* Confidential treatment has been requested for certain portions of this
exhibit. Omitted portions have been filed separately with the Commission.
OPTION AGREEMENT dated as of May 27,
1999 among GHS, INC., a Delaware
corporation ("GHS"), XXXXXXXX XXXXX
COMMUNICATION RESOURCES, INC., a
California corporation (d/b/a The
Learning Annex of San Francisco)
(the "SAN FRANCISCO LEARNING
ANNEX"), SGS COMMUNICATION
RESOURCES, INC., a California
corporation (d/b/a The Learning
Annex of Los Angeles) (the "LOS
ANGELES LEARNING ANNEX"), XXXXXXXX
XXXXX XXXXXXXX ENTERPRISES, INC., a
California corporation (d/b/a The
Learning Annex of San Diego) (the
"SAN DIEGO LEARNING ANNEX"), SGC
COMMUNICATION RESOURCES LLC, a
Delaware limited liability company
(d/b/a The Learning Annex of New
York) (the "NEW YORK LEARNING
ANNEX") and LEARNING ANNEX
INTERACTIVE LLC, a Delaware limited
liability company (the "DELAWARE
LEARNING ANNEX" and collectively
"THE LEARNING ANNEX") and the
shareholders and members, as
applicable, of The Learning Annex
listed on Schedule I attached hereto
(the "SHAREHOLDERS").
Pursuant to this Agreement, GHS shall have, among other things, the
right and option to acquire The Learning Annex on the terms and subject to the
conditions set forth in this Agreement (the "ACQUISITION"). In connection with
the proposed Acquisition, GHS, The Learning Annex and the Shareholders desire to
enter into certain other arrangements, on the terms and subject to the
conditions hereinafter set forth.
NOW, THEREFORE, in consideration of the mutual benefits to be derived
from this Agreement and the representations, warranties, covenants, agreements
and promises contained herein, the parties hereby agree as follows:
1. OPTIONS.
(a) ALTERNATIVE A OPTION. Each Shareholder hereby grants to GHS, and
GHS shall have the irrevocable right and option (the "ALTERNATIVE A OPTION")
exercisable during the period beginning on the date hereof and ending on
September 1, 2004 (the "OPTION PERIOD"), upon compliance with the procedures set
forth in Section 6 hereof, to acquire 100% of the outstanding capital stock and
other interests of The Learning Annex and all options, warrants, rights, calls,
commitments, agreements or arrangements of any character to which the any of the
Shareholders or The Learning Annex is a party or by which he, she, it or they is
or are bound
calling for the issuance of shares of capital stock or other interests of The
Learning Annex or any securities convertible into or exercisable or exchangeable
for, or representing the right to purchase or otherwise receive, directly or
indirectly, any such capital stock or other interests, or other arrangement to
acquire, at any time or under any circumstance, capital stock or other interests
of The Learning Annex or any such other securities (the "FULLY-DILUTED LEARNING
ANNEX SECURITIES").
(b) ALTERNATIVE B OPTION. GHS may in its sole discretion, during the
Option Period, in lieu of exercising the Alternative A Option, elect in
compliance with the procedures set forth in Section 6 hereof, to consummate an
acquisition of The Learning Annex by way of (i) a statutory merger, (ii)
consolidation, (iii) purchase of all or substantially all of the assets of The
Learning Annex or (iv) purchase of the Fully-Diluted Learning Annex Securities
(each, an "ALTERNATIVE B OPTION" and together with the Alternative A Option, the
"OPTIONS"). It is hereby understood that GHS is under no obligation to elect to
consummate such an Alternative B Option and any election to do so shall be in
its sole discretion; PROVIDED, that the consummation of the Alternative B Option
shall, taken as a whole, be mutually beneficial to both parties from a tax
perspective and; PROVIDED FURTHER that notwithstanding the exercise of an
Alternative B Option, GHS may elect to exercise the Alternative A Option at any
time, in which case such exercise of the Alternative A Option shall effect the
termination of negotiations pursuant to the Alternative B Option and the
Alternative A Option shall immediately supersede in all respects the Alternative
B Option election.
(c) ELECTION NOT TO PROCEED WITH OPTION EXERCISE.
(i) NOTICE NOT TO PROCEED. At any time after the exercise of either
of the Options and prior to the consummation of the closing under the applicable
Option, GHS shall have the right and option, without liability to any of the
Shareholders, The Learning Annex or any other third party, to elect not to
proceed with a closing by delivery to The Learning Annex of GHS's election not
to proceed (the "NOTICE NOT TO PROCEED").
(ii) If (A) GHS has no reasonable basis to elect NOT to proceed
with the consummation of the Acquisition, (B) The Learning Annex and the
Shareholders are ready, willing and able to proceed with the consummation of the
Acquisition and (C) GHS delivers the Notice Not to Proceed for a reason outside
of GHS' control, then GHS shall be deemed for all purposes to have exercised the
Options hereunder and shall not thereafter have the right to exercise either of
the Options; PROVIDED, HOWEVER, that GHS shall have the one time right, upon the
payment of the Option Reset Expenses (as defined below), to be deemed not to
have exercised the Options hereunder and shall thereafter have the right to
exercise either of the Options for the term of this Agreement on the terms and
subject to the conditions set forth herein (the "OPTION RESET").
(iii) In connection with the Option Reset, GHS shall reimburse The
Learning Annex for any reasonable fees of The Learning Annex incurred directly
and solely in connection with the transactions related to the exercise of the
Option prior to
2
delivery of the Notice Not to Proceed, upon receipt of reasonable documentation
therefor (the "OPTION RESET EXPENSES").
2. OPTION PRICE; OPTION PERIOD.
(a) The price payable hereunder in consideration of the Options (the
"OPTIONS PRICE") shall be the dollar amount set forth below payable on the
date(s) set forth opposite such amounts (each an "OPTION PAYMENT DATE");
PROVIDED, that if GHS does not pay the applicable Options Price on any Option
Payment Date, The Learning Annex shall deliver notice of its intention to
terminate the Option (the "TERMINATION NOTICE") and GHS shall have 30 days after
delivery of the Termination Notice to deliver the Options Price:
OPTION PERIOD DOLLAR AMOUNT TIMING OF PAYMENT
------------- ------------- -----------------
From the date hereof until the first $75,000.00 Simultaneous with the execution and
anniversary of the date hereof ("YEAR delivery of the License Agreement
ONE"). (as defined below in Section 11(a))
From the first anniversary of the date $125,000.00 September 1, 2000
hereof until the second anniversary of
the date hereof ("YEAR TWO").
From the second anniversary of the $200,000.00 September 1, 2001
date hereof until the third
anniversary of the date hereof ("YEAR
THREE").
From the third anniversary of the date $500,000.00 September 1, 2002
hereof until the fourth anniversary of
the date hereof ("YEAR FOUR").
From the fourth anniversary of the $750,000.00 September 1, 2003
date hereof until the fifth
anniversary of the date hereof ("YEAR
FIVE").
3. PLEDGE OF SHARES. The Shareholders hereby pledge the Fully-Diluted Learning
Annex Securities to be held in trust by Xxxxx Xxxxxxx or another mutually
agreeable third party (the "AGENT") pursuant to an agreement in form and
substance acceptable to GHS for the purpose of securing the obligations of The
Learning Annex and the Shareholders hereunder (the "PLEDGE
3
AGREEMENT"). As soon as practicable after the date hereof, and in no event later
than fifteen (15) days after the date hereof, each Shareholder shall cause to be
deposited with the Agent all stock certificates or certificate of ownership of
membership interests, as the case may be, held by such Shareholder, together
with a stock power or certificate of assignment duly endorsed in blank for
transfer on behalf of such Shareholder, representing all of the shares of
capital stock or membership interests of The Learning Annex (the "OPTION
SECURITIES") owned by such Shareholder (and representing, in the aggregate, the
Fully-Diluted Learning Company Securities).
4. EXERCISE PRICE.
(a) GENERAL. The exercise price to be paid upon exercise by GHS of the
Alternative A Option or the Alternative B Option (in each case, the "EXERCISE
PRICE") shall be as set forth below:
--------------------------------------------------------------------------------
YEAR EXERCISE PRICE
--------------------------------------------------------------------------------
Year One [*]
--------------------------------------------------------------------------------
Year Two [*]
--------------------------------------------------------------------------------
Year Three [*]
--------------------------------------------------------------------------------
Year Four [*]
--------------------------------------------------------------------------------
Year Five [*]
--------------------------------------------------------------------------------
(b) EXERCISE PRICE ADJUSTMENT.
(i) [*]
(ii) [*]
(c) [*]
(d) [*].
5. AUDITOR'S REPORT; CALCULATION OF EBIDA.
(a) DELIVERY TO GHS OF AUDITOR'S REPORT. Within sixty (60) days
following the end of each Option Period, The Learning Annex shall deliver to GHS
reviewed financial statements for the prior Option Period prepared in accordance
with GAAP consistently applied (the "FINANCIAL STATEMENTS") [*] (the
"CALCULATION"), which Calculation and Financial Statements shall be certified by
Chaio and Xxxxx (the "ACCOUNTANTS") (the "AUDITOR'S REPORT").
4
(b) REVIEW BY BUYER OF THE AUDITOR'S REPORT. Following receipt of the
Auditor's Report, GHS will be afforded a period of sixty (60) calendar days (the
"REVIEW PERIOD") to review the Auditor's Report. During such Review Period, GHS
and GHS's accountants will be afforded reasonable access to any of The Learning
Annex's employees and the records, work papers, trial balances and similar
materials prepared by The Learning Annex's Accountants and The Learning Annex
shall, and shall cause the Accountants to, cooperate and provide assistance to
such GHS Accountants in connection therewith. At or before the end of the Review
Period, GHS will either (i) accept the Auditor's Report in its entirety, in
which case the Calculation shall be deemed to be as set forth in the Auditor's
Report, or (ii) deliver to The Learning Annex and The Learning Annex's
Accountants a written notice in accordance with Section 6(c) disputing the
Calculation.
(c) DISPUTES. GHS shall notify the Learning Annex in writing of each
disputed item in the Accountant's Report that bears a relationship to or is
relevant to the determination of EBIDA prior to the expiration of the Review
Period, specifying the amount thereof in dispute, or a reasonable estimation
thereof, and setting forth the basis for such dispute. In the event of such a
dispute, GHS and The Learning Annex shall attempt to reconcile in good faith
their differences as to such items within twenty (20) calendar days (the
"RESOLUTION PERIOD") of The Learning Annex's receipt of such notice, and any
resolution by them as to any disputed amounts shall be final, binding and
conclusive on GHS and The Learning Annex. If GHS and The Learning Annex are
unable to reach a resolution with such effect within the Resolution Period, GHS
and The Learning Annex shall submit the items in the Accountant's Report
remaining in dispute for resolution to an independent accounting firm of
national reputation mutually appointed by GHS and The Learning Annex (the
"INDEPENDENT ACCOUNTING FIRM"), which shall, within thirty (30) calendar days of
such submission, determine and report to GHS and The Learning Annex its
resolution of such remaining disputed items, which shall be deemed to be
resolved as set forth in such report, and such report shall be final, binding
and conclusive on GHS and The Learning Annex. GHS and The Learning Annex shall
each pay fifty percent (50%) of the fees and disbursements of such Independent
Accounting Firm.
(d) FAILURE TO DELIVER AUDITOR'S REPORT. If The Learning Annex fails to
deliver the certified Calculation and Financial Statements on or before ninety
(90) days following the end of any Option Period, then GHS shall have the right
to select an independent certified public accountant (the "GHS ACCOUNTANT") (the
fees and charges of which shall be borne by The Learning Annex) to prepare a
determination of such prior year's EBIDA (the "GHS CALCULATION") (and the GHS
Accountant will be afforded reasonable access to any of The Learning Annex's
employees and the records, work papers, trial balances and similar materials
prepared by The Learning Annex's Accountants and The Learning Annex shall, and
shall cause the Accountants to, cooperate and provide assistance to such GHS
Accountants in connection therewith) and the GHS Calculation shall be the EBIDA
for all calculations hereunder.
6. MECHANICS FOR EXERCISE.
(a) ALTERNATIVE A EXERCISE NOTICE. In the event that GHS desires to
exercise the Alternative A Option, it shall send to The Learning Annex and to
the Agent a written notice (such notice being herein referred to as an
"ALTERNATIVE A EXERCISE NOTICE" and the date of
5
issuance of an Alternative A Exercise Notice being herein referred to as the
"ALTERNATIVE A NOTICE DATE") indicating (i) that GHS is exercising the
Alternative A Option, (ii) specifying a place and date not earlier than five (5)
Business Days and not later than thirty (30) Business Days from the Alternative
A Notice Date for the closing of such purchase (the "ALTERNATIVE A OPTION
CLOSING DATE"), (iii) the Exercise Price to be paid hereunder and (iv) that, and
instructing that, the Agent deliver out of the pledge fund to GHS all shares of
The Learning Annex held by the Agent on the Alternative A Option Closing Date.
GHS may require that, in connection with the exercise of the Alternative A
Option, in which case the parties shall, in good faith negotiate and enter into
definitive agreements (which shall provide for, among other things, customary
representations and warranties (in addition to those representations and
warranties the truth and accuracy of which are being confirmed in accordance
with Section 6(c) hereof), covenants and indemnities and provide a closing date
for consummation of the transactions described therein) customary for
transactions of this type.
(b) ALTERNATIVE B EXERCISE NOTICE. In the event that GHS desires to
exercise the Alternative B Option, it shall send to The Learning Annex a written
notice (such notice being herein referred to as an "ALTERNATIVE B EXERCISE
NOTICE" and the date of issuance of an Alternative B Exercise Notice being
herein referred to as the "ALTERNATIVE B NOTICE DATE") indicating that GHS is
exercising the Alternative B Option, and The Learning Annex and the Shareholders
shall as soon as practicable thereafter, and in any event within thirty (30)
days from the Alternative B Notice Date, in good faith negotiate and enter into
definitive agreements (which shall provide for, among other things, customary
representations and warranties (in addition to those representations and
warranties the truth and accuracy of which are being confirmed in accordance
with Section 6(c) hereof), covenants and indemnities and provide a closing date
for consummation of the transactions described therein) customary for
transactions of this type. GHS can elect to exercise the Alternative A Option at
any time during the Option Period, whether before or after the delivery of the
Alternative B Exercise Notice.
(c) CLOSING. The Closing of the Acquisition shall occur on the
Alternative A Option Closing Date or on the date of the closing of the
Acquisition pursuant to exercise of the Alternative B Option (the "ALTERNATIVE B
OPTION CLOSING DATE"), against delivery of (i) certificates or other instruments
representing the Fully-Diluted Company Securities duly endorsed in blank and
otherwise in proper form for transfer free and clear of any liens or
Encumbrances, (ii) documents listed on ANNEX A and (iii) such other definitive
documents customary for transactions of the applicable type (including
representations, warranties and covenants customary for transactions of the
applicable type) and such other documents (including the documents listed on
ANNEX A) as the parties mutually agree (each of (i) through (iii) hereof being
collectively referred to as the "CLOSING DOCUMENTS").
(d) EXECUTION AND DELIVERY OF FURTHER DOCUMENTS. Upon receipt of the
Alternative A Exercise Notice or the Alternative B Exercise Notice, as the case
may be, each party hereto will promptly and duly execute and deliver such
further documents, certificates and agreements and make such further assurances
for and take such further action reasonably requested by any other party to this
Agreement, in addition to the execution and delivery of the Closing Documents,
all as may be reasonably necessary to carry out more effectively the intent and
purpose of this Agreement and consummate the exercise of the Options.
6
(e) If the form of transaction chosen for the Acquisition permits an
Internal Revenue Code (the "CODE") Section 338 election or a Code Section
338(h)(10) election (or any successor or similar elections relating to the
establishment of the tax basis of the assets underlying the businesses
transferred to GHS) then, if and to the extent requested by GHS, the parties to
the Acquisition shall take all steps reasonably necessary to effect such
election(s); PROVIDED, that such election shall, taken as a whole, be mutually
beneficial from a tax perspective to the parties hereto.
(f) EXTENSION OF OPTION PERIOD. If the closing of the Acquisition
pursuant to the Alternative A Option or the Alternative B Option cannot be
consummated, by reason of any applicable Order (as defined below), the period of
time that otherwise would run pursuant to Section 6(a)(ii) or Section 6(b), as
applicable, shall run instead from the date on which such restriction on
consummation has expired or been terminated (the "TOLLING PERIOD"); and PROVIDED
FURTHER, without limiting the foregoing, that if, in the reasonable opinion of
GHS, prior notification to or approval of any regulatory agency is required in
connection with the Acquisition, The Learning Annex, GHS or one or more of the
Shareholders, as the case may be, shall promptly file the required notice or
application for approval and shall expeditiously process the same and the period
of time that otherwise would run pursuant to this sentence shall run instead
from the date on which any required notification periods have expired or been
terminated or such approvals have been obtained and any requisite waiting period
or periods shall have passed. Anything contained herein to the contrary
notwithstanding, if (A) the Tolling Period continues for more than ninety (90)
days and (B) the next Option Period has begun, then the Exercise Price shall be
recalculated on the terms set forth in Section 4 hereof; PROVIDED that GHS shall
not be required to make any additional Options Payment for the next Option
Period.
(g) DEFINITION OF ORDER. As used herein, "ORDER" shall mean any orders,
judgments, injunctions, decrees and other legislative, administrative or
judicial restrictions (including the Federal securities laws and regulations
thereunder and the rules of all such regulatory organizations including those
which The Learning Annex is subject to).
7. REPRESENTATIONS AND WARRANTIES OF THE LEARNING ANNEX. The Learning Annex
hereby represents and warrants to GHS as follows:
(a) ORGANIZATION. The (i) San Francisco Learning Annex is a corporation
duly organized, validly existing and in good standing under the laws of the
State of California, (ii) Los Angeles Learning Annex is a corporation duly
organized, validly existing and in good standing under the laws of the State of
California, (iii) San Diego Learning Annex is a corporation duly organized,
validly existing and in good standing under the laws of the State of California,
(iv) New York Learning Annex is a limited liability company duly organized,
validly existing and in good standing under the laws of the state of Delaware
and (v) Delaware Learning Annex is a limited liability company duly organized,
validly existing and in good standing under the laws of the state of Delaware,
and, in each case, has all requisite corporate power and authority to own, lease
and operate the assets used in its business, to carry on its business as
presently conducted and as proposed to be conducted, to enter into this
Agreement, to perform its obligations hereunder, and to consummate the
transactions contemplated hereby.
7
(b) QUALIFICATION; GOOD STANDING. The Delaware Learning Annex is
qualified to do business as a foreign corporation in the State of New York. The
Learning Annex is qualified to do business as a foreign corporation in any other
jurisdiction in which it is required to be so qualified.
(c) CORPORATE AUTHORIZATION; ENFORCEABILITY. The Learning Annex has
taken all corporate action (including all action required of its Board of
Directors, managers and Shareholders or members, as applicable) necessary to
authorize its execution and delivery of this Agreement, its performance of its
obligations hereunder, and its consummation of the Acquisition contemplated
hereby. This Agreement has been executed and delivered by officers of The
Learning Annex in accordance with such authorization. This Agreement constitutes
a valid and binding obligation of The Learning Annex, enforceable in accordance
with its terms, subject to applicable bankruptcy, reorganization, insolvency,
moratorium, and similar laws affecting creditors' rights generally and to
general principles of equity.
(d) AUTHORIZATION OF SHARES OF CAPITAL STOCK. The Option Securities,
when issued, were duly authorized by all requisite corporate action of The
Learning Annex and when issued, sold and delivered by The Learning Annex the
Option Securities were validly issued and outstanding, fully paid and
nonassessable with no personal liability attaching to the ownership thereof, and
not subject to preemptive or any similar rights of the shareholders of The
Learning Annex or others.
(e) NO CONFLICT. The execution and delivery by The Learning Annex of
this Agreement, its consummation of the Acquisition contemplated hereby, and its
compliance with the provisions hereof, will not (a) violate or conflict with its
certificate of incorporation, certificate of formation, by-laws or operating
agreement, as applicable, (b) violate, conflict with, or give rise to any right
of termination, cancellation, rescission or acceleration under any material
agreement, lease, security, license, permit, or instrument to which The Learning
Annex is a party, or to which it or any of its assets is subject, (c) result in
the imposition of any security interests, mortgages, liens, pledges, guarantees,
charges, easements, reservations, restrictions, rights of way, options, rights
of first refusal and all other encumbrances, whether or not relating to the
extension of credit or the borrowing of money (an "ENCUMBRANCE") on any asset of
The Learning Annex, (d) violate or conflict with any Laws, or (e) require any
consent, approval or other action of, notice to, or filing with any entity or
person (governmental or private), except for those that have been obtained or
made. "Laws" means all laws, rules, regulations, ordinances, orders, judgments,
injunctions, decrees and other legislative, administrative or judicial
restrictions.
(f) NO CONSENT OR APPROVAL REQUIRED. No authorization, consent,
approval or other order of, or declaration to or filing with, any governmental
agency or body or other person or entity is required for the valid
authorization, execution and delivery by The Learning Annex of this Agreement,
or for the consummation of the Acquisition contemplated hereby or, if required,
the same has been obtained or effected.
(g) CAPITALIZATION. The capitalization of The Learning Annex upon the
signing hereof shall consist of (A) 10,000 shares of common stock, no par value,
of the San Diego Learning Annex, of which 200 shares are validly issued and
outstanding, fully paid and
8
nonassessable, (B) 10,000 shares of common stock, no par value, of the Los
Angeles Learning Annex, of which 200 shares are validly issued and outstanding,
fully paid and nonassessable, (C) 10,000 shares of common stock, no par value,
of the San Francisco Learning Annex, of which 1,000 shares are validly issued
and outstanding, fully paid and nonassessable, (D) membership interests in
respect of 100% of the outstanding equity of the Delaware Learning Annex, all of
which are validly issued and outstanding, fully paid and nonassessable and (E)
membership interests in respect of 100% of the outstanding equity of the New
York Learning Annex, all of which are validly issued and outstanding, fully paid
and nonassessable. The Option Securities listed on SCHEDULE I hereto constitute
all of the capital stock of The Learning Annex. As of the date hereof there are
no (i) outstanding warrants, options, agreements, convertible securities or
other commitments or instruments pursuant to which The Learning Annex is or may
become obligated to issue or sell any shares of capital stock or other
securities of The Learning Annex, (ii) preemptive or similar rights to purchase
or otherwise acquire shares of capital stock of The Learning Annex pursuant to
any provision of law, the Certificate of Incorporation, By-laws, Certificate of
Formation or Operating Agreement, as the case may be, of The Learning Annex or
any agreement to which The Learning Annex is party or otherwise or (iii)
obligation (contingent or otherwise) of The Learning Annex to purchase, redeem
or otherwise acquire any shares of its capital stock or any interest therein or
to pay any dividend or make any other distribution in respect thereof. There are
no voting trusts, voting agreements, proxies, first refusal rights, first offer
rights, co-sale rights, options, transfer restrictions or other agreements,
instruments or understandings (whether written or oral, formal or informal) with
respect to the voting, transfer or disposition of capital stock of The Learning
Annex to which The Learning Annex is a party or by which it is bound, or, to the
best knowledge of The Learning Annex, among or between any persons other than
The Learning Annex..
(h) LITIGATION, ETC. Other than the current proceeding against the
Seminar Center which is described no Schedule 7(h) and which shall not result in
a Liability in excess of $100,000, there are no (i) actions, suits, claims,
investigations or legal or administrative or arbitration proceedings
(collectively, "ACTIONS") pending, or to the best knowledge of The Learning
Annex, threatened against The Learning Annex nor, to the best knowledge of The
Learning Annex, any basis therefor, whether at law or in equity, or before or by
any Federal, state, local, municipal, foreign or other governmental court,
department, commission, board, bureau, agency or instrumentality ("GOVERNMENTAL
AUTHORITY"), (ii) judgments, decrees, injunctions or orders of any Governmental
Authority or arbitrator against The Learning Annex or (iii) disputes with
students, teachers, customers or vendors with an amount in dispute, individually
or in the aggregate, greater than $25,000. There are no Actions pending or, to
the best knowledge of The Learning Annex, threatened, nor, to the best knowledge
of The Learning Annex, any basis therefor, with respect to (A) the current or
future employment by, or association with, The Learning Annex, of any of the
present officers or employees of or consultants to The Learning Annex
(collectively, the "DESIGNATED PERSONS") or (B) the use, in connection with any
business presently conducted or proposed to be conducted by The Learning Annex,
of any information, techniques or processes presently utilized or proposed to be
utilized by The Learning Annex or any of the Designated Persons, that The
Learning Annex or any of the Designated Persons are or would be prohibited from
using as the result of a violation or breach of, or conflict with any agreements
or arrangements between any Designated Person and any other person, or any legal
considerations applicable to unfair competition, trade secrets or
9
confidential or proprietary information. The Learning Annex has delivered to GHS
all material documents and correspondence relating to such matters referred to
in this Section 7(h) (including, in the case of clause (iii) of the first
sentence of this Section 7(h), any correspondence evidencing material customer
dissatisfaction with The Learning Annex or its products or services).
(i) INTELLECTUAL PROPERTY
(i) The Learning Annex has good and valid title to, and
owns free and clear of all Encumbrances, has the exclusive right to use, sell,
transfer, license (or subli cense), transmit, broadcast, deliver (electronically
or otherwise) and dispose of, and has the right to bring actions for the
infringement of, all Intellectual Property Rights necessary or required for the
conduct of its business as currently conducted and as proposed to be conducted
(collectively, the "COMPANY RIGHTS").
(ii) The execution, delivery and performance of this
Agreement, the License Agreement and the Pledge Agreement and the consummation
of the transactions contemplated hereby, will not breach, violate or conflict
with any instrument or agreement governing any Company Rights, will not cause
the forfeiture or termination or give rise to a right of forfeiture or
termination of any Company Right or in any way impair the right of The Learning
Annex to use, sell, license (or sublicense), transmit, broadcast, deliver
(electronically or otherwise) or dispose of, or to bring any action for the
infringement of, any Company Right or portion thereof.
(iii) There are no royalties, honoraria, fees or other
payments payable by The Learning Annex to any person by reason of the ownership,
use, license (or sublicense), transmission, broadcast, delivery (electronically
or otherwise), sale, or disposition of The Learning Annex Rights, other than
sales commissions and other instructor fees paid in the ordinary course of
business.
(iv) All works that were created, prepared or delivered by
consultants, independent contractors or other third parties for or on behalf of
The Learning Annex (including any materials and elements created, prepared or
delivered by such parties in connection therewith) (A) are and shall constitute
"works made for hire" specially ordered or commissioned by The Learning Annex
within the meaning of United States' copyright law, or (B) all right, title and
interest therein (including any materials and elements created, prepared or
delivered by such parties in connection therewith) have been assigned to The
Learning Annex.
(v) Except for the agreement between Hay House and
Xxxxxxxx/Xxxxx Communication Resources, Inc., dba The Learning Annex dated
August 31, 1994, as amended (the "HAY HOUSE AGREEMENT"), no licenses or rights
have been granted by The Learning Annex, or by any employee, consultant,
officer, director, agent or affiliate of The Learning Annex or by anyone other
than the foregoing, to distribute the source code of, or to use source code to
create Derivative Works, of, any product currently marketed by, commercially
available from or under development by The Learning Annex for which The Learning
Annex possesses the source code. As used herein, "DERIVATIVE WORK" shall mean a
work that is based upon one or more preexisting works, such as a revision,
enhancement, modification, abridgment, condensation, expansion or
10
any other form in which such preexisting works may be recast, transformed or
adapted, and which, if prepared without authorization of the owner of the
copyright in such preexisting work, would constitute a copyright infringement.
For purposes herein, a "DERIVATIVE WORK" shall also include any compilation that
incorporates such a preexisting work as well as translations from one type of
code to another.
(vi) Except for the Hay House Agreement, no person has any
marketing rights to any of the Intellectual Property Rights of The Learning
Annex (excluding Intellectual Property Rights licensed to The Learning Annex by
third parties).
(vii) Section 7(i)(viii) of The Learning Annex Disclosure
Schedule contains a true and complete list of all (A) of The Learning Annex's
patents, patent applications, trademarks, trademark applications, trade names,
service marks, service xxxx applications, copyrights, copyright registrations
and copyright applications and Internet domain names and applications therefor
and (B) other filings and formal actions made or taken pursuant to Federal,
state, local and foreign laws by The Learning Annex to perfect or protect its
interest therein.
(viii) Section 7(i)(ix) of The Learning Annex Disclosure
Schedule contains a true and complete list of all options, licenses or other
agreements of any kind by which Intellectual Property Rights have been granted
to The Learning Annex from, or granted by The Learning Annex to, any other
person.
(ix) As used herein, the term "Intellectual Property
Rights" shall mean all industrial and intellectual property rights, including,
without limitation, patents, patent applications, patent rights, trademarks,
trademark applications, trade names, service marks, service xxxx applications,
copyrights, copyright registrations, copyright applications, franchises,
licenses, databases, "URL's" and Internet domain names and applications therefor
(and all interest therein), computer programs and other computer software
(including, but not limited to, the Software), user interfaces, know-how, trade
secrets, customer lists, proprietary technology, processes and formulae, source
code, object code, algorithms, architecture, structure, display screens,
layouts, development tools, instructions, templates, marketing materials,
inventions, trade dress, logos and designs and all documentation and media
constituting, describing or relating to the foregoing.
(j) TITLE TO ASSETS, PROPERTIES AND RIGHTS AND RELATED MATTERS. Except
as set forth on Schedule 7(j) of The Learning Annex Disclosure Schedule, The
Learning Annex has good and valid title to, or good and valid licenses or
leasehold interests in, all assets, properties and interests in properties,
real, personal or mixed, necessary for the conduct of the business as conducted
or as proposed to be conducted, free and clear of all Encumbrances, of any kind
or character, except for (i) those Encumbrances set forth in Section 7(j) of The
Learning Annex Disclosure Schedule, (ii) liens for current taxes not yet due and
payable and (iii) statutory mechanics and materialmen's liens. The assets,
properties and interests in properties of The Learning Annex are in good
operating condition and repair in all material respects. The Learning Annex does
not own or lease any personal and/or mixed property.
(k) ABSENCE OF UNDISCLOSED LIABILITIES.
11
(i) At the Balance Sheet Date, with respect to the Balance Sheet,
The Learning Annex had no material Liability (as defined below) required to be
set forth on the Balance Sheet or the Interim Financial Information,
respectively, in order for the Balance Sheet or the Interim Financial
Information, respectively, to fairly present the financial condition of The
Learning Annex at the dates thereof in accordance with GAAP, which was not
provided for or disclosed thereon.
(ii) All liability reserves established by The Learning Annex and
set forth on the Balance Sheet or the Interim Financial Information,
respectively, were adequate, in all material respects, for all such Liabilities
at the respective dates thereof.
(iii) As used herein the term "LIABILITY" shall mean any liability
or obligation of any nature (whether known or unknown, matured or unmatured,
fixed or contingent, secured or unsecured, accrued, absolute or otherwise).
(l) FINANCIAL STATEMENTS.
(i) The Learning Annex has previously delivered to GHS the
following financial statements (collectively, "THE LEARNING ANNEX FINANCIAL
STATEMENTS"):
(1) the financial information and calculations concerning The
Learning Annex set forth in Section 7(l) of The Learning Annex Disclosure
Schedule as at March 31, 1999 or April 30, 1999, as applicable (the "INTERIM
FINANCIAL INFORMATION"; and the date thereof being the "INTERIM FINANCIAL
INFORMATION DATE"); and
(2) the balance sheets of The Learning Annex as at December 31,
1998 (the "BALANCE SHEET"; and the date thereof being the "BALANCE SHEET
DATE"), 1997 and 1996, respectively, and the related statements of income,
cash flow and shareholders' equity for the respective years then ended
(including complete footnotes thereto), certified by The Learning Annex
Accountants, and accompanied by a copy of such auditor's report.
(ii) The Learning Annex Financial Statements (A) are in accordance
with the books and records of The Learning Annex, (B) fairly present the
financial condition of The Learning Annex as at the respective dates indicated
and the results of operations of The Learning Annex for the respective periods
indicated and (C) have been prepared in accordance with generally accepted
accounting principles consistently applied, except as indicated therein and, in
the case of Interim Financial Statements, for the absence of complete footnote
disclosure as required by GAAP and subject, in the case of the Interim Financial
Statements, to changes resulting from normal year-end audit adjustments, which
adjustments shall not in any event be material individually or in the aggregate.
(m) ABSENCE OF CHANGES. Except as set forth in Section 7(m) of The
Learning Annex Disclosure Schedule, since the Balance Sheet Date, The Learning
Annex has been operated in the ordinary course, consistent with past practice,
and there has not been any material adverse change in the business, assets,
properties, Liabilities, operations, results of operations, condition (financial
or otherwise), prospects or affairs (a "MATERIAL ADVERSE CHANGE") of The
12
Learning Annex, in each case in an amount, individually or in the aggregate,
greater than $25,000.
(n) AGREEMENTS. Schedule 7(n) hereto sets forth a true and complete
list of all contracts, agreements, instruments, understandings or arrangements
to The Learning Annex is a party or by which it is bound (i) that involve
liabilities or obligations of, or payments by or to The Learning Annex or
otherwise have a value in excess of $50,000, (ii) that involve the license to or
from The Learning Annex of any intellectual property rights (other than licenses
of, or licenses arising from purchases of, "off-the-shelf" or other standard
products), (iii) between it and any of its officers, directors, employees,
consultants (or any of their respective family members) or (iv) that restricts
The Learning Annex from engaging in any aspect of its business or competing in
any line of business in any geographic area. To the best knowledge of The
Learning Annex, it is not in default under any agreements with any third
parties.
(o) DISCLOSURE. Neither Section 7 of this Agreement (including The
Learning Annex Disclosure Schedule) nor any document, written information,
statement, financial statement, certificate or exhibit furnished or to be
furnished to GHS by or on behalf of The Learning Annex or any securityholder
pursuant hereto or in connection with the transactions contemplated hereby,
contains or will contain any untrue statement of a material fact or omits or
will omit to state a material fact necessary in order to make the statements or
facts contained herein and therein not misleading in light of the circumstances
under which they were made. There is no fact which materially adversely affects,
or in the future may, insofar as can be reasonably foreseen by The Learning
Annex, materially adversely affect, the business, operations, affairs,
prospects, condition, properties or assets of The Learning Annex which has not
been set forth in this Agreement or in the Closing Documents.
8. REPRESENTATIONS AND WARRANTIES OF THE SHAREHOLDERS. Each of the
Shareholders, severally (and not jointly) represents and warrants to GHS with
respect to himself, herself or itself as follows:
(a) TITLE; ABSENCE OF CERTAIN AGREEMENTS. Such Shareholder is the
lawful and record and beneficial owner of (i) the Option Securities and (ii) all
options, warrants, rights, calls, commitments, agreements or arrangements of any
character to which such Shareholder is a party or by which he, she, or it is
bound calling for the issuance of shares of capital stock of The Learning Annex
or any securities convertible into or exercisable or exchangeable for, or
representing the right to purchase or otherwise receive, directly or indirectly,
any such capital stock, or other arrangement to acquire, at any time or under
any circumstance, capital stock of The Learning Annex (the "COMMON EQUIVALENTS")
or any such other securities in each case set forth opposite the name of such
Shareholder on SCHEDULE I attached hereto, with the full power and authority to
vote such Option Securities and transfer and otherwise dispose of such Option
Securities and Common Equivalents and any and all rights and benefits incident
to the ownership thereof, free and clear of all Encumbrances, and there are no
voting trusts, voting agreements, proxies, first refusal rights, first offer
rights, co-sale rights, options, transfer restrictions or other agreements,
instruments or understandings (whether written or oral, formal or informal)
between such Shareholder and The Learning Annex and/or any other Shareholder or
any other person with respect to the voting, transfer or disposition of Option
Securities or any other matter relating
13
to Option Securities. The Option Securities set forth opposite the name of such
Shareholder are the only shares of capital stock of The Learning Annex held by
such Shareholder.
(b) ORGANIZATION, GOOD STANDING AND POWER. In the case of any
Shareholder that is not a natural person, such Shareholder is duly organized or
formed and validly existing under the laws of the jurisdiction of its
incorporation or formation and has the corporate or other organizational power
and authority under such laws to enter into this Agreement, to perform its
obligations hereunder and to consummate the transactions contemplated hereby.
(c) AUTHORITY - GENERAL. Such Shareholder has full and absolute power
and authority to enter into this Agreement and the Pledge Agreement and, and
has, in the case of a Shareholder that is not a natural person, been duly
authorized by all requisite action on the part of such Shareholder; and this
Agreement and the Pledge Agreement have been duly executed and delivered by such
Shareholder, and each is the valid and binding obligation of such Shareholder,
enforceable against such Shareholder in accordance with its terms. Neither the
execution, delivery and performance of this Agreement or the Pledge Agreement,
nor the consummation of the transactions contemplated hereby or thereby nor
compliance by such Shareholder with any of the provisions hereof or thereof will
(i) (A) conflict with, (B) result in any violations of, (C) cause a default
under (with or without due notice, lapse of time or both), (D) give rise to any
right of termination, amendment, cancellation or acceleration of any obligation
contained in or the loss of any material benefit under or (E) result in the
creation of any Encumbrance upon or against any assets, rights or property of
GHS, under any term, condition or provision of (x) any agreement or instrument
to which such Shareholder is a party, or by which such Shareholder or, to the
best knowledge of such Shareholder, any of his or its properties, assets or
rights may be bound, (y) any law, statute, rule, regulation, order, writ,
injunction, decree, permit, concession, license or franchise of any Governmental
Authority applicable to such Shareholder or, to the best knowledge of such
Shareholder, any of his or its properties, assets or rights or (z) in the case
of any Shareholder that is not a natural person, such Shareholder's Charter or
by-laws, as amended through the date hereof, which conflict, breach, default or
violation or other event would prevent the consummation of the transactions
contemplated by this Agreement or the Pledge Agreement. No permit,
authorization, consent or approval of or by, or any notification of or filing
with, any Governmental Authority or other person is required in connection with
the execution, delivery and performance by such Shareholder of this Agreement,
or the Pledge Agreement or the consummation by such Shareholder of the
transactions contemplated hereby or thereby.
9. REPRESENTATIONS AND WARRANTIES OF GHS. GHS represents and warrants to The
Learning Annex and Shareholders as follows:
(a) ORGANIZATION. GHS is a corporation, duly organized, validly
existing and in good standing under the laws of the State of Delaware and has
all requisite power and authority to enter into this Agreement, to perform its
obligations hereunder, and to consummate the Acquisition contemplated thereby.
(b) AUTHORIZATION. GHS has taken all corporate action necessary to
authorize its execution and delivery of this Agreement, its performance of its
obligations hereunder, and its consummation of the Acquisition contemplated
hereby. This Agreement has been executed and
14
delivered by an officer of GHS in accordance with such authorization. This
Agreement constitutes a valid and binding obligation of GHS, enforceable in
accordance with its terms, subject to bankruptcy, reorganization, insolvency,
moratorium, and similar laws affecting creditors' rights generally and to
general principles of equity.
(c) NO CONFLICT. The execution and delivery by GHS of this Agreement,
its consummation of the Acquisition contemplated hereby, and its compliance with
the provisions hereof, will not (a) violate or conflict with its Certificate of
Incorporation or By-laws, (b) violate, conflict with, or give rise to any right
of termination, cancellation, rescission or acceleration under any agreement,
lease, security, license, permit, or instrument to which GHS is a party, or to
which it or any of its assets is subject, (c) violate or conflict with any Laws,
or (d) require any consent, approval or other action of, notice to, or filing
with any entity or person (governmental or private), except for those that have
been obtained or made.
10. OPERATION OF THE BUSINESS; FINANCIAL INFORMATION.
(a) OPERATION OF BUSINESS. During the Option Period, The Learning Annex
will operate its business as now operated and only in the normal and ordinary
course and, consistent with such operation, will use its best efforts to
preserve intact its present business organization, to keep available the
services of its officers and employees and to maintain satisfactory
relationships with licensors, franchisees, licensees, suppliers, contractors,
distributors, customers and other persons having business dealings with it.
Without limiting the generality of the foregoing, during the Option Period The
Learning Annex shall not without the prior written consent of GHS, in each case
other than in the ordinary course of business, take or cause to occur any of the
following actions or transactions;
(i) The sale, lease, license, transfer, Encumbrance, pledge or
other disposition of The Learning Annex's material assets, involving more
than $50,000 in any one transaction (or series of related transactions);
(ii) any declaration, setting aside or payment of any dividend or
other distribution of any assets of any kind whatsoever with respect to any
shares of the capital stock of The Learning Annex, or any direct or indirect
redemption, purchase or other acquisition of any such shares of the capital
stock of The Learning Annex (other than (1) any cash dividends and (2) the
payment or disposition, by dividend or otherwise, of (A) the payments of the
Options Price pursuant to this Agreement, (B) the Shares and (C) so long as
Xxxxxx Xxxxxxxx or Xxxx Xxxxx are full time employees of The Learning Annex,
the license fees paid by GHS to the Learning Annex pursuant to the License
Agreement);
(iii) any stock split, reverse stock split, combination,
reclassification or recapitalization of any capital stock of The Learning
Annex, or any issuance of any other security in respect of or in exchange
for, any shares of capital stock of The Learning Annex;
(iv) any increase in or modification to or acceleration of any
benefits payable or to become payable under any bonus, pension, severance,
insurance or other benefit plan, payment or arrangement (including, but not
limited to, the granting of stock
15
options, restricted stock awards or stock appreciation rights) made
to, for or with any officer, key employee, consultant or agent of The
Learning Annex;
(v) any loan, advance or capital contribution to or investment in
(or series of related loans, advances or capital contributions to or
investments in) any person in each case in excess of $50,000 or the
engagement in any transaction with any employee, officer, director or
securityholder, other than advances to employees in the ordinary course of
business for travel and similar business expenses;
(vi) any change in the accounting methods or practices followed The
Learning Annex or any change in depreciation or amortization policies or
rates theretofore adopted;
(vii) any acceleration or decceleration of payment of accounts
payable or collection of accounts receivable other than in a manner
consistent with past practice;
(viii) any incurrence, refinancing or alteration of material terms
by The Learning Annex of indebtedness for borrowed money in excess of
$150,000 in the aggregate (or the guaranty by The Learning Annex of any such
indebtedness);
(ix) conducting operations or entering into transactions materially
inconsistent with the annual business plan in effect at the time or material
changes in the strategic direction of the business or scope of the business
or entering into any material joint venture outside the ordinary course of
business;
(x) any amendments or changes in The Learning Annex's Charter or
by-laws.
(b) INFORMATION RIGHTS. During the Option Period The Learning Annex
shall provide GHS with the following information:
(i) GENERAL. The Learning Annex will permit GHS on reasonable
notice to visit and inspect during normal business hours any of the
properties of The Learning Annex and to examine its books and records, and
to discuss with its officers the business and affairs of The Learning Annex,
at such reasonable times as such persons may desire without disruption of
The Learning Annex's normal business and affairs for any reasonable purpose
relating to its investment in The Learning Annex.
(ii) QUARTERLY STATEMENTS. As soon as available, but not later than
sixty (60) days after the end of each quarterly accounting period commencing
with the quarterly period ending on June 30, 1999, an unaudited consolidated
financial report of The Learning Annex, prepared in accordance with
generally accepted accounting principles consistently applied, except that
such financial statements shall not include footnotes and shall be subject
to normal year-end audit adjustments, including, with respect to such
quarterly accounting period, the following:
16
(1) A profit and loss statement for such quarterly accounting
period and on a cumulative basis for the fiscal year to date;
(2) A balance sheet as at the last day of such quarterly
accounting period;
(3) A statement of cash flow for such quarterly accounting
period on a cumulative basis for the fiscal year to date; and
(4) A comparison between the actual figures for such quarterly
accounting period and on a cumulative basis for the fiscal year to
date, the comparable figures (with respect to clauses (1) and (2) only)
for the prior period of year (if any),
certified by the chief executive officer and chief financial officer of the
Corporation as being prepared in accordance with generally accepted
accounting principles (except with respect to footnote disclosure and
subject to normal year-end audit adjustments) consistently applied and
accompanied by a statement showing the number of shares of each class and
series of capital stock, and securities convertible into or exercisable for
shares of capital stock.
(iii) ANNUAL REPORTS. As soon as available, but not later than 90
days after the end of each fiscal year of The Learning Annex, reviewed
financial statements of The Learning Annex, which shall include a statement
of cash flows and statement of operations for such fiscal year and a balance
sheet as at the last day thereof, each prepared in accordance with generally
accepted accounting principles, consistently applied, and accompanied by the
report of Chaio and Xxxxx or another accounting firm reasonably acceptable
to GHS. The Corporation shall maintain a system of accounting sufficient to
enable its independent certified public accountants to render the report
referred to in this Section 7(k).
(c) MATERIAL EVENTS. The Learning Annex shall promptly notify GHS in
writing (i) if there has been or is likely to be a Material Adverse Change, (ii)
if there has been any event which adversely impacts or could reasonably be
expected to adversely impact the integrity and value of the Options or (iii) if
The Learning Annex has entered into any business relationship that could
infringe upon the nature and scope of the contemplated Options.
11. COVENANTS.
(a) LICENSE AGREEMENT. On or before the date hereof, GHS and The
Learning Annex shall have executed and delivered an exclusive online marketing
and licensing agreement in the form attached hereto as EXHIBIT B (the "LICENSE
AGREEMENT").
(b) NO-SHOP.
(i) Subject to the ability of The Learning Annex to consummate a
Corporate Transaction on the terms and subject to the conditions set forth
in Section
17
11(c) hereof, from the date of this Agreement until the earlier
of (i) the termination of this Agreement in accordance with its terms or
(ii) the closing of the Acquisition pursuant to the exercise of either of
the Options, The Learning Annex shall not, nor shall it authorize or permit
any of its respective officers, directors, employees, members,
representatives, Shareholders, agents or affiliates, directly or indirectly,
to (A) solicit, initiate or encourage or take any action to facilitate or
encourage any inquiries or the making of any proposal that constitutes, an
Acquisition Proposal or (B) participate or engage in discussions or
negotiations with, or provide any information to, any person or entity
concerning an Acquisition Proposal or which might reasonably be expected to
result in an Acquisition Proposal. The Learning Annex shall immediately
cease and cause to be terminated and shall cause its affiliates and its or
their respective officers, directors, employees, members, Shareholders,
representatives or agents, to terminate all existing discussions or
negotiations with any persons or entities conducted heretofore with respect
to, or that could reasonably be expected to lead to, an Acquisition Proposal
and hereby agree to immediately disclose to GHS the existence and terms of
any written or oral offer to The Learning Annex or any Shareholder of an
Acquisition Proposal, or any representative acting on its, his, her or their
behalf, including copies of any relevant written materials.
(ii) For purposes of this Agreement, the term "ACQUISITION
PROPOSAL" shall mean any inquiry, proposal or offer from any person
(other than GHS) relating to any (i) merger or consolidation of The
Learning Annex into or with another corporation or other entity, (ii) the
sale, transfer, license or other disposition of all or substantially all
of the properties or of The Learning Annex, (iii) the sale, transfer or
other disposition of capital stock of The Learning Annex, in each case
under circumstances in which the holders of the outstanding capital stock
of The Learning Annex immediately prior to such merger, consolidation or
sale, own less than a majority (by voting power) of outstanding capital
stock of The Learning Annex or the surviving or resulting corporation or
acquirer, as the case may be, immediately following such merger,
consolidation or sale, (iv) any investment in, or any debt or equity
financing of either The Learning Annex, (v) the Internet (as such term is
defined in the License Agreement) distribution of content or services of
The Learning Annex or (vi) any other transaction the consummation of
which could reasonably be expected to impede, interfere with, prevent or
materially delay the consummation of the transactions contemplated hereby
or which would reasonably be expected to dilute materially the benefits
to GHS of the transactions contemplated hereby (each a "CORPORATE
TRANSACTION").
(c) RIGHT OF FIRST REFUSAL.
(i) On and after the third anniversary of the date hereof, if The
Learning Annex proposes to seek or seeks parties to enter into a Corporate
Transaction or takes any action incident thereto, The Learning Annex shall
so notify GHS in writing (the "SHOPPING NOTICE") prior to contacting or
negotiating with any other party and shall provide GHS and its affiliates
the first and exclusive option, for a period of 30 days after such notice is
delivered, to negotiate the terms and conditions upon which GHS may propose
at its option and in its discretion to consummate a Corporate Transaction
(other
18
than pursuant to the exercise of the Option). The Shopping Notice
shall include (A) all relevant terms of the proposed Corporate Transaction
and (B) a list of parties proposed to be involved in such proposed Corporate
Transaction.
(ii) If GHS elects not to make a proposal to The Learning Annex to
enter into a Corporate Transaction and if GHS has not exercised the Option
within one hundred and twenty (120) days of delivery of the Shopping Notice,
then The Learning Annex shall have the right to actively solicit Acquisition
Proposals (but not consummate any Corporate Transaction (other than pursuant
to the exercise of the Option)) for sixty (60) days (the "SHOPPING PERIOD")
at a price and on terms and conditions no more favorable to the purchaser(s)
than the price, terms and conditions set forth in the Shopping Notice.
(iii) The Learning Annex shall keep GHS regularly informed and
updated as to the status of its search for Acquisition Proposals,
discussions and/or negotiations, if any, with third parties for any
Corporate Transaction. If during the Shopping Period The Learning Annex
negotiates all of the material terms of a BONA FIDE Corporate Transaction
with a third party (the "CORPORATE TRANSACTION PROPOSAL"), then GHS shall
immediately thereupon notify GHS in writing thereof and GHS shall have
the right and option (the "RIGHT OF FIRST REFUSAL") for thirty (30) days
after receipt of the such written notice to elect to (A) consummate an
Acquisition pursuant to the exercise of the Option on the terms set forth
in Section 4 hereof or (B) consummate the Corporate Transaction on terms
and conditions no less favorable to GHS than the terms and conditions set
forth in the Corporate Transaction Proposal; PROVIDED, that if the
Corporate Transaction Proposal provides for the third party to provide
capital stock or other securities or other non-cash consideration as
consideration in the Corporate Transaction, GHS shall be entitled to
provide capital stock or other securities or other non-cash consideration
of GHS or (C) deliver a notice to The Learning Annex that GHS elects not
to exercise its Right of First Refusal.
(iv) If (A) GHS elects not to exercise its Right of First Refusal
and (B) The Learning Annex consummates the Corporate Transaction, then The
Learning Annex shall reimburse GHS in cash simultaneous with the closing of
the Corporate Transaction an amount equal to the last payment made by GHS in
respect of the Options Price.
(d) FUTURE SHAREHOLDERS.
(i) ISSUANCE BY THE LEARNING ANNEX. The Learning Annex hereby
covenants that it shall not issue or sell any capital stock of The Learning
Annex or any options, warrants, rights, calls, commitments, agreements or
arrangements of any character calling for the issuance of shares of capital
stock of The Learning Annex or any securities convertible into or
exercisable or exchangeable for, or representing the right to purchase or
otherwise receive, directly or indirectly, any such capital stock, or
other arrangement to acquire, at any time or under any circumstance,
capital stock of The Learning Annex or any such other securities which
The Learning Annex is or may become obligated to issue or sell any shares
of capital stock or other securities of The
19
Learning Annex to any person (a "FUTURE ISSUANCE") unless such person
shall have, as a condition to such Future Issuance, executed a
counterpart to this Agreement and the Pledge Agreement, agreeing to be
bound by and obligated in accordance with this Agreement and the Pledge
Agreement as if he, she or it were a Shareholder.
(ii) TRANSFER BY EXISTING SHAREHOLDER. Each of the Shareholders
hereby covenants and agrees that he, she or it shall not sell, transfer or
otherwise dispose (a "TRANSFER") of any Option Securities or any other
capital stock ("OTHER SHARES" and, together with the Option Securities, the
"SECURITIES") of The Learning Annex now owned or ever owned by such
Shareholder to any person (a "TRANSFEREE") unless such Transferee shall
have, as a condition to such Transfer, executed a counterpart to this
Agreement and the Pledge Agreement, agreeing to be bound by and obligated in
accordance with this Agreement and the Pledge Agreement as if he, she or it
were a Shareholder.
(iii) RESTRICTIVE LEGEND. Each certificate for the Securities and
each certificate for any such Securities issued to subsequent transferees or
pursuant to a Future Issuance shall be stamped or otherwise imprinted with a
legend in substantially the following form:
"THE TRANSFER OF THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE
SUBJECT TO THE CONDITIONS SPECIFIED IN THE OPTION AGREEMENT AMONG GHS,
INC., THE LEARNING ANNEX AND THE SHAREHOLDERS (AS DEFINED THEREIN), AND
NO TRANSFER OF THESE SECURITIES SHALL BE VALID OR EFFECTIVE UNTIL SUCH
CONDITIONS HAVE BEEN FULFILLED. UPON THE FULFILLMENT OF ALL APPLICABLE
CONDITIONS, GHS, INC. HAS AGREED TO DELIVER TO THE HOLDER HEREOF A NEW
CERTIFICATE, NOT BEARING THIS LEGEND, FOR THE SECURITIES REPRESENTED
HEREBY REGISTERED IN THE NAME OF THE HOLDER HEREOF."
(e) SHAREHOLDERS' BEST EFFORTS. Each of the Shareholders hereby
covenants and agrees that he, she or it shall use his, her or its best efforts
to ensure that the Learning Annex abides by, observes and performs his, her or
its obligations hereunder, and the Shareholders and The Learning Annex hereby
agree that they shall not sell their Shares except in accordance with Section 11
hereto.
(f) CONFIDENTIALITY. The parties hereto hereby covenant and agree that
without the express written consent of GHS on the one hand and The Learning
Annex on the other hand, neither The Learning Annex nor any Shareholder, nor
GHS, shall disclose the existence of this Agreement or any agreements referenced
herein or attached hereto, nor any of the terms hereof or thereof, to any third
party except: (i) as required by law; (ii) to such party's attorneys,
accountants, other advisors, officers, employees, directors and equityholders,
as applicable, in order to facilitate the consummation of the Acquisition and
the fulfillment of such party's obligations hereunder or thereunder, provided
that any such third party agrees to be bound by the confidentiality provisions
hereof.
20
(g) NO JOINT VENTURE. Neither party shall make any warranties or
representations, or assume or create any obligations, on the other party's
behalf except as may be expressly permitted hereunder or in writing by such
other party. Each party shall be solely responsible for the actions of all its
respective employees, agents and representatives.
(h) ACCESS TO INFORMATION. Upon the exercise of either of the Options,
The Learning Annex shall afford to the officers, employees, accountants, counsel
and other representatives of GHS, reasonable access, during the period prior to
the date of the closing of the Acquisition, to all its properties, books,
contracts, commitments and records and, during such period, and The Learning
Annex shall furnish promptly to GHS all information concerning its business,
properties and personnel as GHS may reasonably request, and The Learning Annex
shall make available to GHS the appropriate individuals for discussion of The
Learning Annex's business, properties and personnel as GHS may reasonably
request. No investigation pursuant to this Section 11(g) shall affect any
representations or warranties of The Learning Annex herein or the conditions to
the obligations of the parties hereto.
(i) RETENTION OF KEY EMPLOYEES. The Learning Annex hereby covenants and
agrees that it shall use best efforts from the date hereof until the Closing
Date to retain all key employees of The Learning Annex, including, without
limitation, Xxxxx Xxxxxxxx and Xxxx Xxxxx. The Learning Annex shall promptly,
and in any event within 48 hours, notify GHS in writing if any The Learning
Annex key employee on the date hereof ceases to be an employee of The Learning
Annex, or if any The Learning Annex key employee on the date hereof informs any
officer of The Learning Annex that he or she will terminate his or her
employment or engagement with The Learning Annex.
12. SURVIVAL; INDEMNIFICATION.
(a) SURVIVAL. The covenants, representations and warranties and
agreements of the parties hereto contained in this Agreement and in the Closing
Documents shall survive (i) for the term of this Agreement or (ii) if the
Options are exercised and the closing of the Acquisition pursuant thereto is
consummated, then for three (3) years after the closing date of such
Acquisition.
(b) THE LEARNING ANNEX AND SHAREHOLDERS INDEMNITY. The Learning Annex
and the Shareholders hereby jointly and severally indemnify GHS against and
agree to hold GHS harmless from any and all damage, loss, liability and expense
(including, without limitation, reasonable expenses of investigation and
reasonable attorneys' fees and expenses in connection with any action, suit or
proceeding, including any action, suit or proceeding to enforce this indemnity)
("DAMAGES") incurred or suffered by GHS arising out of any misrepresentation or
breach of representation, warranty (or any facts or circumstances constituting
such breach), covenant or agreement made or to be performed by The Learning
Annex or the Shareholders pursuant to this Agreement, the Closing Documents or
other closing documents executed and delivered in connection therewith. The
Shareholders shall not have any right of contribution against The Learning Annex
in connection with this Section 12.
(c) GHS INDEMNITY. GHS hereby indemnifies The Learning Annex and each
of the Shareholders against and agrees to hold each of them harmless from any
and all Damages
21
incurred or suffered by The Learning Annex or each of the Shareholders arising
out of any misrepresentation or breach of representation, warranty (or any facts
or circumstances constituting such breach), covenant or agreement made or to be
performed by GHS pursuant to this Agreement, Closing Documents or other
documents delivered in connection therewith.
(d) PROCEDURES. If any third party shall assert any claim against a
GHS, The Learning Annex or a Shareholder, as the case may be, which, if
successful, would entitle the such person to indemnification under Section 12(a)
or (b), as the case may be, such person (the "INDEMNIFIED PARTY") shall give a
notice of such claim to the party from whom it intends to seek indemnification
(the "INDEMNIFYING PARTY") and the Indemnified Party shall have the right to
assume the defense. If the Indemnified Party does assume such defense, the
Indemnifying Person shall indemnify and hold the Indemnified Party harmless from
and against any and all losses, damages and liabilities caused by or arising out
of any settlement or judgment of such claim and the Indemnifying Person may not
claim that it does not have an indemnification obligation with respect thereto.
In addition, the Indemnifying Party shall have the right to participate in the
defense of such claim at its expense, in which case (i) the Indemnified Party
shall cooperate in providing information to and consulting with the Indemnifying
Party about the claim; and (ii) the Indemnified Party shall not consent to the
entry of judgment or enter into any settlement without the prior written consent
of the Indemnifying Party, which consent shall not be unreasonably withheld or
delayed. If the Indemnified Party does not assume the defense of any such claim,
the Indemnifying Party may defend against or settle such claim in such manner
and on such terms as it in good xxxxx xxxxx appropriate and shall be entitled to
indemnification in respect thereof in accordance with Section 12(a) or (b), as
the case may be.
13. EXPIRATION OR TERMINATION. In the event that the Option shall not have been
exercised on or prior to the end of the Option Period, the Option shall
automatically expire and terminate and no party hereunder shall have any rights
or obligations with respect thereto.
14. MISCELLANEOUS PROVISIONS.
(a) ENTIRE AGREEMENT. This Agreement (including the Exhibits attached
hereto) and the Pledge Agreement and License Agreement contain the entire
agreement among the parties hereto with respect to the transactions contemplated
hereby and supersede all prior agreements or understandings, written or oral,
among the parties with respect thereto.
(b) DESCRIPTIVE HEADINGS. Descriptive headings are for convenience only
and shall not control or affect the meaning or construction of any provision of
this Agreement.
(c) NOTICES. All notices or other communications which are required or
permitted hereunder shall be in writing and sufficient if delivered personally,
sent by nationally-recognized overnight courier or by registered or certified
mail, postage prepaid, return receipt requested or by telecopier, addressed as
follows:
(i) if to GHS, to:
22
GHS, Inc.
0000 Xxxxxxxx Xxxxxxxxx
Xxxxxxxxx, XX 00000
Attention:
Telecopier (000) 000-0000;
with copies to:
Xxxxxx, Xxxxxxxxxx & Xxxxxxxxx LLP
000 Xxxxx Xxxxxx
Xxx Xxxx, Xxx Xxxx 00000
Attention: Xxxxxx X. Xxxxxxxxxx, Esq.
Telecopier: (000) 000-0000; and
(ii) if to The Learning Annex, to:
Xxxxxxxx/Xxxxx Communication Resources, Inc.
000 Xxxxxx Xxxxxx, Xxxxx 000
Xxx Xxxxxxxxx, XX 00000
Attn: Xxxxxxx Xxxxxxxx
Telecopier: (000) 000-0000
with copies to:
Xxxxx Xxxxxxx
Delta Tower
000 Xxxxx Xxxxxx, Xxxxx 0000
Xxx Xxxxxxxxx, Xxxxxxxxxx 00000
Telecopier: (000) 000-0000
(iii) if to the Shareholders, to their respective addresses set
forth on SCHEDULE I, attached hereto,
or to such other address as the party to whom notice is to be given may have
furnished to the other party in writing in accordance herewith. All such notices
or communications shall be deemed to be delivered and received (a) in the case
of personal delivery or telecopy, on the date of such delivery, (b) in the case
of nationally-recognized overnight courier, on the next business day after the
date when sent and (c) in the case of mailing, on the third business day
following the date on which the piece of mail containing such communication was
posted.
(d) COUNTERPARTS. This Agreement may be executed in any number of
counterparts by original or facsimile signature, each such counterpart shall be
an original instrument, and all such counterparts together shall constitute one
and the same agreement.
23
(e) GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of California applicable to contracts made
and to be performed wholly therein, without reference to the principals of
conflicts of law.
(f) BENEFITS OF AGREEMENT. All the terms and provisions of this
Agreement shall be binding upon and inure to the benefit of the parties hereto
and their respective successors and permitted assigns; PROVIDED, HOWEVER, that
this Agreement shall not be assignable by The Learning Annex or the
Shareholders, whether by operation of law or otherwise, without the express
written consent of GHS. Any attempted assignment, pledge, hypothecation or other
disposition of such Option contrary to the provisions hereof shall be null and
void and without effect.
(g) PRONOUNS. As used herein, all pronouns shall include the masculine,
feminine, neuter, singular and plural thereof whenever the context and facts
require such construction.
(h) ATTORNEYS' FEES. In the event of a claim by a party to this
Agreement against another party to this Agreement, arising under this Agreement,
the prevailing party in a disposition of such claim by a court of competent
jurisdiction or by arbitration shall be paid by the other party the reasonable
and actual out-of-pocket attorneys' fees and expenses incurred by the prevailing
party with respect thereto.
(i) SPECIFIC PERFORMANCE. The transactions contemplated hereby are
unique and the parties acknowledge that the breach or threatened breach of the
provisions hereof may cause irreparable harm to GHS for which an award of
monetary damages would be inadequate. Accordingly, in addition to and not in
limitation of any other remedies available for a breach or threatened breach by
a party hereto, GHS shall be entitled to an injunction restraining the breaching
party from continuing such breach or threatened breach or specific performance.
(j) AGENCY. Xxxxxxx Xxxxxxxx as Chief Executive Officer of Xxxxxxxx
Xxxxx Communications Resources, Inc. (the "THE LEARNING ANNEX AGENT") is hereby
designated and shall act on behalf of all The Learning Annex entities identified
in the caption to this Agreement on any matter in connection with this Agreement
and any matters contemplated hereby and is hereby authorized to bind all such
entities in respect thereof. Accordingly, GHS shall only be required to interact
with or in any respect deal with The Learning Annex Agent in any matter
involving The Learning Annex Agent or any of such Learning Annex entities
(including without limitation, the giving of notice, consents or approvals
hereunder or any amendment, modification waiver of any term, condition or
provision of this Agreement or to the other agreements and exhibits contemplated
hereby).
(k) AMENDMENT, MODIFICATION AND WAIVER. This Agreement shall not be
altered or otherwise amended except pursuant to an instrument in writing signed
by each of the parties hereto; PROVIDED, HOWEVER, that any party to this
Agreement may waive in writing any obligation owed to it by any other party
under this Agreement. The waiver by any party hereto of a breach of any
provision of this Agreement shall not operate or be construed as a waiver of any
subsequent breach.
24
IN WITNESS WHEREOF, each of the parties hereto has caused this Option
Agreement to be executed on its behalf as of the date first above written.
GHS, INC.
By: /s/ Xxxx Xxxx
-----------------------------------
Name: Xxxx Xxxx
Title: President
THE LEARNING ANNEX:
XXXXXXXX/XXXXX COMMUNICATION SGS COMMUNICATION RESOURCES,
RESOURCES, INC., INC.,
a California corporation a California corporation
By: /s/ Xxxxxxx Xxxxxxxx By: /s/ Xxxxxxx Xxxxxxxx
--------------------------- -----------------------------------
Name: Xxxxxxx Xxxxxxxx Name: Xxxxxxx Xxxxxxxx
Title: C.E.O. Title: C.E.O.
By: /s/ Xxxx Xxxxx By: /s/ Xxxx Xxxxx
--------------------------- -----------------------------------
Name: Xxxx Xxxxx Name: Xxxx Xxxxx
Title: President Title: President
XXXXXXXX XXXXX XXXXXXXX SGC COMMUNICATION RESOURCES,
ENTERPRISES, INC., a California LLC,
corporation a Delaware limited liability company
By: /s/ Xxxxxxx Xxxxxxxx By: /s/ Xxxxxxx Xxxxxxxx
--------------------------- -----------------------------------
Name: Xxxxxxx Xxxxxxxx Name: Xxxxxxx Xxxxxxxx
Title: C.E.O. Title: C.E.O.
By: /s/ Xxxx Xxxxx By: /s/ Xxxx Xxxxx
--------------------------- -----------------------------------
Name: Xxxx Xxxxx Name: Xxxx Xxxxx
Title: President Title: President
LEARNING ANNEX INTERACTIVE
LLC,
A Delaware limited liability company
By: /s/ Xxxxxxx Xxxxxxxx
---------------------------
Name: Xxxxxxx Xxxxxxxx
Title: C.E.O.
By: /s/ Xxxx Xxxxx
---------------------------
Name: Xxxx Xxxxx
Title: President
25
Title:
26
SIGNATURE PAGE TO OPTION AGREEMENT
DATED AS OF MAY 26, 1999 (THE "AGREEMENT"), AMONG
THE LEARNING ANNEX
AND THE OTHER PARTIES TO THE AGREEMENT
The undersigned hereby executes and delivers the Agreement, authorizes
this signature page to be attached to a counterpart of the Agreement, and agrees
to be bound by the Agreement; and this Signature Page together with the
Signature Pages of GHS, Inc., The Learning Annex (as defined therein) and the
other parties to the Agreement shall constitute counterpart copies of the
Agreement in accordance with the terms of the Agreement.
SHAREHOLDERS:
-----------------------------
XXXXXXX XXXXXXXX
-----------------------------
XXXX XXXXX
27
SCHEDULE I
----------------------------------------------------------------------------------------
COMPANY NAME/
SHAREHOLDER OR MEMBER NAME OPTION SECURITIES
----------------------------------------------------------------------------------------
XXXXXXXX/XXXXX/XXXXXXXX ENTERPRISES, INC., a California
Corporation
----------------------------------------------------------------------------------------
Xxxxxxx Xxxxxxxx 100 shares common stock
----------------------------------------------------------------------------------------
Xxxx Xxxxx 100 shares common stock
----------------------------------------------------------------------------------------
SGS COMMUNICATION RESOURCES, INC., a California corporation
----------------------------------------------------------------------------------------
Xxxxxxx Xxxxxxxx 100 shares common stock
----------------------------------------------------------------------------------------
Xxxx Xxxxx 100 shares common stock
----------------------------------------------------------------------------------------
XXXXXXXX/XXXXX COMMUNICATION RESOURCES, INC., a California
corporation
----------------------------------------------------------------------------------------
Xxxxxxx Xxxxxxxx 500 shares common stock
----------------------------------------------------------------------------------------
Xxxx Xxxxx 500 shares common stock
----------------------------------------------------------------------------------------
LEARNING ANNEX INTERACTIVE, LLC, a Delaware limited
liability company
----------------------------------------------------------------------------------------
Xxxxxxx Xxxxxxxx 50% of membership interests
----------------------------------------------------------------------------------------
Xxxx Xxxxx 50% of membership interests
----------------------------------------------------------------------------------------
SGS COMMUNICATION RESOURCES, LLC, a Delaware limited
liability company
----------------------------------------------------------------------------------------
Xxxxxxx Xxxxxxxx 50% of membership interests
----------------------------------------------------------------------------------------
Xxxx Xxxxx 50% of membership interests
----------------------------------------------------------------------------------------
28
ANNEX A
CLOSING DOCUMENTS
1. Certificate of The Learning Annex confirming the representations and
warranties of The Learning Annex and the disclosure schedule, and including
updated financial statement for purposes of Section 7.
2. Certificate of each Shareholder confirming the representations and warranties
of such Shareholder.
3. Recent Good standing certificate of The Learning Annex and all subsidiaries
and affiliates thereof together with any bring-down certificates.
4. Certificate of the Secretary of The Learning Annex as to incumbency.
5. Such certificates, instruments and documents customary in transactions of
this type as are mutually agreed upon by the parties.
29
