Exhibit 2.1
EXECUTION COPY
CONTRIBUTION AGREEMENT AND PLAN OF REORGANIZATION AND
MERGER
BY AND AMONG
▇▇▇▇▇▇▇▇▇▇▇▇▇▇.▇▇▇, LLC,
▇▇▇▇▇▇▇▇▇▇▇.▇▇▇, INC.,
S-E EDUCATIONAL HOLDINGS CORP.
AND
S-E EDUCATIONAL MERGER CORP.
___________________________________
DATED AS OF NOVEMBER 14, 2000
____________________________________
TABLE OF CONTENTS
Page
----
ARTICLE I. THE CONTRIBUTION AND THE MERGER.................................. 3
Section 1.1 Certificate of Incorporation and
Bylaws of Holdings............................. 3
Section 1.2 The Contribution............................... 3
Section 1.3 The SmarterKids Merger......................... 3
Section 1.4 Effective Time................................. 3
Section 1.5 Closing........................................ 4
Section 1.6 Effect of the Contribution..................... 4
Section 1.7 Effect of the SmarterKids Merger............... 4
Section 1.8 Organizational Documents of
Earlychildhood................................. 4
Section 1.9 Certificate of Incorporation and
Bylaws of the Surviving Corporation............ 4
Section 1.10 Management of Earlychildhood Following
the Contribution; Directors and
Officers of the Surviving Corporation.......... 4
Section 1.11 Earlychildhood Employees....................... 5
ARTICLE II. EXCHANGE AND CONVERSION OF SECURITIES........................... 5
Section 2.1 Exchange of LLC Interests of Earlychildhood.... 5
Section 2.2 Conversion of SmarterKids Capital Stock........ 5
Section 2.3 Treatment of Outstanding Options,
SmarterKids Warrants, and SmarterKids
Employee Stock Purchase Plan................... 6
Section 2.4 Cancellation of Holdings Common Stock.......... 8
Section 2.5 Exchange of Certificates....................... 8
ARTICLE III. REPRESENTATIONS AND WARRANTIES OF EARLYCHILDHOOD............... 11
Section 3.1 Organization of Earlychildhood................. 12
Section 3.2 Earlychildhood Capital Structure............... 12
Section 3.3 Authority; No Conflict; Required Filings
and Consents................................... 13
Section 3.4 Books and Records.............................. 14
Section 3.5 Financial Information.......................... 14
Section 3.6 No Undisclosed Liabilities..................... 15
Section 3.7 Absence of Certain Changes or Events........... 15
Section 3.8 Taxes.......................................... 17
Section 3.9 Properties..................................... 18
Section 3.10 Intellectual Property.......................... 19
Section 3.11 Product Warranty and Liability................. 21
Section 3.12 Material Contracts............................. 21
Section 3.13 Litigation..................................... 23
Section 3.14 Environmental Matters.......................... 23
Section 3.15 Employee Benefit Plans......................... 24
Section 3.16 Compliance With Laws........................... 26
Section 3.17 Tax Matters.................................... 26
Section 3.18 Registration Statement; Proxy
Statement/Prospectus........................... 27
Section 3.19 Labor Matters.................................. 27
Section 3.20 Insurance...................................... 28
Section 3.21 No Existing Discussions........................ 28
Section 3.22 Consent........................................ 28
Section 3.23 Management Committee Approval.................. 28
Page
----
ARTICLE IV. REPRESENTATIONS AND WARRANTIES OF SMARTERKIDS................... 28
Section 4.1 Organization of SmarterKids.................... 28
Section 4.2 SmarterKids Capital Structure.................. 29
Section 4.3 Authority; No Conflict; Required
Filings and Consents........................... 30
Section 4.4 SEC Filings; Financial Statements.............. 31
Section 4.5 No Undisclosed Liabilities..................... 32
Section 4.6 Absence of Certain Changes or Events........... 32
Section 4.7 Taxes.......................................... 33
Section 4.8 Properties..................................... 34
Section 4.9 Intellectual Property.......................... 35
Section 4.10 Product Warranties and Liability............... 37
Section 4.11 Agreements, Contracts and Commitments.......... 37
Section 4.12 Litigation..................................... 39
Section 4.13 Environmental Matters.......................... 39
Section 4.14 Employee Benefit Plans......................... 39
Section 4.15 Compliance With Laws........................... 41
Section 4.16 Tax Matters.................................... 42
Section 4.17 Registration Statement; Proxy
Statement/Prospectus........................... 42
Section 4.18 Labor Matters.................................. 42
Section 4.19 Insurance...................................... 42
Section 4.20 Opinion of Financial Advisor................... 43
Section 4.21 No Existing Discussions........................ 43
Section 4.22 Board Recommendation........................... 43
Section 4.23 Voting Requirements............................ 43
Section 4.24 Section 203 of the DGCL Not Applicable......... 43
ARTICLE V. COVENANTS........................................................ 43
Section 5.1 Conduct of Business............................ 44
Section 5.2 Cooperation; Notice; Cure...................... 46
Section 5.3 No Solicitation................................ 46
Section 5.4 No Negotiation................................. 48
Section 5.5 Proxy Statement/Prospectus;
Registration Statement......................... 50
Section 5.6 Nasdaq Quotation............................... 50
Section 5.7 Access to Information.......................... 50
Section 5.8 SmarterKids Stockholders' Meeting.............. 51
Section 5.9 Legal Conditions to Merger..................... 51
Section 5.10 Earlychildhood Financial Statements............ 52
Section 5.11 Public Disclosure.............................. 52
Section 5.12 Non-recognition Exchange....................... 52
Section 5.13 Affiliate Agreements........................... 52
Section 5.14 Nasdaq Quotation............................... 53
Section 5.15 Stock Plans.................................... 53
Section 5.16 Employee Stock Purchase Plan................... 54
Section 5.17 Non-Employee Director Plan..................... 55
Section 5.18 Brokers or Finders............................. 55
Section 5.19 Indemnification................................ 55
Section 5.20 Letter of SmarterKids' Accountants............. 56
Section 5.21 Letter of Earlychildhood's Accountants......... 56
Section 5.22 Post-Transaction Corporate Governance
of Holdings.................................... 56
Section 5.23 Name of Holdings............................... 57
Section 5.24 Conveyance Taxes............................... 57
Section 5.25 SmarterKids Minimum Closing Cash............... 57
Section 5.26 ▇▇▇▇▇ Consulting Agreement..................... 58
- ii -
Page
----
ARTICLE VI. CONDITIONS TO THE TRANSACTIONS.................................. 58
Section 6.1 Conditions to Each Party's Obligation to
Effect the Transactions........................ 58
Section 6.2 Additional Conditions to Obligations of
Earlychildhood................................. 59
Section 6.3 Additional Conditions to Obligations of
SmarterKids.................................... 60
ARTICLE VII. TERMINATION AND AMENDMENT...................................... 61
Section 7.1 Termination.................................... 61
Section 7.2 Effect of Termination.......................... 62
Section 7.3 Fees and Expenses.............................. 62
Section 7.4 Amendment...................................... 64
Section 7.5 Extension; Waiver.............................. 64
ARTICLE VIII. MISCELLANEOUS 64
Section 8.1 Nonsurvival of Representations,
Warranties and Agreements...................... 64
Section 8.2 Notices........................................ 64
Section 8.3 Interpretation................................. 65
Section 8.4 Counterparts................................... 65
Section 8.5 Entire Agreement; No Third Party Beneficiaries. 65
Section 8.6 Governing Law.................................. 66
Section 8.7 Assignment..................................... 66
- iii -
EXHIBITS
Exhibit A Form of Stockholder Support Agreement
Exhibit B Form of Consent and Non-Contravention Agreement
Exhibit C Form of Lockup Agreement
Exhibit D Form of Registration Rights Agreement
Exhibit E Form of Restated Certificate of Incorporation of Holdings
Exhibit F Form of Amended and Restated Bylaws of Holdings
Exhibit G Form of Second Amended and Restated Operating Agreement
Exhibit H Form of Restated Certificate of Incorporation of Surviving
Corporation
Exhibit I Form of Amended and Restated Bylaws of Surviving Corporation
Exhibit J Form of Affiliate Agreement
Exhibit K Form of Holdings Stock Plan
Exhibit L Form of Holdings Employee Stock Purchase Plan
Exhibit M Form of Holdings Director Plan
Exhibit N Form of ▇▇▇▇▇ Consulting Agreement
- iv -
TABLE OF DEFINED TERMS
Cross Reference
Terms in Agreement
----- ---------------
Acquisition Proposal..............................................Section 5.3(a)
Affiliate ..........................................................Section 5.13
Affiliate Agreement.................................................Section 5.13
Agreement...............................................................Preamble
Bankruptcy and Equity Exception...................................Section 3.3(a)
Benefit Arrangements.............................................Section 3.15(a)
Breaching Party...................................................Section 7.3(b)
Certificates..................................................Section 2.5(b)(ii)
Class A Exchange Ratio...............................................Section 2.1
Class B Exchange Ratio...............................................Section 2.1
Class C Exchange Ratio...............................................Section 2.1
Closing..............................................................Section 1.5
Closing Date.........................................................Section 1.5
Code....................................................................Recitals
Confidentiality Agreements...........................................Section 5.7
Consent Agreement.......................................................Recitals
Contribution............................................................Recitals
Conveyance Taxes....................................................Section 5.24
Costs............................................................Section 5.19(a)
Current Premium..................................................Section 5.19(b)
DGCL....................................................................Recitals
Earlychildhood..........................................................Preamble
Earlychildhood Acquisition Proposal...............................Section 5.4(a)
Earlychildhood Balance Sheet.........................................Section 3.5
Earlychildhood Change of Control Arrangements....................Section 3.15(f)
Earlychildhood Confidentiality Agreement..........................Section 5.3(b)
Earlychildhood Director..........................................Section 5.22(a)
Earlychildhood Disclosure Schedule...................................ARTICLE III
Earlychildhood Employee Plans....................................Section 3.15(a)
Earlychildhood ERISA Affiliate................................Section 3.15(c)(i)
Earlychildhood Exchange Ratio........................................Section 2.1
Earlychildhood Financial Information.................................Section 3.5
Earlychildhood Intellectual Property.............................Section 3.10(a)
Earlychildhood Lease Agreements...................................Section 3.9(a)
Earlychildhood Material Adverse Change...............................Section 3.7
Earlychildhood Material Adverse Effect...............................Section 3.1
Earlychildhood Material Contracts................................Section 3.12(b)
Earlychildhood Option.............................................Section 2.3(a)
Earlychildhood Option Plans.......................................Section 2.3(a)
Earlychildhood Organizational Documents...........................Section 3.3(b)
- v -
Cross Reference
Terms in Agreement
----- ---------------
Earlychildhood Owned Real Property................................Section 3.9(a)
Earlychildhood Permitted Encumbrances.............................Section 3.9(a)
Earlychildhood Third Party Rights................................Section 3.10(e)
Effective Time.......................................................Section 1.4
Employee Benefit Plans...........................................Section 3.15(a)
Encumbrance ......................................................Section 3.2(a)
Environmental Law ...............................................Section 3.14(b)
ERISA ...........................................................Section 3.15(a)
ESPP Termiation Date .............................................Section 2.3(d)
Exchange Act .....................................................Section 4.3(c)
Exchange Agent ...................................................Section 2.5(a)
Exchange Fund ....................................................Section 2.5(a)
Executive Management Agreement ..................................Section 3.12(e)
Expenses .........................................................Section 7.3(b)
Final SmarterKids Purchase Date ..................................Section 2.3(d)
Fund .............................................................Section 3.3(c)
GAAP ................................................................Section 3.5
Governmental Entity ..............................................Section 3.3(c)
Hazardous Substance .............................................Section 3.14(c)
Holdings................................................................Preamble
Holdings Common Stock...................................................Recitals
Holdings Director Plan..............................................Section 5.17
Holdings Employee Stock Purchase Plan............................Section 5.16(a)
Holdings Material Adverse Effect..................................Section 6.1(f)
Holdings Stock Plan..............................................Section 5.15(f)
HSR Act...........................................................Section 3.3(c)
Indemnified Parties..............................................Section 5.19(a)
Independent Director.............................................Section 5.22(a)
IRS...............................................................Section 3.8(b)
LLC Certificates...............................................Section 2.5(b)(i)
LLC Interests........................................................Section 1.2
Lockup Agreement........................................................Recitals
Members...........................................................Section 3.2(a)
Merger Sub..............................................................Preamble
Minimum Closing Cash................................................Section 5.25
Operating Agreement..................................................Section 1.2
Order.............................................................Section 5.9(b)
Other Party.......................................................Section 5.4(a)
Outside Date......................................................Section 7.1(b)
Proxy Statement/Prospectus..........................................Section 3.18
Registration Rights Agreement...........................................Recitals
Registration Statement..............................................Section 3.18
Rule 145............................................................Section 5.13
SEC.................................................................Section 3.18
Second Amended and Restated Operating Agreement......................Section 1.8
Stockholder Support Agreement...........................................Recitals
- vi -
Cross Reference
Terms in Agreement
----- ---------------
Subsidiary...........................................................Section 3.1
Superior Proposal.................................................Section 5.3(b)
Surviving Corporation................................................Section 1.7
SmarterKids.............................................................Preamble
SmarterKids Balance Sheet.........................................Section 4.4(c)
SmarterKids Certificate of Merger....................................Section 1.4
SmarterKids Certificates......................................Section 2.5(b)(ii)
SmarterKids Change of Control Agreements.........................Section 4.14(f)
SmarterKids Common Stock.............................................Section 1.3
SmarterKids Confidentiality Agreement................................Section 5.7
SmarterKids Director.............................................Section 5.22(a)
SmarterKids Disclosure Schedule.......................................ARTICLE IV
SmarterKids Employee Plans.......................................Section 4.14(a)
SmarterKids Employee Stock Purchase Plan..........................Section 2.3(d)
SmarterKids ERISA Affiliate...................................Section 4.14(c)(i)
SmarterKids Exchange Ratio........................................Section 2.2(c)
SmarterKids Intellectual Property.................................Section 4.9(a)
SmarterKids Lease Agreements......................................Section 4.8(a)
SmarterKids Material Adverse Change..................................Section 4.6
SmarterKids Material Adverse Effect..................................Section 4.1
SmarterKids Material Contracts...................................Section 4.11(b)
SmarterKids Merger......................................................Recitals
SmarterKids Organizational Documents..............................Section 4.3(b)
SmarterKids Permitted Encumbrances................................Section 4.8(a)
SmarterKids Preferred Stock.......................................Section 4.2(a)
SmarterKids SEC Reports...........................................Section 4.4(a)
SmarterKids Stock Option..........................................Section 2.3(b)
SmarterKids Stock Plans...........................................Section 4.2(a)
SmarterKids Stockholders' Meeting...................................Section 3.18
SmarterKids Third Party Rights....................................Section 4.9(e)
SmarterKids Warrants .............................................Section 4.2(a)
Tax ..............................................................Section 3.8(a)
Taxes ............................................................Section 3.8(a)
Termination Fee ..................................................Section 7.3(c)
Third Party ......................................................Section 5.3(a)
Transaction Documents ............................................Section 3.3(a)
Transactions ........................................................Section 1.3
Transfer Documents ............................................Section 2.5(b)(i)
- vii -
CONTRIBUTION AGREEMENT AND PLAN OF REORGANIZATION AND MERGER
CONTRIBUTION AGREEMENT AND PLAN OF REORGANIZATION AND MERGER (the
"Agreement"), dated as of November 14, 2000 by and among ▇▇▇▇▇▇▇▇▇▇▇▇▇▇.▇▇▇,
LLC, a California limited liability corporation ("Earlychildhood"),
▇▇▇▇▇▇▇▇▇▇▇.▇▇▇, INC., a Delaware corporation ("SmarterKids"), S-E EDUCATIONAL
HOLDINGS CORP., a newly-formed Delaware corporation, one-half of the issued and
outstanding capital stock of which is owned by each of Earlychildhood and
SmarterKids ("Holdings") and S-E EDUCATIONAL MERGER CORP., a newly-formed
Delaware corporation and a wholly-owned subsidiary of Holdings ("Merger Sub").
WHEREAS, the Management Committee of Earlychildhood and the Board of
Directors of SmarterKids deem it advisable and in the best interests of each
corporation and its members or stockholders, as the case may be, in order to
advance the long-term business interests of Earlychildhood and SmarterKids, that
Earlychildhood and SmarterKids combine;
WHEREAS, the combination of Earlychildhood and SmarterKids shall be
effected through (i) the contribution to Holdings by the holders of all
outstanding LLC Interests (as defined in Section 1.2) of all of the right, title
and interest in and to their entire ownership interest in Earlychildhood (the
"Contribution") such that Earlychildhood will become a wholly-owned subsidiary
of Holdings and the holders of LLC Interests in Earlychildhood will become
stockholders of Holdings, and (ii) the merger of Merger Sub with and into
SmarterKids (the "SmarterKids Merger") such that SmarterKids becomes a wholly-
owned subsidiary of Holdings and the holders of capital stock of SmarterKids
become stockholders of Holdings;
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition and inducement to Earlychildhood's willingness to enter into this
Agreement, certain stockholders of SmarterKids have entered into a Stockholder
Support Agreement with Earlychildhood, dated as of the date hereof,
substantially in the form attached hereto as Exhibit A (the "Stockholder Support
Agreement"), pursuant to which such stockholders have agreed, among other
things, to vote all voting securities of SmarterKids beneficially owned by them
in favor of approval and adoption of this Agreement and the SmarterKids Merger;
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition and inducement to SmarterKids' willingness to enter into this
Agreement, the holders of all outstanding LLC Interests in Earlychildhood have
entered into a Consent and Non-Contravention Agreement, dated as of the date
hereof, substantially in the form attached hereto as Exhibit B (the "Consent
Agreement"), pursuant to which such persons have agreed, among other things, to
(i) effect the Contribution upon the terms and subject to the conditions set
forth herein and (ii) take no action, directly or indirectly, to contravene,
supersede or modify their consent in favor of this Agreement and the
Contribution or to cause Earlychildhood to take any action in contravention of
this Agreement or the transactions contemplated hereby;
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition and inducement to Earlychildhood's and SmarterKids' willingness
to enter into this Agreement, certain holders of LLC Interests in Earlychildhood
and certain stockholders of
1
SmarterKids have entered into a Lockup Agreement, dated as of the date hereof,
substantially in the form attached hereto as Exhibit C (the "Lockup Agreement"),
pursuant to which such persons have agreed, among other things, not to sell the
shares of Holdings Common Stock (as defined below) such persons receive in
connection with the Transactions (as defined in Section 1.3) until the earlier
to occur of (i) 180 days from the Effective Time (as defined in Section 1.4) and
(ii) the date upon which a secondary offering of Holdings Common Stock for the
purposes of effecting the orderly sale of such shares has been consummated;
WHEREAS, concurrently with the execution and delivery of this Agreement and
as a condition and inducement to Earlychildhood's and SmarterKids' willingness
to enter into this Agreement, Holdings has entered into a Registration Rights
Agreement, dated as of the date hereof, substantially in the form attached
hereto as Exhibit D (the "Registration Rights Agreement") with certain Holders
(as defined in the Registration Rights Agreement) of common stock, par value
$0.01 per share of Holdings (the "Holdings Common Stock"), which Registration
Rights Agreement will govern the resale registration by Holdings, for the
benefit of the Holders, of shares of Holdings Common Stock received by such
Holders in the Transactions;
WHEREAS, for Federal income tax purposes, it is intended that (i) the
Contribution shall qualify as a transfer of property to Holdings by holders of
LLC Interests described in Section 351 of the Internal Revenue Code of 1986, as
amended (the "Code"), and (ii) the SmarterKids Merger shall qualify as a
reorganization described in Section 368(a) of the Code and, taken together with
the Contribution, as a transfer of property to Holdings by holders of
SmarterKids capital stock described in Section 351 of the Code; and
WHEREAS, the Management Committee of Earlychildhood and the Board of
Directors of SmarterKids have approved this Agreement and each of the
Transaction Documents (as defined in Section 3.3(a)) to which its company is a
party;
WHEREAS, no further action on the part of the Management Committee of
Earlychildhood is required to effect the transactions contemplated hereby;
WHEREAS, the holders of LLC Interests have approved this Agreement and the
Contribution and no further action on the part of the holders of LLC Interests
is required to effect the transactions contemplated hereby;
WHEREAS, under the Delaware General Corporation Law (the "DGCL"), in order
to effect the SmarterKids Merger, SmarterKids is required to obtain the vote of
the holders of a majority of the outstanding shares of SmarterKids capital stock
to approve this Agreement; and
WHEREAS, Earlychildhood, SmarterKids and Holdings desire to make certain
representations, warranties, covenants and agreements in connection with the
combination and also to prescribe various conditions to the combination.
NOW, THEREFORE, in consideration of the foregoing and the respective
representations, warranties, covenants and agreements set forth below, the
parties agree as follows:
2
ARTICLE I.
THE CONTRIBUTION AND THE MERGER
Section 1.1 Certificate of Incorporation and Bylaws of Holdings. The
Certificate of Incorporation and Bylaws of Holdings shall be amended prior to
the Effective Time to be substantially in the form of Exhibit E and Exhibit F
attached hereto, respectively. From the date hereof until the Effective Time,
Earlychildhood and SmarterKids shall consult with each other prior to causing or
permitting Holdings to take any action and neither shall cause or permit
Holdings to take any action inconsistent with the provisions of this Agreement
without the written consent of the other.
Section 1.2 The Contribution. Upon the terms and subject to the
provisions of this Agreement, at the Effective Time, each holder of an
outstanding membership interest in Earlychildhood (such membership interests
(other than Earlychildhood Options (as defined below) and membership interests
issuable upon conversion of Earlychildhood Options) being collectively referred
to herein as the "LLC Interests") shall contribute to Holdings all of the right,
title and interest in and to such holder's entire ownership interest in
Earlychildhood, which ownership interest, in each case, is set forth next to the
name of such person in the Earlychildhood Disclosure Schedule (as defined in
Article III), and in exchange therefor (as described in Section 2.1), (i) each
holder of LLC Interests which is a Class A Member (as defined in that certain
Amended and Restated Operating Agreement of Earlychildhood dated as of May 5,
1999 (the "Operating Agreement")) shall be entitled to receive 4.9951 shares of
Holdings Common Stock for each .00001% of an LLC Interest held in such capacity,
(ii) each holder of an LLC Interest which is a Class B Member (as defined in the
Operating Agreement) shall be entitled to receive 4.6781 shares of Holdings
Common Stock for each .00001% of an LLC Interest held in such capacity, and
(iii) each holder of an LLC Interest which is a Class C Member (as defined in
the Operating Agreement) shall be entitled to receive 2.3365 shares of Holdings
Common Stock for each .00001% of an LLC Interest held in such capacity. At the
Effective Time, the Operating Agreement shall be amended and restated to provide
that Holdings shall be the sole member of Earlychildhood, holding a single class
of membership interests.
Section 1.3 The SmarterKids Merger. Earlychildhood and SmarterKids shall
cause Holdings to form Merger Sub under the laws of the State of Delaware.
Earlychildhood and SmarterKids shall cause Holdings to cause Merger Sub to
execute and deliver this Agreement. Upon the terms and subject to the provisions
of this Agreement, and in accordance with the DGCL, Merger Sub shall merge with
and into SmarterKids at the Effective Time, and each outstanding share of common
stock, par value $.01 per share, of SmarterKids ("SmarterKids Common Stock")
shall be converted into the right to receive one (1) share of Holdings Common
Stock (as described in Section 2.2(c)). Merger Sub will be formed solely to
facilitate the SmarterKids Merger and will conduct no business or activity other
than in connection with the SmarterKids Merger. The SmarterKids Merger, together
with the Contribution, collectively constitute the "Transactions."
Section 1.4 Effective Time. Subject to, and consistent with, the
provisions of this Agreement, a certificate of merger (the "SmarterKids
Certificate of Merger") with respect to the SmarterKids Merger in such form as
is required by the relevant provisions of the DGCL shall be
3
duly prepared, executed and acknowledged and thereafter delivered to the
Secretary of State of the State of Delaware for filing, as provided in the DGCL,
as early as practicable on the Closing Date. The SmarterKids Merger shall become
effective upon the filing of the SmarterKids Certificate of Merger with the
Secretary of State of the State of Delaware or such later time as may be
specified therein. The time at which the Contribution has been consummated and
the SmarterKids Merger has become fully effective is hereinafter referred to as
the "Effective Time."
Section 1.5 Closing. The closing of the Transactions (the "Closing")
will take place at 10:00 a.m., Eastern Standard Time, on a date to be specified
by SmarterKids and Earlychildhood, which shall be no later than the third
business day after satisfaction or, if permissible, waiver of the conditions set
forth in Article VI (the "Closing Date"), at the offices of ▇▇▇▇▇▇ & ▇▇▇▇▇▇▇,
▇▇▇ ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇ ▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇, unless another
date, place or time is agreed to in writing by SmarterKids and Earlychildhood.
Section 1.6 Effect of the Contribution. As a result of the
Contribution, (i) Holdings shall become the sole member of Earlychildhood and
shall have all of the rights, benefits and obligations set forth in the Second
Amended and Restated Operating Agreement (as defined in Section 1.8) and (ii)
Earlychildhood will become a wholly-owned subsidiary of Holdings.
Section 1.7 Effect of the SmarterKids Merger. As a result of the
SmarterKids Merger, the separate corporate existence of Merger Sub shall cease
and SmarterKids shall continue as the surviving corporation (the "Surviving
Corporation"). Upon becoming effective, the SmarterKids Merger shall have the
effects set forth in the DGCL. Without limiting the generality of the foregoing,
and subject thereto, at the Effective Time, all properties, rights, privileges,
powers and franchises of SmarterKids and Merger Sub shall vest in the Surviving
Corporation, and all debts, liabilities and duties of SmarterKids and Merger Sub
shall become the debts, liabilities and duties of the Surviving Corporation.
Section 1.8 Organizational Documents of Earlychildhood. At the
Effective Time, the Operating Agreement shall be amended and restated in
substantially the form attached hereto as Exhibit G to provide that Holdings
shall be the sole member of Earlychildhood upon consummation of the Contribution
holding a single class of membership interests (as so amended and restated, the
"Second Amended and Restated Operating Agreement").
Section 1.9 Certificate of Incorporation and Bylaws of the Surviving
Corporation. At the Effective Time, the Certificate of Incorporation and Bylaws
of the Surviving Corporation shall be amended and restated as set forth in
Exhibit H and Exhibit I attached hereto, respectively, in each case until duly
amended in accordance with applicable law.
Section 1.10 Management of Earlychildhood Following the Contribution;
Directors and Officers of the Surviving Corporation.
(a) Management of Earlychildhood. At the Effective Time (after giving
effect to the Contribution), Earlychildhood shall be managed in accordance with
the provisions of the Second Amended and Restated Operating Agreement.
4
(b) Directors and Officers of the Surviving Corporation. The directors and
officers of SmarterKids immediately prior to the Effective Time shall be the
initial directors and officers of the Surviving Corporation, each to hold office
in accordance with the Certificate of Incorporation and Bylaws of the Surviving
Corporation.
Section 1.11 Earlychildhood Employees. At the Effective Time, all of
the employees of Earlychildhood shall be transferred to Holdings and, from and
after the Effective Time, shall be employees of Holdings. Such transferred
employees shall serve Holdings in the same capacity or capacities as they served
Earlychildhood prior to the Effective Time. Each of the parties hereto shall
take all actions necessary to effect the provisions of this Section 1.11.
ARTICLE II.
EXCHANGE AND CONVERSION OF SECURITIES
Section 2.1 Exchange of LLC Interests of Earlychildhood. At the
Effective Time, subject to Section 2.5(e), (i) each .00001% of an LLC Interest
then outstanding and owned by a holder of LLC Interests which is a Class A
Member in such capacity shall, by virtue of the Contribution, be exchanged for
4.9951 shares of Holdings Common Stock (the "Class A Exchange Ratio"), (ii) each
.00001% of an LLC Interest then outstanding and owned by a holder of LLC
Interests which is a Class B Member in such capacity shall, by virtue of the
Contribution, be exchanged for 4.6781 shares of Holdings Common Stock (the
"Class B Exchange Ratio"), and (iii) each .00001% of an LLC Interest then
outstanding and owned by a holder of LLC Interests which is a Class C Member in
such capacity shall, by virtue of the Contribution, be exchanged for 2.3365
shares of Holdings Common Stock (the "Class C Exchange Ratio" and, collectively
with the Class A Exchange Ratio and the Class B Exchange Ratio, the
"Earlychildhood Exchange Ratio"). Upon such Contribution, all such LLC Interests
shall be transferred in full, together with all right, title and interest in and
to such LLC Interests, to Holdings and each person who was formerly a holder of
an LLC Interest shall cease to have any rights with respect thereto, except the
right to receive the shares of Holdings Common Stock and any cash in lieu of
fractional shares of Holdings Common Stock to be issued or paid in consideration
therefor, without interest thereon.
Section 2.2 Conversion of SmarterKids Capital Stock. At the Effective
Time, by virtue of the SmarterKids Merger and without any action on the part of
any of the parties hereto or the holders of any shares of SmarterKids Common
Stock or capital stock of Merger Sub:
(a) Capital Stock of Merger Sub. Each issued and outstanding share of the
capital stock of Merger Sub shall be converted into and become one fully paid
and nonassessable share of common stock, par value $.01 per share, of the
Surviving Corporation.
(b) Cancellation of Treasury Stock. All shares of SmarterKids Common Stock
that are owned by SmarterKids (including treasury stock) shall be canceled and
retired and shall cease to exist and no shares of Holdings Common Stock or other
consideration shall be delivered in exchange therefor.
(c) Exchange Ratio for SmarterKids Common Stock. Subject to Section
2.5(e), each issued and outstanding share of SmarterKids Common Stock (other
than shares to be
5
canceled in accordance with Section 2.2(b)) shall be converted into the right to
receive one (1) share of Holdings Common Stock (the "SmarterKids Exchange
Ratio"). All such shares of SmarterKids Common Stock, when so converted, shall
no longer be outstanding and shall automatically be cancelled and retired and
shall cease to exist, and each holder of a certificate representing any such
shares shall cease to have any rights with respect thereto, except the right to
receive the shares of Holdings Common Stock and any cash in lieu of fractional
shares of Holdings Common Stock to be issued or paid in consideration therefor,
in each case upon the surrender of such certificate in accordance with Section
2.5 and without interest thereon.
Section 2.3 Treatment of Outstanding Options, SmarterKids Warrants, and
SmarterKids Employee Stock Purchase Plan.
(a) Earlychildhood Options. At the Effective Time, each outstanding
option to purchase LLC Interests (an "Earlychildhood Option") under any option
plans of Earlychildhood in effect on the date hereof (the "Earlychildhood Option
Plans"), whether vested or unvested, shall be deemed to constitute an option to
acquire, on substantially the same terms and conditions as were applicable under
such Earlychildhood Option the same number of shares of Holdings Common Stock as
the holder of such Earlychildhood Option would have been entitled to receive
pursuant to the Contribution had such holder exercised such option in full
immediately prior to the Effective Time (rounded down to the nearest whole
number), at a price per share (rounded up to the nearest whole cent) equal to
(x) the aggregate exercise price for the LLC Interests purchasable pursuant to
such Earlychildhood Option immediately prior to the Effective Time divided by
(y) the number of full shares of Holdings Common Stock deemed purchasable
pursuant to such Earlychildhood Option in accordance with the foregoing. Prior
to the Effective Time, Earlychildhood shall make any such amendments to the
terms of the Earlychildhood Option Plans that are necessary to give effect to
the transactions contemplated by this Section 2.3(a) and to make such
Earlychildhood Option Plans and the provisions thereof consistent with option
plans customary for public companies.
(b) SmarterKids Stock Options. At the Effective Time, each outstanding
option to purchase shares of SmarterKids Common Stock (a "SmarterKids Stock
Option") under the SmarterKids Stock Plans (as defined in Section 4.2(a)),
whether vested or unvested, shall be deemed to constitute an option to acquire,
on the same terms and conditions as were applicable under such SmarterKids Stock
Option the same number of shares of Holdings Common Stock as the holder of such
SmarterKids Stock Option would have been entitled to receive pursuant to the
SmarterKids Merger had such holder exercised such option in full immediately
prior to the Effective Time (rounded down to the nearest whole number), at a
price per share (rounded up to the nearest whole cent) equal to (x) the
aggregate exercise price for the shares of SmarterKids Common Stock purchasable
pursuant to such SmarterKids Stock Option immediately prior to the Effective
Time divided by (y) the number of full shares of Holdings Common Stock deemed
purchasable pursuant to such SmarterKids Stock Option in accordance with the
foregoing. Prior to the Effective Time, SmarterKids shall make any such
amendments to the terms of the SmarterKids Stock Plans that are necessary to
give effect to the transactions contemplated by this Section 2.3(b). It is the
intention of the parties that any SmarterKids Stock Options that are "incentive
stock options" within the meaning of Section 422 of the Code and which are
converted into options to acquire Holdings Common Stock pursuant to this Section
2.3(b) qualify
6
following the Effective Time as incentive stock options. Such adjustments
pursuant to this Section 2.3(b) are intended to be effective in a manner which
is consistent with Section 424(a) of the Code.
(c) SmarterKids Warrants. At the Effective Time, each SmarterKids Warrant
(as defined in Section 4.2(a)) shall thereafter represent solely the right to
acquire, on substantially the terms and conditions as are currently applicable
under the SmarterKids Warrants, the same number of shares of Holdings Common
Stock as a holder of the SmarterKids Warrants would have been entitled to
receive pursuant to the SmarterKids Merger had such holder exercised such
SmarterKids Warrants in full immediately prior to the Effective Time (rounded
down to the nearest whole number), at the price per share (rounded up to the
nearest whole cent) equal to (x) the aggregate exercise price for the shares of
SmarterKids Common Stock purchasable pursuant to the SmarterKids Warrants
immediately prior to the Effective Time divided by (y) the number of full shares
of Holdings Common Stock deemed purchasable pursuant to the SmarterKids Warrants
in accordance with the foregoing. Prior to the Effective Time, SmarterKids shall
make any such amendments to the terms of the SmarterKids Warrants that are
necessary to give effect to the transactions contemplated by this Section
2.3(c).
(d) SmarterKids Employee Stock Purchase Plan.
(i) In the event that the current "payment period" (as such
term is used in the 1999 Employee Stock Purchase Plan of SmarterKids (the
"SmarterKids Employee Stock Purchase Plan")), in effect as of the date of this
Agreement, ends prior to the Effective Time, SmarterKids shall use its
reasonable best efforts to terminate the SmarterKids Employee Stock Purchase
Plan, subject to Section 2.3(d)(iii) below, as of the date that the current
payment period ends (the "ESPP Termination Date").
(ii) In the event that the Effective Time occurs on or
prior to the end of the current payment period in effect as of the date of this
Agreement, SmarterKids shall use its reasonable best efforts, to the extent
permitted by law and the provisions of the SmarterKids Employee Stock Purchase
Plan, including any amendment provisions thereof, to cause the exercise date
applicable to the current payment period to be the last trading day on which the
shares of SmarterKids Common Stock are traded on Nasdaq immediately prior to the
Effective Time (the "Final SmarterKids Purchase Date"); provided, that, such
change in the Final SmarterKids Purchase Date will be conditioned upon the
consummation of the SmarterKids Merger. Subject to Section 2.3(d)(iii) below,
SmarterKids shall use its reasonable best efforts to terminate the SmarterKids
Employee Stock Purchase Plan immediately after the Final SmarterKids Purchase
Date and prior to the Effective Time.
(iii) On the occurrence of either the ESPP Termination Date
or the Final SmarterKids Purchase Date, as the case may be, SmarterKids shall
apply the funds credited as of such date under the SmarterKids Employee Stock
Purchase Plan within each participant's payroll withholdings account to the
purchase of whole shares of SmarterKids Common Stock in accordance with the
terms of the SmarterKids Employee Stock Purchase Plan. The cost to each
participant in the SmarterKids Employee Stock Purchase Plan for shares of
SmarterKids Common Stock will be the lower of 85% of the average market price of
SmarterKids Common
7
Stock on Nasdaq on (A) the first day of the then current offering period or (B)
the ESPP Termination Date or the Final SmarterKids Purchase Date, as the case
may be. No fractional shares of SmarterKids Common Stock shall be issued and any
payroll withholdings not used to purchase fractional shares of SmarterKids
Common Stock will be refunded, without interest to the participant.
(iv) It is the intention of the parties that
notwithstanding anything contained in this Agreement, the exercise price, the
number of shares purchasable and the terms and conditions applicable to any
adjustments to the SmarterKids Employee Stock Purchase Plan and any employee
stock purchase plan maintained by Holdings will be determined so as to comply
with Sections 423 and 424 of the Code and the regulations promulgated thereunder
such that the arrangement implemented under the SmarterKids Employee Stock
Purchase Plan by reason of the SmarterKids Merger not constitute a
"modification."
Section 2.4 Cancellation of Holdings Common Stock. At the Effective
Time, by virtue of the Transactions and without any action on the part of any
holder of any LLC Interest or any holder of capital stock of SmarterKids or
Holdings, each share of Holdings Common Stock issued and outstanding immediately
prior to the Effective Time shall be canceled, and no consideration shall be
delivered in exchange therefor.
Section 2.5 Exchange of Certificates. The procedures for exchanging
LLC Interests and shares of SmarterKids Common Stock outstanding immediately
prior to the Effective Time for shares of Holdings Common Stock in the
Transactions are as follows:
(a) Exchange Agent. As of the Effective Time, Holdings shall deposit
with a bank or trust company designated by SmarterKids and Earlychildhood (the
"Exchange Agent"), for the benefit of the holders of LLC Interests outstanding
immediately prior to the Effective Time and the holders of shares of SmarterKids
Common Stock outstanding immediately prior to the Effective Time, for exchange
in accordance with this Section 2.5, through the Exchange Agent, certificates
representing the shares of Holdings Common Stock issuable pursuant to Sections
2.1 and 2.2 in exchange for outstanding LLC Interests and outstanding shares of
SmarterKids Common Stock, respectively (such shares of Holdings Common Stock,
together with any dividends or distributions with respect thereto, and any cash
in lieu of fractional shares of Holdings Common Stock being hereinafter referred
to as the "Exchange Fund").
(b) Exchange Procedures.
(i) At the Effective Time, each holder of an LLC Interest
shall deliver to the Exchange Agent, or to such other agent or agents (including
Holdings) as may be appointed by Holdings, (A) documentation reasonably
satisfactory to the Exchange Agent or Holdings evidencing the transfer of the
LLC Interests to Holdings (the "Transfer Documents"), which Transfer Documents
shall include, to the extent previously issued by Earlychildhood, certificates
evidencing the LLC Interests (the "LLC Certificates") and (B) instructions for
effecting the exchange of such LLC Interests for certificates evidencing shares
of Holdings Common Stock (plus cash in lieu of fractional shares, if any, of
Holdings Common Stock as provided below) in accordance with Section 2.1. Upon
delivery of the Transfer Documents, duly
8
endorsed, to the Exchange Agent or to such other agent or agents (including
Holdings) as may be appointed by Holdings, such holders of LLC Interests shall
be entitled to receive in exchange therefor, certificates representing the
number of whole shares of Holdings Common Stock which such holder has the right
to receive pursuant to the provisions of this Article II and any cash in lieu of
fractional shares, if any, of Holdings Common Stock.
(ii) As soon as reasonably practicable after the Effective
Time, the Exchange Agent shall mail to each holder of record of a certificate or
certificates which immediately prior to the Effective Time represented
outstanding shares of SmarterKids Common Stock (the "SmarterKids Certificates"
and, together with the LLC Certificates, the "Certificates") whose shares were
converted pursuant to Section 2.2 into the right to receive shares of Holdings
Common Stock, (A) a letter of transmittal (which shall specify that delivery
shall be effected, and risk of loss and title to the SmarterKids Certificates
shall pass, only upon delivery of the SmarterKids Certificates to the Exchange
Agent and shall be in such form and have such other provisions as Earlychildhood
and SmarterKids may reasonably specify), and (B) instructions for effecting the
surrender of the SmarterKids Certificates in exchange for certificates
representing shares of Holdings Common Stock (plus cash in lieu of fractional
shares, if any, of Holdings Common Stock as provided below). Upon surrender of a
SmarterKids Certificate for cancellation to the Exchange Agent or to such other
agent or agents (including Holdings) as may be appointed by Holdings, together
with such letter of transmittal, duly executed, the holder of such SmarterKids
Certificate shall be entitled to receive in exchange therefor a certificate
representing that number of whole shares of Holdings Common Stock which such
holder has the right to receive pursuant to the provisions of this Article II,
and any cash in lieu of fractional shares, if any, of Holdings Common Stock, and
the SmarterKids Certificate so surrendered shall immediately be canceled.
(iii) In the event of a transfer of ownership of LLC
Interests or SmarterKids Common Stock prior to the Effective Time which is not
registered in the transfer records of Earlychildhood or SmarterKids,
respectively, a certificate representing the proper number of shares of Holdings
Common Stock may be issued to a transferee if the Transfer Documents for such
LLC Interests or the SmarterKids Certificate representing such SmarterKids
Common Stock, as applicable, is presented to the Exchange Agent, or such other
agent or agents as may be appointed by Holdings (including Holdings),
accompanied by all documents required to evidence and effect such transfer and
by evidence that any applicable stock transfer taxes have been paid.
(iv) Immediately after the Effective Time, (A) all LLC
Interests shall have been delivered (or, in the absence of certificated LLC
Interests, shall be deemed to have been delivered) to the Exchange Agent (or to
such other agent or agents (including Holdings) as may be appointed by Holdings,
and exchanged for shares of Holdings Common Stock in accordance with the
provisions set forth in subsection (i) above and (B) each outstanding
SmarterKids Certificate which theretofore represented shares of SmarterKids
Common Stock shall represent only the right to receive shares of Holdings Common
Stock pursuant to the terms hereof and shall not be deemed to evidence ownership
of the number of shares of Holdings Common Stock into which such shares of
SmarterKids Common Stock would
9
be or were, as the case may be, converted until the SmarterKids Certificate
therefor shall have been surrendered in accordance with this Section 2.5.
(c) Distributions With Respect to Unexchanged Interests or Shares. No
dividends or other distributions declared or made after the Effective Time with
respect to Holdings Common Stock with a record date after the Effective Time
shall be paid to the holder of any uncontributed LLC Interest or unsurrendered
SmarterKids Certificate with respect to the shares of Holdings Common Stock the
holder thereof is entitled to receive in respect thereof and no cash payment in
lieu of fractional shares shall be paid to any such holder pursuant to
subsection (e) below until the holder of record of such LLC Interests or
SmarterKids Certificate shall contribute such LLC Interest as described in
subsection (b)(i) above or surrender such SmarterKids Certificate as described
in subsection (b)(ii) above, as applicable. Subject to the effect of applicable
laws, following the contribution of any such LLC Interest or surrender of any
such SmarterKids Certificate, there shall be paid to the record holder of the
certificates representing whole shares of Holdings Common Stock issued in
exchange therefor, without interest, (i) at the time of such contribution or
surrender, as applicable, the amount of any cash payable in lieu of a fractional
share of Holdings Common Stock to which such holder is entitled pursuant to
subsection (e) below and the amount of dividends or other distributions with a
record date after the Effective Time previously paid with respect to such whole
shares of Holdings Common Stock, and (ii) at the appropriate payment date, the
amount of dividends or other distributions with a record date after the
Effective Time but prior to surrender and a payment date subsequent to surrender
payable with respect to such whole shares of Holdings Common Stock.
(d) No Further Ownership Rights in LLC Interests and SmarterKids Common
Stock. All shares of Holdings Common Stock issued upon the delivery of the
Transfer Documents and/or surrender for exchange of the SmarterKids
Certificates, as applicable, in accordance with the terms hereof (including any
cash paid pursuant to subsection (c) or (e) of this Section 2.5) shall be deemed
to have been issued in full satisfaction of all rights pertaining to the LLC
Interests so contributed or to the shares of SmarterKids Common Stock
theretofore represented by such SmarterKids Certificates, as applicable, and
from and after the Effective Time there shall be no further registration of
transfers on the stock transfer books of the Surviving Corporation of the shares
of SmarterKids Common Stock which were outstanding immediately prior to the
Effective Time or registration of transfers on the ownership records of
Earlychildhood of LLC Interests held by holders thereof immediately prior to the
Effective Time. If, after the Effective Time, SmarterKids Certificates are
presented to the Surviving Corporation or Holdings for any reason, such
SmarterKids Certificates shall be canceled and exchanged as provided in this
Section 2.5. If, after the Effective Time, Transfer Documents with respect to
valid LLC Interests are presented to Holdings for any reason, such LLC Interests
shall be deemed contributed to Holdings in accordance with the provisions of
this Agreement, effective as of the Effective Time and the holders thereof, in
exchange therefor, shall receive such number of shares of Holdings Common Stock
as may be calculated pursuant to the applicable Earlychildhood Exchange Ratio,
together, without interest, with cash in lieu of fractional shares as described
in Section 2.5(e).
(e) No Fractional Shares. No certificate or scrip representing
fractional shares of Holdings Common Stock shall be issued upon the
contribution or surrender for exchange,
10
as applicable, of LLC Interests or SmarterKids Certificates, and such fractional
share interests will not entitle the owner thereof to vote or to any other
rights of a stockholder of Holdings. Notwithstanding any other provision of this
Agreement, each holder of LLC Interests or shares of SmarterKids Common Stock
outstanding immediately prior to the Effective Time exchanged pursuant to the
Contribution or the SmarterKids Merger who would otherwise have been entitled to
receive a fraction of a share of Holdings Common Stock (after taking into
account the entire LLC Interest exchanged by such holder or all SmarterKids
Certificates delivered by such holder, as applicable) shall receive, in lieu
thereof, cash (without interest) in an amount equal to such fractional part of a
share of Holdings Common Stock multiplied by the per share opening sales price
of Holdings Common Stock (as reported by the national securities exchange or
market on which such Holdings Common Stock is traded or quoted) on the first day
of trading of Holdings Common Stock on such exchange or market after the
Effective Time.
(f) Termination of Exchange Fund. Any portion of the Exchange Fund which
remains undistributed to the former holders of LLC Interests or the former
stockholders of SmarterKids on the 180th day after the Effective Time shall be
delivered to Holdings upon demand, and any former holder or stockholder, as the
case may be, who has not previously complied with Section 1.2 or this Section
2.5 shall thereafter look only to Holdings for payment of such holder's or
stockholder's claim for Holdings Common Stock, any cash in lieu of fractional
shares of Holdings Common Stock and any dividends or distributions with respect
to Holdings Common Stock.
(g) No Liability. None of Earlychildhood, SmarterKids or Holdings shall
be liable to any holder of LLC Interests or shares of SmarterKids Common Stock,
as the case may be, for any shares of Holdings Common Stock (or cash in lieu of
fractional shares of Holdings Common Stock or any dividends or distributions
with respect thereto) delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law.
(h) Withholding Rights. Holdings and the Surviving Corporation shall be
entitled to deduct and withhold from the consideration otherwise payable
pursuant to this Agreement to any holder of LLC Interests or shares of
SmarterKids Common Stock such amounts as it is required to deduct and withhold
with respect to the making of such payment under the Code, or any provision of
state, local or foreign tax law. To the extent that amounts are so withheld by
Holdings or the Surviving Corporation, as the case may be, such withheld amounts
shall be treated for all purposes of this Agreement as having been paid to the
holder of LLC Interests or shares of SmarterKids Common Stock, as the case may
be, in respect of which such deduction and withholding was made.
(i) Lost Certificates. If any Certificate shall have been lost, stolen
or destroyed, upon the making of an affidavit of that fact by the person
claiming such Certificate to be lost, stolen or destroyed and, if required by
Holdings or the Surviving Corporation, the posting by such person of a bond in
such reasonable amount as Holdings or the Surviving Corporation may direct as
indemnity against any claim that may be made against it with respect to such
Certificate, the Exchange Agent will issue in exchange for such lost, stolen or
destroyed Certificate, the shares of Holdings Common Stock, any cash in lieu of
fractional shares, and any
11
unpaid dividends and distributions on shares of Holdings Common Stock
deliverable in respect thereof pursuant to this Agreement.
(j) Affiliates. Notwithstanding anything herein to the contrary, neither
LLC Interests nor SmarterKids Certificates surrendered for exchange by any
Affiliate (as defined in Section 5.13) of Earlychildhood or SmarterKids shall be
exchanged until Holdings has received an Affiliate Agreement (as defined in
Section 5.13) substantially in the form of Exhibit J attached hereto from such
Affiliate.
ARTICLE III.
REPRESENTATIONS AND WARRANTIES OF EARLYCHILDHOOD
Earlychildhood represents and warrants to SmarterKids that the statements
contained in this Article III are true and correct, except as set forth herein
and in the disclosure schedules delivered by Earlychildhood to SmarterKids on or
before the date of this Agreement (the "Earlychildhood Disclosure Schedule").
The Earlychildhood Disclosure Schedule shall be arranged in paragraphs
corresponding to the numbered and lettered paragraphs contained in this Article
III and the disclosure in any paragraph shall qualify other paragraphs in this
Article III only to the extent that it is reasonably apparent from a reading of
such disclosure that it also qualifies or applies to such other paragraphs.
Section 3.1 Organization of Earlychildhood. Each of Earlychildhood and
its Subsidiaries (as defined below) is duly organized, validly existing and in
good standing under the laws of the jurisdiction of its organization, has all
requisite corporate power to own, lease and operate its property and to carry on
its business as now being conducted and as proposed to be conducted, and is duly
qualified to do business and is in good standing as a foreign limited liability
company or corporation, as the case may be, in each jurisdiction in which the
failure to be so qualified would have a material adverse effect on the business,
assets, properties, financial condition or results of operations of
Earlychildhood and its Subsidiaries, taken as a whole (an "Earlychildhood
Material Adverse Effect"). Except as set forth on the Earlychildhood Disclosure
Schedule, neither Earlychildhood nor any of its Subsidiaries, directly or
indirectly owns (other than ownership interests in Earlychildhood or in one or
more of its Subsidiaries) any equity or similar interest in, or any interest
that is mandatorily convertible into or exchangeable or exercisable for, any
corporation, partnership, joint venture or other business association or entity.
A true, correct and complete copy of the organizational documents of
Earlychildhood and each of its Subsidiaries has been delivered to SmarterKids.
As used in this Agreement, the word "Subsidiary" means, with respect to any
party, any corporation or other organization, whether incorporated or
unincorporated, of which (i) such party or any other Subsidiary of such party is
a general partner (excluding partnerships the general partnership interests of
which held by such party or any Subsidiary of such party do not have a majority
of the voting interest in such partnership) or (ii) at least a majority of the
securities or other interests having by their terms ordinary voting power to
elect a majority of the board of directors or others performing similar
functions with respect to such corporation or other organization is directly or
indirectly owned or controlled by such party or by any one or more of its
Subsidiaries, or by such party and one or more of its Subsidiaries.
12
Section 3.2 Earlychildhood Capital Structure.
(a) The outstanding LLC Interests currently consist, and will consist on
the Closing Date, of the LLC Interests set forth in the Earlychildhood
Disclosure Schedule, which LLC Interests, subject to LLC Interests represented
by options granted under the Earlychildhood Option Plans, represent one hundred
percent (100%) of the membership and other equity interests in Earlychildhood.
Other than the persons set forth in the Earlychildhood Disclosure Schedule (the
"Members"), no other person owns or holds any LLC Interest or portion of an LLC
Interest, including, without limitation, an economic interest in Earlychildhood,
an interest in the profits or losses of Earlychildhood, an interest in the right
to affect the management of Earlychildhood or an interest in the right to
receive distributions from Earlychildhood. With respect to each Member, the
Earlychildhood Disclosure Schedule sets forth such Member's designation as a
Class A Member, Class B Member or Class C Member, as applicable. Set forth on
the Earlychildhood Disclosure Schedule is the aggregate amount of LLC Interests
issuable pursuant to options granted and outstanding under the Earlychildhood
Option Plans as of the date hereof, and the entities or persons to whom such
options were granted. Except as may exist under the Earlychildhood Option Plan
or as otherwise set forth on the Earlychildhood Disclosure Schedule, there are
no outstanding subscriptions, calls, commitments, warrants or options for the
purchase of LLC Interests, or any securities convertible into or exchangeable
for LLC Interests, or any other commitments of any kind for the granting of
additional LLC Interests or other equity interests or securities issued by
Earlychildhood. All of the outstanding LLC Interests are duly authorized, fully
paid and nonassessable securities of Earlychildhood, free and clear of all
Encumbrances (as defined below). Except as set forth on the Earlychildhood
Disclosure Schedule, there are no contracts relating to the issuance, sale, or
transfer of any LLC Interests, or any portions of any LLC Interests. To the
knowledge of Earlychildhood, there are no voting trusts, proxies or other voting
agreements or understandings with respect to the outstanding LLC Interests. For
purposes of this Agreement, "Encumbrance" shall mean any charge, claim,
condition, equitable interest, lien, option, pledge, security interest, right of
first refusal or restriction of any kind, including any restriction on use,
voting, transfer, receipt of income or exercise of any other attribute of
ownership.
(b) All of the outstanding shares of capital stock or other equity
interests of each of Earlychildhood's Subsidiaries are duly authorized, validly
issued, fully paid and nonassessable and all such shares are owned by
Earlychildhood or another Subsidiary free and clear of all Encumbrances. There
are no outstanding subscriptions, calls, commitments, warrants or options for
the purchase of shares of capital stock or equity interests, as the case may be,
or any securities convertible into or exchangeable for shares of capital stock
or equity interests, as the case may be, or any other commitments of any kind
for the granting of additional shares of capital stock, other equity interests
or securities issued by any of Earlychildhood's Subsidiaries. There are no
contracts relating to the issuance, sale, or transfer of any shares of capital
stock or equity interests, as the case may be, of any of Earlychildhood's
Subsidiaries.
Section 3.3 Authority; No Conflict; Required Filings and Consents.
(a) Earlychildhood has all requisite corporate power and authority to
enter into this Agreement and each of the Transaction Documents (as defined
below) to which it is a party and to consummate the Transactions contemplated by
this Agreement and each of the Transaction Documents to which it is a party. The
execution and delivery of this Agreement and each of the
13
Transaction Documents to which it is a party and the consummation of the
transactions contemplated by this Agreement and each of the Transaction
Documents to which it is a party by Earlychildhood have been duly authorized by
all necessary action on the part of Earlychildhood, its Management Committee and
its Members. Each holder of an LLC Interest outstanding on the date hereof has
executed and delivered a Consent Agreement in the form of Exhibit B attached
hereto and, assuming the due authorization and execution of the Consent
Agreement by each such Member, the Consent Agreements constitute the valid and
binding obligations of such Members, enforceable in accordance with their terms,
subject to the Bankruptcy and Equity Exception (as hereafter defined). This
Agreement and each of the Transaction Documents to which it is a party have been
duly executed and delivered by Earlychildhood and constitute the valid and
binding obligations of Earlychildhood, enforceable in accordance with their
terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or affecting
creditors' rights and to general equitable principles (the "Bankruptcy and
Equity Exception"). "Transaction Documents" means the Stockholder Support
Agreement, the Registration Rights Agreement, the Consent Agreement, the
Affiliate Agreement and the Lockup Agreement.
(b) Except as set forth on the Earlychildhood Disclosure Schedule, the
execution and delivery of this Agreement and each of the Transaction Documents
to which it is a party by Earlychildhood does not, and the consummation of the
Transactions contemplated by this Agreement, and each of the Transaction
Documents to which Earlychildhood is a party will not, (i) conflict with, or
result in any violation or breach of, any provision of the organizational
documents of Earlychildhood (including the Operating Agreement) or any of the
organizational documents of any of Earlychildhood's Subsidiaries (collectively,
the "Earlychildhood Organizational Documents"), (ii) result in any violation or
breach of, or constitute (with or without notice or lapse of time, or both) a
default (or give rise to a right of termination, cancellation or acceleration of
any obligation or loss of any material benefit) under, or require a consent or
waiver under, any of the terms, conditions or provisions of any note, bond,
mortgage, indenture, lease, contract or other agreement, instrument or
obligation to which Earlychildhood or any of its Subsidiaries is a party or by
which any of them or any of their respective properties or assets may be bound,
or (iii) conflict with or violate any permit, concession, franchise, license,
judgment, order, decree, statute, law, ordinance, rule or regulation applicable
to Earlychildhood or any of its Subsidiaries or any of its or their properties
or assets, except in the case of (ii) and (iii) for any such conflicts,
violations, defaults, terminations, cancellations or accelerations which are
not, individually or in the aggregate, reasonably likely to have an
Earlychildhood Material Adverse Effect. The execution and delivery of each
Consent Agreement by the holders of all outstanding LLC Interests does not
conflict with, and will not result in any violation or breach of any provision
of, the Earlychildhood Organizational Documents.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any court, administrative agency or commission or
other governmental authority or instrumentality ("Governmental Entity") is
required by or with respect to Earlychildhood or any of its Subsidiaries in
connection with the execution and delivery of this Agreement and each of the
Transaction Documents to which it is a party or the consummation of the
transactions contemplated hereby or thereby, except for (i) the filing of the
pre-merger notification report under the ▇▇▇▇-▇▇▇▇▇-▇▇▇▇▇▇ Antitrust
Improvements Act of 1976, as amended (the "HSR Act"),
14
if applicable, (ii) such consents, approvals, orders, authorizations,
registrations, declarations and filings as may be required under applicable
state securities laws, and (iii) such other consents, authorizations, filings,
approvals and registrations which, if not obtained or made, would not be
reasonably likely to have an Earlychildhood Material Adverse Effect.
Earlychildhood is not a "$100 Million Person" within the meaning of the HSR Act
(and the Regulations thereunder) and ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇ & Sons Private Equity
Fund, L.P. (the "Fund"), to the extent the Fund is the "ultimate parent entity"
of Earlychildhood (as such term is used in the HSR Act and the Regulations
thereunder), is not, together, with all the entities that it controls, directly
and indirectly, a "$100 million Person" within the meaning of the HSR Act (and
the Regulations thereunder).
Section 3.4 Books and Records. The books of account, minute books
(or any other books containing records of member or manager action) and record
books and other records which are material to the business of Earlychildhood and
its Subsidiaries, all of which have been made available to SmarterKids, are
complete and correct in all material respects and have been maintained in
accordance with sound business practices. The minute books (or any other books
containing records of member or manager action) of Earlychildhood and its
Subsidiaries contain, in all material respects, accurate records of all meetings
held of, and corporate or other action taken by, the Members, or the Management
Committee of Earlychildhood, or the stockholders or owners or board of directors
or other similar bodies of any of its Subsidiaries and no meeting has been held
for which minutes have not been prepared and are not contained in such minute
books. At the Closing, all of the books and records of Earlychildhood and its
Subsidiaries will be in the possession of Earlychildhood.
Section 3.5 Financial Information.
Earlychildhood has delivered to SmarterKids: (i) an audited consolidated
balance sheet of Earlychildhood and its Subsidiaries as of December 31, 1999 and
the related audited consolidated statements of income, changes in members'
equity and cash flows of Earlychildhood and its Subsidiaries for the fiscal year
then ended, together with the report thereon of KPMG, LLP, its independent
certified public accountants; (ii) an audited consolidated balance sheet of QTL
Corporation and its Subsidiaries as of December 31, 1998 and the related audited
consolidated statements of income, stockholders' equity and cash flows of QTL
Corporation for the nine months then ended, together with the report thereon of
KPMG LLP, its independent certified public accountants; (iii) an audited balance
sheet of Educational Products, Inc. as of March 31, 1999 and the related audited
statements of income, stockholders' equity and cash flows of Educational
Products, Inc. for the fiscal year then ended, together with the report thereon
of KPMG LLP, its independent certified public accountants and (iv) an unaudited
consolidated balance sheet of Earlychildhood and its Subsidiaries as of
September 30, 2000 (the "Earlychildhood Balance Sheet") and the related
unaudited consolidated statements of income, changes in members' equity, and
cash flows, including, in each case, the notes thereto (together with the
Earlychildhood Balance Sheet, the "Earlychildhood Financial Information"). The
Earlychildhood Financial Information has been prepared in accordance with
generally accepted accounting principles ("GAAP") applied on a consistent basis
(except as may be noted therein), and presents fairly, in all material respects,
the financial position of Earlychildhood and its Subsidiaries on a consolidated
basis as of the respective dates and for the periods referred to in
15
such Earlychildhood Financial Information, except that the Earlychildhood
Financial Information is subject to normal and recurring year-end adjustments
and subject, in each case, to the notes regarding the matters reflected therein.
Except set forth on the Earlychildhood Disclosure Schedule, no financial
information of any entity are required to be included in the financial
statements of Earlychildhood under GAAP.
Section 3.6 No Undisclosed Liabilities. Except as set forth on the
Earlychildhood Disclosure Schedule or the Earlychildhood Balance Sheet and
except for normal or recurring liabilities incurred since the date of the
Earlychildhood Balance Sheet in the ordinary course of business consistent with
past practices, Earlychildhood and its Subsidiaries do not have any liabilities,
either accrued, contingent or otherwise (whether or not required to be reflected
in the Earlychildhood Financial Information in accordance with GAAP), and
whether due or to become due, which, individually or in the aggregate, are
reasonably likely to have an Earlychildhood Material Adverse Effect.
Section 3.7 Absence of Certain Changes or Events. Except as expressly
contemplated by this Agreement and the Transaction Documents or as set forth on
the Earlychildhood Disclosure Schedule, since the date of the Earlychildhood
Balance Sheet, Earlychildhood has conducted its businesses only in the ordinary
course and in a manner consistent with past practice, and, since such date,
there has been no material adverse change in the financial condition, results of
operations, business, assets or properties of Earlychildhood or any of its
Subsidiaries, taken as a whole (an "Earlychildhood Material Adverse Change") or
any development or combination of developments of which the management of
Earlychildhood is aware that, individually or in the aggregate, has had, or is
reasonably likely to have, an Earlychildhood Material Adverse Effect, and, since
such date, there has not been any:
(a) (i) issuance of LLC Interests, or options or rights therefor, other
than pursuant to the Earlychildhood Option Plans through the date hereof; (ii)
purchase, redemption, retirement or other acquisition by Earlychildhood of any
LLC Interest, parts of any LLC Interest or other rights or equity interests in
Earlychildhood or any of its Subsidiaries; or (iii) declaration or payment of
any dividend or other distribution or payment in respect of any LLC Interest,
parts of any LLC Interest or other rights or equity interests in Earlychildhood
or any of its Subsidiaries, other than tax distributions made in the ordinary
course of business;
(b) amendment to the organizational documents of Earlychildhood or any
of its Subsidiaries (including the Operating Agreement);
(c) payment by Earlychildhood or any of its Subsidiaries of any bonuses,
salaries or other compensation (including management or other similar fees but
excluding tax distributions) to any shareholder or member, as applicable,
managing member, member of the Management Committee or executive officer (except
for payments of salary, bonuses and other compensation payable for employment
services rendered in the ordinary course of business (in which case there has
been no increase in such payments)) or entry into any employment, severance or
similar contract with any such person;
(d) adoption of any new Employee Benefit Plan or Benefit Arrangement
(each as defined below) for or with any employees of Earlychildhood or any
Earlychildhood ERISA
16
Affiliate or any increase in the payment to or benefits under any Earlychildhood
Plan or other benefit obligations for or with any employees of Earlychildhood or
any Earlychildhood ERISA Affiliate or change any actuarial or other assumption
used to calculate funding obligations with respect to any Earlychildhood
Employee Benefit Plans or Benefit Arrangements, or any change in the manner in
which contributions to any Earlychildhood Employee Benefit Plans or Benefit
Arrangements are made or the basis on which such contributions are determined;
(e) damage to or destruction or loss of any asset or property of
Earlychildhood or any of its Subsidiaries, whether or not covered by insurance,
that would have an Earlychildhood Material Adverse Effect;
(f) sale, lease or other disposition of any material asset or property
of Earlychildhood or any of its Subsidiaries (other than sales of inventory in
the ordinary course of business);
(g) accrual of any expenses except for such accruals in the ordinary
course of business;
(h) cancellation or waiver of any claims or rights by Earlychildhood or
any of its Subsidiaries that would have an Earlychildhood Material Adverse
Effect;
(i) assumption, guarantee or endorsement or other agreement to become
responsible for the obligations of any other individual, firm or corporation
(other than intercompany obligations) or making of any loans or advances to, any
employee of Earlychildhood or any of its Subsidiaries, other than in the
ordinary course of business;
(j) material change by Earlychildhood or its Subsidiaries in their
respective accounting methods, principles or practices to which SmarterKids has
not previously consented in writing, except insofar as may be appropriate for
changes required by applicable law or GAAP;
(k) revaluations by Earlychildhood or its Subsidiaries of any of their
respective assets having an Earlychildhood Material Adverse Effect;
(l) agreement, whether oral or written, by Earlychildhood or any of its
Subsidiaries, with respect to or to do any of the foregoing; or
(m) other action or event that would have required the consent of
SmarterKids pursuant to Section 5.1 of this Agreement had such action or event
occurred after the date of this Agreement, and that, individually or in the
aggregate, has had, or is reasonably likely to have, an Earlychildhood Material
Adverse Effect.
Section 3.8 Taxes.
(a) For the purposes of this Agreement, a "Tax" or, collectively,
"Taxes," means any and all federal, state, local and foreign taxes, assessments
and other governmental charges, duties, impositions and liabilities, including
taxes based upon or measured by gross receipts, income, profits, sales, use and
occupation, and value added, ad valorem, transfer, gains,
17
franchise, withholding, payroll, recapture, employment, excise, unemployment
insurance, social security, business license, occupation, business organization,
stamp, environmental and property taxes, together with all interest, penalties
and additions imposed with respect to such amounts. For purposes of this
Agreement, "Taxes" also includes any obligations under any agreements or
arrangements with any other person or any provision of law with respect to Taxes
of such other person (including pursuant to Treas. Reg. (S) 1.1502-6 or
comparable provisions of state, local or foreign tax law) and including any
liability for Taxes of any predecessor entity.
(b) Except as set forth on the Earlychildhood Disclosure Schedule,
Earlychildhood and each of its Subsidiaries have (i) timely filed all federal,
state, local and foreign Tax returns and reports required to be filed by them
prior to the date of this Agreement (taking into account all applicable
extensions) and such Tax returns are accurate and complete in all material
respects, (ii) timely paid or accrued all Taxes owed (whether or not shown on
any Tax return), and (iii) paid all Taxes for which a notice of assessment or
collection has been received (other than amounts being contested in good faith
by appropriate proceedings). None of the Tax returns filed or Taxes payable by
either Earlychildhood or any of its Subsidiaries (or, to the knowledge of
Earlychildhood, by the holders of the LLC Interests as they relate to the items
of income, deductions, etc. of Earlychildhood) have been the subject of an
audit, action, suit, proceeding, claim, examination, deficiency or assessment by
the Internal Revenue Service (the "IRS") or any other governmental authority,
and no such audit, action, suit, proceeding, claim, examination, deficiency or
assessment is currently pending or, to the knowledge of Earlychildhood or any of
its Subsidiaries, contemplated or threatened. The unpaid Taxes of Earlychildhood
and each of its Subsidiaries (whether or not yet payable) attributable to any
period (or portion thereof) ending on or before the Closing Date did not, as of
September 30, 2000, exceed the reserve for actual Taxes (as opposed to any
reserve for deferred Taxes established to reflect timing differences between
book and Tax income) as shown on the Earlychildhood Balance Sheet, and will not
exceed such reserve as adjusted for the passage of time through the Closing Date
in accordance with the reasonable past custom and practice of Earlychildhood and
its Subsidiaries in filing their Tax returns. Earlychildhood and each of its
Subsidiaries will not incur any liability for Taxes from September 30, 2000
through the Closing Date other than in the ordinary course of business and
consistent with reasonable past practice, and will not incur any Tax liability
in connection with the transactions contemplated by this Agreement. Except as
set forth on the Earlychildhood Disclosure Schedule, neither Earlychildhood nor
any of its Subsidiaries has agreed to make any adjustment under Section 481(a)
of the Code (or any corresponding provision of state, local or foreign Tax law)
by reason of a change in accounting method or otherwise, and neither
Earlychildhood nor any of its Subsidiaries will be required to make any such
adjustment as a result of the transactions contemplated by this Agreement.
Earlychildhood and each of its Subsidiaries have timely withheld or collected
and paid over to the appropriate governmental authorities (or are properly
holding for such timely payment) all Taxes required by law to be withheld or
collected. None of the Subsidiaries of Earlychildhood which is a corporation has
made an election under Section 341(f) of the Code. There are no liens for Taxes
upon the assets of Earlychildhood or any of its Subsidiaries (other than liens
for Taxes that are not yet due or that are being contested in good faith by
appropriate proceedings). No extension of a statute of limitations relating to
any Taxes is in effect with respect to Earlychildhood and its Subsidiaries.
18
(c) Earlychildhood and any non-corporate Subsidiaries of Earlychildhood
have at all times during their existence been properly treated as a partnership
or a disregarded entity for U.S. federal, state and local income tax purposes.
No Subsidiary of Earlychildhood which is a corporation has been a member of an
affiliated group of corporations filing a consolidated federal income tax return
(or a group of corporations filing a consolidated, combined or unitary income
tax return under comparable provisions of state, local or foreign tax law) for
any taxable period. Neither Earlychildhood nor any of its Subsidiaries has been
or is a party to or member of any joint venture, partnership, limited liability
company, or other arrangement or contract which could be treated as a
partnership for federal income tax purposes. None of the LLC Interests nor any
assets transferred from Earlychildhood to Holdings, whether an actual transfer
or a deemed transfer of assets, pursuant to the Contribution is a U.S. real
property interest (as that term is defined in Section 897(c)(1) of the Code).
(d) Neither Earlychildhood nor any of its Subsidiaries has any
obligation under any agreement or arrangement with any other person or any
provision of law with respect to Taxes of such other person (including pursuant
to Treas. Reg. (S) 1.1502-6 or comparable provisions of state, local or foreign
tax law) and including any liability for Taxes of any predecessor entity.
Section 3.9 Properties.
(a) The Earlychildhood Disclosure Schedule sets forth a list of (i) all
material leases to which Earlychildhood or any of its Subsidiaries is a party as
a lessee as of the date hereof (the "Earlychildhood Lease Agreements"), setting
forth in the case of any such lease covering real property, the location of such
real property, and (ii) all material real properties owned by Earlychildhood or
any of its Subsidiaries as of the date hereof (the "Earlychildhood Owned Real
Property"). To the knowledge of Earlychildhood, each of Earlychildhood and its
Subsidiaries has good and marketable titled to the Earlychildhood Owned Real
Property and a valid and binding leasehold interest in each of the properties
that is the subject of an Earlychildhood Lease Agreement, free and clear of all
Encumbrances, except for (i) any Encumbrances reflected in the Earlychildhood
Financial Information and the Earlychildhood Disclosure Schedule; (ii) any
Encumbrances which, individually or in the aggregate, are not reasonably likely
to have an Earlychildhood Material Adverse Effect; (iii) zoning laws and other
land use restrictions that do not impair the present or anticipated use or
occupancy of the property subject thereto, (iv) any Encumbrances for taxes,
assessments and other governmental charges not yet due and payable or due but
not delinquent or due and being contested in good faith; (v) any mechanics'
workmen's, repairmen's, warehousemen's, carrier's or other similar liens and
encumbrances arising in the ordinary course of business consistent with past
practice or being contested in good faith and (vi) any Encumbrances which are
matters of public record or are shown by a current title report and reflected on
the Earlychildhood Disclosure Schedule (clauses (i) through (vi) above
collectively referred to herein as "Earlychildhood Permitted Encumbrances").
(b) None of Earlychildhood and its Subsidiaries is in default under any
of the Earlychildhood Lease Agreements, except for such defaults which have not
had and are not reasonably likely to have an Earlychildhood Material Adverse
Effect.
19
Section 3.10 Intellectual Property.
(a) Each of Earlychildhood and its Subsidiaries owns free and clear of
all Encumbrances 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,
copyrights, know-how, computer software programs or applications and tangible or
intangible proprietary information or material that are necessary to conduct the
business of each of Earlychildhood and its Subsidiaries as currently conducted
(the "Earlychildhood Intellectual Property"), subject to such exceptions that
would not be reasonably likely to have an Earlychildhood Material Adverse
Effect. The Earlychildhood Disclosure Schedule contains a list of all of the
following that are material within the Earlychildhood Intellectual Property: (i)
patents and patent applications; (ii) trademarks, trade names and service marks
and registrations thereof and applications therefor; and (iii) registered
copyrights and applications therefor. The Earlychildhood Disclosure Schedule
identifies the owner of each item listed thereon and, in the case of
registrations and applications, the application or registration number and date.
(b) To the knowledge of Earlychildhood, Earlychildhood or a Subsidiary
thereof is the sole and exclusive owner or a licensee of all of the material
Earlychildhood Intellectual Property. All of the material Earlychildhood
Intellectual Property will be owned or available for use by Earlychildhood or
its Subsidiaries on terms and conditions immediately following the Effective
Time identical to the terms and conditions pertaining to Earlychildhood or a
Subsidiary thereof immediately prior to the Effective Time. Earlychildhood or a
Subsidiary thereof has taken reasonable measures to protect the proprietary
nature of the Earlychildhood Intellectual Property and to maintain in confidence
the trade secrets and confidential information that they own or use. No other
person has any rights to any material item of the Earlychildhood Intellectual
Property or has any rights to any of the material Earlychildhood Intellectual
Property, except that the items of the Earlychildhood Intellectual Property
identified on the Earlychildhood Disclosure Schedule as licensed to
Earlychildhood or a Subsidiary thereof are owned by the respective owners
identified on the Earlychildhood Disclosure Schedule, and, to the knowledge of
Earlychildhood, no person is infringing, violating or misappropriating any of
the material Earlychildhood Intellectual Property.
(c) To the knowledge of Earlychildhood, none of the activities or
business presently conducted by Earlychildhood or any of its Subsidiaries
infringes or violates, or constitutes a misappropriation of, any intellectual
property of any other person, and, if without the knowledge of Earlychildhood,
such activities or business presently conducted by Earlychildhood or any of its
Subsidiaries does infringe, violate or constitute a misappropriation of any
intellectual property of any other person, no such infringement, violation or
misappropriation, individually or in the aggregate, is reasonably likely to have
an Earlychildhood Material Adverse Effect. None of Earlychildhood, any
Subsidiary or any Affiliate of Earlychildhood has received any complaint, claim
or notice alleging any such infringement, violation or misappropriation.
(d) With respect to each item of the Earlychildhood Intellectual
Property:
(i) Earlychildhood or a Subsidiary thereof possesses all
right, title and interest in and to such item, except for any Earlychildhood
Third Party Rights (as defined below);
20
(ii) such item is not subject to any outstanding judgment,
order, decree, stipulation or injunction; and
(iii) neither Earlychildhood nor any of its Subsidiaries
has agreed, except in the ordinary course of business consistent with past
practice or in conjunction with product or service sales or licenses, to
indemnify any person for or against any infringement, misappropriation or other
conflict with respect to such item.
(e) The Earlychildhood Disclosure Schedule identifies each item of the
intellectual property used by Earlychildhood or any Subsidiary that is owned by
a party other than Earlychildhood ("Earlychildhood Third Party Rights"), and all
licenses or other agreements pursuant to which Earlychildhood or any Subsidiary
uses such items are listed on the Earlychildhood Disclosure Schedule. With
respect to each such item:
(i) the license or other agreement covering any such
material item is valid, binding, enforceable and in full force and effect with
respect to Earlychildhood or a Subsidiary thereof and, to the knowledge of
Earlychildhood, with respect to every other party thereto;
(ii) each such license or other agreement, including
licenses to all third-party software listed in the Earlychildhood Disclosure
Schedule other than generally commercially available software, to which
Earlychildhood or a Subsidiary thereof is a party, is assignable by
Earlychildhood or such Subsidiary without the consent or approval of, or any
payment to, any party except as set forth on the Earlychildhood Disclosure
Schedule, and, except as set forth on the Earlychildhood Disclosure Schedule,
all such licenses and other agreements will continue to be valid, binding,
enforceable and in full force and effect immediately following the Effective
Time in accordance with the terms thereof as in effect immediately prior to the
Effective Time, and the consummation of the transactions will not conflict with,
result in a violation or breach of or constitute a default under (with notice or
lapse of time or both) any such license or other agreement; and
(iii) neither Earlychildhood, any Subsidiary thereof nor,
to the knowledge of Earlychildhood, any other party to any such license or other
agreement, is in breach or default under any such license or other agreement
and, to the knowledge of Earlychildhood, no event has occurred that, with notice
or lapse of time or both, would constitute such a breach or default or permit
termination, modification or acceleration thereunder.
Section 3.11 Product Warranty and Liability.
(a) No reserves have been provided for by Earlychildhood to cover
potential claims under existing customer indemnification agreements.
(b) Except as to claims, actions, proceedings or investigations which
have been asserted but as to which no notice has been given to Earlychildhood or
any of its Subsidiaries, and except as set forth on the Earlychildhood
Disclosure Schedule, there are no product liability claims, actions, proceedings
or investigations pending or, to the knowledge of Earlychildhood, threatened
against Earlychildhood or any of its Subsidiaries or their respective assets,
or, to the
21
knowledge of Earlychildhood, any state of facts existing which could give rise
to any such product liability claim, action, proceeding or investigation.
(c) To the knowledge of Earlychildhood, no claims have been made that
the products sold by Earlychildhood or any of its Subsidiaries are not effective
for the uses such products purport to serve. To the knowledge of Earlychildhood,
neither Earlychildhood nor any of its Subsidiary has received any written notice
that any product manufactured or distributed by Earlychildhood or any of its
Subsidiaries has not been manufactured in accordance with "current Good
Manufacturing Practices" (as such term is commonly understood within
Earlychildhood's industry) or has not been properly labeled for its approved
use.
Section 3.12 Material Contracts.
(a) The Earlychildhood Disclosure Schedule sets forth a complete and
accurate list, and Earlychildhood has made available to SmarterKids, true and
complete copies of:
(i) each contract that provides for annual payments to or
by Earlychildhood or any of its Subsidiaries in excess of $150,000;
(ii) each contract of Earlychildhood or any of its
Subsidiaries that was not entered into in the ordinary course of business;
(iii) any contract under which Earlychildhood or any of its
Subsidiaries has or may, except by way of endorsement of negotiable instruments
for collection in the ordinary course of business and consistent with past
practice, become absolutely or contingently or otherwise liable for (x) the
performance under any contract of any other person, firm or corporation or (y)
the whole or any part of the indebtedness or liabilities of any other person,
firm or corporation, in all cases, individually in excess of $1,000,000 and in
the aggregate in excess of $5,000,000;
(iv) all employment agreements, consulting agreements,
contracts or commitments with any employee or member of Earlychildhood's
Management Committee, other than those which are terminable by Earlychildhood or
any of its Subsidiaries on not more than thirty days notice without liability or
financial obligation, and within each such category of agreements, contracts or
commitments, which are individually in excess of $150,000;
(v) any agreements or plans, including, without
limitation, any stock option, stock or equity appreciation right or stock or
equity purchase plans or agreements, any of the benefits of which will be
increased, or the vesting of benefits of which will be accelerated, by the
occurrence of any of the transactions contemplated by this Agreement or the
value of any of the benefits of which will be calculated on the basis of any of
the transactions contemplated by this Agreement;
(vi) any contract with any Member, managing member or
member of the Management Committee of Earlychildhood, other than in such
person's capacity as a Member, managing member or member of the Management
Committee, or any contract with any entity in which, to the knowledge of
Earlychildhood, any Member, managing member or
22
member of the Management Committee or any family member of any such person has a
material economic interest;
(vii) any contract that limits or restricts in any
material respect where Earlychildhood or any of its Subsidiaries may conduct its
or their business or the type or line of business that Earlychildhood or any of
its Subsidiaries may engage in;
(viii) any powers of attorney outstanding (other than those
issued in the ordinary course of business with respect to Tax matters), or
material obligations or liabilities (absolute or contingent) as guarantor,
surety, cosigner, endorser, co-maker, indemnitor, or otherwise respecting the
obligations or liabilities of any person.
(ix) any material contract containing any agreement with
respect to any change of control; and
(x) each material amendment, supplement, and
modification (whether oral or written) in respect of any of the foregoing.
(b) Neither Earlychildhood nor any of its Subsidiaries have breached, or
received in writing any claim or notice that it has breached, any of the terms
or conditions of any material agreement, contract or commitment set forth or
required to be set forth in Section 3.12 of the Earlychildhood Disclosure
Schedule ("Earlychildhood Material Contracts") in such a manner as, individually
or in the aggregate, is reasonably likely to have an Earlychildhood Material
Adverse Effect. Except as set forth in the Earlychildhood Disclosure Schedule,
each Earlychildhood Material Contract that has not expired by its terms is in
full force and effect, except for those contracts, the ineffectiveness of which
would not reasonably be likely to have an Earlychildhood Material Adverse Effect
and, if all of the consents, approvals, authorizations, filings, notifications
and other actions listed with respect to such contract in the Earlychildhood
Disclosure Schedule are obtained, taken or made, as applicable, such contract
will continue, after the Effective Time, to be in full force and effect on
identical terms.
(c) To the knowledge of Earlychildhood or its Subsidiaries, none of the
parties to any Earlychildhood Material Contract have terminated, or notified
Earlychildhood or any of its Subsidiaries in writing of its intent to materially
reduce or terminate its business relationship with Earlychildhood or any of its
Subsidiaries in the future.
(d) Neither of Earlychildhood nor any of its Subsidiaries have received
written notice from any customer, or group of customers, that are under common
ownership or control, and that accounted for a material percentage of the
aggregate products and services furnished by Earlychildhood or any of its
Subsidiaries since January 1, 1999 that such customer or group of customers has
stopped or intends to stop purchasing Earlychildhood's or any of its
Subsidiaries' products or services, nor has Earlychildhood or any of its
Subsidiaries lost any supplier, or group of suppliers that are under common
ownership or control, that accounted for a material percentage of the aggregate
supplies purchased by Earlychildhood or any of its Subsidiaries since January 1,
1999.
23
(e) As of the Effective Time, Earlychildhood will have terminated the
Executive Management Agreement, dated as of May 5, 1999 by and between
Earlychildhood and ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇ and Sons, L.L.C., a Delaware limited
liability company (the "Executive Management Agreement"), and, from and after
the Effective Time, there will be no further obligations or liabilities,
including payment obligations, outstanding or due thereunder. The fees payable
to ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇ and Sons, L.L.C. between the date hereof and the Effective
Time pursuant to the Executive Management Agreement shall not exceed $25,000 per
month.
Section 3.13 Litigation. Except as disclosed in the Earlychildhood
Financial Information or in the Earlychildhood Disclosure Schedule, there is no
(i) action, suit or proceeding, claim, arbitration or investigation against
Earlychildhood or any of its Subsidiaries pending or, to the knowledge of
Earlychildhood, threatened, against Earlychildhood or any of its Subsidiaries or
(ii) outstanding order, judgment, writ, injunction or decree of any court,
governmental agency or arbitration tribunal in a proceeding to which
Earlychildhood or any of its Subsidiaries is a party, except, in the case of
each of clauses (i) and (ii) above, those that, individually or in the
aggregate, are not reasonably likely to have an Earlychildhood Material Adverse
Effect or a material adverse effect on the ability of Earlychildhood to
consummate the transactions contemplated by this Agreement.
Section 3.14 Environmental Matters. (a) To the knowledge of
Earlychildhood, except as disclosed on the Earlychildhood Disclosure Schedule
and except, with or without the knowledge of Earlychildhood, for such matters
that, individually or in the aggregate, are not reasonably likely to have an
Earlychildhood Material Adverse Effect: (i) Earlychildhood and its Subsidiaries
are in material compliance with all applicable Environmental Laws (as defined in
Section 3.14(b)); (ii) the properties currently owned or operated by
Earlychildhood and its Subsidiaries (including soils, groundwater, surface
water, buildings or other structures) are not contaminated with any Hazardous
Substances (as defined in Section 3.14(c)); (iii) the properties formerly owned
or operated by Earlychildhood or any of its Subsidiaries were not contaminated
with Hazardous Substances during the period of ownership or operation by
Earlychildhood or any of its Subsidiaries; (iv) neither Earlychildhood nor its
Subsidiaries are subject to liability for any Hazardous Substance disposal or
contamination on any third party property; (v) neither Earlychildhood nor any of
its Subsidiaries has been associated with any release or threat of release of
any Hazardous Substance; (vi) neither Earlychildhood nor any of its Subsidiaries
has received any written notice, demand, letter, claim or request for
information alleging that Earlychildhood or any of its Subsidiaries may be in
violation of or liable under any Environmental Law; and (vii) neither
Earlychildhood nor any of its Subsidiaries is subject to any orders, decrees,
injunctions or other arrangements with any Governmental Entity or is subject to
any indemnity or other agreement with any third party relating to liability
under any Environmental Law or relating to Hazardous Substances.
(b) As used in this Agreement, the term "Environmental Law" means any
federal, state, local or foreign law, regulation, order, decree, permit,
authorization, common law or agency requirement relating to: (A) the protection,
investigation or restoration of the environment, health and safety, or natural
resources, (B) the handling, use, presence, disposal, release or threatened
release of any Hazardous Substance or (C) noise, odor, wetlands, pollution,
contamination or any injury or threat of injury to persons or property.
24
(c) As used in this Agreement, the term "Hazardous Substance" means any
substance that is: (A) listed, classified or regulated pursuant to any
Environmental Law; (B) any petroleum product or by-product, asbestos-containing
material, lead-containing paint or plumbing, polychlorinated biphenyls,
radioactive materials or radon; or (C) any other substance which is the subject
of regulatory action by any Governmental Entity pursuant to any Environmental
Law.
Section 3.15 Employee Benefit Plans.
(a) The Earlychildhood Disclosure Schedule sets forth all employee benefit
plans ("Employee Benefit Plans"), as defined in Section 3(3) of the Employee
Retirement Income Security Act of 1974, as amended ("ERISA"), and all other
material employee benefit arrangements that are not Employee Benefit Plans,
including, but not limited to any employment or consulting agreement, any
arrangement providing insurance benefits, any incentive bonus or deferred bonus
arrangement, any arrangement providing termination allowance, severance or
similar benefits, any equity compensation plan, any deferred compensation plan,
and any compensation policy or practice (collectively "Benefit Arrangements"),
which are maintained, contributed to or required to be contributed to by
Earlychildhood or any of its Subsidiaries ("Earlychildhood Employee Plans").
(b) A true and complete copy of each written Earlychildhood Employee
Plan, including, if applicable, each amendment thereto and any trust agreement,
insurance contract, collective bargaining agreement, or other funding or
investment arrangements for the benefits under such Earlychildhood Employee
Plan, has been made available to SmarterKids. In addition, with respect to each
such Earlychildhood Employee Plan to the extent applicable, Earlychildhood has
made available to SmarterKids the most recently filed Federal Forms 5500, the
most recent summary plan description (including any summaries of material
modifications), the most recent IRS determination letter, if applicable, the
most recent actuarial report or valuation, if applicable, and all material
employee communications with respect to each such Earlychildhood Employee Plan.
(c) Except as set forth on the Earlychildhood Disclosure Schedule:
(i) neither Earlychildhood nor any entity that, together
with Earlychildhood is required to be treated as a single employer under Section
414 of the Code ("Earlychildhood ERISA Affiliate"), sponsors or has previously
sponsored, maintained, contributed to or incurred an obligation to contribute to
any Employee Benefit Plan regulated under Title IV of ERISA, including any
"multiemployer plan," as defined in Sections 3(37) and 4001(a)(3) of ERISA and
neither Earlychildhood nor any Earlychildhood ERISA Affiliate has incurred nor
reasonably expects to incur any liability under Title IV of ERISA arising in
connection with the termination of any plan covered or previously covered by
Title IV of ERISA. Neither Earlychildhood nor any ERISA Affiliate participates
in or has employees covered by an Employee Plan sponsored by a professional
employer organization or similar entity;
(ii) neither Earlychildhood nor any of its Subsidiaries
sponsors or has previously sponsored, maintained, contributed to or incurred an
obligation to contribute to any Employee Benefit Plan that provides or will
provide benefits described in Section 3(1) of
25
ERISA to any former employee or retiree of Earlychildhood or any of its
Subsidiaries, except as required under Part 6 of Title I of ERISA and Section
4980B of the Code or applicable state law;
(iii) all Earlychildhood Employee Plans and Benefit
Arrangements have been maintained and operated, and currently are, in compliance
in all material respects with their terms, the requirements prescribed by any
and all applicable laws (including ERISA and the Code), orders, or governmental
rules and regulations in effect with respect thereto, and Earlychildhood and its
Subsidiaries have performed all material obligations required to be performed by
them under, are not in any material respect in default under or in violation of,
and have no knowledge of any default or violation by any other party to, any of
the Earlychildhood Employee Plans;
(iv) each Earlychildhood Employee Plan that is intended to
qualify under Section 401(a) of the Code and each trust established pursuant to
each such Earlychildhood Employee Plan that is intended to qualify under Section
501(a) of the Code is the subject of a favorable determination letter from the
IRS, a copy of which has been made available to SmarterKids, and, to
Earlychildhood's knowledge, nothing has occurred which may reasonably be
expected to impair such determination or otherwise adversely affect the tax-
qualified status of such Earlychildhood Employee Plan;
(v) Earlychildhood and its Subsidiaries have made full
and timely payment of all amounts required to be contributed under the terms of
each Earlychildhood Employee Plan and applicable law or required to be paid as
expenses under such Earlychildhood Employee Plan and there has been no amendment
to, written interpretation of or announcement (whether or not written) by
Earlychildhood or any Earlychildhood ERISA Affiliates relating to, or change in
employee participation or coverage under, any Employee Benefit Plan or Benefit
Arrangement that would increase materially the expense of maintaining such
Employee Benefit Plan or Benefit Arrangement above the level of the expense
incurred in respect thereof for the fiscal year ended prior to the date hereof;
and
(vi) other than claims for benefits in the ordinary
course, there is no claim, suit, action, dispute, arbitration or legal,
administrative or other proceeding or governmental investigation or audit
pending, or, to the knowledge of Earlychildhood, threatened, alleging any breach
of the terms of any Earlychildhood Employee Plan or of any fiduciary duty
thereunder or violation of any applicable law with respect to any such
Earlychildhood Employee Plan.
(d) With respect to the Earlychildhood Employee Plans, individually and
in the aggregate, no event has occurred, and to the knowledge of Earlychildhood,
there exists no condition or set of circumstances in connection with which
Earlychildhood could be subject to any liability that is reasonably likely to
have an Earlychildhood Material Adverse Effect under ERISA, the Code or any
other applicable law.
(e) Earlychildhood is not a party to any written or oral contract,
agreement, plan or arrangement pursuant to which Earlychildhood has any
obligation to "gross up," indemnify or otherwise compensate or hold harmless any
person with respect to any portion of any excise tax (or interest or penalties
with respect thereto) which such person may become subject to under
26
Section 4999 of the Code or any similar state tax law, and there is no contract,
agreement, plan or arrangement covering any person that, individually or
collectively, would constitute compensation in excess of the limitation set
forth in Section 162(m) of the Code.
(f) Except as set forth on the Earlychildhood Disclosure Schedule, and
except as provided for in this Agreement, neither Earlychildhood nor any of its
Subsidiaries is a party to any oral or written (i) agreement with any officer or
other key employee of Earlychildhood or any of its Subsidiaries, the benefits of
which are contingent, or the terms of which are materially altered, upon the
occurrence of a transaction involving Earlychildhood of the nature contemplated
by this Agreement, (ii) agreement with any officer of Earlychildhood providing
any term of employment or compensation guarantee extending for a period longer
than one year from the date hereof and for the payment of compensation in excess
of $100,000 per annum, or (iii) agreement or plan, including any stock option
plan, stock appreciation right plan, restricted stock plan or stock purchase
plan, any of the benefits of which will be increased, or the vesting of the
benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement or the value of any of the benefits
of which will be calculated on the basis of any of the transactions contemplated
by this Agreement. None of the execution and delivery of this Agreement or any
of the Transaction Documents or the consummation of the transactions
contemplated hereunder or thereunder will trigger any "change of control" or
similar provisions resulting in the acceleration of benefits or compensation
with respect to any agreements with any officer or other key employee of
Earlychildhood or any of its Subsidiaries except for such applicable agreements
as set forth on the Earlychildhood Disclosure Schedule (the "Earlychildhood
Change of Control Agreements").
Section 3.16 Compliance With Laws.
(a) Neither Earlychildhood nor any of its Subsidiaries has violated or
failed to comply with any statute, law, ordinance, regulation, rule or order of
any Governmental Entity, or any judgment, decree or order of any court,
applicable to it, its business or operations or by which it, its business or
operations are bound, except for any such violations or failures to comply that,
individually or in the aggregate have not had and are not reasonably likely to
have an Earlychildhood Material Adverse Effect;
(b) No investigation or review by any Governmental Entity is pending or,
to the knowledge of Earlychildhood, has been threatened against Earlychildhood
or any of its Subsidiaries, nor, to the knowledge of Earlychildhood, has any
Governmental Entity indicated by written notice or otherwise, an intention to
conduct an investigation of Earlychildhood or any of its Subsidiaries; and
(c) There is no agreement, judgment, injunction, order or decree binding
upon Earlychildhood or any of its Subsidiaries which has had or is reasonably
likely to have the effect of prohibiting or materially impairing the conduct of
Earlychildhood's business as currently conducted or the transactions
contemplated by this Agreement.
27
Section 3.17 Tax Matters.
(a) To the knowledge of Earlychildhood, none of Earlychildhood, any of
its Subsidiaries or other Affiliates (as defined in Section 5.13) and any
holders of LLC Interests have taken or agreed to take any action (or failed to
take or agreed not to take any action) which such action or inaction, as the
case may be, would prevent (i) the Contribution from constituting a transaction
qualifying as a transfer of property to Holdings by the holders of LLC Interests
under Section 351 of the Code or (ii) the SmarterKids Merger as qualifying as a
reorganization described in Section 368(a) of the Code.
(b) To the knowledge of Earlychildhood, the holders of LLC Interests
have no present plan, intention or arrangement to sell or otherwise dispose of
any of the Holdings Common Stock received in the Contribution that would cause
the Contribution and the SmarterKids Merger to fail to qualify as transfers
under Section 351 of the Code.
Section 3.18 Registration Statement; Proxy Statement/Prospectus. The
information to be supplied by Earlychildhood or its Subsidiaries or about
Earlychildhood or its Subsidiaries by Earlychildhood's agents for inclusion in
the registration statement on Form S-4 pursuant to which shares of Holdings
Common Stock issued in the Transactions will be registered under the Securities
Act (the "Registration Statement"), shall not at the time the Registration
Statement is declared effective by the Securities and Exchange Commission (the
"SEC") contain any untrue statement of a material fact or omit to state any
material fact required to be stated in the Registration Statement or necessary
in order to make the statements in the Registration Statement, in light of the
circumstances under which they were made, not misleading. The information
supplied by Earlychildhood or its Subsidiaries for inclusion in the proxy
statement/prospectus to be sent to the stockholders of SmarterKids in connection
with the meeting of SmarterKids' stockholders (the "SmarterKids Stockholders'
Meeting'") to consider this Agreement and the SmarterKids Merger (the "Proxy
Statement/Prospectus") shall not, on the date the Proxy Statement/Prospectus is
first mailed to the stockholders of SmarterKids, at the time of the SmarterKids
Stockholders' Meeting and at the Effective Time, contain any statement which, at
such time and in light of the circumstances under which it shall be made, is
false or misleading with respect to any material fact, omit to state any
material fact necessary in order to make the statements made in the Proxy
Statement/Prospectus not false or misleading, or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of proxies for the SmarterKids Stockholders' Meeting which has
become false or misleading. If at any time prior to the Effective Time any event
relating to Earlychildhood or any of its Affiliates, should be discovered by
Earlychildhood which should be set forth in an amendment to the Registration
Statement or a supplement to the Proxy Statement/Prospectus, Earlychildhood
shall promptly inform SmarterKids.
Section 3.19 Labor Matters. Neither Earlychildhood nor any of its
Subsidiaries is a party to or otherwise bound by any collective bargaining
agreement, contract or other agreement or understanding with a labor union or
labor organization, nor, as of the date hereof, is Earlychildhood or any of its
Subsidiaries the subject of any material proceeding asserting that
Earlychildhood or any of its Subsidiaries has committed an unfair labor practice
or seeking to compel it to bargain with any labor union or
28
labor organization nor, as of the date of this Agreement, is there pending or,
to the knowledge of Earlychildhood, threatened, any material labor strike,
dispute, walkout, work stoppage, slow-down or lockout involving Earlychildhood
or any of its Subsidiaries.
Section 3.20 Insurance. All material fire and casualty, general
liability, business interruption, product liability, and sprinkler and water
damage insurance policies maintained by Earlychildhood or any of its
Subsidiaries are with reputable insurance carriers, provide full and adequate
coverage for all normal risks incident to the business of Earlychildhood and its
Subsidiaries and their respective properties and assets, and are in character
and amount at least equivalent to that carried by persons engaged in similar
businesses and subject to the same or similar perils or hazards, except for any
such failures to maintain insurance policies that, individually or in the
aggregate, are not reasonably likely to have an Earlychildhood Material Adverse
Effect. All premiums and other payments due from Earlychildhood or any
Subsidiary with respect to any such contracts of insurance or indemnity have
been paid. Neither Earlychildhood nor any of its Subsidiaries have received
written notice of any threatened termination of, or premium increase with
respect to, any of such policies or bonds.
Section 3.21 No Existing Discussions. As of the date hereof, other than
the Transactions, neither Earlychildhood nor any of its Affiliates is engaged,
directly or indirectly, in any discussions or negotiations with any other party
with respect to any Earlychildhood Acquisition Proposal (as defined in Section
5.4).
Section 3.22 Consent. The Contribution has been approved by the
unanimous consent of all holders of LLC Interests and such holders have taken
all actions necessary under the California Limited Liability Company Act
required for the approval of the Transactions. No separate approval by the
holders of any class or series of LLC Interests or other equity interests in
Earlychildhood is necessary to approve this Agreement, the Contribution, the
Transaction Documents to which Earlychildhood is a party or any of the other
transactions contemplated hereby.
Section 3.23 Management Committee Approval. The Management Committee of
Earlychildhood has taken all actions necessary under the California Limited
Liability Company Act required for the approval of the Transactions and no other
approval under any California anti-takeover statute or regulation applicable to
Earlychildhood is required in connection with the consummation of the
Transactions. No "fair price," "moratorium," "control share acquisitions" or
other similar anti-takeover statute or regulation is applicable to
Earlychildhood or (by reason of Earlychildhood's participation therein) this
Agreement, the Contribution or the Transactions.
ARTICLE IV.
REPRESENTATIONS AND WARRANTIES OF SMARTERKIDS
SmarterKids represents and warrants to Earlychildhood that the statements
contained in this Article IV are true and correct, except as set forth herein
and in the disclosure schedules delivered by SmarterKids to Earlychildhood on or
before the date of this Agreement (the "SmarterKids Disclosure Schedule"). The
SmarterKids Disclosure Schedule shall be arranged in paragraphs corresponding to
the numbered and lettered paragraphs contained in this Article IV and the
disclosure in any paragraph shall qualify other paragraphs in this Article IV
only to the
29
extent that it is reasonably apparent from a reading of such disclosure that it
also qualifies or applies to such other paragraphs.
Section 4.1 Organization of SmarterKids. SmarterKids is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Delaware, has all requisite corporate power to own, lease and operate
its property and to carry on its business as now being conducted and as proposed
to be conducted, and is duly qualified to do business and is in good standing as
a foreign corporation in each jurisdiction in which the failure to be so
qualified would have a SmarterKids Material Adverse Effect (as defined below).
SmarterKids does not have, and, since the date of its incorporation, has not had
any Subsidiaries. Except as set forth on the SmarterKids Disclosure Schedule or
in the SmarterKids SEC Reports (as defined in Section 4.4) filed prior to the
date hereof, SmarterKids does not directly or indirectly own any equity or
similar interest in, or any interest that is mandatorily convertible into or
exchangeable or exercisable for, any corporation, partnership, joint venture or
other business association or entity. A true, correct and complete copy of the
Certificate of Incorporation and other similar organizational documents of
SmarterKids has been delivered to Earlychildhood. For purposes of this Agreement
"SmarterKids Material Adverse Effect" shall mean a material adverse effect on
the business, assets, properties, financial condition or results of operations
of SmarterKids, provided, that a decrease or successive decreases in the market
price of the SmarterKids Common Stock prior to the Effective Time shall not, in
and of itself, constitute a SmarterKids Material Adverse Effect (it being
understood that any decrease or successive decreases in market price may be
indicative of other factors which, in and of themselves (without giving effect
to such decrease(s) in market price), would and, to the extent applicable, shall
constitute a SmarterKids Material Adverse Effect).
Section 4.2 SmarterKids Capital Structure.
(a) The authorized capital stock of SmarterKids consists of 90,000,000
shares of SmarterKids Common Stock and 10,000,000 shares of Preferred Stock,
$.01 par value ("SmarterKids Preferred Stock"). As of the date hereof, (i)
20,651,115 shares of SmarterKids Common Stock were issued and outstanding, all
of which are validly issued, fully paid and nonassessable, (ii) no shares of
SmarterKids Common Stock were held in the treasury of SmarterKids and (iii) no
shares of SmarterKids Preferred Stock were issued and outstanding. The
SmarterKids Disclosure Schedule shows the number of shares of SmarterKids Common
Stock reserved for future issuance pursuant to stock options granted and
outstanding as of the date hereof, the plans under which such options were
granted and award agreements pursuant to which "non-plan" options were granted
(collectively, the "SmarterKids Stock Plans"), and the entities or persons to
whom such options were granted. As of the date hereof, warrants to purchase an
aggregate of 217,292 shares of SmarterKids Common Stock were issued and
outstanding the ("SmarterKids Warrants"). The SmarterKids Disclosure Schedule
sets forth the SmarterKids agreements under which the SmarterKids Warrants were
issued and to whom such warrants were granted. Except as set forth on the
SmarterKids Disclosure Schedule, there are no obligations, contingent or
otherwise, of SmarterKids to repurchase, redeem or otherwise acquire any shares
of SmarterKids Common Stock or make any material investment (in the form of a
loan, capital contribution or otherwise) in any other entity. A maximum of
400,000 shares of SmarterKids Common Stock is authorized for issuance under the
SmarterKids Employee Stock
30
Purchase Plan, of which 40,666 shares have been purchased pursuant thereto as of
the date hereof.
(b) Except as set forth in this Section 4.2 or as reserved for future
grants of options under the SmarterKids Stock Plans or as disclosed on the
SmarterKids Disclosure Schedule, (i) there are no equity securities of any class
of SmarterKids, or any security exchangeable into or exercisable for such equity
securities, issued, reserved for issuance or outstanding; (ii) there are no
options, warrants, equity securities, calls, rights, commitments or agreements
of any character to which SmarterKids is a party or by which it is bound
obligating SmarterKids to issue, deliver or sell, or cause to be issued,
delivered or sold, additional shares of capital stock of SmarterKids or
obligating SmarterKids to grant, extend, accelerate the vesting of or enter into
any such option, warrant, equity security, call, right, commitment or agreement;
and (iii) to the knowledge of SmarterKids, there are no voting trusts, proxies
or other voting agreements or understandings with respect to the shares of
capital stock of SmarterKids.
Section 4.3 Authority; No Conflict; Required Filings and Consents.
(a) SmarterKids has all requisite corporate power and authority to enter
into this Agreement and each of the Transaction Documents to which it is a party
and to consummate the Transactions contemplated by this Agreement and each of
the Transaction Documents to which it is a party. The execution and delivery of
this Agreement and each of the Transactions Documents to which it is a party and
the consummation of the transactions contemplated by this Agreement and each of
the Transaction Documents to which it is a party by SmarterKids have been duly
authorized by all necessary corporate action on the part of SmarterKids, subject
only to the approval and adoption of this Agreement by SmarterKids' stockholders
under the DGCL. The stockholders of SmarterKids identified on the SmarterKids
Disclosure Schedule have each executed and delivered the Stockholder Support
Agreement in the form of Exhibit A attached hereto and assuming the due
authorization and execution of the Stockholder Support Agreement by each such
stockholder, the Stockholder Support Agreement constitutes a valid and binding
obligation of such stockholders, enforceable in accordance with its terms,
subject to the Bankruptcy and Equity Exception. This Agreement and each of the
Transaction Documents to which SmarterKids is a party have been duly executed
and delivered by SmarterKids and constitute the valid and binding obligations of
SmarterKids, enforceable in accordance with their terms, subject to the
Bankruptcy and Equity Exception.
(b) Except as set forth on the SmarterKids Disclosure Schedule, the
execution and delivery of this Agreement and each of the Transaction Documents
to which it is a party by SmarterKids does not, and the consummation of the
Transactions contemplated by this Agreement and each of the Transaction
Documents to which it is a party will not, (i) conflict with, or result in any
violation or breach of, any provision of the Certificate of Incorporation or
Bylaws of SmarterKids (the "SmarterKids Organizational Documents"), (ii) result
in any violation or breach of, or constitute (with or without notice or lapse of
time, or both) a default (or give rise to a right of termination, cancellation
or acceleration of any obligation or loss of any material benefit) under, or
require a consent or waiver under, any of the terms, conditions or provisions of
any note, bond, mortgage, indenture, lease, contract or other agreement,
instrument or obligation to which SmarterKids is a party or by which it or any
of its properties or assets may
31
be bound, or (iii) conflict with or violate any permit, concession, franchise,
license, judgment, order, decree, statute, law, ordinance, rule or regulation
applicable to SmarterKids or any of its properties or assets, except in the case
of (ii) and (iii) for any such conflicts, violations, defaults, terminations,
cancellations or accelerations which are not, individually or in the aggregate,
reasonably likely to have a SmarterKids Material Adverse Effect. The execution
and delivery of the Stockholder Support Agreement by the stockholders of
SmarterKids party thereto does not conflict with, and will not result in any
violation or breach of, any provision of SmarterKids Organizational Documents.
(c) No consent, approval, order or authorization of, or registration,
declaration or filing with, any Governmental Entity is required by or with
respect to SmarterKids in connection with the execution and delivery of this
Agreement and each of the Transaction Documents to which it is a party or the
consummation of the Transactions contemplated hereby or thereby, except for (i)
the filing of the pre-merger notification report under the HSR Act, if
applicable, (ii) the filing of a Certificate of Merger with respect to the
SmarterKids Merger with the Delaware Secretary of State, (iii) the filing of the
Proxy Statement/Prospectus with the SEC in accordance with the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), (iv) such consents,
approvals, orders, authorizations, registrations, declarations and filings as
may be required under applicable state or foreign securities laws, and (v) such
other consents, authorizations, filings, approvals and registrations which, if
not obtained or made, would not be reasonably likely to have a SmarterKids
Material Adverse Effect. SmarterKids is its own "ultimate parent entity" (as
such term is used in the HSR Act and the Regulations thereunder) and is not a
"$100 million Person" within the meaning of the HSR Act and the Regulations
thereunder.
Section 4.4 SEC Filings; Financial Statements.
(a) SmarterKids has timely filed and made available to Earlychildhood
all forms, reports and documents filed or required to be filed by SmarterKids
with the SEC since the date of its initial public offering (collectively, the
"SmarterKids SEC Reports"). The SmarterKids SEC Reports (including all exhibits
and schedules thereto and documents incorporated by reference therein) (i) at
the time filed, complied in all material respects with the applicable
requirements of the Securities Act and the Exchange Act, as the case may be, and
(ii) did not at the time they were filed (or if amended or superseded by a
filing prior to the date of this Agreement, then on the date of such filing)
contain any untrue statement of a material fact or omit to state a material fact
required to be stated in such SmarterKids SEC Reports or necessary in order to
make the statements in such SmarterKids SEC Reports, in the light of the
circumstances under which they were made, not misleading.
(b) SmarterKids will deliver to Earlychildhood as soon as they become
available true and complete copies of any report or statement mailed by
SmarterKids to its security holders generally or filed by it with the SEC, in
each case subsequent to the date hereof and prior to the Effective Time. As of
their respective dates, such reports and statements (excluding any information
therein provided by Earlychildhood, as to which SmarterKids makes no
representation) will not contain any untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary to make the
statements therein, in the light of the circumstances under which they are made,
not misleading and will comply in all material
32
respects with all applicable requirements of law. The audited financial
statements and unaudited interim financial statements of SmarterKids to be
included or incorporated by reference in such reports and statements will be
prepared in accordance with GAAP and regulations of the SEC applicable to public
companies and will fairly present the financial position of SmarterKids as of
the dates thereof and the results of operations and consolidated cash flows for
the periods then ended (subject, in the case of any unaudited interim financial
statements, to normal year-end adjustments and to the extent they may not
include footnotes or may be condensed or summary statements).
(c) Each of the financial statements (including, in each case, any
related notes) contained in the SmarterKids SEC Reports complied as to form in
all material respects with the applicable published rules and regulations of the
SEC with respect thereto, was prepared in accordance with GAAP and regulations
of the SEC applicable to public companies applied on a consistent basis
throughout the periods involved (except as may be indicated in the notes to such
financial statements or, in the case of unaudited statements, in conformity with
the requirements of Form 10-Q under the Exchange Act) and fairly presented in
all material respects the financial position of SmarterKids as of the respective
dates and the results of its operations and cash flows for the periods
indicated, except that the unaudited interim financial statements were or are
subject to normal and recurring year-end adjustments which were not or are not
expected to be material in amount. The unaudited balance sheet of SmarterKids as
of September 30, 2000 is referred to herein as the "SmarterKids Balance Sheet."
No financial statements of any other entity are required to be included in the
financial statements of SmarterKids under GAAP.
Section 4.5 No Undisclosed Liabilities. Except as disclosed in the
SmarterKids SEC Reports filed prior to the date hereof or on the SmarterKids
Disclosure Schedule, and except for normal or recurring liabilities incurred
since the date of the SmarterKids Balance Sheet in the ordinary course of
business consistent with past practices, SmarterKids does not have any
liabilities, either accrued, contingent or otherwise (whether or not required to
be reflected in financial statements in accordance with GAAP), and whether due
or to become due, which individually or in the aggregate, are reasonably likely
to have a SmarterKids Material Adverse Effect.
Section 4.6 Absence of Certain Changes or Events. Except as expressly
contemplated by this Agreement and the Transaction Documents or as disclosed in
the SmarterKids SEC Reports filed prior to the date hereof or as set forth on
the SmarterKids Disclosure Schedule, since the date of the SmarterKids Balance
Sheet, SmarterKids has conducted its businesses only in the ordinary course and
in a manner consistent with past practice and, since such date, there has been
no material adverse change in the financial condition, results of operations,
business, assets or properties of SmarterKids (a "SmarterKids Material Adverse
Change") or any development or combination of developments of which the
management of SmarterKids is aware that, individually or in the aggregate, has
had, or is reasonably likely to have, a SmarterKids Material Adverse Effect, and
since such date, there has not been any:
(a) issuances of any capital stock, other than pursuant to the
SmarterKids Stock Plans through the date hereof, or purchases, redemptions or
other acquisitions, or agreements to
33
purchase, redeem or otherwise acquire, any shares of capital stock of
SmarterKids, or issuances or purchases of any options, warrants or other equity
securities, debt securities or evidence of indebtedness of SmarterKids, or
declarations or payments of any dividends or any distributions (whether in cash,
stock or property or any combination thereof) in respect of SmarterKids' capital
stock;
(b) amendment to the organizational documents of SmarterKids;
(c) payment by SmarterKids of any bonuses, salaries or other
compensation to any director or executive officer (except for payments of
salary, bonuses and other compensation payable for employment services rendered
in the ordinary course of business (in which case there has been no increase in
such payments)) or entry into any employment, severance or similar contract with
any such person;
(d) adoption of any Employee Benefit Plan or Benefit Arrangement for or
with any employees of SmarterKids or any SmarterKids ERISA Affiliate or any
increase in the payment to or benefits under any SmarterKids Plan or other
benefit obligations for or with any employees of SmarterKids or any SmarterKids
ERISA Affiliate or change in any actuarial or other assumption used to calculate
funding obligations with respect to any SmarterKids Employee Benefit Plan or
Benefit Arrangements, or any change in the manner in which contributions to any
SmarterKids Employee Benefit Plan or Benefit Arrangements are made or the basis
on which such contributions are determined;
(e) damage to or destruction or loss of any asset or property of
SmarterKids, whether or not covered by insurance, that would have a SmarterKids
Material Adverse Effect;
(f) sale, lease or other disposition of any material asset or property
of SmarterKids (other than sales of inventory in the ordinary course of
business);
(g) accrual of any expenses except for such accruals in the ordinary
course of business;
(h) cancellation or waiver of any claims or rights by SmarterKids that
would have a SmarterKids Material Adverse Effect;
(i) assumption, guarantee or endorsement or other agreement to become
responsible for the obligations of any other individual, firm or corporation
(other than intercompany obligations) or making of any loans or advances to, any
employee of SmarterKids, other than in the ordinary course of business;
(j) material change by SmarterKids in its accounting methods, principles
or practices to which Earlychildhood has not previously consented in writing,
except insofar as may be appropriate for changes required by applicable law or
GAAP;
(k) revaluation by SmarterKids of any of its assets having a SmarterKids
Material Adverse Effect;
34
(l) agreement, whether oral or written, by SmarterKids with respect to
or to do any of the foregoing;
(m) other action or event that would have required the consent of
Earlychildhood pursuant to Section 5.1 of this Agreement had such action or
event occurred after the date of this Agreement and that, individually or in the
aggregate, has had or is reasonably likely to have a SmarterKids Material
Adverse Effect.
Section 4.7 Taxes.
(a) SmarterKids has (i) timely filed all federal, state, local and
foreign Tax returns and reports required to be filed by it prior to the date of
this Agreement (taking into account all applicable extensions) and such Tax
returns are accurate and complete in all material respects, (ii) timely paid or
accrued all Taxes owed (whether or not shown on any Tax returns), and (iii) paid
or accrued all Taxes for which a notice of assessment or collection has been
received (other than amounts being contested in good faith by appropriate
proceedings). None of the Tax returns filed or Taxes payable by SmarterKids have
been the subject of an audit, action, suit, proceeding, claim, examination,
deficiency or assessment by the IRS or any other governmental authority, and no
such audit, action, suit, proceeding, claim, examination, deficiency or
assessment is currently pending or, to the knowledge of SmarterKids,
contemplated or threatened. The unpaid Taxes of SmarterKids (whether or not yet
payable) attributable to any period (or portion thereof) ending on or before the
Closing Date did not, as of September 30, 2000, exceed the reserve for actual
Taxes (as opposed to any reserve for deferred Taxes established to reflect
timing differences between book and Tax income) as shown on the SmarterKids
Balance Sheet, and will not exceed such reserve as adjusted for the passage of
time through the Closing Date in accordance with the reasonable past custom and
practice of SmarterKids in filing its Tax returns. SmarterKids will not incur
any liability for Taxes from September 30, 2000 through the Closing Date other
than in the ordinary course of business and consistent with reasonable past
practice, and will not incur any Tax liability in connection with the
transactions contemplated by this Agreement. SmarterKids has not agreed to make
any adjustment under Section 481(a) of the Code (or any corresponding provision
of state, local or foreign Tax law) by reason of a change in accounting method
or otherwise, and SmarterKids will not be required to make any such adjustment
as a result of the transactions contemplated by this Agreement. SmarterKids has
timely withheld or collected and paid over to the appropriate governmental
authorities (or is properly holding for such timely payment) all Taxes required
by law to be withheld or collected. SmarterKids has not made an election under
Section 341(f) of the Code. There are no liens for Taxes upon the assets of
SmarterKids (other than liens for Taxes that are not yet due or that are being
contested in good faith by appropriate proceedings). No extension of a statute
of limitations relating to any Taxes is in effect with respect to SmarterKids.
(b) SmarterKids has not been a member of an affiliated group of
corporations filing a consolidated federal income tax return (or a group of
corporations filing a consolidated, combined or unitary income tax return under
comparable provisions of state, local or foreign tax law) for any taxable
period, other than a group the common parent of which is or was SmarterKids.
SmarterKids has not been and is not a party to or member of any joint venture,
partnership, limited liability company, or other arrangement or contract which
could be treated as
35
a partnership for federal income tax purposes. SmarterKids is not, and has not
been, a U.S. real property holding corporation (as defined in Section 897(c)(2)
of the Code) during the applicable period specified in Section 897(c)(1)(A)(ii)
of the Code.
(c) SmarterKids has no obligation under any agreement or arrangement
with any other person or any provision of law with respect to Taxes of such
other person (including pursuant to Treas. Reg. (S) 1.1502-6 or comparable
provisions of state, local or foreign tax law) and including any liability for
Taxes of any predecessor entity.
Section 4.8 Properties.
(a) The SmarterKids Disclosure Schedule sets forth a list of all
material leases to which SmarterKids is a party as a lessee as of the date
hereof (the "SmarterKids Lease Agreements"), setting forth in the case of any
such lease covering real property, the location of such real property. To the
knowledge of SmarterKids, SmarterKids has a valid and binding leasehold interest
in each of the properties that is the subject of a SmarterKids Lease Agreement
free and clear of all Encumbrances except for (i) any Encumbrances reflected in
the financial statements included in the SmarterKids SEC Reports and the
SmarterKids Disclosure Schedule; (ii) any Encumbrances which, individually or in
the aggregate, are not reasonably likely to have a SmarterKids Material Adverse
Effect; (iii) zoning laws and other land use restrictions that do not impair the
present or anticipated use or occupancy of the property subject thereto, (iv)
any Encumbrances for taxes, assessments and other governmental charges not yet
due and payable or due but not delinquent or due and being contested in good
faith; (v) any mechanics' workmen's, repairmen's, warehousemen's, carrier's or
other similar liens and encumbrances arising in the ordinary course of business
consistent with past practice or being contested in good faith and (vi) any
Encumbrances which are matters of public record or are shown by a current title
report and reflected on the SmarterKids Disclosure Schedule (clauses (i) through
(vi) above collectively referred to herein as "SmarterKids Permitted
Encumbrances").
(b) SmarterKids is not in default under any SmarterKids Lease Agreement
except where the existence of such defaults, individually or in the aggregate,
has not had and is not reasonably likely to have a SmarterKids Material Adverse
Effect.
(c) SmarterKids does not own any real property.
Section 4.9 Intellectual Property.
(a) SmarterKids owns free and clear of all Encumbrances 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, copyrights, know-how,
computer software programs or applications and tangible or intangible
proprietary information or material that are necessary to conduct the business
of SmarterKids as currently conducted (the "SmarterKids Intellectual Property"),
subject to such exceptions that would not be reasonably likely to have an
SmarterKids Material Adverse Effect. The SmarterKids Disclosure Schedule
contains a list of all of the following that are included in the material within
the SmarterKids Intellectual Property: (i) patents and patent applications; (ii)
trademarks, trade names and service marks and registrations thereof and
applications
36
therefor; and (iii) registered copyrights and applications therefor. The
SmarterKids Disclosure Schedule identifies the owner of each item listed thereon
and, in the case of registrations and applications, the application or
registration number and date.
(b) To the knowledge of SmarterKids, SmarterKids is the sole and
exclusive owner or a licensee of all of the material SmarterKids Intellectual
Property. All of the material SmarterKids Intellectual Property will be owned or
available for use by SmarterKids on terms and conditions immediately following
the Effective Time identical to the terms and conditions pertaining to
SmarterKids immediately prior to the Effective Time. SmarterKids has taken
reasonable measures to protect the proprietary nature of the SmarterKids
Intellectual Property and to maintain in confidence the trade secrets and
confidential information that they own or use. No other person has any rights to
any material item of the SmarterKids Intellectual Property or has any rights to
any of the material SmarterKids Intellectual Property, except that the items of
the SmarterKids Intellectual Property identified on the SmarterKids Disclosure
Schedule as licensed to SmarterKids are owned by the respective owners
identified on the SmarterKids Disclosure Schedule, and, to the knowledge of
SmarterKids, no person is infringing, violating or misappropriating any of the
material SmarterKids Intellectual Property.
(c) To the knowledge of SmarterKids, none of the activities or business
presently conducted by SmarterKids infringes or violates, or constitutes a
misappropriation of, any intellectual property of any other person, and, if
without the knowledge of SmarterKids, such activities or business presently
conducted by SmarterKids does infringe, violate or constitute a misappropriation
of any intellectual property of any other person, no such infringement,
violation or misappropriation, individually or in the aggregate, is reasonably
likely to have a SmarterKids Material Adverse Effect. Neither SmarterKids nor
any Affiliate of SmarterKids has received any complaint, claim or notice
alleging any such infringement, violation or misappropriation.
(d) With respect to each item of the SmarterKids Intellectual Property:
(i) SmarterKids possesses all right, title and interest
in and to such item, except for any SmarterKids Third Party Rights (as defined
below;)
(ii) such item is not subject to any outstanding judgment,
order, decree, stipulation or injunction; and
(iii) SmarterKids has not agreed, except in the ordinary
course of business consistent with past practice or in conjunction with product
or service sales or licenses, to indemnify any person for or against any
infringement, misappropriation or other conflict with respect to such item.
(e) The SmarterKids Disclosure Schedule identifies each item of the
intellectual property used by SmarterKids that is owned by a party other
than SmarterKids ("SmarterKids Third Party Rights"), and all licenses or
other agreements pursuant to which SmarterKids uses such items are listed
on the SmarterKids Disclosure Schedule. With respect to each such item:
37
(i) the license or other agreement covering any such
material item is valid, binding, enforceable and in full force and effect with
respect to SmarterKids and, to the knowledge of SmarterKids, with respect to
every other party thereto;
(ii) each such license or other agreement, including
licenses to all third-party software listed in the SmarterKids Disclosure
Schedule other than generally commercially available software, to which
SmarterKids is a party, is assignable by SmarterKids without the consent or
approval of, or any payment to, any party except as set forth on the SmarterKids
Disclosure Schedule, and, except as set forth on the SmarterKids Disclosure
Schedule, all such licenses and other agreements will continue to be valid,
binding, enforceable and in full force and effect immediately following the
Effective Time in accordance with the terms thereof as in effect immediately
prior to the Effective Time, and the consummation of the transactions will not
conflict with, result in a violation or breach of or constitute a default under
(with notice or lapse of time or both) any such license or other agreement; and
(iii) neither SmarterKids nor, to the knowledge of
SmarterKids, any other party to any such license or other agreement, is in
breach or default under any such license or other agreement and, to the
knowledge of SmarterKids, no event has occurred that, with notice or lapse of
time or both, would constitute such a breach or default or permit termination,
modification or acceleration thereunder.
(g) The systems and web architecture currently associated with
SmarterKids' web site are capable of supporting revenue of $40 million on an
annual basis at present performance standards and consistent with the
seasonality of SmarterKids' business.
Section 4.10 Product Warranties and Liability.
(a) No reserves have been provided for by SmarterKids to cover potential
claims under existing customer indemnification agreements.
(b) Except as to claims, actions, proceedings or investigations which
have been asserted but as to which no notice has been given to SmarterKids and
except as set forth on SmarterKids Disclosure Schedule, there are no product
liability claims, actions, proceedings or investigations pending or, to the
knowledge of SmarterKids, threatened against SmarterKids or its assets or, to
the knowledge of SmarterKids, any state of facts existing which could give rise
to any such product liability claim, action, proceeding or investigation.
(c) To the knowledge of SmarterKids, no claims have been made that the
products sold by SmarterKids are not effective for the uses such products
purport to serve. To its knowledge, SmarterKids has not received any written
notice that any product manufactured by it has not been manufactured in
accordance with "current Good Manufacturing Practices" (as such term is commonly
understood within SmarterKids' industry) or has not been properly labeled for
its approved use.
38
Section 4.11 Agreements, Contracts and Commitments.
(a) As of the date hereof, SmarterKids is not a party to any existing
contract, obligation or commitment (including amendments, supplements or
modifications thereof (whether orally or in writing)) of any type in any of the
following categories except for contracts filed as exhibits to the SmarterKids
SEC Reports or set forth in the SmarterKids Disclosure Schedule (true and
complete copies of which contracts have been delivered to or made available to
Earlychildhood):
(i) contracts that provide for annual payments to or by
SmarterKids aggregating in excess of $150,000;
(ii) each contract of SmarterKids that was not entered
into in the ordinary course of business;
(iii) contracts under which SmarterKids has or may,
except by way of endorsement of negotiable instruments for collection in the
ordinary course of business and consistent with past practice, become absolutely
or contingently or otherwise liable for (x) the performance under a contract of
any other person, firm or corporation or (y) the whole or any part of the
indebtedness or liabilities of any other person, firm or corporation, in all
cases, individually in excess of $1,000,000 and in the aggregate in excess of
$5,000,000;
(iv) employment agreements, consulting agreements,
contracts or commitments with any employee or member of SmarterKids' Board of
Directors, other than those which are terminable by SmarterKids on not more than
thirty days notice without liability or financial obligation, and within each
such category of agreements, contracts or commitments, which are individually in
excess of $150,000;
(v) any agreements or plans, including, without
limitation, any stock option, stock appreciation right or stock purchase plans
or agreements, any of the benefits of which will be increased, or the vesting of
benefits of which will be accelerated, by the occurrence of any of the
transactions contemplated by this Agreement or the value of any of the benefits
of which will be calculated on the basis of any of the transactions contemplated
by this Agreement;
(vi) any contract with any director, officer or more than
5% stockholder of SmarterKids, other than in such person's capacity as a
director or officer of SmarterKids, or any contract with any entity in which, to
the knowledge of SmarterKids, any director, officer or more than 5% stockholder
or any family member of any director, officer or stockholder has a material
economic interest;
(vii) any contract that limits or restricts in any material
respect where SmarterKids may conduct its business or the type or line of
business that Earlychildhood may engage in;
(viii) any powers of attorney outstanding (other than those
issued in the ordinary course of business with respect to Tax matters), or
material obligations or liabilities (absolute or contingent) as guarantor,
surety, cosigner, endorser, co-maker, indemnitor, or otherwise respecting the
obligations or liabilities of any person;
39
(ix) any material contract containing any agreement with
respect to any change of control; and
(x) each material amendment, supplement and modification
(whether oral or written) in respect of any of the foregoing.
(b) SmarterKids has not breached, or received in writing any claim or
notice that it has breached, any of the terms or conditions of any material
agreement, contract or commitment filed or required to be filed as an exhibit to
the SmarterKids SEC Reports or set forth or required to be set forth in Section
4.11 of the SmarterKids Disclosure Schedule ("SmarterKids Material Contracts")
in such a manner as, individually or in the aggregate, is reasonably likely to
have a SmarterKids Material Adverse Effect. Each SmarterKids Material Contract
that has not expired by its terms is in full force and effect, except for those
contracts the ineffectiveness of which would not reasonably be likely to have a
SmarterKids Material Adverse Effect, and, if all of the consents, approvals,
authorizations, filings, notifications and other actions listed with respect to
such contract in the SmarterKids Disclosure Schedule are obtained, taken or
made, as applicable, such contract will continue, after the Effective Time, to
be in full force and effect on identical terms.
(c) To SmarterKids' knowledge, none of the parties to any SmarterKids
Material Contract have terminated, or notified SmarterKids in writing of its
intent to materially reduce or terminate its business relationship with
SmarterKids in the future.
(d) SmarterKids has not received written notice from any customer, or
group of customers, that are under common ownership or control, and that
accounted for a material percentage of the aggregate products and services
furnished by SmarterKids since January 1, 1999 that such customer or group of
customers has stopped or intends to stop purchasing SmarterKids' products or
services, nor has SmarterKids lost any supplier, or group of suppliers that are
under common ownership or control, that accounted for a material percentage of
the aggregate supplies purchased by SmarterKids since January 1, 1999.
Section 4.12 Litigation. Except as disclosed in the SmarterKids SEC
Reports or in the SmarterKids Disclosure Schedule, there is no (i) action, suit
or proceeding, claim, arbitration or investigation against SmarterKids pending
or, to the knowledge of SmarterKids, threatened, against SmarterKids or (ii)
outstanding order, judgment, writ, injunction or decree of any court,
governmental agency or arbitration tribunal in a proceeding to which SmarterKids
is a party, except, in the case of each of clauses (i) and (ii) above, those
that, individually or in the aggregate, are not reasonably likely to have a
SmarterKids Material Adverse Effect or a material adverse effect on the ability
of SmarterKids to consummate the transactions contemplated by this Agreement.
Section 4.13 Environmental Matters. To the knowledge of SmarterKids,
except as disclosed in the SmarterKids SEC Reports filed prior to the date
hereof and except, with or without the knowledge of SmarterKids, for such
matters that, individually or in the aggregate, are not reasonably likely to
have a SmarterKids Material Adverse Effect: (i) SmarterKids is in material
compliance with all applicable Environmental Laws; (ii) the properties currently
owned or operated by SmarterKids (including soils, groundwater, surface water,
buildings or other
40
structures) are not contaminated with any Hazardous Substances; (iii) the
properties formerly owned or operated by SmarterKids were not contaminated with
Hazardous Substances during the period of ownership or operation by SmarterKids;
(iv) SmarterKids is not subject to liability for any Hazardous Substance
disposal or contamination on any third party property; (v) SmarterKids has not
been associated with any release or threat of release of any Hazardous
Substance; (vi) SmarterKids has not received any written notice, demand, letter,
claim or request for information alleging that SmarterKids may be in violation
of or liable under any Environmental Law; and (vii) SmarterKids is not subject
to any orders, decrees, injunctions or other arrangements with any Governmental
Entity or subject to any indemnity or other agreement with any third party
relating to liability under any Environmental Law or relating to Hazardous
Substances.
Section 4.14 Employee Benefit Plans.
(a) The SmarterKids Disclosure Schedule sets forth all Employee Benefit
Plans, as defined in Section 3(3) of ERISA, and all other material Benefit
Arrangements, (i) which are maintained, contributed to or required to be
contributed to by SmarterKids ("SmarterKids Employee Plans").
(b) A true and complete copy of each written SmarterKids Employee Plan,
including, if applicable, each amendment thereto and any trust agreement,
insurance contract, collective bargaining agreement, or other funding or
investment arrangements for the benefits under such SmarterKids Employee Plan,
has been made available to Earlychildhood. In addition, with respect to each
such SmarterKids Employee Plan to the extent applicable, SmarterKids has made
available to Earlychildhood the most recently filed Federal Forms 5500, the most
recent summary plan description (including any summaries of material
modifications), the most recent IRS determination letter, if applicable, the
most recent actuarial report or valuation, if applicable, and all material
employee communications with respect to each such SmarterKids Employee Plan.
(c) Except as set forth on the SmarterKids Disclosure Schedule:
(i) neither SmarterKids nor any entity that, together with
SmarterKids is required to be treated as a single employer under Section 414 of
the Code ("SmarterKids ERISA Affiliate") sponsors or has previously sponsored,
maintained, contributed to or incurred an obligation to contribute to any
Employee Benefit Plan regulated under Title IV of ERISA, including any
"multiemployer plan," as defined in Sections 3(37) and 4001(a)(3) of ERISA and
neither SmarterKids nor any SmarterKids ERISA Affiliate has incurred nor
reasonably expects to incur any liability under Title IV of ERISA arising in
connection with the termination of any plan covered or previously covered by
Title IV or ERISA. Neither SmarterKids nor any ERISA Affiliate participates in
or has employees covered by an Employee Plan sponsored by a professional
employer organization or similar entity;
(ii) SmarterKids does not and has not previously sponsored,
maintained, contributed to or incurred an obligation to contribute to any
Employee Benefit Plan that provides or will provide benefits described in
Section 3(1) of ERISA to any former
41
employee or retiree of SmarterKids, except as required under Part 6 of Title I
of ERISA and Section 4980B of the Code or applicable state law;
(iii) all SmarterKids Employee Plans and Benefit
Arrangements have been maintained and operated, and currently are, in compliance
in all material respects with their terms, the requirements prescribed by any
and all applicable laws (including ERISA and the Code), orders, or governmental
rules and regulations in effect with respect thereto, and SmarterKids has
performed all material obligations required to be performed by it under, is not
in any material respect in default under or in violation of, and has no
knowledge of any default or violation by any other party to, any of the
SmarterKids Employee Plans;
(iv) each SmarterKids Employee Plan that is intended to
qualify under Section 401(a) of the Code and each trust established pursuant to
each such SmarterKids Employee Plan that is intended to qualify under Section
501(a) of the Code is the subject of a favorable determination letter from the
IRS, a copy of which has been made available to Earlychildhood, and, to
SmarterKids' knowledge, nothing has occurred which may reasonably be expected to
impair such determination or otherwise adversely affect the tax-qualified status
of such SmarterKids Employee Plan;
(v) SmarterKids has made full and timely payment of all
amounts required to be contributed under the terms of each SmarterKids Employee
Plan and applicable law or required to be paid as expenses under such
SmarterKids Employee Plan and there has been no amendment to, written
interpretation of or announcement (whether or not written) by SmarterKids or any
SmarterKids ERISA Affiliates relating to, or change in employee participation or
coverage under, any Employee Benefit Plan or Benefit Arrangement that would
increase materially the expense of maintaining such Employee Benefit Plan or
Benefit Arrangement above the level of the expense incurred in respect thereof
for the fiscal year ended prior to the date hereof; and
(vi) other than claims for benefits in the ordinary course,
there is no claim, suit, action, dispute, arbitration or legal, administrative
or other proceeding or governmental investigation or audit pending, or, to the
knowledge of SmarterKids, threatened, alleging any breach of the terms of any
SmarterKids Employee Plan or of any fiduciary duty thereunder or violation of
any applicable law with respect to any such SmarterKids Employee Plan.
(d) With respect to the SmarterKids Employee Plans, individually and in
the aggregate, no event has occurred, and to the knowledge of SmarterKids, there
exists no condition or set of circumstances in connection with which SmarterKids
could be subject to any liability that is reasonably likely to have a
SmarterKids Material Adverse Effect under ERISA, the Code or any other
applicable law.
(e) SmarterKids is not a party to any written or oral contract, agreement,
plan or arrangement pursuant to which SmarterKids has any obligation to "gross
up," indemnify or otherwise compensate or hold harmless any person with respect
to any portion of any excise tax (or interest or penalties with respect thereto)
which such person may become subject to under Section 4999 of the Code or any
similar state tax law, and there is no contract, agreement, plan or
42
arrangement covering any person that, individually or collectively, would
constitute compensation in excess of the limitation set forth in Section 162(m)
of the Code.
(f) Except as set forth on the SmarterKids Disclosure Schedule, and except
as provided for in this Agreement, SmarterKids is not a party to any oral or
written (i) agreement with any officer or other key employee of SmarterKids, the
benefits of which are contingent, or the terms of which are materially altered,
upon the occurrence of a transaction involving SmarterKids of the nature
contemplated by this Agreement, (ii) agreement with any officer of SmarterKids
providing any term of employment or compensation guarantee extending for a
period longer than one year from the date hereof and for the payment of
compensation in excess of $100,000 per annum, or (iii) agreement or plan,
including any stock option plan, stock appreciation right plan, restricted stock
plan or stock purchase plan, any of the benefits of which will be increased, or
the vesting of the benefits of which will be accelerated, by the occurrence of
any of the transactions contemplated by this Agreement or the value of any of
the benefits of which will be calculated on the basis of any of the transactions
contemplated by this Agreement. None of the execution and delivery of this
Agreement or any of the Transaction Documents or the consummation of the
transactions contemplated hereunder or thereunder will trigger any "change of
control" or similar provisions resulting in the acceleration of benefits or
compensation with respect to any agreements with any officer or other key
employee of SmarterKids except for such applicable agreements as set forth on
the SmarterKids Disclosure Schedule (the "SmarterKids Change of Control
Agreements").
Section 4.15 Compliance With Laws.
(a) SmarterKids has not violated or failed to comply with any statute,
law, ordinance, regulation, rule or order of any Governmental Entity, or any
judgment, decree or order of any court, applicable to it, its business or
operations or by which it, its business or operations are bound, except for any
such violations or failures to comply that, individually or in the aggregate
have not had and are not reasonably likely to have a SmarterKids Material
Adverse Effect;
(b) No investigation or review by any Governmental Entity is pending or,
to the knowledge of SmarterKids, has been threatened against SmarterKids, nor,
to the knowledge of SmarterKids, has any Governmental Entity indicated by
written notice or otherwise, an intention to conduct an investigation of
SmarterKids; and
(c) There is no agreement, judgment, injunction, order or decree binding
upon SmarterKids which has had or is reasonably likely to have the effect of
prohibiting or materially impairing the conduct of SmarterKids' business as
currently conducted or the transactions contemplated by this Agreement.
Section 4.16 Tax Matters.
(a) To the knowledge of SmarterKids, none of SmarterKids, its Affiliates
(as defined in Section 5.13) and any of SmarterKids' stockholders have taken or
agreed to take any action (or failed to take or agreed not to take any action)
which such action or inaction, as the case may be, would prevent the SmarterKids
Merger from (i) qualifying as a reorganization
43
described in Section 368(a) of the Code and, (ii) taken together with the
Contribution, as a transfer of property to Holdings qualifying under Section 351
of the Code.
(b) To the knowledge of SmarterKids, the stockholders of SmarterKids
have no present plan, intention or arrangement to sell or otherwise dispose of
any of the Holdings Common Stock received in the SmarterKids Merger that would
cause the Contribution and the SmarterKids Merger to fail to qualify as
transfers under Section 351 of the Code.
Section 4.17 Registration Statement; Proxy Statement/Prospectus. The
information to be supplied by SmarterKids or about SmarterKids to be supplied by
SmarterKids' agents for inclusion in the Registration Statement shall not at the
time the Registration Statement is declared effective by the SEC contain any
untrue statement of a material fact or omit to state any material fact required
to be stated in the Registration Statement or necessary in order to make the
statements in the Registration Statement, in light of the circumstances under
which they were made, not misleading. The information to be supplied by
SmarterKids or about SmarterKids by SmarterKids' agents for inclusion in the
Proxy Statement/Prospectus shall not, on the date the Proxy Statement/Prospectus
is first mailed to stockholders of SmarterKids, at the time of the SmarterKids
Stockholders' Meeting and at the Effective Time, contain any statement which, at
such time and in light of the circumstances under which it shall be made, is
false or misleading with respect to any material fact, omit to state any
material fact necessary in order to make the statements made in the Proxy
Statement/Prospectus not false or misleading, or omit to state any material fact
necessary to correct any statement in any earlier communication with respect to
the solicitation of proxies for the SmarterKids Stockholders' Meeting which has
become false or misleading. If at any time prior to the Effective Time any event
relating to SmarterKids or any of its Affiliates, officers or directors should
be discovered by SmarterKids which should be set forth in an amendment to the
Registration Statement or a supplement to the Proxy Statement/Prospectus,
SmarterKids shall promptly inform Earlychildhood.
Section 4.18 Labor Matters. SmarterKids is not a party to or otherwise
bound by any collective bargaining agreement, contract or other agreement or
understanding with a labor union or labor organization, nor, as of the date
hereof, is SmarterKids the subject of any material proceeding asserting that
SmarterKids has committed an unfair labor practice or seeking to compel it to
bargain with any labor union or labor organization nor, as of the date of this
Agreement, is there pending or, to the knowledge of SmarterKids, threatened, any
material labor strike, dispute, walkout, work stoppage, slow-down or lockout
involving SmarterKids.
Section 4.19 Insurance. All material fire and casualty, general
liability, business interruption, product liability, and sprinkler and water
damage insurance policies maintained by SmarterKids are with reputable insurance
carriers, provide full and adequate coverage for all normal risks incident to
the business of SmarterKids and its respective properties and assets, and are in
character and amount at least equivalent to that carried by persons engaged in
similar businesses and subject to the same or similar perils or hazards, except
for any such failures to maintain insurance policies that, individually or in
the aggregate, are not reasonably likely to have a SmarterKids Material Adverse
Effect. All premiums and other payments due from SmarterKids with respect to any
such contracts of insurance or indemnity have been paid.
44
SmarterKids has not received written notice of any threatened termination of, or
premium increase with respect to, any of such policies or bonds.
Section 4.20 Opinion of Financial Advisor. The financial advisor of
SmarterKids, Chase H&Q, has delivered to SmarterKids an opinion dated the date
of this Agreement to the effect that the SmarterKids Exchange Ratio is fair to
the holders of SmarterKids Common Stock from a financial point of view.
Section 4.21 No Existing Discussions. As of the date hereof, neither
SmarterKids nor any of its Affiliates is engaged, directly or indirectly, in any
discussions or negotiations with any other party with respect to a SmarterKids
Alternative Transaction or any proposal therefor.
Section 4.22 Board Recommendation. The Board of Directors of SmarterKids
has, by a unanimous vote at a meeting of such board duly held on November 8,
2000, approved and adopted this Agreement, the SmarterKids Merger and the other
transactions contemplated hereby and thereby, and determined that this
Agreement, the SmarterKids Merger, and the other transactions contemplated
hereby and thereby, taken together, are in the best interest of the stockholders
of SmarterKids, and prior to the date hereof resolved to recommend that the
holders of SmarterKids Common Stock approve and adopt this Agreement, the
SmarterKids Merger and the other transactions contemplated hereby.
Section 4.23 Voting Requirements. The approval by a majority of the
voting power represented by the outstanding shares of SmarterKids Common Stock
entitled to vote thereon is the only vote of the holders of any class of
SmarterKids' capital stock necessary to approve this Agreement, the SmarterKids
Merger and the other transactions contemplated hereby. No separate approval by
the holders of any other class or series of capital stock of SmarterKids is
necessary to approve this Agreement, the SmarterKids Merger or any of the other
transactions contemplated hereby.
Section 4.24 Section 203 of the DGCL Not Applicable. The Board of
Directors of SmarterKids has taken all actions necessary under the DGCL,
including approving the transactions contemplated by this Agreement and each of
the Transaction Documents to which it is a party, to ensure that Section 203 of
the DGCL applicable to a "business combination" (as defined in Section 203 of
the DGCL) do not, and will not, apply to the transactions contemplated hereunder
and thereunder. No other "fair price," "moratorium," "control share acquisition"
or other similar anti-takeover statute or regulation is applicable to
SmarterKids or (by reason of SmarterKids' participation therein) the SmarterKids
Merger or the other transactions contemplated by this Agreement or the other
Transaction Documents to which it is a party.
ARTICLE V.
COVENANTS
Section 5.1 Conduct of Business. Except as set forth in the
Earlychildhood Disclosure Schedule or the SmarterKids Disclosure Schedule,
during the period from the date of this Agreement and continuing until the
earlier of the termination of this Agreement or the Effective Time,
Earlychildhood and SmarterKids each agrees as to itself and, in the case of
Earlychildhood, its Subsidiaries (except to the extent that the other party
shall otherwise consent
45
in writing) to carry on its business in the usual, regular and ordinary course
in substantially the same manner as previously conducted, to pay its debts and
taxes when due subject to good faith disputes over such debts or taxes, to pay
or perform its other obligations when due, and, to the extent consistent with
such business, use all reasonable efforts consistent with past practices and
policies to (i) preserve intact its present business organization, (ii) keep
available the services of its present officers, key employees and/or managers
and (iii) preserve its relationships with customers, suppliers, distributors,
and others having business dealings with it. Except as expressly contemplated by
this Agreement (including the Exhibits attached hereto) or as set forth in the
Earlychildhood Disclosure Schedule or the SmarterKids Disclosure Schedule,
during the period from the date of this Agreement and continuing until the
earlier of the termination of this Agreement or the Effective Time,
Earlychildhood and SmarterKids each shall not (and Earlychildhood shall not
permit its Subsidiaries to), without the written consent of the other party:
(a) Split, combine or reclassify any shares of its capital stock or
equity interests, as applicable, declare, set aside or pay any dividend or other
distribution (whether in cash, stock or property or any combination thereof) in
respect of its capital stock, LLC Interests or other equity interests (as
applicable) or, except pursuant to agreements in effect on the date of execution
of this Agreement which have been disclosed in the Earlychildhood Disclosure
Schedule or the SmarterKids Disclosure Schedule, as the case may be, purchase,
prepay, redeem or otherwise acquire any shares of its own capital stock, LLC
Interests or any other equity interests (as applicable) or any indebtedness or
debt security; provided, however, that Earlychildhood (and to the extent
necessary, its Subsidiaries) may effect tax distributions to its equity holders
in the ordinary course of business up to the maximum amounts permitted under the
Operating Agreement;
(b) Accelerate, amend or change the period of exercisability of options or
restricted stock granted under any employee stock or equity plan of such party
or authorize cash payments in exchange for any options granted under any of such
plans, except as required by the terms of such plans or any related agreements
in effect as of the date of this Agreement;
(c) Issue, deliver or sell, or authorize or propose the issuance, delivery
or sale of, any shares of its capital stock or other equity interests (as
applicable) or securities convertible into or exchangeable for shares of its
capital stock or other equity interests (as applicable) or subscriptions,
rights, warrants or options to acquire, or other agreements or commitments of
any character obligating it to issue any such shares or equity interests, as
applicable, or other convertible securities, other than the issuance of LLC
Interests or SmarterKids Common Stock, as the case may be, pursuant to the
exercise of options or the SmarterKids Warrants outstanding on the date of this
Agreement;
(d) Acquire or agree to acquire by merging or consolidating with, or by
purchasing an equity interest in or portion of the assets of, or by any other
manner, any business or any corporation, partnership or other business
organization or division, or otherwise acquire or agree to acquire any assets
(other than inventory and other items in the ordinary course of business),
except for any such acquisitions involving aggregate consideration of not more
than $250,000;
46
(e) Consolidate, merge or amalgamate with or into any other person, or
sell, lease, license or otherwise dispose of (in one or more transactions) any
of its material properties or assets;
(f) (i) Increase or agree to increase the compensation payable or to
become payable to its directors or management committee members (as applicable),
officers, managers, employees or consultants, except for increases in salary or
wages of employees (other than officers) in accordance with past practices, (ii)
grant any additional severance or termination pay to, or enter into any
employment or severance agreements with, any consultants, employees, officers,
directors or management committee members (as applicable), (iii) terminate any
officers, employees or consultants, (iv) enter into any collective bargaining
agreement (other than as required by law), or (v) establish, adopt, enter into
or amend any Employee Benefit Plan or Benefit Arrangement or other plan, trust,
fund, policy or arrangement for the benefit of any directors, officers,
employees or consultants; provided, however, that SmarterKids may make bonus
payments to its senior officers, up to an aggregate maximum of $200,000, after
the date of this Agreement and prior to January 31, 2001, so long as such
payments are made in the ordinary course of business consistent with past
practice and approved by the compensation committee of SmarterKids' Board of
Directors.
(g) Amend or propose to amend its organizational documents (including, in
the case of Earlychildhood, the Operating Agreement), except as contemplated by
this Agreement and in any event pursuant to draft amendments sent for review and
comment to the other party;
(h) (A) Incur any indebtedness for borrowed money other than in the
ordinary course of business, (B) assume, guarantee, endorse or otherwise become
liable or responsible for the obligations of any other individual, firm or
corporation or make any loans or advances, except advances to employees for
expense reimbursement made in the ordinary course of business consistent with
past practice, (C) enter into any commitment or transaction material to
SmarterKids or material to Earlychildhood and its Subsidiaries, taken as a whole
(as applicable) outside of product sales in the ordinary course of business, or
(D) incur any liabilities, except for liabilities that, individually or in the
aggregate, would not have an Earlychildhood Material Adverse Effect or a
SmarterKids Material Adverse Effect, as the case may be;
(i) Take any action that would or is reasonably likely to result in (A) a
material breach of any provision of this Agreement or any of the Transaction
Documents to which it is a party or (B) any of its representations and
warranties set forth in this Agreement or any of the Transaction Documents to
which it is a party being untrue on and as of the Closing Date;
(j) Institute any significant change in accounting methods, principles or
practices affecting its assets, liabilities, reserve or expense recognition,
reserves, amortization or accruals, except insofar as may be appropriate to
conform to changes in law or GAAP;
(k) Revalue any of its respective assets, including without limitation,
writing down the value of inventory or notes or accounts receivables, in each
case, except in the ordinary course of business consistent with past practice
and except insofar as may be appropriate to conform to changes in law or GAAP;
47
(l) Make or rescind any material express or deemed election relating to
Taxes, settle or compromise any material claim, action, suit, litigation,
proceeding, arbitration, investigation, audit or controversy relating to Taxes,
or change any of its methods of reporting income or deductions for federal
income Tax purposes from those employed in the preparation of its federal income
tax return for the taxable year ending December 31, 1999, except as may be
required by applicable law;
(m) Settle any litigation relating to the transactions contemplated hereby
or any other litigation if the cost of the settlement would exceed $250,000;
(n) Permit any material insurance policy naming it as a beneficiary or a
loss payee to be cancelled, terminated or materially altered, unless such policy
is replaced with a comparable policy for comparable cost;
(o) Take, or agree in writing or otherwise to take, any of the actions
described in Sections (a) through (n) above.
Section 5.2 Cooperation; Notice; Cure. Each of Earlychildhood,
SmarterKids and Holdings will use commercially reasonable efforts to effectuate
the transactions contemplated hereby and to fulfill and cause to be fulfilled
the conditions to Closing under this Agreement. Subject to compliance with
applicable law, from the date hereof until the Effective Time, each of
Earlychildhood and SmarterKids shall confer on a regular and frequent basis with
one or more representatives of the other party to report on the general status
of ongoing operations and shall promptly provide the other party or its counsel
with copies of all filings made by such party with any Governmental Entity and,
in the case of SmarterKids, with the SEC, in connection with this Agreement, the
Transactions and the transactions contemplated hereby and thereby. Each of
Earlychildhood and SmarterKids shall notify the other of, and will use all
commercially reasonable efforts to cure before the Closing Date, any event,
transaction or circumstance, as soon as practical after it becomes known to such
party, that causes or will cause any covenant or agreement of Earlychildhood or
SmarterKids under this Agreement to be breached or that renders or will render
untrue any representation or warranty of Earlychildhood or SmarterKids contained
in this Agreement. Each of Earlychildhood and SmarterKids shall notify the other
in writing of, and will use all commercially reasonable efforts to cure, before
the Closing Date, any violation or breach, as soon as practical after it becomes
known to such party, of any representation, warranty, covenant or agreement made
by Earlychildhood or SmarterKids. No notice given pursuant to this paragraph
shall have any effect on the representations, warranties, covenants or
agreements contained in this Agreement for purposes of determining satisfaction
of any condition contained herein.
Section 5.3 No Solicitation.
(a) Subject to Section 5.3(b), unless and until this Agreement shall have
been terminated by SmarterKids or Earlychildhood pursuant to and in compliance
with Article VII hereof, SmarterKids shall not, nor will it authorize or permit
any of its officers, directors, employees, financial advisors, attorneys,
accountants, or other representatives or agents to, directly or indirectly
through another person (i) solicit, initiate, facilitate or encourage any
inquiries, offers or proposals by or from any Third Party (as defined below)
that constitute, or
48
could reasonably be expected to lead to, any Acquisition Proposal (as defined
below), (ii) enter into or execute any agreement with respect to an Acquisition
Proposal, (iii) engage in or continue negotiations or discussions with any Third
Party concerning, or, except pursuant to a governmental request for information,
otherwise communicate or provide any non-public information to any Third Party
relating to any Acquisition Proposal, (iv) make or authorize any public
statement, recommendation or solicitation in support of any Acquisition
Proposal, or (v) take any other action inconsistent with its obligations or
commitments under this Section 5.3. As used in this Agreement, "Acquisition
Proposal" means any (i) transaction pursuant to which any corporation,
partnership, trust, person or other entity or group other than Earlychildhood or
its Affiliates (a "Third Party"), acquires more than 20% of the outstanding
shares of SmarterKids Common Stock pursuant to a tender offer or exchange offer
or otherwise, (ii) merger or other business combination, recapitalization,
restructuring or similar transaction involving SmarterKids, (iii) other
transaction pursuant to which any Third Party acquires control of assets of
SmarterKids having a fair market value equal to more than 20% of the fair market
value of all the assets of SmarterKids immediately prior to such transaction, or
(iv) any public announcement of a proposal, plan or intention to do any of the
foregoing or any agreement to engage in any of the foregoing.
(b) Notwithstanding the foregoing, SmarterKids may, and may authorize and
permit its officers, directors, employees, financial advisors, attorneys,
accountants and other representatives or agents, in response to a bona fide,
written, unsolicited Acquisition Proposal from a Third Party which did not
otherwise result from a breach of this Section 5.3, to (i) furnish non-public
information to such Third Party; (ii) otherwise facilitate any effort or attempt
by such Third Party to make or implement an Acquisition Proposal; (iii) agree to
or recommend or endorse any such Acquisition Proposal with or by any Third
Party; (iv) withdraw or modify, or propose publicly to withdraw or modify, in a
manner adverse to Earlychildhood, its approval and recommendation of the
SmarterKids Merger and this Agreement; (v) participate in discussions and
negotiations with such Third Party relating to such Acquisition Proposal; and
(vi) cause SmarterKids to enter into an agreement implementing an Acquisition
Proposal, provided that SmarterKids simultaneously terminates this Agreement
pursuant to Section 7.1(f) and pays the Termination Fee (as defined in Section
7.3); provided, however, that SmarterKids shall be permitted to take any one or
more of the actions enumerated in clauses (i)-(vi) above if and only to the
extent that (A) the Board of Directors of SmarterKids reasonably determines in
good faith (after consultation with a financial advisor of nationally recognized
reputation) that (X) the Acquisition Proposal is more favorable or is reasonably
likely to lead to an Acquisition Proposal that is more favorable to the
SmarterKids stockholders from a financial point of view than the Transactions,
and (Y) is made by a Third Party reasonably believed by the SmarterKids Board of
Directors to be financially capable of completing such Acquisition Proposal, (B)
the SmarterKids Board of Directors reasonably determines in good faith (after
having consulted with and considered the advice of its outside legal counsel)
that the failure to take such actions would cause the members of the SmarterKids
Board of Directors to breach their fiduciary duties to the SmarterKids
stockholders under applicable law, and (C) prior to furnishing or disclosing any
non-public information to, or entering into discussions or negotiations with,
such Third Party, it receives from such Third Party an executed confidentiality
agreement with respect to the information to be furnished with terms no less
favorable in the aggregate to it than those contained in the Confidentiality
Agreement dated as of January 19, 2000 by and between
49
Earlychildhood and SmarterKids (the "Earlychildhood Confidentiality Agreement"),
but which confidentiality agreement shall not (nor shall any other agreement or
arrangement between SmarterKids, on the one hand, and such Third Party, on the
other hand, or any of their respective representatives or agents) provide for
any exclusive right to negotiate with SmarterKids or any payments by
SmarterKids. Without limiting the foregoing, it is understood that any violation
of the restrictions set forth in this Section 5.3(b) by any officer, director or
employee of SmarterKids or any investment banker, attorney, accountant or other
advisor, representative or agent of SmarterKids shall be deemed to be a breach
of this Section 5.3 by SmarterKids.
(c) SmarterKids shall (i) immediately cease and cause to be terminated any
existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any Acquisition Proposal or similar transaction, and
take all necessary steps to inform such individuals or entities of the
obligations undertaken in this Section 5.3, (ii) as promptly as practicable (and
in any event within twenty-four (24) hours) notify Earlychildhood in writing of
any Acquisition Proposal or receipt of any inquiries, proposals or offers with
respect to an Acquisition Proposal or any request for non-public information
relating to it in connection with an Acquisition Proposal or for access to its
properties, books or records by any Third Party that informs SmarterKids' Board
of Directors or any representative thereof that it is considering making, or has
made (or which SmarterKids' Board of Directors reasonably believes may be
considering making or has made) a proposal or offer with respect to an
Acquisition Proposal, (iii) in such written notice, indicate in reasonable
detail the identity of such Third Party (including the name of such Third Party
and a copy of any offer or proposal and any supporting documentation) and the
terms and conditions of such proposal or offer, all of which information shall
be held in confidence by Earlychildhood, and (iv) as promptly as practicable
(and in any event within twenty-four (24) hours) notify Earlychildhood in
writing of any determination by its Board of Directors to furnish information or
engage in discussions or negotiations with any Third Party. SmarterKids shall
promptly furnish to Earlychildhood copies of any written information (and advise
it orally of any non-written information) provided to or by any Third Party
relating to an Acquisition Proposal to the extent such information has not
previously been provided to Earlychildhood. If any notice is given or required
to be given in accordance with the second preceding sentence, then SmarterKids
shall thereafter continue to keep Earlychildhood informed, on a current basis,
of the status of any such discussions or negotiations and the terms being
discussed or negotiated. Notwithstanding the foregoing, SmarterKids shall not
accept or enter into any agreement concerning an Acquisition Proposal for a
period of at least three business days after Earlychildhood's receipt of the
notification of the terms thereof pursuant to the third preceding sentence (and
only in compliance with the terms of Article VII hereof).
(d) Nothing contained in this Section 5.3 shall prohibit SmarterKids from
taking and disclosing to its stockholders a position contemplated by Rule 14e-2
promulgated under the Exchange Act or from making any disclosure to its
stockholders if the SmarterKids Board of Directors reasonably determines in good
faith after receiving the advice of its outside legal counsel (who may be its
regularly engaged outside counsel) that the failure to do so would cause the
members of the SmarterKids Board of Directors to breach of their fiduciary
duties to the SmarterKids stockholders under any applicable law, provided,
however, that neither SmarterKids nor the SmarterKids Board of Directors nor any
committee thereof may, except as expressly permitted by Section 5.3(b) or
required by Rule 14e-2 promulgated under the Exchange Act, withdraw or modify,
or propose publicly to
50
withdraw or modify, its position with respect to this Agreement or the
SmarterKids Merger or approve or recommend, or propose publicly to approve or
recommend, an Acquisition Proposal.
Section 5.4 No Negotiation.
(a) From the date hereof until the Effective Time, or unless this
Agreement is earlier terminated by SmarterKids or Earlychildhood pursuant to and
in compliance with Article VII, Earlychildhood shall not and shall not permit
its Subsidiaries nor any of its Members or any of their respective Affiliates,
nor will Earlychildhood authorize or permit any of its employees, financial
advisors, attorneys, accountants, or other representatives or agents to,
directly or indirectly through another person, (i) solicit, initiate, facilitate
or encourage any inquiries, offers or proposals by or from any Other Party (as
defined below) that constitute, or could reasonably be expected to lead to, any
Earlychildhood Acquisition Proposal (as defined below), (ii) enter into or
execute any agreement with respect to an Earlychildhood Acquisition Proposal,
(iii) engage in or continue negotiations or discussions with any Other Party
concerning, or, except pursuant to a governmental request for information,
otherwise communicate or provide any non-public information to any Other Party
relating to, any Earlychildhood Acquisition Proposal, (iv) make or authorize any
public statement, recommendation or solicitation in support of any
Earlychildhood Acquisition Proposal, or (v) take any other action inconsistent
with its obligations or commitments under this Section 5.4. As used in this
Agreement, "Earlychildhood Acquisition Proposal" means any (i) transaction
pursuant to which any corporation, partnership, trust, person or other entity or
group other than SmarterKids or its Affiliates (an "Other Party"), acquires more
than 20% of the outstanding LLC Interests, (ii) merger or other business
combination, recapitalization, restructuring or similar transaction involving
Earlychildhood, (iii) other transaction pursuant to which any Other Party
acquires control of assets of Earlychildhood having a fair market value equal to
more than 20% of the fair market value of all the assets of Earlychildhood
immediately prior to such transaction, or (iv) any public announcement of a
proposal, plan or intention to do any of the foregoing or any agreement to
engage in any of the foregoing.
(b) Earlychildhood shall (i) immediately cease and cause to be terminated
any existing activities, discussions or negotiations with any parties conducted
heretofore with respect to any Earlychildhood Acquisition Proposal or similar
transaction, and take all necessary steps to inform such individuals or entities
of the obligations undertaken in this Section 5.4, (ii) as promptly as
practicable (and in any event within twenty-four (24) hours) notify SmarterKids
in writing of receipt of any Earlychildhood Acquisition Proposal or any
inquiries, proposals or offers with respect to an Earlychildhood Acquisition
Proposal or any request for nonpublic information relating to it in connection
with an Earlychildhood Acquisition Proposal or for access to its properties,
books or records by any Other Party that informs Earlychildhood's Management
Committee or any officer of Earlychildhood that is its considering making, or
has made (or which Earlychildhood's Management Committee reasonably believes may
be considering making or has made) a proposal or offer with respect to an
Earlychildhood Acquisition Proposal, (iii) in such written notice indicate in
reasonable detail the identity of such Other Party (including the name of such
Other Party and a copy of any offer or proposal and any supporting
documentation) and the terms and conditions of such proposal or offer, all of
which
51
information shall be held in confidence by SmarterKids, and (iv) as
promptly as practicable (and in any event within twenty-four (24) hours) notify
SmarterKids in writing of any determination by Earlychildhood's Management
Committee or its officers or Affiliates to furnish information or engage in
discussions or negotiations with any Other Party, it being understood that if
Earlychildhood furnishes such information or engages in discussions or
negotiations without SmarterKids' prior written consent, it shall constitute a
breach of this Agreement. During such period, neither the Earlychildhood
Management Committee nor any subcommittee thereof will approve or enter into any
agreement to initiate, facilitate, encourage or implement an Earlychildhood
Acquisition Proposal, or take any other action to contravene, supersede or
modify their approval of this Agreement, the Transaction Documents, the
Contribution or the other transactions contemplated hereby.
Section 5.5 Proxy Statement/Prospectus; Registration Statement.
(a) As promptly as practicable after the execution of this Agreement,
SmarterKids shall prepare and file with the SEC the Proxy Statement/Prospectus
and Earlychildhood and SmarterKids will cause Holdings to prepare and file with
the SEC the Registration Statement on Form S-4 in which the Proxy
Statement/Prospectus will be included as a prospectus. Holdings shall use all
reasonable efforts to cause the Registration Statement to become effective as
soon after such filing as practical and to keep such Registration Statement
effective for so long as is necessary to consummate the Contribution and the
SmarterKids Merger. The Proxy Statement/Prospectus shall include the
recommendation of the Board of Directors of SmarterKids in favor of this
Agreement and the SmarterKids Merger; provided that the Board of Directors of
SmarterKids may modify or withdraw such recommendation in accordance with the
terms of Section 5.3.
(b) SmarterKids and Earlychildhood shall make all necessary filings with
respect to the SmarterKids Merger and the Contribution, respectively, under the
Securities Act, the Exchange Act, applicable state blue sky laws and the rules
and regulations thereunder.
(c) Earlychildhood and SmarterKids shall use their best efforts to furnish
to each other all information required for any application or other filing to be
made pursuant to the rules and regulations of any applicable law (including all
information required to be included in the Proxy Statement/Prospectus and the
Registration Statement) in connection with the transactions contemplated by this
Agreement.
Section 5.6 Nasdaq Quotation.
SmarterKids agrees to use its reasonable best efforts to continue the
quotation and listing of SmarterKids Common Stock on Nasdaq during the term of
this Agreement.
Section 5.7 Access to Information. Upon reasonable notice,
Earlychildhood and SmarterKids shall each (and Earlychildhood shall cause its
Subsidiaries to) afford to the officers, managers, employees, accountants,
counsel and other authorized representatives of the other, access, during normal
business hours during the period prior to the Effective Time, to all its
personnel, properties, books, contracts, commitments and records and, during
such period, each of Earlychildhood and SmarterKids shall (and Earlychildhood
shall cause its Subsidiaries to) furnish promptly to the other (a) a copy of
each report, schedule, registration statement and other
52
document filed or received by it during such period pursuant to the requirements
of federal securities laws and (b) all other information concerning its
business, properties and personnel as such other party may reasonably request.
The parties will hold any such information which is nonpublic in confidence in
accordance with the Earlychildhood Confidentiality Agreement and the
Confidentiality Agreement dated as of January 19, 2000 between SmarterKids,
Earlychildhood and ▇▇▇▇▇▇ ▇▇▇▇▇▇ Partners (the "SmarterKids Confidentiality
Agreement", and together with the Earlychildhood Confidentiality Agreement, the
"Confidentiality Agreements"). No information or knowledge obtained in any
investigation pursuant to this Section 5.7 shall affect or be deemed to modify
any representation or warranty contained in this Agreement or the conditions to
the obligations of the parties to consummate the Contribution or the SmarterKids
Merger.
Section 5.8 SmarterKids Stockholders' Meeting. SmarterKids shall call a
meeting of its stockholders to be held as promptly as practicable for the
purpose of voting upon this Agreement and the SmarterKids Merger. Subject to
Section 5.3, SmarterKids shall, through its Board of Directors, recommend to its
stockholders approval of such matters and shall coordinate and cooperate with
Earlychildhood with respect to the timing of such meeting and shall use its best
efforts to hold such meeting as soon as practicable after the date hereof. The
only matters SmarterKids shall propose to be acted on by its stockholders at the
stockholders' meeting shall be the approval of this Agreement and the
SmarterKids Merger and related matters incidental to the consummation of the
SmarterKids Merger. Unless otherwise required to comply with the fiduciary
duties of SmarterKids' Board of Directors, as determined by such directors in
good faith after consultation with outside legal counsel, SmarterKids shall use
commercially reasonable efforts to solicit from its stockholders proxies in
favor of such matters including the retention of a proxy solicitation firm.
SmarterKids shall not require any vote greater than a majority of the votes
entitled to be cast by the holders of the issued and outstanding shares of
SmarterKids Common Stock for approval of this Agreement and the SmarterKids
Merger.
Section 5.9 Legal Conditions to Merger.
(a) Earlychildhood and SmarterKids shall each use all reasonable efforts
to (i) take, or cause to be taken, all appropriate action, and do, or cause to
be done, all things necessary and proper under applicable law to consummate and
make effective the transactions contemplated hereby as promptly as practicable,
(ii) obtain from any Governmental Entity or any other third party any consents,
licenses, permits, waivers, approvals, authorizations, or orders required to be
obtained or made by Earlychildhood or SmarterKids (and in the case of
Earlychildhood, its Subsidiaries) in connection with the authorization,
execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby including, without limitation, the Contribution
and the SmarterKids Merger, (iii) as promptly as practicable, make all necessary
filings, and thereafter make any other required submissions, with respect to
this Agreement, the Contribution and the SmarterKids Merger required under (A)
the Securities Act and the Exchange Act, and any other applicable federal or
state securities laws, (B) the HSR Act, if applicable, and (C) any other
applicable law, and (iv) refrain from taking any actions (other than as
expressly permitted under Sections 5.3 or 5.4) which would reasonably be likely
to delay, hinder or interfere with the transactions contemplated hereby.
Earlychildhood and SmarterKids shall cooperate with each other in connection
with the making of all such filings, including
53
providing copies of all such documents to the non-filing party and its advisors
prior to filing and, if requested, to accept all reasonable additions, deletions
or changes suggested in connection therewith.
(b) Earlychildhood and SmarterKids agree, and Earlychildhood shall cause
each of its Subsidiaries, to cooperate and to use their respective best efforts
to obtain any government clearances required for Closing (including through
compliance with the HSR Act), to respond to any government requests for
information, and to contest and resist any action, including any legislative,
administrative or judicial action, and to have vacated, lifted, reversed or
overturned any decree, judgment, injunction or other order (whether temporary,
preliminary or permanent) (an "Order") that restricts, prevents or prohibits the
consummation of the Transactions or any other transactions contemplated by this
Agreement. The parties hereto will consult and cooperate with one another, and
consider in good faith the views of one another, in connection with any
analyses, appearances, presentations, memoranda, briefs, arguments, opinions and
proposals made or submitted by or on behalf of any party hereto in connection
with proceedings under or relating to the HSR Act or any other federal, state or
foreign antitrust or fair trade law. Earlychildhood and SmarterKids shall
cooperate and work together in any proceedings or negotiations with any
Governmental Entity relating to any of the foregoing. Notwithstanding anything
to the contrary in this Section 5.9, neither Earlychildhood nor SmarterKids
shall be required to take any action that would reasonably be expected to
substantially impair the overall benefits expected, as of the date hereof, to be
realized from the consummation of the Transactions.
(c) Each of Earlychildhood and SmarterKids shall give any notices to
third parties, and shall use all reasonable efforts to obtain any third party
consents related to or required in connection with the Transactions.
(d) Prior to the Effective Time, unless the parties hereto otherwise
agree in writing, SmarterKids and Earlychildhood shall take all action necessary
to terminate, as of immediately prior to the Effective Time, the respective
Employee Benefit Plan subject to Section 401(k) of the Code maintained by
Earlychildhood and each ERISA Affiliate.
Section 5.10 Earlychildhood Financial Statements. Earlychildhood shall
provide both audited and unaudited financial statements required to be included
in the Proxy Statement/Prospectus in compliance with applicable SEC reporting
requirements.
Section 5.11 Public Disclosure. Earlychildhood and SmarterKids shall
agree on the form and content of the initial press release regarding the
transactions contemplated hereby and thereafter shall consult with each other
before issuing, and use all reasonable efforts to agree upon, any press release
or other public statement with respect to any of the transactions contemplated
hereby and shall not issue any such press release or make any such public
statement prior to such consultation, except as may be required by law.
Section 5.12 Non-recognition Exchange. Whether before or after the
Effective Time, none of Earlychildhood, SmarterKids, their respective
Subsidiaries or Affiliates and Holdings shall knowingly take any action, or
knowingly fail to take any action, that is reasonably likely to jeopardize the
treatment of the SmarterKids Merger and the Contribution as transfers of
property
54
described in Section 351 of the Code or the SmarterKids Merger as a
reorganization described in Section 368(a) of the Code.
Section 5.13 Affiliate Agreements. Upon the execution of this Agreement,
Earlychildhood and SmarterKids will provide each other with a list of those
persons who are, in Earlychildhood's or SmarterKids' respective reasonable
judgment, "affiliates" of Earlychildhood or SmarterKids, as the case may be,
within the meaning of Rule 145 (each such person who is an "affiliate" of
Earlychildhood or SmarterKids within the meaning of Rule 145 is referred to as
an "Affiliate") promulgated under the Securities Act ("Rule 145").
Earlychildhood and SmarterKids shall provide each other such information and
documents as the other party shall reasonably request for purposes of reviewing
such list and shall notify the other party in writing regarding any change in
the identity of its Affiliates prior to the Closing Date. Earlychildhood and
SmarterKids shall each use all reasonable efforts to deliver or cause to be
delivered to each other by November 30, 2000 (and in any case prior to the
Effective Time) from each of its Affiliates, an executed Affiliate Agreement,
substantially similar to the form attached hereto as Exhibit J, by which each
Affiliate of Earlychildhood and each Affiliate of SmarterKids agrees to comply
with the applicable requirements of Rule 145 (an "Affiliate Agreement").
Holdings shall be entitled to place appropriate legends on the certificates
evidencing any Holdings Common Stock to be received by such Affiliates of
Earlychildhood or SmarterKids pursuant to the terms of this Agreement, and to
issue appropriate stop transfer instructions to the transfer agent for Holdings
Common Stock, consistent with the terms of the Affiliate Agreements (provided
that such legends or stop transfer instructions shall be removed, when such
shares of Holdings Common Stock are generally transferable without any
restrictions imposed by Rule 145, upon the request of any stockholder that is
not then an Affiliate of Holdings).
Section 5.14 Nasdaq Quotation. Earlychildhood and SmarterKids shall
cause Holdings to promptly prepare and submit an application to Nasdaq to quote
the shares of Holdings Common Stock to be issued in the Transactions and upon
exercise or conversion of the Earlychildhood Options, the SmarterKids Stock
Options and the SmarterKids Warrants, and shall use all reasonable efforts to
cause such shares to be approved for quotation on Nasdaq, prior to the Effective
Time, subject to official notice of issuance.
Section 5.15 Stock Plans.
(a) At the Effective Time, each outstanding Earlychildhood Option under
the Earlychildhood Option Plans and each outstanding SmarterKids Stock Option
under the SmarterKids Stock Plans, in each case whether vested or unvested,
shall be deemed to constitute an option to acquire, in the case of
Earlychildhood, on substantially the same terms and conditions as were
applicable under such Earlychildhood Option and, in the case of SmarterKids, on
the same terms and conditions as were applicable under such SmarterKids Stock
Option, the same number of shares of Holdings Common Stock as the holder of such
Earlychildhood Option or SmarterKids Stock Option, as the case may be, would
have been entitled to receive pursuant to the Contribution or the SmarterKids
Merger, respectively, had such holder exercised such option in full immediately
prior to the Effective Time (rounded down to the nearest whole number), at a
price per share (rounded up to the nearest whole cent) equal to (y) the
aggregate exercise price for the LLC Interests or shares of SmarterKids Common
Stock, as the case may be, purchasable
55
pursuant to such Earlychildhood Option or such SmarterKids Stock Option
immediately prior to the Effective Time divided by (z) the number of full shares
of Holdings Common Stock deemed purchasable pursuant to such Earlychildhood
Option or SmarterKids Stock Option, as the case may be, in accordance with the
foregoing. Prior to the Effective Time, each of Earlychildhood and SmarterKids
shall make any such adjustments to the terms of the Earlychildhood Option Plans
or SmarterKids Stock Plans as may be necessary to give effect to the provisions
of this Section 5.15.
(b) As soon as practicable after the Effective Time, Holdings shall
deliver to the participants in the Earlychildhood Option Plans and the
SmarterKids Stock Plans appropriate notice setting forth such participants'
rights pursuant thereto and the grants pursuant to Earlychildhood Option Plans
or SmarterKids Stock Plans, as the case may be, shall continue in effect on the
same terms and conditions (subject to the adjustments required by this Section
5.15 after giving effect to the Transactions).
(c) Holdings shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Holdings Common Stock for delivery
under Earlychildhood Option Plans and SmarterKids Stock Plans in accordance with
this Section 5.15. As soon as practicable after the Effective Time, Holdings
shall file a registration statement on Form S-8 (or any successor or other
appropriate forms), or another appropriate form with respect to the shares of
Holdings Common Stock subject to such options and shall use its best efforts to
maintain the effectiveness of such registration statement or registration
statements (and maintain the current status of the prospectus or prospectuses
contained therein) for so long as such options remain outstanding.
(d) The Management Committee or Board of Directors, as the case may be,
of Earlychildhood and SmarterKids shall, prior to or as of the Effective Time,
take all necessary actions, pursuant to and in accordance with the terms of the
Earlychildhood Option Plans and the instruments evidencing the Earlychildhood
Options, or the SmarterKids Stock Plans and the instruments evidencing the
SmarterKids Stock Options, as the case may be, to provide for the conversion of
the Earlychildhood Options and the SmarterKids Stock Options into options to
acquire Holdings Common Stock in accordance with this Section 5.14, and to the
extent required, obtain the consent of the holders of the Earlychildhood Options
or SmarterKids Stock Options in connection with such conversion.
(e) The Board of Directors of SmarterKids shall, prior to or as of the
Effective Time, take appropriate action to approve the deemed disposition of the
SmarterKids Stock Options, as the case may be, for purposes of excepting such
disposition under Rule 16b-3(e) promulgated under the Exchange Act. The Board of
Directors of Holdings shall, prior to or as of the Effective Time, take
appropriate action to approve the deemed grant of options to purchase Holdings
Common Stock under the Earlychildhood Options and the SmarterKids Stock Options
(as converted pursuant to this Section 5.14) for purposes of excepting such
grant under Rule 16b-3(d) promulgated under the Exchange Act.
(f) Prior to the Effective Time, Holdings shall adopt the stock plan
(the "Holdings Stock Plan") substantially in the form attached hereto as Exhibit
K, which Holdings Stock Plan shall become effective as of the Effective Time.
56
Section 5.16 Employee Stock Purchase Plan.
(a) Prior to the Effective Time, Holdings shall adopt an Employee Stock
Purchase Plan (the "Holdings Employee Stock Purchase Plan") substantially in the
form attached hereto as Exhibit L, which Holdings Employee Stock Purchase Plan
shall be effective as of the Effective Time, so that employees of Earlychildhood
and SmarterKids as of the Effective Time will be permitted to participate in
Holdings' Employee Stock Purchase Plan commencing on the first enrollment date
following the Effective Time, subject to compliance with the eligibility
provisions of such plan (with employees receiving credit, to the extent
permissible, for purposes of such eligibility provisions, for service with
SmarterKids).
(b) Holdings shall take all corporate action necessary to reserve for
issuance a sufficient number of shares of Holdings Common Stock for purchase
under the Holdings Employee Stock Purchase Plan assumed in accordance with this
Section 5.16.
Section 5.17 Non-Employee Director Plan. Prior to the Effective Time,
Holdings shall adopt a Non-Employee Director Plan (the "Holdings Director Plan")
substantially in the form attached hereto as Exhibit M, which Holdings Director
Plan shall become effective as of the Effective Time.
Section 5.18 Brokers or Finders. Each of SmarterKids and Earlychildhood
represents, as to itself, its Subsidiaries and its Affiliates, that no agent,
broker, investment banker, financial advisor or other firm or person is or will
be entitled to any broker's or finder's fee or any other commission or similar
fee in connection with any of the transactions contemplated by this Agreement,
except ▇▇▇▇▇▇ ▇▇▇▇▇▇ Partners, whose fees and expenses will be paid by
Earlychildhood in accordance with Earlychildhood's agreement with such firm (a
copy of which has been delivered by Earlychildhood to SmarterKids prior to the
date of this Agreement), and Chase H&Q, whose fees and expenses will be paid by
SmarterKids in accordance with SmarterKids' agreement with such firm (a copy of
which has been delivered by SmarterKids to Earlychildhood prior to the date of
this Agreement). Each of SmarterKids and Earlychildhood agrees to indemnify and
hold the other harmless from and against any and all claims, liabilities or
obligations with respect to any such fees, commissions or expenses asserted by
any person on the basis of any act or statement alleged to have been made by
such party or any of its Affiliates.
Section 5.19 Indemnification.
(a) From and after the Effective Time, Holdings agrees that it will, and
will cause Earlychildhood and the Surviving Corporation to, indemnify and hold
harmless each present and former director, Management Committee member and
officer of Earlychildhood and SmarterKids (the "Indemnified Parties"), against
any costs or expenses (including attorneys' fees), judgments, fines, losses,
claims, damages, liabilities or amounts paid in settlement (collectively,
"Costs") incurred in connection with any claim, action, suit, proceeding or
investigation, whether civil, criminal, administrative or investigative, arising
out of or pertaining to matters existing or occurring at or prior to the
Effective Time, whether asserted or claimed prior to, at or after the Effective
Time, to the fullest extent that Earlychildhood or SmarterKids, as the case may
be, would have been permitted under applicable law and its organizational
documents (including, in the case of Earlychildhood, the Operating Agreement) in
effect on the
57
date hereof to indemnify such Indemnified Party (and Holdings, Earlychildhood
and the Surviving Corporation, as applicable, shall also advance expenses as
incurred to the fullest extent permitted under applicable law; provided the
Indemnified Party to whom expenses are advanced provides an undertaking to repay
such advances if it is ultimately determined that such Indemnified Party is not
entitled to indemnification).
(b) For a period of six years after the Effective Time, Holdings shall
maintain (to the extent available in the market) in effect a directors' and
officers' liability insurance policy covering those persons who are currently
covered by Earlychildhood's and SmarterKids' directors' and officers' liability
insurance policies (copies of which have been heretofore delivered by
SmarterKids to Earlychildhood and vice versa) with coverage in amount and scope
at least as favorable as Earlychildhood's and SmarterKids' existing coverage;
provided that in no event shall Holdings be required to expend in excess of 200%
of the higher annual premium currently paid by Earlychildhood or SmarterKids, as
applicable, for such coverage (in either case, the "Current Premium"); and if
such premium would at any time exceed 200% of the Current Premium, then Holdings
shall maintain insurance policies which provide the maximum and best coverage
available at an annual premium equal to 200% of the Current Premium.
(c) The provisions of this Section 5.19 are intended to be in addition
to the rights otherwise available to the current officers, directors or members
of the Management Committee of Earlychildhood and SmarterKids, as applicable, by
law, charter, statute, bylaw or agreement, and shall operate for the benefit of,
and shall be enforceable by, each of the Indemnified Parties, their heirs and
their representatives.
Section 5.20 Letter of SmarterKids' Accountants. SmarterKids shall use
all reasonable efforts to cause to be delivered to Earlychildhood and
SmarterKids a comfort letter of PricewaterhouseCoopers LLP, SmarterKids'
independent accountants, dated a date within two business days before the date
on which the Registration Statement shall become effective and addressed to
Holdings, in form reasonably satisfactory to Earlychildhood and customary in
scope and substance for letters delivered by independent public accountants in
connection with registration statements similar to the Registration Statement.
Section 5.21 Letter of Earlychildhood's Accountants. Earlychildhood
shall use all reasonable efforts to cause to be delivered to SmarterKids and
Earlychildhood a comfort letter of KPMG, LLP, Earlychildhood's independent
accountants, dated a date within two business days before the date on which the
Registration Statement shall become effective and addressed to Holdings, in form
reasonably satisfactory to SmarterKids and customary in scope and substance for
letters delivered by independent public accountants in connection with
registration statements similar to the Registration Statement.
Section 5.22 Post-Transaction Corporate Governance of Holdings. At the
Effective Time, the total number of persons serving on the Board of Directors of
Holdings shall be nine (9) (unless otherwise agreed in writing by Earlychildhood
and SmarterKids prior to the Effective Time), four (4) of whom shall be
Earlychildhood Directors, two (2) of whom shall be SmarterKids Directors and
three (3) of whom shall be Independent Directors (as such terms are defined
below), all of which Earlychildhood Directors, SmarterKids Directors and
Independent Directors shall be spread proportionately among Holdings' three
classes of Directors; provided,
58
however, that one SmarterKids Director shall be required to stand for election
at the first annual meeting of stockholders of Holdings after the Effective Time
and one SmarterKids Director shall be required to stand for election at the
third annual meeting of stockholders of Holdings after the Effective Time; the
persons to serve initially on the Board of Directors of Holdings at the
Effective Time who are Earlychildhood Directors shall be selected solely by and
at the absolute discretion of Earlychildhood's Management Committee prior to the
Effective Time; the persons to serve initially on the Board of Directors of
Holdings at the Effective Time who are SmarterKids Directors shall be selected
solely by and at the absolute discretion of the Board of Directors of
SmarterKids prior to the Effective Time; and the persons to serve initially on
the Board of Directors of Holdings at the Effective Time who are Independent
Directors shall be mutually agreed upon by Earlychildhood and SmarterKids prior
to the Effective Time. In the event that, prior to the Effective Time, any
person so selected to serve on the Board of Directors of Holdings after the
Effective Time is unable or unwilling to serve in such position, the Management
Committee or Board of Directors which selected such person shall designate
another of its members or another person to serve in such person's stead in
accordance with the provisions of the immediately preceding sentence. The term
"Earlychildhood Director" means any person serving on the Management Committee
of Earlychildhood on the date hereof or any other person so designated who
becomes a Director of Holdings at the Effective Time and any successor director
appointed or elected pursuant to the Bylaws of Holdings; the term "SmarterKids
Director" means any person serving as a Director of SmarterKids on the date
hereof or any other person so designated who becomes a Director of Holdings at
the Effective Time and any successor director appointed or elected pursuant to
the Bylaws of Holdings and the term "Independent Director" means any person who
becomes a Director of Holdings at the Effective Time and is not an employee of
Earlychildhood, SmarterKids or Holdings at any time during the term in which
they serve as an Independent Director, and any successor director appointed or
elected pursuant to the Bylaws of Holdings.
(b) Subject to Section 8.5, at the Effective Time, (i) ▇▇▇▇▇▇ ▇▇▇▇▇▇▇,
shall hold the position of Chairman of the Board of Holdings, (ii) ▇▇ ▇▇▇▇▇,
shall hold the position of Chief Executive Officer of Holdings, (iii) ▇▇▇▇
▇▇▇▇▇▇▇ shall hold the position of Chief Operating Officer of Holdings and (iv)
▇▇▇ ▇▇▇▇▇▇ shall hold the position of Chief Financial Officer of Holdings. If
any of the persons identified in the preceding sentence is unable or unwilling
to hold such offices as set forth above, his successor shall be selected by the
Board of Directors of Holdings in accordance with the Bylaws of Holdings.
Section 5.23 Name of Holdings. Prior to the Effective Time,
Earlychildhood and SmarterKids shall use reasonable efforts to decide on a new
corporate name for Holdings.
Section 5.24 Conveyance Taxes. Earlychildhood and SmarterKids shall
cooperate in the preparation, execution and filing of all returns,
questionnaires, applications or other documents regarding any real property
transfer or gains, sales, use, transfer, value added, stock transfer and stamp
taxes, any transfer, recording, registration and other fees or any similar taxes
(together, "Conveyance Taxes") which become payable in connection with the
transactions contemplated by this Agreement that are required or permitted to be
filed on or before the Effective Time. Earlychildhood shall pay with respect to
the Contribution, and SmarterKids shall pay with respect to the SmarterKids
Merger, without deduction or withholding from any
59
amount payable to the holders of LLC Interests or SmarterKids Common Stock, as
the case may be, any such Conveyance Taxes imposed by any Governmental Entity
(and any penalties and interest with respect to such Conveyance Taxes), which
become payable in connection with the transactions contemplated by this
Agreement, on behalf of their stockholders or holders of LLC interests, as the
case may be.
Section 5.25 SmarterKids Minimum Closing Cash. As of the Effective Time,
SmarterKids covenants, agrees and commits that it shall have Cash on Hand (as
defined by GAAP) of not less than $18,000,000 after deducting (a) all of the
fees, costs and expenses incurred in connection with the Transactions
(including, without limitation, (i) attorney, accounting and other professional
fees and expenses incurred in the negotiation and performance of the Transaction
Documents, the preparation, filing and effectiveness of the Proxy
Statement/Prospectus and the Registration Statement and the consummation of the
Transactions and (ii) all fees of financial advisors incurred in connection with
the Transactions) and (b) all of the fees, costs and expenses incurred or
reasonably likely to be incurred in connection with realizing all contemplated
cost savings resulting from the integration of the businesses (including,
without limitation, costs associated with the integration of the respective
technologies) of Earlychildhood and SmarterKids (the "Minimum Closing Cash").
Prior to the Effective Time, SmarterKids shall provide Earlychildhood with
written verification satisfactory to Earlychildhood evidencing the Minimum
Closing Cash, and Earlychildhood shall have the right to investigate and confirm
the existence thereof in such manner as it deems necessary.
Section 5.26 ▇▇▇▇▇ Consulting Agreement. At the Effective Time, Holdings
shall enter into a consulting agreement with ▇▇▇▇▇ ▇▇▇▇▇, substantially in the
form attached hereto as Exhibit N.
ARTICLE VI.
CONDITIONS TO THE TRANSACTIONS
Section 6.1 Conditions to Each Party's Obligation to Effect the
Transactions. The respective obligations of each party to this Agreement to
effect the Transactions shall be subject to the satisfaction or waiver in
writing by each of SmarterKids and Earlychildhood prior to the Effective Time of
the following conditions:
(a) HSR Act. The waiting period applicable, if any, to the
consummation of the Transactions under the HSR Act shall have expired or been
terminated.
(b) Approvals. All authorizations, consents, orders or approvals of, or
declarations or filings with, or expirations of waiting periods imposed by, any
Governmental Entity (including, without limitation, an SEC order of
effectiveness with respect to the Proxy Statement/Prospectus) the failure of
which to file, obtain or occur is reasonably likely to have an Earlychildhood
Material Adverse Effect, a SmarterKids Material Adverse Effect or a Holdings
Material Adverse Effect (as defined below) shall have been filed, obtained or
occurred.
(c) Registration Statement. The Registration Statement shall have become
effective under the Securities Act and shall not be the subject of any stop
order or proceedings seeking a stop order.
60
(d) No Injunctions. No Governmental Entity shall have enacted, issued,
promulgated, enforced or entered any order, executive order, stay, decree,
judgment or injunction or statute, rule, regulation which is in effect and which
has the effect of making the Transactions illegal or otherwise prohibiting
consummation of the Transactions.
(e) National Listing or Nasdaq Quotation. The shares of Holdings Common
Stock to be issued in the Transactions shall have been approved for listing on a
national securities exchange or for quotation on The Nasdaq Stock Market,
subject to official notice of issuance.
(f) Consents Under Earlychildhood Agreements. Earlychildhood shall have
obtained the consent or approval of any person whose consent or approval shall
be required under any agreement or instrument in order to permit the
consummation of the transactions contemplated hereby, except those of which, if
not obtained, would not, individually or in the aggregate, have (i) an
Earlychildhood Material Adverse Effect or (ii) a material adverse effect on the
business, assets, properties, financial condition or results of operations of
Holdings after giving effect to the Transactions (a "Holdings Material Adverse
Effect").
(g) Consents Under SmarterKids Agreements. SmarterKids shall have
obtained the consent or approval of any person whose consent or approval shall
be required under any agreement or instrument in order to permit the
consummation of the transactions contemplated hereby, except those which, if not
obtained, would not, individually or in the aggregate, have (i) a SmarterKids
Material Adverse Effect or (ii) a Holdings Material Adverse Effect.
(h) Corporate Governance. Earlychildhood and SmarterKids shall have
taken all actions necessary so that (i) not later than the Effective Time, the
Certificate of Incorporation and Bylaws of Holdings shall have been amended to
be substantially in the form of Exhibit E and Exhibit F attached hereto; and
(ii) at the Effective Time, the composition of the Board of Directors of
Holdings shall comply with Section 5.20 hereof (assuming Earlychildhood has
designated the Earlychildhood Directors and SmarterKids has designated the
SmarterKids Directors, in each case as contemplated by Section 5.20(a) hereof).
(i) Transaction Documents. Each of the Transaction Documents shall have
been executed by each of the parties thereto and shall be in full force and
effect and legally binding against the parties thereto and no material breach by
any party shall have occurred thereunder as of the Closing Date.
Section 6.2 Additional Conditions to Obligations of Earlychildhood.
The obligation of Earlychildhood to effect the Contribution is subject to
the satisfaction of each of the following conditions prior to the Effective
Time, any of which may be waived in writing exclusively by Earlychildhood:
(a) Stockholder Approval. This Agreement and the SmarterKids Merger
shall have been approved in the manner required under the DGCL by the holders of
the issued and outstanding shares of SmarterKids Common Stock.
(b) Representations and Warranties. The representations and
warranties of SmarterKids set forth in this Agreement shall be true and correct
as of the date of this Agreement
61
and (except to the extent such representations and warranties speak as of an
earlier date) as of the Closing Date as though made on and as of the Closing
Date, except for, (i) changes contemplated by this Agreement and (ii)
inaccuracies which, individually or in the aggregate, have not had and are not
reasonably likely to have a SmarterKids Material Adverse Effect or a Holdings
Material Adverse Effect (without regard to any materiality limitations contained
in any such representation or warranty), or a material adverse effect upon the
consummation of the transactions contemplated hereby; and Earlychildhood shall
have received a certificate signed on behalf of SmarterKids by the chief
executive officer and the chief financial officer of SmarterKids to such effect.
(c) Performance of Obligations of SmarterKids. SmarterKids shall have
performed in all material respects all material obligations required to be
performed by it under this Agreement at or prior to the Closing Date, and
Earlychildhood shall have received a certificate signed on behalf of SmarterKids
by the chief executive officer and the chief financial officer of SmarterKids to
such effect.
(d) SmarterKids Material Adverse Effect. No SmarterKids Material
Adverse Effect or SmarterKids Material Adverse Change shall have occurred since
the date of this Agreement and be continuing.
(e) Minimum Closing Cash. SmarterKids shall have Cash on Hand (as
defined by GAAP) of not less than the amount of the Minimum Closing Cash,
verified as set forth in Section 5.24.
(f) Tax Opinion. Earlychildhood shall have received a written opinion
from ▇▇▇▇▇▇ & ▇▇▇▇▇▇▇, counsel to Earlychildhood, to the effect that the
Contribution will be treated for Federal income tax purposes as a transfer of
property to Holdings qualifying under Section 351 of the Code (it being agreed
that Earlychildhood, Holdings and SmarterKids shall provide reasonable
cooperation, including the delivery of such certifications as shall be
reasonably requested, to ▇▇▇▇▇▇ & ▇▇▇▇▇▇▇ to enable it to render such opinion).
Section 6.3 Additional Conditions to Obligations of SmarterKids.
The obligations of SmarterKids to effect the SmarterKids Merger are subject to
the satisfaction of each of the following conditions prior to the Effective
Time, any of which may be waived in writing exclusively by SmarterKids:
(a) Representations and Warranties. The representations and warranties
of Earlychildhood set forth in this Agreement shall be true and correct as of
the date of this Agreement and (except to the extent such representations and
warranties speak as of an earlier date) as of the Closing Date as though made on
and as of the Closing Date, except for, (i) changes contemplated by this
Agreement, and (ii) inaccuracies which, individually or in the aggregate, have
not had and are not reasonably likely to have an Earlychildhood Material Adverse
Effect or Holdings Material Adverse Effect (without regard to any materiality
limitations contained in any such representation or warranty), or a material
adverse effect upon the consummation of the transactions contemplated hereby;
and SmarterKids shall have received a certificate signed on behalf of
Earlychildhood by its chief executive officer or chief financial officer to such
effect.
62
(b) Performance of Obligations of Earlychildhood. Earlychildhood shall
have performed in all material respects all material obligations required to be
performed by it under this Agreement at or prior to the Closing Date; and
SmarterKids shall have received a certificate signed on behalf of Earlychildhood
by its chief executive officer or chief financial officer to such effect.
(c) Earlychildhood Material Adverse Effect. No Earlychildhood Material
Adverse Effect or Earlychildhood Material Adverse Change shall have occurred
since the date of this Agreement and be continuing.
(d) Tax Opinion. SmarterKids shall have received a written opinion
from ▇▇▇▇▇, ▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇▇, counsel to SmarterKids, to the effect that the
SmarterKids Merger will be treated for Federal income tax purposes as a
reorganization under Section 368(a) of the Code or, taken together with the
Contribution, as a transfer of property to Holdings qualifying under Section 351
of the Code (it being agreed that Earlychildhood, Holdings and SmarterKids shall
provide reasonable cooperation, including the delivery of such certifications as
shall be reasonably requested, to ▇▇▇▇▇, ▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇▇ to enable it to
render such opinion).
(e) Transaction Documents. Earlychildhood shall have duly executed each of
the Transaction Documents to which it is a party, and such Transaction Documents
shall be in full force and effect and legally binding against Earlychildhood and
no material breach by Earlychildhood shall have occurred thereunder as of the
Closing Date.
ARTICLE VII.
TERMINATION AND AMENDMENT
Section 7.1 Termination. This Agreement may be terminated at any time
prior to the Effective Time (with respect to Sections 7.1(b) through 7.1(f), by
written notice by the terminating party to the other party), whether before or
after approval of the matters presented in connection with the Transactions by
the stockholders of SmarterKids:
(a) by mutual written consent of Earlychildhood and SmarterKids; or
(b) by either Earlychildhood or SmarterKids if the Transactions shall
not have been consummated by April 30, 2001 (the "Outside Date"); provided,
however, that if the Transactions shall have not been consummated by the Outside
Date due to the failure of the condition set forth in Section 6.1(b), the
Outside Date shall be extended to July 31, 2001; and provided, further, however,
that the right to terminate this Agreement under this Section 7.1(b) shall not
be available to any party whose failure to fulfill any obligation under this
Agreement has been the cause of or resulted in the failure of the Transactions
to occur on or before such date; or
(c) by either Earlychildhood or SmarterKids if a court of competent
jurisdiction or other Governmental Entity shall have issued a nonappealable
final order, decree or ruling or taken any other nonappealable final action, in
each case having the effect of permanently restraining, enjoining or otherwise
prohibiting the Transactions; or
63
(d) by Earlychildhood, if, at the SmarterKids Stockholders' Meeting
(including any adjournment or postponement thereof), the requisite vote of the
stockholders of SmarterKids in favor of the approval and adoption of this
Agreement and the SmarterKids Merger shall not have been obtained; or
(e) by Earlychildhood, if (i) the SmarterKids Board of Directors shall
have withdrawn or modified in any manner its recommendation that its
stockholders vote in favor of this Agreement or the SmarterKids Merger; (ii)
SmarterKids shall have failed to include in the Proxy Statement/Prospectus the
recommendation of its Board of Directors in favor of the approval of this
Agreement and the SmarterKids Merger; (iii) after the receipt by SmarterKids of
an Acquisition Proposal, Earlychildhood requests in writing that the SmarterKids
Board of Directors reconfirm its recommendation of this Agreement and the
SmarterKids Merger to the stockholders of SmarterKids and the SmarterKids Board
of Directors fails to do so within ten (10) business days after its receipt of
Earlychildhood's request; (iv) the SmarterKids Board of Directors or any
committee thereof shall have approved or recommended to the stockholders of
SmarterKids an Acquisition Proposal, other than the Transactions; (v) a tender
offer or exchange offer for 20% or more of the outstanding shares of SmarterKids
Common Stock is commenced (other than by Earlychildhood or an Affiliate of
Earlychildhood) and the SmarterKids Board of Directors does not oppose such
tender or exchange offer; (vi) SmarterKids shall have entered into any letter of
intent or similar document or any agreement, contract or commitment accepting or
expressing an intent to accept an Acquisition Proposal; or (vii) SmarterKids
fails to call and hold the SmarterKids Stockholders' Meeting by the Outside Date
(provided that Earlychildhood's right to terminate this Agreement under this
clause (vii) shall not be available if at such time SmarterKids would be
entitled to terminate this Agreement under Section 7.1(f));
(f) by SmarterKids, prior to the approval by its stockholders of the
SmarterKids Merger, if (i) the SmarterKids Board of Directors reasonably
determines in good faith (after consultation with a financial advisor of
nationally recognized reputation) that (X) the Acquisition Proposal is more
favorable or is reasonably likely to lead to an Acquisition Proposal that is
more favorable to the SmarterKids stockholders from a financial point of view
than the Transactions, and (Y) is made by a Third Party reasonably believed by
the SmarterKids Board of Directors to be financially capable of completing such
Acquisition Proposal, and (ii) the SmarterKids Board of Directors reasonably
determines in good faith (after having consulted with and considered the advice
of its outside legal counsel) that the failure to take such actions would cause
the members of the SmarterKids Board of Directors to breach their fiduciary
duties to the SmarterKids stockholders under applicable law; provided, that
SmarterKids shall have given Earlychildhood three (3) business days' notice
prior to such termination and otherwise complied with the provisions of Section
5.3; and, provided further, that such termination shall not be effective until
the fee specified in Section 7.3(b) has been paid to Earlychildhood; or
(g) by Earlychildhood or SmarterKids, if there has been a breach of any
representation, warranty, covenant or agreement on the part of the other party
set forth in this Agreement, which breach (i) will cause the conditions set
forth in Section 6.2(b) or (c) (in the case of termination by Earlychildhood) or
6.3(a) or (b) (in the case of termination by SmarterKids) not to be satisfied,
and (ii) shall not have been cured within thirty (30) business
64
days following receipt by the breaching party of written notice of such breach
from the other party.
Section 7.2 Effect of Termination. In the event of termination of this
Agreement as provided in Section 7.1, written notice shall be given to the other
party hereto and this Agreement shall, subject to the provisions of Section
7.1(f), immediately become void and there shall be no liability or obligation on
the part of Earlychildhood, SmarterKids, Holdings or their respective officers,
directors, members, stockholders or Affiliates, except as set forth in Sections
5.19 and 7.3 and except that such termination shall not limit liability for a
willful breach of this Agreement; provided that, the provisions of Sections 5.19
and 7.3 of this Agreement and the Confidentiality Agreements shall remain in
full force and effect and survive any termination of this Agreement.
Section 7.3 Fees and Expenses.
(a) Except as set forth in this Section 7.3, if the Transactions are
terminated, all fees and expenses incurred in connection with this Agreement and
the transactions contemplated hereby shall be paid by the party incurring such
expenses.
(b) If this Agreement is terminated by either party pursuant to Section
7.1(g) hereof, then the non-terminating party (the "Breaching Party") shall pay
the Expenses (as defined below) incurred by the non-Breaching Party up to a
maximum of $350,000; provided, however, that if this Agreement is terminated by
SmarterKids pursuant to Section 7.1(g) and, at the time of such termination,
Earlychildhood is permitted to terminate this Agreement pursuant to Section
7.1(e), Earlychildhood shall not be required to pay any of SmarterKids' Expenses
pursuant to this Section 7.3(b). As used in this Agreement "Expenses" shall
include all reasonable out-of-pocket fees and expenses (including without
limitation, all reasonable fees and expenses of counsel, accountants, investment
bankers, experts and consultants to a party hereto) incurred by a party or on
its behalf in connection with or related to the authorization, preparation,
negotiation, execution and performance of this Agreement and the transactions
contemplated hereby, including the preparation, printing, filing and mailing of
the Proxy Statement/Prospectus and the solicitation of stockholder approvals and
all other matters related to the transactions contemplated hereby.
SmarterKids' payment of the Expenses incurred by Earlychildhood pursuant
to this subsection shall be the sole and exclusive remedy of Earlychildhood
against SmarterKids and its directors, officers, employees, agents, advisory or
other representatives with respect to the occurrences giving rise to such
payment, except for liabilities or damages caused by the willful breach of any
representations, warranties, covenants or agreements herein by SmarterKids.
Earlychildhood's payment of the Expenses incurred by SmarterKids pursuant to
this subsection shall be the sole and exclusive remedy of SmarterKids against
Earlychildhood and any of its Subsidiaries and their respective managers,
directors, officers, employees, agents, advisors or other representatives with
respect to the occurrences giving rise to such payment, except for liabilities
or damages caused by the willful breach of any representations, warranties,
covenants or agreements herein by Earlychildhood.
65
(c) SmarterKids shall pay Earlychildhood a termination fee (the
"Termination Fee") of $1,300,000 (a portion of which may be deemed to include
the reimbursement of Expenses) in cash if any of the following events occurs:
(i) the termination of this Agreement by Earlychildhood
pursuant to Section 7.1(d), and (x) at the time of such termination a definitive
proposal for an Acquisition Proposal has been provided to SmarterKids by a Third
Party and (y) within twelve (12) months of such termination, either SmarterKids
shall have entered into a definitive agreement with respect to, or consummated,
a transaction in connection with such Acquisition Proposal;
(ii) the termination of this Agreement by SmarterKids
pursuant to Section 7.1 hereof and at such time Earlychildhood shall have been
permitted to terminate this Agreement under Section 7.1(e);
(iii) the termination of this Agreement by Earlychildhood
pursuant to Section 7.1(e); or
(iv) the termination of this Agreement by SmarterKids
pursuant to Section 7.1(f).
(d) In the event of a termination pursuant to clause (i) above, the
Termination Fee shall be paid upon the earlier of the consummation or entering
into of a definitive agreement for an Acquisition Proposal, and in the event of
a termination pursuant to clause (ii), (iii) or (iv) above, the Termination Fee
shall be paid concurrently with such termination.
(e) SmarterKids' payment of the Termination Fee pursuant to subsection (b)
above shall be the sole and exclusive remedy of Earlychildhood against
SmarterKids and its directors, officers, employees, agents, advisors or other
representatives with respect to the occurrences giving rise to such payment;
provided that this limitation shall not apply in the event of a willful breach
of this Agreement by SmarterKids.
Section 7.4 Amendment. This Agreement may be amended by the parties
hereto, by action taken or authorized by their Management Committee or Board of
Directors, as the case may be, at any time before or after approval of the
matters presented in connection with the SmarterKids Merger by the stockholders
of SmarterKids, but, after any such approval, no amendment shall be made which
by law requires further approval by such stockholders without such further
approval. This Agreement may not be amended except by an instrument in writing
signed on behalf of each of the parties hereto.
Section 7.5 Extension; Waiver. At any time prior to the Effective
Time, the parties hereto, by action taken or authorized by their Management
Committee or Board of Directors, as the case may be, may, to the extent legally
allowed, (i) extend the time for the performance of any of the obligations or
other acts of the other parties hereto, (ii) waive any inaccuracies in the
representations and warranties of the other parties hereto contained herein or
in any document delivered pursuant hereto and (iii) waive compliance with any of
the agreements or conditions of the other parties hereto contained herein. Any
agreement on the part of a party hereto to any
66
such extension or waiver shall be valid only if set forth in a written
instrument signed on behalf of such party. Any waiver or failure to insist on
strict compliance with any obligation, covenant, agreement or condition
contained in this Agreement shall not operate as a waiver of, or estoppel with
respect to, any subsequent or other failure.
ARTICLE VIII.
MISCELLANEOUS
Section 8.1 Nonsurvival of Representations, Warranties and Agreements.
None of the representations, warranties and agreements in this Agreement
or in any instrument delivered pursuant to this Agreement shall survive the
Effective Time, except for the agreements contained in Sections 1.6, 1.7, 1.8,
2.1, 2.2, 2.4, 2.5, 5.12, 5.15, 5.16, 5.17, 5.18, 5.19, 5.22, 5.24, and this
Article VIII, and the agreements of the Affiliates delivered pursuant to Section
5.13. The Confidentiality Agreement shall survive the execution and delivery of
this Agreement.
Section 8.2 Notices. All notices and other communications hereunder
shall be in writing and shall be deemed given if delivered personally,
telecopied (which is confirmed) or mailed by registered or certified mail
(return receipt requested) to the parties at the following addresses (or at such
other address for a party as shall be specified by like notice):
(a) if to Earlychildhood, to
▇▇▇▇▇▇▇▇▇▇▇▇▇▇.▇▇▇, LLC
▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇
▇▇▇▇▇ ▇▇▇
▇▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇▇▇▇▇▇▇
Telecopy: (▇▇▇) ▇▇▇-▇▇▇▇
with a copy to
▇▇▇▇▇▇ & ▇▇▇▇▇▇▇
▇▇▇ ▇▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇
▇▇▇ ▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇-▇▇▇▇
Attention: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Esq.
Telecopy: (▇▇▇) ▇▇▇-▇▇▇▇
(b) if to SmarterKids, to
▇▇▇▇▇▇▇▇▇▇▇.▇▇▇, Inc.
▇▇ ▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇▇▇▇▇▇
Telecopy: (▇▇▇) ▇▇▇-▇▇▇▇
67
with a copy to:
▇▇▇▇▇, ▇▇▇▇▇▇▇ & ▇▇▇▇▇▇▇▇▇
▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇
▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇
Attention: ▇▇▇▇▇▇ ▇▇▇▇▇, Esq.
Telecopy: (▇▇▇) ▇▇▇-▇▇▇▇
Section 8.3 Interpretation. When a reference is made in this
Agreement to Sections, such reference shall be to a Section of this Agreement
unless otherwise indicated. The table of contents and headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of this Agreement. Whenever the words "include,"
"includes" or "including" are used in this Agreement they shall be deemed to be
followed by the words "without limitation." The phrase "made available" in this
Agreement shall mean that the information referred to has been made available if
requested by the party to whom such information is to be made available. The
phrases "the date of this Agreement", "the date hereof," and terms of similar
import, unless the context otherwise requires, shall be deemed to refer to
November 14, 2000.
Section 8.4 Counterparts. This Agreement may be executed in two or
more counterparts, all of which shall be considered one and the same agreement
and shall become effective when two or more counterparts have been signed by
each of the parties and delivered to the other parties, it being understood that
all parties need not sign the same counterpart.
Section 8.5 Entire Agreement; No Third Party Beneficiaries. This
Agreement and all documents and instruments referred to herein (a) constitute
the entire agreement and supersedes all prior agreements and understandings,
both written and oral, among the parties with respect to the subject matter
hereof and thereof, and (b) except as provided in Section 5.19, are not intended
to confer upon any person (including, without limitation, the individuals
identified in Section 5.19 and 5.22) other than the parties hereto any rights or
remedies hereunder; provided that the Confidentiality Agreement shall remain in
full force and effect until the Effective Time. Each party hereto agrees that,
except for the representations and warranties contained in this Agreement,
neither Earlychildhood nor SmarterKids makes any other representations or
warranties, and each hereby disclaims any other representations and warranties
made by itself or any of its officers, directors, managers, members, employees,
agents, financial and legal advisors or other representatives, with respect to
the execution and delivery of this Agreement or the transactions contemplated
hereby, notwithstanding the delivery or disclosure to the other or the other's
representatives of any documentation or other information with respect to any
one or more of the foregoing.
Section 8.6 Governing Law. This Agreement shall be governed and
construed in accordance with the laws of the State of Delaware without regard to
any applicable conflicts of law.
68
Section 8.7 Assignment. Neither this Agreement nor any of the rights,
interests or obligations hereunder shall be assigned by any of the parties
hereto (whether by operation of law or otherwise) without the prior written
consent of the other parties. Subject to the preceding sentence, this Agreement
will be binding upon, inure to the benefit of and be enforceable by the parties
and their respective successors and assigns.
[Signature Page Follows]
69
IN WITNESS WHEREOF, Earlychildhood, SmarterKids, Holdings and Merger Sub
have caused this Agreement to be signed by their respective duly authorized
officers as of the date first written above.
▇▇▇▇▇▇▇▇▇▇▇▇▇▇.▇▇▇, INC.
-------------------------------------
By:
Its:
▇▇▇▇▇▇▇▇▇▇▇.▇▇▇, INC.
-------------------------------------
By:
Its:
S-E EDUCATIONAL HOLDINGS CORP.
-------------------------------------
By:
Its:
S-E EDUCATIONAL MERGER CORP.
-------------------------------------
By:
Its:
S-1