregate have a Material Adverse Effect on either of the
Companies.
2.7 Course Contracts and Licensing Agreements. Except as set forth
-----------------------------------------
in Section 2.7 of the Stockholder's Disclosure Schedule:
(a) Neither of the Companies is in breach or default under or in
violation of, nor alleged to have breached, defaulted or violated any of the
Course Contracts or Licensing Agreements except for such violations, breaches
and defaults which would not alone or in the aggregate have a Material Adverse
Effect on the Companies;
(b) Except for accrued reserves shown on the Financial
Statements, neither of the Companies is under any liability or obligation to
refund any material amount previously paid to either of the Companies under any
of the Course Contracts or Licensing
-7-
Agreements, and each of the Companies has paid or has made adequate provision to
pay when due all accounts payable, payroll, payroll taxes and other amounts due
prior to Closing on account of the Course Contracts and Licensing Agreements;
(c) To the best of the Stockholder's knowledge, neither of the
Companies has secured any of the Course Contracts or Licensing Agreements other
than in compliance with all applicable laws, rules and regulations; and the
terms of payment and/or compensation for each of the Course Contracts and
Licensing Agreements complies with all applicable laws, rules and regulations
relating to competitive bidding; to the best of the Stockholder's knowledge,
each of the Course Contracts or Licensing Agreements not obtained through
competitive bidding was secured in an arms' length transaction.
(d) Each of the Course Contracts and Licensing Agreements is valid and
in full force and effect; each of the Companies has, in all material respects,
performed all obligations required to be performed by it under, and is not in
material default in any respect under, in material conflict in any respect with,
or in material violation in any respect of, any of the Course Contracts or
Licensing Agreements; and neither of the Companies nor the Stockholder has
received notice of non-compliance or alleged non-compliance with any of the
Course Contracts or Licensing Agreements; and, except as set forth in Section
2.7 of the Stockholder's Disclosure Schedule, neither of the Companies nor the
Stockholder has knowledge of any facts or circumstances relating to the Course
Contracts or Licensing Agreements which reasonably could be expected to have a
Material Adverse Effect on the Companies' revenues or operating profit from the
Course Contracts.
(e) Except as set forth in Section 2.7(e) of the Stockholder's
Disclosure Schedule, neither of the Companies nor the Stockholder has knowledge:
(i) of any current intention on the part of any of the other parties to the
Course Contracts or Licensing Agreements to cancel the same or not to renew the
same with each of the Companies at the end of the current term thereof, or (ii)
that any of the other parties to the Course Contracts or Licensing Agreements
does not have the financial capacity to continue the same, where the failure to
so continue would have a Material Adverse Effect on the Companies.
(f) Neither of the Companies nor the Stockholder has received any
claim of material overpayment or alleged material overpayment by any other party
to any of the Course Contracts or Licensing Agreements, and except as described
in Section 2.7 of the Stockholder's Disclosure Schedule, there have been no
audits or other reviews of the costs, billing methods or performance of either
of the Companies under any of the Course Contracts or Licensing Agreements, and
to the best of the Stockholder's actual knowledge, no such audits or other
reviews are in progress or contemplated.
(g) Except as set forth in Section 2.7 of the Stockholder's Disclosure
Schedule, no consent, approval or authorization of, notice to or declaration,
filing or registration with, any third party to any of the Course Contracts or
Licensing Agreements is required in connection with the Stock Purchases or the
execution, delivery and performance of this
-8-
Agreement and the Closing Documents and the consummation of the transactions
contemplated thereby.
(h) Section 2.7(h) of the Stockholder's Disclosure Schedule identifies
all of the territories granted in writing or orally by either of the Companies
under any of the Course Contracts. Neither of the Companies has granted any one
exclusive territory to more than one educational institution.
2.8 Intellectual Property.
---------------------
(a) Except as provided for in the Consulting Agreement between the
Companies, the Stockholder and ▇▇. ▇▇▇▇▇▇, dated _______, 1997 (the ("▇▇▇▇▇▇
Consulting Agreement"), which is attached hereto as Exhibit 2.8, or as set forth
elsewhere in this Agreement, each of the Companies owns, or is licensed or
otherwise possesses legally enforceable rights to use, all patents, trademarks,
trade names, service marks, copyrights, and any applications for such patents,
trademarks, trade names, service marks and copyrights, processes, formulae,
methods, schematics, technology, know-how, computer software programs or
applications and tangible or intangible proprietary information or material that
are necessary to conduct the business of the Companies as currently conducted,
or proposed to be conducted, the absence of which would be reasonably likely to
have a Material Adverse Effect on the Companies taken as a whole (the
"Companies' Intellectual Property Rights"). Section 2.8 of the Stockholder's
Disclosure Schedule lists each item of the Companies' Intellectual Property
Rights.
(b) Neither of the Companies is, nor will either of them be as a
result of the execution and delivery of this Agreement or the performance of the
Stockholder's obligations under this Agreement, in breach of any license,
sublicense or other agreement relating to the Companies' Intellectual Property
Rights, the breach of which could have a Material Adverse Effect on the
Companies, taken as a whole.
(c) To the Stockholder's knowledge, all patents, registered
trademarks, service marks and copyrights held by the Companies are valid and
subsisting. Neither of the Companies has been sued (or threatened with suit) in
any suit, action or proceeding which involves a claim of infringement of any
patents, trademarks, service marks, copyrights or violation of any trade secret
or other propriety right of any third party. The Stockholder has no reason to
believe that the manufacturing, marketing, licensing or sale of its products or
services infringes any patent, trademark, service ▇▇▇▇, copyright, trade secret
or other proprietary right of any third party, which such infringement is
reasonably likely to have a Material Adverse Effect on the Companies, taken as a
whole.
2.9 Legal Proceedings, Etc. Except as set forth in Section 2.9 of
-----------------------
the Stockholder's Disclosure Schedule, there are no legal, administrative,
arbitration, or other proceedings or governmental investigations pending or, to
the best of the Companies' and the Stockholder's knowledge, threatened against
or involving (i) the shares of Company Common Stock owned by the Stockholder,
(ii) the transactions contemplated by this Agreement or (iii)
-9-
either of the Companies or the Stockholder or their respective properties or
assets, except (with respect to clause (iii) only) for such actions which are
not reasonably likely to have a Material Adverse Effect on the Companies.
2.10 Compliance; Licenses. Each of the Companies has at all times in
--------------------
the past operated its business and used its assets in material compliance with,
and currently is not in material violation of, and has obtained all material
licenses and permits required by, any law, rule or regulation. Each of the
Companies is duly qualified to do business as a foreign corporation in good
standing in those jurisdictions in which the ownership and operation of its
business requires such qualification, except where the failure to be so
qualified would not be reasonably likely to have a Material Adverse Effect on
the Companies. Section 2.10 of the Stockholder's Disclosure Schedule contains a
true and complete list of all material licenses, permits, approvals, franchises
and other authorizations as are necessary in order to enable each of the
Companies to own and conduct its business.
2.11 Bank Accounts, etc. Section 2.11 of the Stockholder's
-------------------
Disclosure Schedule sets forth a true and complete list of all bank accounts,
safe deposit boxes and lock boxes of each of the Companies, including
identification of all authorized signatories.
2.12 Insurance. Section 2.12 of the Stockholder's Disclosure
---------
Schedule sets forth a summary of all policies of general liability, product
liability, fire, casualty, motor vehicle health, workers' compensation and other
insurance or bonding currently maintained by or on behalf of the Companies or
any of their respective employees. All requirements and provisions of such
policies and bonds are being complied with except for those failures to comply
which would not be reasonably likely, alone or in the aggregate, to have a
Material Adverse Effect on the Companies. True and correct copies of all
insurance policies and bonds relating to such coverage have been provided by the
Stockholder to the Purchaser. No notice of cancellation has been given to or
received by either of the Companies with respect to any of its insurance
policies or bonds. To the best knowledge of the Companies and the Stockholder,
no such policies or bonds are or will become subject to an assessment due to any
retroactive rate or audit adjustments or coinsurance or similar arrangements.
2.13 Employee Matters. Except as set forth in Section 2.13 of the
----------------
Stockholder's Disclosure Schedule, neither of the Companies maintains, sponsors
or contributes to any plans for pension, profit-sharing, deferred compensation,
severance pay, bonuses, stock options, stock purchases, or any other retirement
or deferred benefit, or for any health, accident or other welfare plan, or any
other employee or retired employee benefits or incentive plan, program,
contract, understanding or arrangement in which any of either Companies'
employees, former employees, retired employees or consultants (or beneficiaries
of any of the foregoing) is entitled to participate. The plans, programs,
contracts, understandings and arrangements listed on the Stockholder's
Disclosure Schedule pursuant to this Section 2.13 are hereinafter referred to as
the "Employee Plans." Each of the Companies has supplied the Purchaser with
complete and accurate copies of each such Employee Plan. Each Employee Plan has
been operated according to its terms and, to the best of the Stockholder's and
the Companies' knowledge, in material
-10-
compliance with all applicable laws. There are no material past due tax
liabilities of either of the Companies with respect to any of the Employee
Plans. Each of the Employee Plans required to be qualified under the Employee
Retirement Income Security Act ("ERISA") has been so qualified and, to the best
of the Stockholder's and the Companies' knowledge, has at all times been
operated in compliance with ERISA and the regulations thereunder. Except as set
forth in Section 2.13 of the Stockholder's Disclosure Schedule, there is no
underfunding liability nor any anticipated underfunding liability with respect
to any of the Employee Plans.
2.14 Recent Operations. Since September 30,1997, (i) each of the
-----------------
Companies has operated its business substantially as it was operated immediately
prior thereto and only in the ordinary course; (ii) each of the Companies and
the Stockholder has used its or her commercially reasonable efforts to preserve
intact each of the Companies' business relationships; (iii) there have been no
bonuses paid to or increases in the compensation of officers, employees or
consultants, of either of the Companies, except as set forth in Section 2.14 of
the Stockholder's Disclosure Schedule, and (iv) except as set forth in Section
2.14 of the Stockholder's Disclosure Schedule, neither of the Companies has
declared or paid any dividend or made any other distribution with respect to its
capital stock. Section 2.14 of the Stockholder's Disclosure Schedule sets forth
the name and job title of each individual who has left the employ of either of
the Companies since September 30, 1997 and the loss of whose services had a
Material Adverse Effect on either of the Companies.
2.15 Working Capital and Financial Condition of the Companies. As of
--------------------------------------------------------
the date hereof have, the Companies have on a combined basis (after reductions
for intercompany transactions): (i) adequate working capital (after payment of,
or accrual for, all distributions of cash or property to be made to the
Stockholder as of and through the date hereof) to operate the business in
accordance with past practice after taking into account seasonality factors and
other appropriate adjustments; ("Combined Working Capital") and (ii) no long-
term debt.
2.16 Environmental Matters. To the best knowledge of the Companies
---------------------
and the Stockholder, no storage tanks, underground or otherwise, are now located
on any properties occupied by either of the Companies. To the best knowledge of
the Companies and the Stockholder, each of the Companies has complied in all
material respects with all environmental laws relating to its operations or
properties occupied by it. To the best knowledge of the Companies and the
Stockholder without any duty of investigation or inquiry, there are no asbestos
containing materials located on properties occupied by either of the Companies.
Neither of the Companies has received any notice, demand, suit or information
request pursuant to the Comprehensive Environmental Response, Compensation and
Liability Act or any comparable state law, nor does it have knowledge of any
other party's receipt of the same relative to any properties occupied by either
of the Companies.
2.17 Disclosure. All agreements, schedules, exhibits, documents,
----------
certificates, reports or statements furnished or to be furnished to the
Purchaser by or on behalf of either of the Companies in connection with this
Agreement or the transactions contemplated hereby are true and accurate in all
material respects, and no such items contain any untrue statement of a material
-11-
fact or omit to state any material fact necessary to make the statements
contained herein or therein not misleading; provided, however, that the
-------- -------
foregoing representation and warranty shall not apply to the Confidential
Descriptive Memorandum, furnished by Genesis Merchant Group, relative to the
Companies and provided to Purchaser on or about November 11, 1997, and any
projections of the Companies' future results of operation provided to the
Purchaser by or on behalf of the Companies or the Stockholder.
2.18 No Conflict With Other Documents. Except as disclosed in
--------------------------------
Section 2.18 of the Stockholder's Disclosure Schedule, neither the execution and
delivery of this Agreement, nor the carrying out of any of the transactions
contemplated hereby: (i) will result in any material violation, termination or
modification of, or be in conflict with, the Articles of Incorporation or By-
Laws of either of the Companies, any material terms of any contract, instrument
or other agreement to which either of the Companies or the Stockholder is a
party or by which it or she or any of its or her properties is bound or
affected, or any law, rule, regulation, license, permit, judgment, decree or
order applicable to either of the Companies or the Stockholder or by which any
of its or her properties or assets are bound or affected (other than State
securities laws and antitrust laws, as to which no representation and warranty
is made), or (ii) result in any material breach of or constitute a material
default (or with notice or lapse of time or both would become a material
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation, or result in the creation of any material Lien
upon any of the properties or assets of either of the Companies or the
Stockholder pursuant to any contract, instrument or other agreement to which
either of the Companies or the Stockholder is a party or by which it or she or
any of its or her properties or assets is bound or affected.
2.19 Conduct of Business. Except as disclosed in Section 2.19 of the
-------------------
Stockholder's Disclosure Schedule, since September 30, 1997, and through the
date hereof: (a) the business of each of the Companies has been conducted only
in the ordinary course; (b) neither of the Companies has entered into, adopted,
amended or terminated any employee benefit plan, agreement or arrangement,
entered into or amended any employment contracts, or increased the salaries of
or compensation of its officers or employees, other than ordinary increases in
salaries of employees (other than the Stockholder) in accordance with past
practices; (c) the Stockholder has used her commercially reasonable efforts to
preserve the business organization of each of the Companies intact, to keep
available the service of the officers, employees and consultants of each of the
Companies and to preserve the goodwill of suppliers, customers and others doing
business with either of the Companies; (d) neither of the Companies nor the
Stockholder has entered into any agreement for the purchase, sale or other
disposition of any equipment, supplies, inventory, investments or other assets
(other than sales of inventory and purchases of materials and supplies in the
ordinary course of business and in accordance with past practices) of either of
the Companies; (e) no change has been made in the Articles of Incorporation or
By-Laws of either of the Companies; (f) no change has been made in the number of
shares or terms of the authorized, issued or outstanding capital stock of either
of the Companies, nor has either of the Companies entered into or granted any
options, calls, contracts or commitments of any character relating to any issued
or unissued capital stock; and (g) no
-12-
dividend or other distribution or payment has been declared or paid in respect
of the capital stock of either of the Companies.
2.20 Other Property. Section 2.20 of the Stockholder's Disclosure
--------------
Schedule sets forth a schedule of (i) all real property owned or leased by
either of the Companies and (ii) all individual items of tangible personal
property of material value (other than inventory) of either of the Companies.
Except as set forth in Section 2.20 of the Stockholder's Disclosure Schedule,
each of the Companies has good and marketable title to all of such property
owned by it, free of any material Lien. The machinery and equipment of the
Companies which are material to its operations are in good operating condition
and repair, ordinary wear and tear excepted.
2.21 Brokers and Advisors. Neither of the Companies nor the
--------------------
Stockholder has taken any action which could give rise to a valid claim against
the Purchaser for a brokerage commission, finder's fee, counseling or advisory
fee, investment banking fee or like payment.
2.22. Binding Effect. This Agreement is a valid and legally binding
--------------
obligation of the Stockholder, enforceable against the Stockholder in accordance
with its terms.
2.23. Investment Intent. It is understood that the Earnout Shares
-----------------
are not being registered for purposes of the transactions hereunder under the
Securities Act or any state securities laws, and such shares are being delivered
without registration in reliance upon an exemption from the registration
requirements of the Securities Act and applicable state securities laws. The
Stockholder will acquire the Earnout Shares, if any, only for her own account
for investment and not with any intention of making, or with a view to, or for
sale in connection with, any distribution thereof within the meaning of the
Securities Act unless such shares first are registered under the Securities Act;
provided, however, that the Stockholder may transfer Earnout Shares to the Named
Officers and/or ▇▇. ▇▇▇▇▇▇ so long as she first receives from them a written
acknowledgment of the restrictions on further transfer of the Earnout Shares and
of their investment intent, in form and substance reasonably satisfactory to
Purchaser.
In connection with the foregoing, the Stockholder hereby represents
and warrants that:
(a) she has reviewed, discussed and evaluated the information
delivered under Section 1.2 and has had the opportunity to ask questions of, and
receive answers from, executive officers of the Purchaser concerning the terms
and conditions of this Agreement and to obtain any additional information which
she considered necessary to verify the accuracy of the information delivered
under Section 1.2;
(b) she understands that she must bear the economic risks of the
investment in the Earnout Shares for an indefinite period of time because such
shares will not be registered under the Securities Act and, therefore, may not
be sold until subsequently registered under the Securities Act or an exemption
from registration is available; and
-13-
(c) she has sufficient knowledge and experience in financial
and business matters to enable her to be capable of evaluating the merits and
the risks of an investment in the Earnout Shares.
2.24. Legends. It is understood and agreed that, to implement the
-------
requirements of the Securities Act and state securities laws and evidence the
restrictions upon transfer contained in this Agreement, the Purchaser will cause
a legend to be conspicuously noted on the certificates representing any Earnout
Shares deliverable hereunder, and that the Purchaser will issue stop transfer
instructions to its transfer agent, to the effect that such stock, if issued,
will not have been registered under the Securities Act and that no transfer may
take place except after delivery of an opinion of counsel reasonably
satisfactory to the Purchaser to the effect that registration thereof for the
purpose of transfer is not required under the Securities Act or that the stock
proposed to be transferred has been effectively registered for that purpose
under the Securities Act. The foregoing restrictions are in addition to the
restrictions described in Section 7.3(b)(6) hereof.
3. REPRESENTATIONS AND WARRANTIES OF ▇▇. ▇▇▇▇▇▇. ▇▇. ▇▇▇▇▇▇ hereby
represents and warrants to the Purchaser that the statements contained in this
Section 3 are true and correct, except as set forth in the disclosure schedules
delivered by ▇▇. ▇▇▇▇▇▇ on or before the date of this Agreement (the "▇▇▇▇▇▇
Disclosure Schedule). The ▇▇▇▇▇▇ Disclosure Schedule shall be arranged in
sections corresponding to the numbered and lettered sections contained in this
Section 3. The disclosure in any section, however, shall be deemed to
constitute disclosure for all sections in this Article 3.
3.1 Legal Proceedings, Etc. Except as set forth in Section 3.1 of
-----------------------
the ▇▇▇▇▇▇ Disclosure Schedule, to ▇▇. ▇▇▇▇▇▇'▇ actual knowledge, there are no
legal, arbitration, or other proceedings pending or threatened involving or
arising out of ▇▇. ▇▇▇▇▇▇'▇ execution of and performance under this Agreement,
the Stock Redemption Agreement or the ▇▇▇▇▇▇ Consulting Agreement.
3.2. No Conflicts. Neither the execution and delivery by ▇▇▇▇▇▇ of
------------
this Agreement nor the ▇▇▇▇▇▇ Consulting Agreement nor the carrying out of the
transactions contemplated hereby or thereby as they relate to ▇▇. ▇▇▇▇▇▇, will
result in any material breach of or constitute a default (or with notice or
lapse of time or both would become a material default), or give to others any
rights, under the terms of any material contract, instrument or other agreement
to which ▇▇. ▇▇▇▇▇▇ is a party.
3.3 Ownership of Certain Assets. ▇▇. ▇▇▇▇▇▇ does not own any
---------------------------
intellectual property or other assets which are necessary to the operation of
the Companies' business. The Companies have the ongoing right to use ▇▇.
▇▇▇▇▇▇'▇ name in accordance with the applicable provisions of the ▇▇▇▇▇▇
Consulting Agreement. To the actual knowledge of ▇▇. ▇▇▇▇▇▇, the Intellectual
Property Rights developed by ▇▇. ▇▇▇▇▇▇ and transferred to and now owned by the
Companies' did not, at the time of transfer, infringe upon any copyright,
franchise right, trade
-14-
secret or other proprietary right of any third party. Section 3.3 of the ▇▇▇▇▇▇
Disclosure Schedule is a true and complete description of all of ▇▇. ▇▇▇▇▇▇'▇
current business activities.
3.4. No Interest in the Companies or the Aggregate Purchase Price.
------------------------------------------------------------
Other than as set forth in the ▇▇▇▇▇▇ Consulting Agreement or in the Redemption
Agreement by and between ▇▇. ▇▇▇▇▇▇, the Companies and the Stockholder, dated
______________, 1997 and attached hereto as Exhibit 3.5 (the "▇▇▇▇▇▇ Redemption
-----------
Agreement"), ▇▇. ▇▇▇▇▇▇ has no interest, option or other rights with respect to
the Company Common Stock, any of the assets of either of the Companies or the
Aggregate Purchase Price (as defined in Section 7.3 hereof). Assuming full
performance of same by the Stockholder and the Companies, the ▇▇▇▇▇▇ Consulting
Agreement and the ▇▇▇▇▇▇ Redemption Agreement together represent a full and
final settlement of ▇▇. ▇▇▇▇▇▇'▇ ownership rights in the Companies.
3.5. Binding Effect. The ▇▇▇▇▇▇ Consulting Agreement and the
--------------
Redemption Agreement are each valid and legally binding obligations of ▇▇.
▇▇▇▇▇▇, enforceable against ▇▇. ▇▇▇▇▇▇ in accordance with their respective
terms.
4. COVENANTS OF THE PURCHASER. The Purchaser covenants to the Stockholder
that, except as otherwise consented to in writing by the Stockholder after the
date of this Agreement until the Closing hereunder:
4.1 Cause Conditions to be Satisfied. The Purchaser will use its
--------------------------------
best efforts to cause all of the conditions described in Sections 8 and 9 of
this Agreement to be satisfied (to the extent reasonably are within its
control).
4.2 Consents. Purchaser agrees to take all necessary corporate or
--------
other action and use its best efforts to obtain all consents and approvals
required, or deemed advisable in the Stockholder' reasonable opinion, for
consummation of the transactions contemplated by this Agreement.
5. COVENANTS OF THE STOCKHOLDER. The Stockholder covenants to the
Purchaser that, except as otherwise consented to in writing by the Purchaser
after the date of this Agreement until the Closing hereunder:
5.1 Consents. The Stockholder agrees to cause each of the Companies
--------
to take all necessary corporate or other action (including using her best
efforts to obtain consents from the other parties to those of the Course
Contracts and Licensing Agreements the terms of which require prior consent to
the indirect transfer of the Course Contracts and Licensing Agreements in
transactions such as the Stock Purchases) and to use her best efforts to cause
the Companies to obtain all consents and approvals required, or deemed advisable
in Purchaser's reasonable opinion, for consummation of the transactions
contemplated by this Agreement.
5.2 Estimated Balance Sheets. At least one day before the date of
------------------------
Closing, the Stockholder shall deliver to the Purchaser an estimated balance
sheet for each of the Companies as of the close of business on the day
immediately preceding the Closing Date (collectively, the
-15-
"Estimated Balance Sheets"), prepared in accordance with GAAP and on a basis
consistent with normal past practice (except as may be indicated in the notes
thereto) and the Financial Statements. The Estimated Balance Sheet shall (i) not
contain any amount owed to the Companies by the Stockholder or any officer of
either of the Companies and (ii) contain all accruals required by GAAP,
including, without limitation, an accrual for cancellations or forfeitures
payable by the Companies to schools, colleges or universities.
5.3 No Solicitation. The Stockholder shall, and shall cause the
---------------
Companies and their respective officers, directors, employees, representatives
and agents to, (i) immediately cease any existing discussions or negotiations,
if any, with any parties with respect to any acquisition (other than the
transactions contemplated by this Agreement) of all or any material portion of
the assets of, or any equity interest in, either of the Companies or any
business combination with either of the Companies, (ii) not solicit, initiate,
encourage, or furnish information in response to any inquiries or proposals that
constitute, or could reasonably be expected to lead to, a proposal or offer for
a merger, consolidation, business combination, sale of substantial assets, sale
of shares of capital stock (including without limitation by way of a tender
offer or similar transactions involving either of the Companies, other than the
transactions contemplated by this Agreement) (any of the foregoing transactions
being referred to in this Agreement as an "Acquisition Transaction") (iii) not
engage in negotiations or discussions concerning, or provide any non-public
information to any person or entity relating to, any Acquisition Transaction,
and (iv) not agree to, approve or recommend any Acquisition Transaction. If
either of the Companies or the Stockholder shall nevertheless receive any
indication of interests or proposal with respect to any Acquisition
Transactions, which indications or proposals the Stockholder reasonably believes
to represent a serious inquiry, the Stockholder shall provide a copy of any such
written inquiry or proposal to the Purchaser immediately after receipt thereof
by the Stockholder, ▇▇▇▇▇▇ and/or ▇▇▇▇▇▇ Productions or any of their
representatives or agents. The Stockholder agrees that the Purchaser's remedy
at law for breach of the covenants contained in this Section 5.3 would be
inadequate and, accordingly agrees that the Purchaser shall be entitled to
equitable relief, including injunction and specific performance, to prevent
breach of the covenants contained in this Section 5.3; provided, however, that
Purchaser shall have delivered the Initial Purchase Price into an escrow account
with a commercial bank with five (5) days of seeking such equitable relief.
5.4 Employment Agreements. The Stockholder shall use her best
---------------------
efforts to cause each of ▇▇▇▇ ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ and ▇▇▇ Fiance (the
"Named Officers") to, at or prior to the Closing, enter into an employment and
non-competition agreement with one of the Companies, in substantially the form
of Exhibit 5.4 attached hereto.
-----------
5.5 Cause Conditions to Be Satisfied. The Stockholder will use her
--------------------------------
best efforts to cause all of the conditions described in Sections 8 and 9 of
this Agreement to be satisfied (to the extent such matters reasonably are within
her control).
-16-
6. COVENANTS OF ▇▇. ▇▇▇▇▇▇. ▇▇. ▇▇▇▇▇▇ covenants to the Purchaser that,
except as otherwise agreed to by the Purchaser in writing:
6.1 Addendum to ▇▇▇▇▇▇ Consulting Agreement. At the Closing,
---------------------------------------
assuming performance by the Companies, Stockholder and Purchaser under (as
applicable) the ▇▇▇▇▇▇ Consulting Agreement, the Stock Redemption Agreement, and
this Agreement, ▇▇. ▇▇▇▇▇▇ shall enter into an addendum to the ▇▇▇▇▇▇ Consulting
Agreement (the "▇▇▇▇▇▇ Addendum"), substantially in the form of Exhibit 6.2
-----------
attached hereto.
6.2 Transition of Business; Employees. After the Closing, ▇▇. ▇▇▇▇▇▇
----------------------------------
agrees to cooperate with Purchaser's efforts to continue and expand
relationships with the customers and clients of the Companies that are parties
to the Course Contracts and Licensing Agreements.
7. PURCHASE AND SALE OF THE COMPANY COMMON STOCK. Subject to the terms
and conditions of this Agreement, the Purchaser and the Stockholder agree to
effect the following transactions at the Closing:
7.1 Conditions. The Purchaser and the Stockholder will deliver to
----------
the other appropriate evidence of the satisfaction of the conditions to their
respective obligations hereunder.
7.2 Stock Purchases. The Stockholder shall sell the Company Common
---------------
Stock to the Purchaser and the Purchaser shall purchase the Company Common Stock
from the Stockholder. The Company Common Stock shall be transferred to the
Purchaser pursuant to the terms and conditions of this Agreement, free and clear
of all Liens, except as set forth on Schedule 2.1 of the Stockholder's
Disclosure Schedule. At the Closing, the Stockholder will deliver to the
Purchaser certificates in due and proper form representing all of the issued and
outstanding shares of Common Stock of each of the Companies, duly endorsed or
accompanied by duly executed stock powers.
7.3 Purchase Price. In full payment for the sale and delivery of the
---------------
Company Common Stock, the Purchaser shall pay to the Stockholder the Initial
Purchase Price and, if earned, the Earnout Consideration, in the manner set
forth below:
(a) Initial Purchase Price. At the Closing, the Purchaser shall
----------------------
pay to the Stockholder $25,000,000 (the "Initial Purchase Price"), to be paid by
wire transfer in immediately available funds to an account designated by the
Stockholder prior to the Closing Date.
(b) Earnout Consideration. In addition to the Initial Purchase
----------------------
Price to be paid at Closing, the Purchaser shall pay to the Stockholder the
amounts set forth in clauses (1), (2) and (3) below (together, the "Earnout
Consideration," and, collectively with the Initial Purchase Price, the
"Aggregate Purchase Price"), subject to the terms and conditions of those
clauses.
-17-
(1) The Purchaser agrees to pay the Stockholder as additional consideration
for the purchase of the Company Common Stock, $12.5 million in cash and that
number of shares of the Purchaser Common Stock having a then Market Value (as
defined below) equal to $12.5 million (together, the "Additional Consideration")
upon the earlier of the Companies' achieving (x) EBITDA (as hereinafter defined)
of $5.0 million or more in 1998, (y) cumulative EBITDA of $10.0 million or more
during 1998 and 1999 or (z) cumulative EBITDA of $15.0 million or more during
1998, 1999 and 2000. If earned, the Purchaser will pay Seller the Additional
Consideration by March 31 of the year following the year in which the Additional
Consideration was earned.
(2) In addition to the Additional Consideration, the Purchaser agrees to
pay the Stockholder additional consideration for the purchase of the Company
Common Stock (the "APP") as follows: (a) if the Companies achieve EBITDA of
$6.0 million or more in 1998 (the "1998 Threshold"), Purchaser will pay the
Stockholder $1.5 million in cash and that number of shares of Purchaser Common
Stock having a then Market Value equal to $1.5 million; (b) if the Companies
achieve EBITDA of $8.0 million or more in 1999 (the "1999 Threshold"), the
Purchaser will pay the Stockholders $4.5 million in cash and that number of
shares of Purchaser Common Stock having a then Market Value equal to $4.5
million; and (c) if the Companies achieve EBITDA of $10.0 million or more in
2000 (the "2000 Threshold"), the Purchaser will pay the Stockholder $6.5 million
in cash and that number of shares of the Purchaser's Common Stock having a then
Market Value equal to $6.5 million. If in any of these three years, the
Companies exceed the EBITDA amount for that year set forth above, the Purchaser
will pay the Stockholder further consideration of one dollar of cash and the
number of shares of the Purchaser's Common Stock having a then Market Value of
one dollar for each one dollar of EBITDA in excess of the EBITDA amount for that
year (the cash and shares, collectively payable pursuant to this sentence, the
"AEO"). Notwithstanding the prior sentence and provided the APP which was not
achieved in a given year is achieved in a subsequent year pursuant to Section
7.3(b)(3) below: (i) if the Companies fail to achieve EBITDA of $6.0 million in
1998, the amount of such shortfall shall be added to $8.0 million (the "Revised
1999 Threshold"), and such sum shall become the amount of EBITDA the Companies
must achieve in 1999 in order for the Stockholder to become entitled to the AEO,
and (ii) if the Companies fail to achieve EBITDA of $8.0 million in 1999 or the
Revised 1999 Threshold, if applicable, the amount of such shortfall shall be
added to $10.0 million, and such sum shall become the amount of EBITDA the
Companies must achieve in 2000 in order for the Stockholder to become entitled
to the AEO.
(3) If the Companies fail to achieve the relevant EBITDA Threshold set
forth in paragraph (2) in any year, the Stockholder nevertheless may earn the
APP for that year as follows:
(i) If the Companies' EBITDA for 1998 is less than the 1998 Threshold
but the sum of the Companies' EBITDA for 1998 and 1999 is $14 million or more,
then the Purchaser will pay the Stockholder the APP for both 1998 and 1999;
-18-
(ii) If the Companies' EBITDA for 1998 is less than the 1998
Threshold and the sum of the Companies EBITDA for 1998 and 1999 is less than $14
million, but the sum of the Companies' EBITDA for 1998, 1999 and 2000 is $24
million or more, then the Purchaser will pay the Stockholder the APP for all
three years but only if the Companies' EBITDA for 1999 is greater than their
EBITDA for 1998 and their EBITDA for 2000 is greater than their EBITDA for 1999;
(iii) If the Companies' EBITDA for 1999 is less than the 1999
Threshold but the sum of the Companies' EBITDA for 1998 and 1999 is $14 million
or more, then the Purchaser will pay the Stockholder the APP for 1998 and 1999
but only if the Companies' EBITDA for 1999 is greater than their EBITDA for
1998;
(iv) If the Companies' EBITDA for 1999 is less than the 1999
Threshold but the sum of the Companies' EBITDA for 1999 and 2000 is $18 million
or more, then the Purchaser will pay the Stockholder the APP for 1999 and 2000;
(v) If the Companies' EBITDA for 1998 and 1999 are both less than
the 1998 and 1999 Thresholds but the sum of the Companies' EBITDA for all three
years is $24 million or more, then the Purchaser will pay the Stockholder the
APP for all three years but only if the Companies EBITDA for 1999 is greater
than their EBITDA for 1998;
(vi) If the Companies' EBITDA for 2000 is less than the 2000
Threshold, but the sum of the Companies' EBITDA for all three years is $24
million or more, then the Purchaser will pay the Stockholder the APP for 2000
but only if the Companies' EBITDA for 2000 is greater than 1999;
(vii) If the Companies' EBITDA for 2000 is less than the 2000
Threshold, but the sum of the Companies' EBITDA for 1999 and 2000 is $18 million
or more, then the Purchaser will pay the Stockholder the APP for 2000 but only
if the Companies' EBITDA for 2000 is greater than their EBITDA for 1999; and
(viii) If the Companies' EBITDA for 1999 and 2000 are less than the
1999 and 2000 Thresholds but the sum of the Companies EBITDA for all three years
is $24 million or more, then the Purchaser will pay the Stockholder the APP for
all three years but only if the Companies' EBITDA for 1999 is greater than their
EBITDA for 1998 and the Companies' EBITDA for 2000 is greater than their EBITDA
for 1999.
(4) For purposes of this Section 7.3, the Market Value of a share of
Purchaser Common Stock shall equal the average of the closing per share sales
prices reported in the Wall Street Journal, Eastern Edition, for each of the 20
trading days immediately prior to issuance. Any payments earned by the
Stockholder pursuant to paragraphs (2) and (3) will be paid by March 31 of the
following year.
-19-
(5) The Stockholder agrees that she will not sell, transfer (other than to
the Named Officers and/or ▇▇. ▇▇▇▇▇▇ in compliance with the requirements of
Section 2.13 hereof), pledge, hypothecate or otherwise dispose of any Earnout
Shares, (i) until after December 31, 2001 in the case of any shares issued to
her as Additional Consideration, and (ii) for three years from the applicable
year end in the case of any shares issued to her as APP or AEO. In furtherance
of the foregoing restrictions, the Purchaser may place a restrictive legend on
any certificate representing the Earnout Shares and may deliver stop transfer
instructions to its stock transfer agent. If on the date that any of the
foregoing restrictions lapse, the Market Value of the affected Earnout Shares is
less than three-quarters of the Market Value of such Earnout Shares at the time
of their issuance (the "Three-quarters Value"), the Purchaser shall issue to the
Stockholder (or her permitted transferee or transferees) that number of
additional shares of its Common Stock having a Market Value equal to the amount
by which such Earnout Shares' Market Value is less than the Three-quarters
Value. The Purchaser agrees to file a Registration Statement with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
within 30 days of issuance of such additional shares so as to permit the
Stockholder to immediately resell any such additional shares.
(6) EBITDA means the combined revenues, on a calendar year basis, of the
Companies or their successors (excluding revenues attributable to transactions
outside the Companies' normal course of business and any material one-time, non-
recurring contracts not of a type similar to contracts that the Companies have
entered into in the ordinary course of business in the past (the "Non-Recurring
Revenues")), reduced by the Companies' combined recurring operating expenses
(excluding those incurred in generating the Non-Recurring Revenues), but not
reduced by the charges incurred or allocated by Purchaser or its affiliates,
non-recurring expenses (such as professional fees associated with one-time
events and compensation to key employees and Named Officers that will not be
recurring after Closing), interest, taxes, depreciation and amortization.
EBITDA shall be calculated by Ernst & Young LLP, independent auditors, in
accordance with GAAP which shall be consistently applied in accordance with the
past practices of the Companies within 60 days of the applicable calendar year-
end, and copies of such calculation shall promptly thereafter be provided to
Purchaser and Stockholder. For purposes of calculating EBITDA, the following
rules shall apply: (i) there shall be ignored any reduction after 1998 in the
aggregate compensation (by way of salary, bonus or otherwise) or benefits paid
or payable to the Companies' employees below the amounts thereof for the prior
year; (ii) if the Stockholder or any of the Named Officers resigns from the
Companies and is not replaced by the Companies within 90 days provided Purchaser
specifies in writing that a replacement is required, the compensation (by way of
salary, bonus or otherwise) or benefits paid or payable to the Stockholder or
such Named Officer who resigned for services rendered by her or him to the
Companies for the twelve months preceding such resignation shall be included in
the calculation of EBITDA for the twelve months' period beginning on the date of
such resignation; and (iii) the method by which the Companies accounted for
deferred marketing costs, deferred product development and deferred revenues on
the Financial Statements shall be used, regardless of the method by which the
Purchaser accounts for any such item following the Closing.
-20-
(7) Any cash payment due from Purchaser to Stockholder under this Section
7.3 which is not paid within fifteen (15) days of when due shall bear interest
at the rate of fifteen percent (15%) per annum until paid in full.
(8) Purchaser covenants to Stockholder that it will, at all times, reserve
a sufficient number of shares of Purchaser Common Stock to enable it to pay the
Earnout Consideration in full.
(9) The Stockholder shall have 30 days from receipt of a calculation of
EBITDA by Ernst & Young LLP to object thereto. If Stockholder does object, she
shall so notify Purchaser in writing, whereupon Purchaser and Stockholder shall
reasonably attempt to resolve the objection. If Purchaser and Stockholder have
been unable to resolve Stockholder's objection within 10 days, Stockholder shall
engage a nationally recognized firm of independent certified public accountants
(the "CPA's") to recalculate the EBITDA in question, and the CPA's shall be
directed to complete such recalculation within 30 days. The recalculation of the
EBITDA in question by the CPA's shall be final and binding on all parties to
this Agreement.
7.4 Management of Companies After Closing. (a) Purchaser agrees that
-------------------------------------
Stockholder and ▇▇▇▇ ▇▇▇▇▇▇▇▇▇ will continue as Co-Chief Executive Officers of
the Companies (the "Co-CEO's") following the Closing, in accordance with the
terms and provisions of their Employment Agreements to be entered into by them
at Closing. The Co-CEO's shall be the sole persons responsible for managing the
operations (including decisions relating to revenue and expenses) of the
Companies' businesses, and, in furtherance thereof, shall prepare and submit
annual budgets for approval by a Management Committee of Purchaser (consisting
of Messrs. ▇▇▇▇▇▇, ▇▇▇▇▇-▇▇▇▇▇ and ▇▇▇▇▇), whose approval shall not be
unreasonably withheld or delayed. The Co-CEO's, in managing the operation of the
Companies' businesses, may not vary any item of expense shown on an approved
budget by an annual cumulative amount of more than $500,000 without the approval
of the Management Committee, whose approval shall not be unreasonably withheld
or delayed.
(b) From the Closing through December 31, 2000, Purchaser agrees that
it will maintain the Companies as separate corporations and will not require the
companies to operate any other business or acquire any assets other than as
approved by the Co-CEO's.
7.5 Closing. The closing (the "Closing") of the transactions
-------
contemplated by this Agreement shall take place at the offices of Piper &
Marbury L.L.P., ▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇ beginning at
10:00 a.m. on the second business day after all conditions set forth in Section
8 and Section 9 hereof have been fulfilled or waived but in no event subsequent
to January 30, 1998 (the "Termination Date"), or at such other time and place as
may be agreed upon in writing by the Purchaser and the Stockholder. If the
Closing shall not have occurred on or before the Termination Date, either the
Purchaser or the Stockholder may terminate this Agreement so long as the party
seeking such termination is not then in default hereunder and has not failed to
satisfy any condition to closing hereunder within its or her control.
-21-
7.6 Accounting for Stock Purchases. Each of the Parties hereby
------------------------------
agrees that the Stock Purchases, for Purchaser's financial reporting purposes,
will be deemed to have occurred on January 1, 1998. Each party agrees to take
no action which would be inconsistent with the foregoing sentence.
8. CONDITIONS TO THE PURCHASER'S OBLIGATIONS. Unless waived by the
Purchaser in writing in its sole discretion, all obligations of the Purchaser
under this Agreement are subject to the fulfillment, prior to or at the Closing,
of each of the following conditions:
8.1 Covenants and Representations of the Stockholder and ▇▇. ▇▇▇▇▇▇.
---------------------------------------------------------------
The Stockholder, the Companies and ▇▇. ▇▇▇▇▇▇ shall have executed all agreements
contemplated by this Agreement and the Closing Documents to be executed on or
prior to Closing and shall have performed and complied in all material respects
with all agreements, covenants, obligations and conditions required thereby to
be performed or complied with by them on or prior to Closing. All
representations and warranties of the Stockholder and ▇▇. ▇▇▇▇▇▇ shall be true
and correct as if made for the first time on the Closing Date.
8.2 Opinion of Counsel. The Stockholder shall have delivered to the
------------------
Purchaser a favorable opinion of the Companies' counsel dated the date of
Closing, in form and substance satisfactory to the Purchaser and its counsel, to
the effect that: (a) each of the Companies is a corporation duly organized,
validly existing and in good standing under the laws of the State of California
and has full corporate power to carry on its business as it is now being
conducted, to own or hold under lease the properties and assets it now owns or
holds under lease and to enter into and perform its obligations under this
Agreement; (b) the authorized, issued and outstanding capital stock of each of
the Companies is as set forth in Section 2.1 of this Agreement, and each of the
issued and outstanding shares of such stock has been duly authorized and issued
and is fully paid and non-assessable and is reflected on the stock ledger of
each of the Companies as being issued to and solely owned by the Stockholder;
(c) to the knowledge of such counsel, the Stockholder has good and marketable
title to the Company Common Stock, free and clear of any Liens; (d) the
execution, delivery and performance of this Agreement and all other documents to
be executed by the Stockholder or ▇▇. ▇▇▇▇▇▇ in connection with this Agreement
(collectively, the "▇▇▇▇▇▇ Documents") have been duly executed and delivered by
the Stockholder and ▇▇. ▇▇▇▇▇▇, and constitute valid and legally binding
obligations of the Stockholder and ▇▇. ▇▇▇▇▇▇, as applicable, subject to
applicable bankruptcy, insolvency, moratorium and other similar laws of general
application and such general principles of equity as a court having jurisdiction
may apply; (e) the execution and delivery of this Agreement and the other ▇▇▇▇▇▇
Documents by the Stockholder and ▇▇. ▇▇▇▇▇▇, as applicable, did not, and the
consummation of the transactions contemplated hereby and thereby will not,
violate any provision of the Articles of Incorporation or By-Laws of either of
the Companies or any provision of any agreement, instrument, order, judgment or
decree, of which such counsel has knowledge, to which the Stockholder, either of
the Companies or ▇▇. ▇▇▇▇▇▇ may be a party or by which any of them is bound; (f)
except as may be specified by such counsel, such counsel does not know of any
suit or proceeding pending or threatened against or affecting the
-22-
Stockholder, either of the Companies or ▇▇. ▇▇▇▇▇▇, their respective businesses
or properties or the consummation of the transactions contemplated hereunder, or
which seeks to restrain or prohibit the transactions contemplated by this
Agreement; and (g) to the best actual knowledge of such counsel, all regulatory
and governmental approvals, consents and filings required of the Stockholder,
either of the Companies or ▇▇. ▇▇▇▇▇▇ for the consummation of the transactions
contemplated by this Agreement or any of the other ▇▇▇▇▇▇ Documents have been
obtained or made.
8.3 Approvals of Governmental Authorities. All governmental
-------------------------------------
approvals necessary or advisable in the opinion of the Purchaser's counsel to
consummate the transactions contemplated by this Agreement, including expiration
of the waiting period under the HSR Act, shall have been received, and the
Purchaser shall not have received any request or requirement for additional
information or condition to consummation of the Stock Purchases from the Federal
Trade Commission or the Department of Justice which contains any provision
which, in the reasonable judgment of the Purchaser, is unduly burdensome.
8.4 No Adverse Proceedings or Events. Except for those matters
--------------------------------
disclosed in Section 8.4 of the Stockholder Disclosure Schedule, no suit, action
or other proceeding against either of the Companies, the Purchaser, or their
respective officers, directors or employees, or against the Stockholder or ▇▇.
▇▇▇▇▇▇, which, if decided adversely to any of them could reasonably be expected
to have a Material Adverse Effect on the Companies, shall be threatened or
pending before any court or governmental agency, including any proceeding
(regardless of the materiality or lack thereof to the Companies) in which it
will be, or it is, sought to restrain or prohibit any of the transactions
contemplated by this Agreement or any in which it is sought to obtain material
monetary damage in connection with this Agreement or the transactions
contemplated hereby.
8.5 Consents and Actions; Contracts. All requisite consents of any
-------------------------------
third parties and other actions which the Stockholder has covenanted to use her
best efforts to obtain and take under Section 5.1 hereof shall have been
obtained and completed or have been waived by Purchaser. All material contracts
and agreements of each of the Companies, including, without limitation, those
listed on Section 2.6 or 2.7 of the Stockholder Disclosure Schedule, shall be in
full force and effect and shall not be affected by the consummation of the
transactions contemplated hereby.
8.6 Employment, Non-Compete and Other Matters. (a) Each of the
-----------------------------------------
Stockholder and the Named Officers shall have executed and delivered an
employment and non-competition agreement in substantially the form attached
hereto as Exhibit 5.4; (b) ▇▇. ▇▇▇▇▇▇ shall have executed and delivered to the
-----------
Purchaser the ▇▇▇▇▇▇ Addendum; and (d) other than as set forth in Section
2.6(iv) of the Stockholder's Disclosure Schedule, there shall be no employment
agreements between either of the Companies and any of the Companies' employees.
-23-
8.7 Other Evidence. The Purchaser shall have received from Mr.
--------------
▇▇▇▇▇▇ and the Stockholder such further certificates and documents evidencing
due action in accordance with this Agreement as the Purchaser reasonably shall
request.
8.8 Estimated Balance Sheets; Post-Closing Adjustments. (a) The
--------------------------------------------------
Stockholder shall have provided to the Purchaser the Estimated Balance Sheet
which shall not reflect any materially adverse differences from the Unaudited
Financial Statements delivered to the Purchaser pursuant to Section 2.4 hereof.
(b) If at any time during the six months' period beginning on the
Closing date, Purchaser is required to provide cash working capital to the
Companies (each a "Working Capital Infusion") Stockholder shall reimburse
Purchaser for each Working Capital Infusion, which reimbursement shall be paid
by Stockholder within 10 days after Purchaser notifies Stockholder in writing of
any Working Capital Infusion.
8.9 Section 338(h)(10) Election. At closing, the Stockholder and the
---------------------------
Companies shall sign the documents necessary, in Purchaser's reasonable
judgment, to effect an election under Section 338(h)(10) of the Internal Revenue
Code of 1954, as amended, in connection with the transactions hereunder.
9. CONDITIONS TO THE STOCKHOLDER'S OBLIGATIONS. Unless waived in writing
by the Stockholder in her sole discretion, all obligations of the Stockholder
under this Agreement are subject to the fulfillment, prior to or at the Closing,
of each of the following conditions:
9.1 Covenants and Representations of the Purchaser. The Purchaser
----------------------------------------------
shall have executed all agreements contemplated by this Agreement and the
Closing Documents to be executed on or prior to Closing and shall have performed
and complied in all material respects with all agreements, covenants,
obligations and conditions required thereby to be performed or complied with by
them on or prior to Closing. All representations and warranties of the
Purchaser shall be true and correct as if made for the first time on the Closing
Date
9.2 Opinion of Counsel to the Purchaser. The Purchaser shall have
-----------------------------------
delivered to each of the Companies a favorable opinion of the Purchaser's
counsel, Piper & Marbury L.L.P., dated the date of Closing, in form and
substance satisfactory to the Stockholder and her counsel, to the effect that
(a) the Purchaser is a corporation duly organized, validly existing and in good
standing under the laws of the State of Maryland; (b) the Purchaser has the
corporate power to carry on its business as it is now being conducted and to own
or hold under lease the properties and assets it now owns or holds under lease;
(c) the Purchaser has the corporate power to enter into the transactions
contemplated by this Agreement; (d) the execution, delivery and performance of
this Agreement and all other documents to be executed by the Purchaser in
connection with this Agreement (the "Purchaser Documents" and, together with the
▇▇▇▇▇▇ Documents, the "Closing Documents") have been duly authorized and
approved by all requisite action of the Board of Directors and stockholders of
the Purchaser, and this Agreement and all
-24-
other Purchaser Documents have been duly executed and delivered by the Purchaser
and constitute valid and legally binding obligations of the Purchaser, subject
to applicable bankruptcy, insolvency, moratorium and other similar laws of
general application and such general principles of equity as a court having
jurisdiction may apply; (e) the execution and delivery of this Agreement and the
other the Purchaser Documents did not, and the consummation of the transactions
contemplated hereby or thereby will not, violate or conflict with any provision
of the Articles of Incorporation or By-Laws of the Purchaser; (f) the execution
and delivery of this Agreement and the other the Purchaser Documents did not,
and the consummation of the transactions contemplated hereby or thereby will
not, violate any provision of any agreement, instrument, order, judgment or
decree, of which such counsel has knowledge, to which the Purchaser may be a
party or by which it is bound; (g) except as may be specified by such counsel,
such counsel does not know of any material suit or proceeding pending or
threatened against the Purchaser which seeks to restrain or prohibit the
consummation of the transactions contemplated by this Agreement; (h) the shares
of Purchaser Common Stock issuable as Earnout Shares have been duly authorized
and reserved for issuance and, if and when issued and delivered in accordance
with this Agreement, will be duly and validly issued and outstanding shares of
Purchaser Common Stock, fully paid and non assessable under the laws of the
State of Maryland; (i) to the knowledge of such counsel, all regulatory and
governmental approvals, consents and filings required of the Purchaser for the
consummation of the transactions contemplated by this Agreement or any of the
other the Purchaser Documents have been obtained or made, and to the knowledge
of such counsel, all such approvals, consents or filings remain in full effect
as of the date of such opinion; and (j) to such further effect regarding the
validity and sufficiency of legal proceedings and matters relative to the
transactions contemplated by this Agreement as the Stockholder may reasonably
request.
9.3 No Adverse Proceedings or Events. No suit, action or other
--------------------------------
proceeding against either of the Companies or the Purchaser, or their respective
officers, directors or employees, or against the Stockholder, shall be
threatened or pending before any court or governmental agency in which it will
be, or it is, sought to restrain or prohibit any transactions contemplated by
this Agreement or to obtain damages or other relief in connection with this
Agreement or the transactions contemplated hereby.
9.4 Employment, Non-Competition and Other Matters. (a) the Companies
---------------------------------------------
shall have executed and delivered to each of the Stockholder and the Named
Officers an employment and non-competition agreement in substantially the form
attached hereto as Exhibit A; and (b) the Companies shall have executed and
---------
delivered to ▇▇. ▇▇▇▇▇▇ a consulting and non-compete agreement in substantially
the form attached hereto as Exhibit B.
---------
9.5 Approvals of Governmental Authorities. All governmental
-------------------------------------
approvals necessary or advisable in the opinion of the Stockholder's counsel to
consummate the transactions contemplated by this Agreement, including expiration
of the waiting period under the HSR Act, shall have been received, and neither
the Stockholder nor the Companies shall have received any request or requirement
for additional information or condition to consummation of the Stock Purchases
from the Federal Trade Commission or the Department of Justice which
-25-
contains any provision which, in the reasonable judgment of the Stockholder, is
unduly burdensome.
9.6 Other Evidence. The Stockholder shall have received from the
--------------
Purchaser such further certificates and documents evidencing due action in
accordance with this Agreement, as the Stockholder reasonably shall request.
9.7 Consents and Actions. All requisite consents of any third
--------------------
parties and other actions which the Purchaser has covenanted to use its best
efforts to obtain and take under Article 4 hereof shall have been obtained and
completed.
10. INDEMNIFICATION.
10.1 Indemnification by the Stockholder. Subject to Section 10.4
----------------------------------
hereof, the Stockholder hereby covenants and agrees to indemnify and hold
harmless the Purchaser and its successors and assigns, at all times from and
after the Closing Date against and in respect of the following:
(a) any liability, loss, damage, expense or other cost resulting
from any misrepresentation, breach of representation or warranty or breach or
non-fulfillment of any agreement or covenant on the part of either of the
Companies, the Stockholder or ▇▇. ▇▇▇▇▇▇ under this Agreement, or from any
inaccuracy or misrepresentation in or omission from the Company Disclosure
Schedule, any certificate or other instrument or document furnished or to be
furnished by either of the Companies, the Stockholder or ▇▇. ▇▇▇▇▇▇ hereunder;
(b) any loss, damage, expense or other cost which arises out of
any liabilities or obligations of either of the Companies, the Stockholder or
▇▇. ▇▇▇▇▇▇ (including, without limitation, federal, state or local income and
other taxes) incurred prior to the Closing (but only to the extent that such
liabilities and obligations were not shown, provided for or reserved against in
the Financial Statements, the Estimated Balance Sheet or on the Stockholder's
Disclosure Schedule).
(c) all claims, actions, suits, proceedings, demands,
assessments, judgments, costs and expenses, including without limitation
reasonable attorneys' fees and expenses, of any nature incident to any of the
matters indemnified against pursuant to this Section 10.1, including, without
limitation, all such costs and expenses incurred in the defense thereof or in
the enforcement of any rights of the Purchaser hereunder against the Stockholder
or the Companies.
Any amounts covered by paragraphs (a), (b) or (c) of this
Section 10.1 or Section 10.3 are hereinafter referred to as a "Loss."
10.2 Indemnification Procedure. The procedure for indemnification
-------------------------
under Section 10.1 shall be as follows:
-26-
(a) If at any time the Purchaser is entitled to indemnification
hereunder (the "Indemnitee"), it shall receive notice of any state of facts that
have resulted or may result in a Loss, the Indemnitee shall promptly give
written notice (a "Notice of Claim") to the Stockholder (the "Indemnitor") of
the discovery of such potential or actual Loss. A Notice of Claim shall set
forth (x) a brief description of the nature of the potential or actual Loss, and
(y) the total amount of Loss anticipated (including any costs or expenses which
have been or may be incurred in connection therewith). Upon receipt of a Notice
of Claim, the Indemnitor may elect to cure the event of Loss within 90 days
after the date of receipt of the Notice of Claim. Except for a failure to
deliver a Notice of Claim within the applicable survival period as provided
under Section 11 (which failure shall constitute a complete defense), the
Indemnitee's failure to give prompt notice or to provide copies of documents or
to furnish relevant data shall not constitute a defense (in whole or in part) to
any claim by the Indemnitee against the Indemnitor for indemnification, unless
and then only to the extent that such failure shall have caused or increased
such liability or adversely affected the ability of the Indemnitor to defend
against or reduce her liability.
(b) The Indemnitor shall accept or reject any Loss as to which
a Notice of Claim is sent by the Indemnitee by giving written notice of such
acceptance or rejection to the Indemnitee within 30 days after the date of
receipt of the Notice of Claim. Failure of the Indemnitor to reject a Loss
within 30 days of receipt of the Notice of Claim shall be conclusive evidence of
the Indemnitor's acceptance of her responsibility to indemnify the Indemnitee
against such Loss. Even if the Indemnitor assumes the defense thereof, the
Indemnitee shall have the right to settle any matter for which a claim for
indemnification is made hereunder upon notice to the Indemnitor and by waiving
any right against the Indemnitor with respect to such matter.
(c) If any Notice of Claim relates to any claim made against
the Indemnitee by any third person, the Notice of Claim shall state the nature,
basis and amount of such claim. The Indemnitor shall have the right, at its
election, by written notice given to the Indemnitee, to assume the defense of
the claim as to which such notice has been given with counsel reasonably
acceptable to the Indemnitee. Except as provided in the next sentence, if the
Indemnitor so elects to assume such defense, it shall diligently and in good
faith defend such claim and shall keep the Indemnitee reasonably informed of the
status of such defense, and the Indemnitee shall cooperate with the Indemnitor
in the defense of such claim, provided that in the case of any settlement
providing for remedies other than monetary damages for which indemnification is
provided, the Indemnitee shall have the right to approve the settlement, which
approval shall not be unreasonably withheld or delayed. If the Indemnitor does
not so elect to defend any claim as aforesaid or shall fail to defend any claim
diligently and in good faith (after having so elected), the Indemnitee may, at
the Indemnitor's expense, assume the defense of such claim and take such other
action as it may elect to defend or settle such claim as it may determine in its
reasonable discretion and seek reimbursement therefor from Indemnitor.
(d) In the event there arises a dispute between the parties as
to whether a Loss is required to be indemnified pursuant to this Section 10.1,
the parties agree to resolve such dispute in accordance with the arbitration
provisions of Section 12.4 hereof.
-27-
(e) The Indemnitor expressly agrees that if the Indemnitee
incurs any Loss hereunder as to which it is entitled to indemnity pursuant to
this Section 10.1, Indemnitee may set-off the same against any amount then or
thereafter due and owing by Purchaser to the Indemnitor, including, without
limitation, any Earnout Consideration payable pursuant to Section 7.3 hereof. In
addition, any amount required to be paid by Indemnitor to Indemnitee hereunder
may be paid, at Indemnitor's option, either in cash or by delivery of shares of
Purchaser Common Stock having a then Market Value equal to such amount required
to be paid.
10.3 Indemnification by the Purchaser. The Purchaser hereby
--------------------------------
covenants and agrees to indemnify and hold harmless the Stockholder, her
successors and assigns, at all times from and after the Closing Date, against
and in respect of the following:
(a) any liability, loss, damage, expense or other cost resulting
from any misrepresentation, breach of representation or warranty or breach or
non-fulfillment of any agreement or covenant on the part of the Purchaser under
this Agreement, or from any inaccuracy or misrepresentation in or omission from
the Purchaser Disclosure Schedule, any certificate or other instrument or
document furnished or to be furnished by the Purchaser hereunder; and
(b) all claims, actions, suits, proceedings, demands,
assessments, judgments, costs and expenses, including without limitation,
reasonable attorneys' fees and expenses, of any nature incident to any of the
matters indemnified against pursuant to this Section 10.3, including without
limitation, all such costs and expenses incurred in the defense thereof or in
the enforcement of any rights of the Stockholder hereunder.
The Stockholder shall promptly notify the Purchaser of any asserted
liability, damage, loss or expense claimed to give rise to indemnification
hereunder and thereafter the Purchaser shall have the right to defend,
compromise and settle such matter, provided that the Purchaser takes all such
actions as are necessary to cause the Stockholder not to be required to pay any
cost or expense in connection therewith. Any dispute with respect to indemnity
pursuant to this Section 10.3 shall be resolved in accordance with the
arbitration provisions of Section 10.4 hereof.
The Stockholder's failure to give prompt notice shall not constitute a
defense (in whole or in part) to any claim by the Stockholder against the
Purchaser for indemnification, unless and then only to the extent that such
failure shall have caused or increased such liability or adversely affected the
ability of the Purchaser to defend against or reduce its liability.
The Purchaser shall accept or reject any Loss as to which a notice is
sent by the Stockholder by giving written notice of such acceptance or rejection
to the Stockholder within 30 days after the date of receipt of the notice.
Failure of the Purchaser to reject a Loss within 30 days of receipt of the
notice shall be conclusive evidence of the Purchaser's acceptance of its
responsibility to indemnify the Stockholder against such Loss. Even if the
Purchaser assumes the defense thereof, the Stockholder shall have the right to
settle any matter for which a claim for
-28-
indemnification is made hereunder upon notice to the Purchaser and by waiving
any right against the Purchaser with respect to such matter.
10.4 Limitations on Indemnity. Neither the Purchaser nor the
------------------------
Stockholder shall be required to make any indemnity payment under this Article
10 to the extent such payment, together with all other payments previously made
by such party under Article 10 would exceed 20% of the Aggregate Purchase Price
previously paid to the Stockholder (with any Earnout Shares issued to the
Stockholder prior to such payment valued at their Market Value as of the date of
the indemnity payment if then held by the Stockholder or at the net sales price
if such shares had previously been sold); provided, however, if any indemnity
payment is not made on account of the limit set forth earlier in this sentence
and subsequently any additional Aggregate Purchase Price is paid, the
indemnifying party shall immediately pay to the indemnified party the amount not
previously paid as a result of such limitation, which payment shall not exceed
twenty percent (20%) of the amount of such additional payment of the Aggregate
Purchase Price. The Purchaser shall make no claim for indemnity under Section
10.1, and the Stockholder shall make no claim for indemnity under Section 10.3,
unless the amount of liability as to which such claim relates exceeds $175,000.
Notwithstanding the prior sentence, if a party making a claim for indemnity as
to any liability which equals or exceeds $175,000, previously had the right to
indemnity in one or more instances involving a claim or claims relating to
liability which was less than $175,000, such party shall then be entitled to
aggregate such prior claim or claims with the claim relating to liability equal
to or exceeding $175,000. The limitations on indemnity in the prior two
sentences shall not apply after a party entitled to indemnity has made a claim
relating to liability equal to or exceeding $175,000.
11. SURVIVAL. The representations, warranties, covenants and agreements
made by the parties in this Agreement (including, without limitation, Section
12.1) and in any other certificates and documents delivered in connection
herewith, including the indemnification obligations of the Stockholder and the
Purchaser set forth in Article 10 hereof, shall survive the Closing under this
Agreement regardless of any investigation made by the party making claim
hereunder, except that, subject to the provisions of the next sentence, neither
the Purchaser, on the one hand, nor the Stockholder, on the other, shall have
any liability with respect to any matter if notice of a claim has not been
provided on or prior to the end of the thirtieth month following the Closing
Date. Notwithstanding the foregoing, (i) any indemnification obligations of the
Stockholder relating to federal, state or local income tax matters of any sort
shall continue in full force and effect without limitation until expiration of
the statute of limitations applicable to such tax matters, (ii) the
representations and warranties contained in Sections 1.5(a), 2.1, 2.23 and 3.4
and any indemnification obligations in connection therewith shall continue in
full force and effect without any limitation, and (iii) any claims, actions or
suits based upon fraud, willful misconduct or intentional misrepresentation by
any party hereto or any representative of such party shall continue in full
force and effect without limitation until expiration of the statute of
limitations applicable thereto.
-29-
12. OTHER AGREEMENTS.
12.1 Access. The Stockholder and the Companies will, and will cause
------
their respective affiliates, directors, officers, employees and agents to,
afford to the Purchaser and its advisors, officers, employees, agents and
attorneys reasonable access at all reasonable times to the Companies' officers,
employees, agents, consultants, properties, books, records and contracts and
will furnish to the Purchaser and its advisors all financial, operating and
other data and information relating to the Companies as the Purchaser or its
advisors may reasonably request. The Purchaser will, and will cause its
affiliates, directors, officers, employees and agents to, afford to the
Stockholder and their respective advisors, officers, employees, agents and
attorneys reasonable access at all reasonable time to the Purchaser's officers,
employees, agents, consultants, properties, books, records and contracts and
will furnish to the Companies and their respective advisors all financial,
operating and other data and information relating to the Purchaser as the
Companies, the Stockholder or their respective advisors may reasonably request.
Except as otherwise required by law, the party receiving any information
hereunder (i) will use any such information solely for the purpose of due
diligence review and for no other purpose, (ii) will maintain such information
confidential, (iii) will not at any time or in any manner, directly or
indirectly, disclose to any person any or all of such information (other than
for the purpose of due diligence review on a need to know basis), (iv) will not
use for its benefit or the benefit of any third party any such information
(other than benefits resulting from the consummation of the Stock Purchases),
and (v) upon the termination of this Agreement without consummation of the Stock
Purchases will either (A) deliver to the party that originally provided it all
such information, including originals or copies thereof, that are in its
possession or in the possession of its officers, employees, agents and advisors
or (B) certify to the other party that such information has been destroyed.
12.2 Public Statements. Neither the Companies nor the Stockholder
-----------------
nor the Purchaser, from and after the date of this Agreement until the Closing,
shall make any public announcement or other disclosure concerning this Agreement
or the Stock Purchases without the prior consent of the other (the "Reviewing
Party") as to form, content and timing; provided, however, that the consent of
the Reviewing Party shall not be unreasonably withheld and, if upon advice of
legal counsel, the Purchaser determines that public announcement or disclosure
is required by law or any securities exchange on which the Purchaser's stock is
listed and the Reviewing Party fails to give its consent in a timely manner
(considering the circumstances), the Purchaser shall not be prohibited from
disseminating and/or filing the public announcement or disclosure without
obtaining such consent.
12.3 S Corporation Earnings; 1997 Income Tax Returns.
-----------------------------------------------
(a) The Companies' S Corporation estimated earnings for the
period from January 1, 1998 to but not including the date of Closing (the
"Estimated Earnings"), to the extent not previously distributed, shall be
distributed by the Companies to the Stockholder immediately prior to the
Closing.
-30-
(b) In order to apportion the Companies' 1998 earnings between
the Stockholder and the Purchaser, the Actual Earnings (as defined below) shall
be allocated to the Stockholder and the Companies' earnings for the period
beginning on the Closing Date and ending on December 31, 1998 shall be allocated
to the Purchaser. For tax and accounting purposes, such apportionment of
earnings shall be determined under the closing of the books method consistent
with Code Sections 1362(e)(3) and 1362(e)(6)(D) and the Regulations thereunder.
The Stockholder, the Companies and the Purchaser shall take all action necessary
to make the election to have the closing of the books method apply and shall
timely file such elections and reports, including the election required under
Regulation Section 1.1362-6(a)(5), to effectuate the use of the closing of the
books method. Notwithstanding the foregoing, the Companies' EBITDA for all of
1998 shall be used for purposes of the calculations pursuant to Section 7.3(b)
hereof.
(c) No later than 45 days after the Closing Date, the Purchaser
shall deliver to the Stockholder a written calculation (the "Calculation") of
the actual earnings for each of the Companies to but not including the Closing
Date (the "Actual Earnings"). In the event the Stockholder does not accept the
Calculation as accurate, the Stockholder shall notify the Purchaser of the non-
acceptance of the Calculation in writing within 20 days after receipt of the
Calculation (the failure of which notice within such 20 days shall be deemed
acceptance of the Calculation), and the Stockholder and the Purchaser shall
promptly attempt to reach agreement on the correct amount of the Calculation. In
the event the Stockholder and the Purchaser cannot reach agreement either Ernst
& Young, LLP or the CPA's (at Purchaser's option) shall determine the correct
amount of the Calculation, which determination shall be binding on the
Stockholder and the Purchaser. Thereafter, any amounts required to be under this
Section 12.3 shall be paid and the releases signed as provided in Section
12.3(d) and (e), as the case may be.
(d) To the extent the Actual Earnings exceed the Estimated
Earnings, the Purchaser shall pay such excess amount to the Stockholder within
three days after the later of acceptance of the Calculation by the Stockholder
or determination thereof by Ernst & Young, L.L.P.; provided, however, any
payment required to be made by the Purchaser hereunder shall not be due and
payable unless and until the Stockholder shall have executed and delivered to
the Purchaser a release relating to the Purchaser's obligations under this
Section 12.3, in form and substance reasonably acceptable to the Purchaser.
(e) To the extent the Estimated Earnings exceed the Actual
Earnings, the Stockholder agrees to pay to the Purchaser, by certified check,
within three business days after the later of acceptance of the Calculation or
the determination by Ernst & Young, LLP, the amount by which the Estimated
Earnings exceeded the Actual Earnings; provided, however, any payment required
to be made by the Stockholder hereunder shall not be due and payable unless and
until the Purchaser shall have executed and delivered to the Stockholder a
release relating to the Stockholder' obligations under this Section 12.3, in
form and substance reasonably acceptable to the Stockholder.
-31-
(f) The Companies' Accountants shall be responsible for
preparing and filing the Companies' 1997 federal and state income tax returns.
12.4. Dispute Resolution. Except as provided in Section 7.3, Section
------------------
12.3 and in the last sentence of this Section 12.4, Stockholder and the
Purchaser agree that any controversy or claim arising out of or relating to this
Agreement or breach thereof shall be settled exclusively by arbitration in Los
Angeles, California in accordance with the National Rules of the American
Arbitration Association. The decision of the arbitration or arbitrators shall be
binding on all parties hereto, and judgment upon the award rendered by the
arbitrator may be entered by any court having jurisdiction thereover. In
reaching its decision, the arbitrator shall have no authority to change or
modify any provision of this Agreement. Notwithstanding the foregoing, any party
hereto may seek specific performance, injunctive relief or other equitable
relief before a court of competent jurisdiction (i) prior to the Closing for the
purpose of compelling any other party hereto to perform its obligations
hereunder, or (ii) subsequent to Closing for the purpose of compelling any other
party to arbitrate any controversy or claim in the manner provided for above.
The failure of a court to grant the equitable relief sought by a party hereto
pursuant to clause (i) shall not bar such party from seeking to arbitrate the
same claim, and such failure shall be taken into account by the arbitrators in
any arbitration.
13. CONFIDENTIALITY. After the date hereof, each party hereto will hold
in confidence and not reveal to any third parties any knowledge or information
of a confidential nature with respect to the business, products, know-how and
methods of operation of each of the other parties hereto, and will not disclose,
publish or make use of the same, provided, however, that the foregoing shall not
be applicable to any disclosure or use of confidential information or knowledge
that can be demonstrated to have (i) been publicly known prior to the date of
this Agreement, (ii) become known by publication or otherwise not due to the
unauthorized act or omission on the part of the recipient, or (iii) been
supplied to the recipient by a third party without violation of the rights of
any of the parties to this Agreement or any other party's rights. The parties
agree that the remedy at law for any breach of this Section 13 may be inadequate
and that the aggrieved party shall be entitled to injunctive relief in addition
to any other remedy available to it in law or equity.
14. EXPENSES. Each party to this Agreement shall pay all of its expenses
relating hereto, including fees and disbursements of its counsel, accountants
and financial advisors, whether or not the transactions hereunder are
consummated. It is expressly understood, however, that (i) Purchaser shall bear
all costs and expenses relating to any post-closing audits and any filings with
governmental entities in connection with the transactions contemplated by this
Agreement, and (ii) the Stockholder may require the Companies (but only to the
extent such expenses are accounted for or reserved against in the Estimated
Balance Sheets) to bear the fees and other expenses of counsel and financial
advisors to the Companies and/or the Stockholder or other types of fees and
expenses incurred in connection with the transactions contemplated by this
Agreement. In addition, if the Closing has not occurred by January 30, 1998,
Sylvan shall immediately pay the Companies $250,000 unless the Closing has not
occurred because of the failure or inability of the Companies, the Stockholders
or ▇▇▇. ▇▇▇▇▇▇ to abide by the covenants
-32-
contained herein or to satisfy the conditions to Closing contained herein or
because of their breach of this Agreement.
15. NOTICES. Except as otherwise provided herein, all notices, requests,
demands and other communications under or in connection with this Agreement
shall be in writing, and:
(a) if to the Purchaser, shall be addressed to:
▇. ▇▇▇ ▇▇▇▇▇
▇▇▇▇▇▇ Learning Systems, Inc.
▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
with a copy to:
▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇, ▇▇., Esquire
Piper & Marbury L.L.P.
▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
(b) if to the Companies or the Stockholder, shall be addressed to the
Stockholder:
▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇ & Associates, Inc.
▇▇▇▇▇▇ Educational Productions, Inc.
▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
with a copy to:
▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Esquire
Hamburg, Hanover, ▇▇▇▇▇▇▇ & ▇▇▇▇▇▇
▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
(b) if to ▇▇. ▇▇▇▇▇▇:
▇▇▇ ▇▇▇▇▇, #▇▇▇▇
▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
with a copy to:
▇▇▇▇, Golden & ▇▇▇▇▇▇▇, LLP
▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇, #▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇
-33-
All such notices, requests, demands or communications shall be mailed
postage prepaid, certified mail, return receipt requested, or by overnight
delivery or delivered personally, and shall be sufficient and effective when
delivered to or received at the address so specified. Any party may change the
address at which it is to receive notice by like written notice to the other.
16. TERMINATION; EXTENSION; WAIVER
16.1 Termination. This Agreement may be terminated at any time prior
-----------
to the Closing by written notice by the terminating party to the other party):
(a) by mutual written consent of the Purchaser and the
Stockholder; or
(b) by either the Purchaser or the Companies and the Stockholder
if the ▇▇▇▇▇▇ Stock Purchase and the ▇▇▇▇▇▇ Productions Stock Purchase shall not
have been consummated by January 30, 1998, subject to the provisions of Section
7.5 hereof; or
(c) by either the Purchaser or the Companies and the Stockholder,
if a court of competent jurisdiction or other governmental entity shall have
issued a nonappealable final order, decree or ruling or taken any other action,
in each case having the effect of permanently restraining, enjoining or
otherwise prohibiting either of the Stock Purchases; or
(d) by the Purchaser on the one hand or the Companies and the
Stockholder on the other hand, if there has been a material breach of any
representation, warranty, covenant or agreement on the part of the other parties
set forth in this Agreement, which breach shall not have been cured prior to the
Closing Date;
16.2 Effect of Termination. In the event of termination of this
---------------------
Agreement as provided in Section 7.5 or Section 16.1, this Agreement shall
immediately become void and there shall be no liability or obligation on the
part of the Stockholder or the Purchaser or the Companies or their respective
officers, directors, stockholders or affiliates, except as set forth in Sections
13, 14 and 16.3 and further except to the extent that such termination results
from the willful breach by a party of any of its representations, warranties or
covenants set forth in this Agreement, as to which all legal and equitable
remedies of the party adversely affected shall survive and be enforceable.
16.3 Extension; Waiver. At any time prior to the Closing, each party
-----------------
hereto may but shall not be required to (i) extend the time for the performance
of any of the obligations or other acts of the other party, (ii) waive any
inaccuracies in the representations and warranties of the other party contained
herein or in any document, certificate or writing delivered pursuant hereto, or
(iii) waive compliance by the other party with any of the agreements or
conditions contained herein. Any agreement on the part of either party hereto
to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party, and the failure of either
party hereto to assert any of its rights hereunder shall not constitute a waiver
of such rights absent such instrument in writing.
-34-
17. ENTIRE AGREEMENT. This Agreement (including the exhibits hereto and
the lists, schedules and documents delivered hereunder, which are a part hereof)
is intended by the parties to and does constitute the entire agreement of the
parties with respect to the transactions contemplated by this Agreement. This
Agreement supersedes any and all prior understandings, written or oral, between
the parties, and this Agreement may be amended, modified, waived, discharged or
terminated only by an instrument in writing signed by the party against which
enforcement of the amendment, modification, waiver, discharge or termination is
sought. This Agreement may not be amended except by an instrument in writing
signed by each of the parties hereto.
18. GENERAL. The paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. This Agreement may be executed simultaneously
in two or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument. This Agreement
shall inure to the benefit of and be binding upon the parties hereto and their
respective successors and permitted assigns, but nothing herein, express or
implied, is intended to or shall confer any rights, remedies or benefits upon
any person other than the parties hereto. This Agreement may not be assigned by
any party hereto. This Agreement shall be construed in accordance with and
governed by the laws of the State of California, without giving effect to the
principles of conflicts of law.
-35-
IN WITNESS WHEREOF, the Purchaser, each of the Companies and the
Stockholder have caused this Agreement to be duly executed and their respective
seals to be hereunto affixed as of the date first above written.
WITNESS: SYLVAN LEARNING SYSTEMS, INC.
__________________________ By:____________________________________
WITNESS: ▇▇▇▇▇▇ & ASSOCIATES, INC.
__________________________ By:____________________________________
WITNESS: ▇▇▇▇▇▇ EDUCATIONAL PRODUCTIONS,
INC.
__________________________ By:____________________________________
WITNESS: STOCKHOLDER:
___________________________ _________________________________(Seal)
▇▇▇▇▇▇▇ ▇▇▇▇▇▇
WITNESS: ▇▇. ▇▇▇▇▇▇:
___________________________ _________________________________(Seal)
▇▇▇ ▇▇▇▇▇▇
-36-
