-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UKew6mcT6eL4fXMVzFmBhWU+4K07QqKUzn2WkMRYSzYDl4LjIXsx6khqrLoim7RX 37Q0TW562QMj17dyqaQqfg== 0001047469-98-013737.txt : 19980406 0001047469-98-013737.hdr.sgml : 19980406 ACCESSION NUMBER: 0001047469-98-013737 CONFORMED SUBMISSION TYPE: SC 14D1 PUBLIC DOCUMENT COUNT: 13 FILED AS OF DATE: 19980403 SROS: NONE SUBJECT COMPANY: COMPANY DATA: COMPANY CONFORMED NAME: CHILDRENS DISCOVERY CENTERS OF AMERICA INC CENTRAL INDEX KEY: 0000775820 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-CHILD DAY CARE SERVICES [8351] IRS NUMBER: 061097006 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D1 SEC ACT: SEC FILE NUMBER: 005-38079 FILM NUMBER: 98587401 BUSINESS ADDRESS: STREET 1: 851 IRWIN ST STE 200 CITY: SAN RAFAEL STATE: CA ZIP: 94901 BUSINESS PHONE: 4152574200 MAIL ADDRESS: STREET 1: 851 IRWIN STREET STREET 2: SUITE 200 CITY: SAN RAFAEL STATE: CA ZIP: 94901 FILED BY: COMPANY DATA: COMPANY CONFORMED NAME: KNOWLEDGE BEGINNINGS INC CENTRAL INDEX KEY: 0001059072 STANDARD INDUSTRIAL CLASSIFICATION: [] IRS NUMBER: 954672767 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: SC 14D1 BUSINESS ADDRESS: STREET 1: 844 MORAGA DRIVE CITY: LOS ANGELES STATE: CA ZIP: 90049 BUSINESS PHONE: 3104403657 MAIL ADDRESS: STREET 1: 844 MORAGA DRIVE CITY: LOS ANGELES STATE: CA ZIP: 90049 SC 14D1 1 SC 14D1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------ SCHEDULE 14D-1 TENDER OFFER STATEMENT (PURSUANT TO SECTION 14(D)(1) OF THE SECURITIES EXCHANGE ACT OF 1934) CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. (Name of Subject Company) KNOWLEDGE BEGINNINGS, INC. KBI ACQUISITION CORP. (Bidders) COMMON STOCK, PAR VALUE $.01 PER SHARE (Title of Class of Securities) 168757201 (CUSIP Number of Class of Securities) ------------------------------ RONALD J. PACKARD TREASURER AND SECRETARY KNOWLEDGE BEGINNINGS, INC. 844 MORAGA DRIVE LOS ANGELES, CALIFORNIA 90049-1639 (310) 440-3657 (Name, Address and Telephone Number of Persons Authorized to Receive Notices and Communications on Behalf of Bidders) COPIES TO: MARK D. GERSTEIN, ESQ. LATHAM & WATKINS SEARS TOWER, SUITE 5800 CHICAGO, ILLINOIS 60606-6401 (312) 876-7700 JOHN J. HUBER, ESQ. LATHAM & WATKINS 1001 PENNSYLVANIA AVENUE, N.W., SUITE 1300 WASHINGTON, D.C. 20004-2505 (202) 637-2200 CALCULATION OF FILING FEE:
TRANSACTION VALUATION* AMOUNT OF FILING FEE** $93,995,034 $18,800
* For the purpose of calculating the fee only, this amount assumes the purchase of 7,673,064 shares of common stock, par value $.01 per share, of Children's Discovery Centers of America, Inc. at $12.25 per share. Such number of shares consists of (i) 6,744,499 shares issued and outstanding as of March 27, 1998 and (ii) 928,565 shares reserved for issuance upon the exercise of outstanding options as of such date. ** The amount of the filing fee calculated in accordance with Regulation 240.0-11 of the Securities Exchange Act of 1934 equals 1/50th of one percent of the value of the shares to be purchased. / / Check box if any part of the fee is offset as provided by Rule 0-11(a)(2) and identify the filing with which the offsetting fee was previously paid. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. Not Filing Not Amount Previously Paid: applicable. Party: applicable. Form or Registration Not Not No.: applicable. Date Filed: applicable.
- -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- (CONTINUED ON FOLLOWING PAGE(S)) (Page 1 of 7 Pages) SCHEDULE 14D-1 CUSIP NO. 168757201 Page 2 of 7 Pages - -------------------------------------------------------------------------------- (1) Name of Reporting Persons: Knowledge Beginnings, Inc. I.R.S. Identification No. of above person (Entities Only): 95-4672767 - -------------------------------------------------------------------------------- (2) Check the appropriate box if a member of a group (See instructions): (a) / / (b) / / - -------------------------------------------------------------------------------- (3) SEC Use Only - -------------------------------------------------------------------------------- (4) Source of funds (See instructions): WC - -------------------------------------------------------------------------------- (5) Check box if disclosure of legal proceedings is required pursuant to Items 2(e) or 2(f): /X/ - -------------------------------------------------------------------------------- (6) Citizenship or place of organization: Delaware - -------------------------------------------------------------------------------- (7) Aggregate amount beneficially owned by each reporting person: 0 - -------------------------------------------------------------------------------- (8) Check box if the aggregate amount in row (7) excludes certain shares (See instructions): / / - -------------------------------------------------------------------------------- (9) Percent of class represented to amount in row (7): 0% - -------------------------------------------------------------------------------- (10) Type of reporting person (See instructions): CO - -------------------------------------------------------------------------------- SCHEDULE 14D-1 CUSIP NO. 168757201 Page 3 of 7 Pages - -------------------------------------------------------------------------------- (1) Name of Reporting Persons: KBI Acquisition Corp. I.R.S. Identification No. of above person (Entities Only): 95-4679455 - -------------------------------------------------------------------------------- (2) Check the appropriate box if a member of a group (See instructions): (a) / / (b) / / - -------------------------------------------------------------------------------- (3) SEC Use Only - -------------------------------------------------------------------------------- (4) Source of funds (See instructions): AF - -------------------------------------------------------------------------------- (5) Check box if disclosure of legal proceedings is required pursuant to Items 2(e) or 2(f): /X/ - -------------------------------------------------------------------------------- (6) Citizenship or place of organization: Delaware - -------------------------------------------------------------------------------- (7) Aggregate amount beneficially owned by each reporting person: 0 - -------------------------------------------------------------------------------- (8) Check box if the aggregate amount in row (7) excludes certain shares (See instructions): / / - -------------------------------------------------------------------------------- (9) Percent of class represented to amount in row (7): 0% - -------------------------------------------------------------------------------- (10) Type of reporting person (See instructions): CO - -------------------------------------------------------------------------------- TENDER OFFER This Tender Offer Statement on Schedule 14D-1 (this "Schedule 14D-1") relates to a tender offer by KBI Acquisition Corp., a Delaware corporation ("Purchaser") and a wholly owned subsidiary of Knowledge Beginnings, Inc., a Delaware corporation ("Parent"), to purchase any and all outstanding shares of common stock, par value $.01 per share, of Children's Discovery Centers of America, Inc., a Delaware corporation (the "Company"), for a purchase price of $12.25 per share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer to Purchase dated April 3, 1998 (the "Offer to Purchase") and in the related Letter of Transmittal (the "Letter of Transmittal" and together with the Offer to Purchase, as amended and supplemented from time to time, the "Offer"), and is intended to satisfy the reporting requirements of Section 14(d) of the Securities Exchange Act of 1934, as amended. Copies of the Offer to Purchase and the related Letter of Transmittal are filed with this Schedule 14D-1 as Exhibits (a)(1) and (a)(2) hereto, respectively. ITEM 1. SECURITY AND SUBJECT COMPANY. (a) The name of the subject company is Children's Discovery Centers of America, Inc., a Delaware corporation, which has its principal executive and operating offices at 851 Irwin Street, Suite 200, San Rafael, California 94901. (b) The title of the securities which are the subject of the Offer is the Company's common stock, par value $.01 per share (the "Shares"), and the Offer is for any and all outstanding Shares at a price of $12.25 per Share, net to the seller in cash, without interest thereon. The information set forth in the "Introduction" to the Offer to Purchase is incorporated herein by reference. (c) The information set forth in Section 6 of the Offer to Purchase is incorporated herein by reference. ITEM 2. IDENTITY AND BACKGROUND. (a)-(d) and (g) This Schedule 14D-1 is being filed jointly by Purchaser and Parent. The information set forth in the "Introduction" to the Offer to Purchase, in Section 9 of the Offer to Purchase and in Annex I to the Offer to Purchase is incorporated herein by reference. (e)-(f) The information set forth in Annex I to the Offer to Purchase is incorporated herein by reference. ITEM 3. PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS WITH THE SUBJECT COMPANY. (a)-(b) The information set forth in the "Introduction" to the Offer to Purchase and in Sections 9, 11, 12 and 13 of the Offer to Purchase is incorporated herein by reference. ITEM 4. SOURCE AND AMOUNT OF FUNDS OR OTHER CONSIDERATION. (a)-(c) The information set forth in Section 10 of the Offer to Purchase is incorporated herein by reference. ITEM 5. PURPOSE OF THE TENDER OFFER AND PLANS OR PROPOSALS OF THE BIDDER. (a)-(g) The information set forth in the "Introduction" to the Offer to Purchase and in Sections 7, 12 and 13 of the Offer to Purchase is incorporated herein by reference. ITEM 6. INTEREST IN SECURITIES OF THE SUBJECT COMPANY. The information set forth in the "Introduction" to the Offer to Purchase and in Sections 9 and 13 of the Offer to Purchase is incorporated herein by reference. ITEM 7. CONTRACTS, ARRANGEMENTS, UNDERSTANDINGS OR RELATIONSHIPS WITH RESPECT TO THE SUBJECT COMPANY'S SECURITIES. The information set forth in the "Introduction" to the Offer to Purchase and in Sections 9 and 13 of the Offer to Purchase is incorporated herein by reference. ITEM 8. PERSONS RETAINED, EMPLOYED OR TO BE COMPENSATED. The information set forth in the "Introduction" to the Offer to Purchase and in Section 17 of the Offer to Purchase is incorporated herein by reference. ITEM 9. FINANCIAL STATEMENTS OF CERTAIN BIDDERS. Not applicable. ITEM 10. ADDITIONAL INFORMATION. (a) The information set forth in Sections 7, 11, 12 and 13 of the Offer to Purchase is incorporated herein by reference. (b)-(c) The information set forth in Section 16 of the Offer to Purchase is incorporated herein by reference. (d) The information set forth in Sections 7 and 16 of the Offer to Purchase is incorporated herein by reference. (e) Not applicable. (f) The information set forth in the entire Offer to Purchase and the Letter of Transmittal, copies of which are filed with this Schedule 14D-1 as Exhibits (a)(1) and (a)(2), respectively, is incorporated herein by reference. ITEM 11. MATERIAL TO BE FILED AS EXHIBITS. (a)(1) Offer to Purchase. (a)(2) Letter of Transmittal. (a)(3) Notice of Guaranteed Delivery. (a)(4) Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. (a)(5) Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. (a)(6) Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. (a)(7) Text of Press Release jointly issued by Parent, Purchaser and the Company dated March 30, 1998. (a)(8) Summary Advertisement dated April 3, 1998. (b)(1) Promissory Note dated April 2, 1998 by Parent in favor of Knowledge University Holdings, L.L.C. (c)(1) Agreement and Plan of Merger by and among Parent, Purchaser and the Company, dated as of March 27, 1998. (c)(2) Option and Support Agreement by and among Parent, the Company and certain stockholders of the Company, dated as of March 27, 1998. (c)(3) Employment Agreement by and between Parent and Elanna S. Yalow, dated as of March 27, 1998. (d) Not applicable. (e) Not applicable. (f) Not applicable. SIGNATURE After due inquiry and to the best of our knowledge and belief, we certify that the information set forth in this statement is true, complete and correct. Dated: April 3, 1998 KBI ACQUISITION CORP. By: /s/ RONALD J. PACKARD -------------------------------------- Name: Ronald J. Packard Title: Treasurer and Secretary KNOWLEDGE BEGINNINGS, INC. By: /s/ RONALD J. PACKARD -------------------------------------- Name: Ronald J. Packard Title: Treasurer and Secretary
EXHIBIT INDEX
EXHIBIT NUMBER DESCRIPTION - --------- -------------------------------------------------------------------------------------------------------- (a)(1) Offer to Purchase. (a)(2) Letter of Transmittal. (a)(3) Notice of Guaranteed Delivery. (a)(4) Letter to Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. (a)(5) Letter to Clients for use by Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees. (a)(6) Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9. (a)(7) Text of Press Release jointly issued by Parent, Purchaser and the Company dated March 30, 1998. (a)(8) Summary Advertisement dated April 3, 1998. (b)(1) Promissory Note dated April 2, 1998 by Parent in favor of Knowledge University Holdings, L.L.C. (c)(1) Agreement and Plan of Merger by and among Parent, Purchaser and the Company, dated as of March 27, 1998. (c)(2) Option and Support Agreement by and among Parent, the Company and certain stockholders of the Company, dated as of March 27, 1998. (c)(3) Employment Agreement by and between Parent and Elanna S. Yalow, dated as of March 27, 1998. (d) Not applicable. (e) Not applicable. (f) Not applicable.
EX-99.A1 2 EXHIBIT 99-A1 OFFER TO PURCHASE FOR CASH ANY AND ALL OUTSTANDING SHARES OF COMMON STOCK OF CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AT $12.25 NET PER SHARE BY KBI ACQUISITION CORP. A WHOLLY OWNED SUBSIDIARY OF KNOWLEDGE BEGINNINGS, INC. - ---------------------------------------------------------------- THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON FRIDAY, MAY 1, 1998, UNLESS THE OFFER IS EXTENDED. - -------------------------------------------------------------------------------- THE OFFER IS BEING MADE PURSUANT TO AN AGREEMENT AND PLAN OF MERGER, DATED AS OF MARCH 27, 1998, BY AND AMONG KNOWLEDGE BEGINNINGS, INC. ("PARENT"), KBI ACQUISITION CORP. ("PURCHASER") AND CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. (THE "COMPANY"). THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, (1) THERE HAVING BEEN VALIDLY TENDERED PURSUANT TO THE OFFER, AND NOT VALIDLY WITHDRAWN, A MINIMUM OF A MAJORITY OF THE SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE (THE "SHARES"), OF THE COMPANY (DETERMINED ON A FULLY DILUTED BASIS), (2) THE EXPIRATION OR TERMINATION OF ANY APPLICABLE WAITING PERIOD UNDER THE HART-SCOTT-RODINO ANTITRUST IMPROVEMENTS ACT OF 1976, AS AMENDED, AND THE PASSAGE OF CERTAIN STATUTORY WAITING PERIODS RELATING TO THE COMPANY'S OPERATING LICENSES, (3) CERTAIN ANCILLARY AGREEMENTS AND INSTRUMENTS HAVING BEEN OBTAINED BY THE COMPANY AND PARENT, AND (4) THE SATISFACTION OF CERTAIN OTHER TERMS AND CONDITIONS. SEE SECTION 15 OF THIS OFFER TO PURCHASE. THE BOARD OF DIRECTORS OF THE COMPANY HAS, BY A VOTE OF ALL DIRECTORS AT A MEETING DULY CALLED AND HELD, UNANIMOUSLY (1) DETERMINED THAT EACH OF THE OFFER AND THE MERGER IS FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY'S STOCKHOLDERS, (2) APPROVED AND ADOPTED THE MERGER AGREEMENT AND THE OPTION AND SUPPORT AGREEMENT (EACH AS DEFINED HEREIN) AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE OFFER AND THE MERGER (EACH AS DEFINED HEREIN), (3) RECOMMENDED THAT THE COMPANY'S STOCKHOLDERS ACCEPT THE OFFER AND TENDER THEIR SHARES PURSUANT TO THE OFFER, AND (4) TAKEN ALL ACTION NECESSARY TO RENDER SECTION 203 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE AND OTHER STATE TAKEOVER STATUTES INAPPLICABLE TO THE OFFER, THE MERGER AND THE OPTION AND SUPPORT AGREEMENT. THE COMPANY HAS GRANTED PARENT AN IRREVOCABLE OPTION TO PURCHASE NEWLY ISSUED SHARES REPRESENTING UP TO 19.9% OF THE OUTSTANDING SHARES PURSUANT TO AND UPON THE TERMS SET FORTH IN THE OPTION AND SUPPORT AGREEMENT. IN ADDITION, PURSUANT TO THE OPTION AND SUPPORT AGREEMENT, CERTAIN STOCKHOLDERS OF THE COMPANY (THE "SELLING STOCKHOLDERS"), OWNING IN THE AGGREGATE APPROXIMATELY 20.2% OF THE OUTSTANDING SHARES, HAVE AGREED TO TENDER AND SELL ALL OF THEIR SHARES TO PURCHASER PURSUANT TO THE OFFER AND HAVE GRANTED TO PARENT AN IRREVOCABLE OPTION TO PURCHASE ALL OF SUCH SELLING STOCKHOLDERS' SHARES UPON THE TERMS SET FORTH IN THE OPTION AND SUPPORT AGREEMENT. SEE SECTION 13 OF THIS OFFER TO PURCHASE. IMPORTANT Any stockholder desiring to tender all or a portion of such stockholder's Shares should either (i) complete and sign the Letter of Transmittal or a facsimile thereof in accordance with the instructions set forth in the Letter of Transmittal, have such stockholder's signature thereon guaranteed if required by Instruction 1 to the Letter of Transmittal, and mail or deliver the Letter of Transmittal together with the certificate(s) representing tendered Shares and all other required documents to IBJ Schroder Bank & Trust Company, the Depositary for the Offer, or tender such Shares pursuant to the procedure for book-entry transfer set forth in Section 3 of this Offer to Purchase or (ii) request such stockholder's broker, dealer, commercial bank, trust company or other nominee to effect the transaction for such stockholder. Stockholders having Shares registered in the name of a broker, dealer, commercial bank, trust company or other nominee must contact such person or entity if they desire to tender their Shares. Any stockholder who desires to tender Shares and whose certificates representing such Shares are not immediately available, or who cannot comply with the procedures for book-entry transfer on a timely basis, may tender such Shares pursuant to the guaranteed delivery procedure set forth in Section 3 of this Offer to Purchase. Questions and requests for assistance may be directed to the Information Agent or to Donaldson, Lufkin & Jenrette Securities Corporation ("DLJ"), as Dealer Manager (the "Dealer Manager"), at their respective addresses and telephone numbers set forth on the back cover of this Offer to Purchase. Additional copies of this Offer to Purchase, the Letter of Transmittal, the Notice of Guaranteed Delivery and other related materials may be obtained from the Information Agent or from brokers, dealers, commercial banks and trust companies. THE DEALER MANAGER FOR THE OFFER IS: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION APRIL 3, 1998 TABLE OF CONTENTS INTRODUCTION................................................................................ 1 1. Terms of the Offer............................................................... 3 2. Acceptance for Payment and Payment for Shares.................................... 5 3. Procedure for Tendering Shares................................................... 6 4. Withdrawal Rights................................................................ 8 5. Certain United States Federal Income Tax Consequences............................ 9 6. Price Range of Shares; Dividends................................................. 11 7. Certain Effects of the Transaction............................................... 11 8. Certain Information Concerning the Company....................................... 13 9. Certain Information Concerning Parent and Purchaser.............................. 15 10. Source and Amount of Funds....................................................... 16 Background of the Offer; Past Contacts, Transactions or Negotiations with the 11. Company........................................................................ 16 12. Purpose of the Offer and the Merger; Plans for the Company....................... 19 13. Merger Agreement and Option and Support Agreement................................ 21 14. Dividends and Distributions...................................................... 34 15. Certain Conditions of the Offer.................................................. 34 16. Certain Regulatory and Legal Matters............................................. 36 17. Fees and Expenses................................................................ 39 18. Miscellaneous.................................................................... 40 ANNEX I-- Certain Information Concerning Certain Entities and Certain of their Directors and Executive Officers ANNEX II-- Section 262 of the General Corporation Law of the State of Delaware
i To the Holders of Common Stock of Children's Discovery Centers of America, Inc.: INTRODUCTION KBI Acquisition Corp., a Delaware corporation ("Purchaser") and a wholly owned subsidiary of Knowledge Beginnings, Inc., a Delaware corporation ("Parent"), hereby offers to purchase any and all outstanding shares of common stock, par value $.01 per share (the "Shares"), of Children's Discovery Centers of America, Inc., a Delaware corporation (the "Company"), at a purchase price of $12.25 per Share (the "Offer Price"), net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in this Offer to Purchase and in the related Letter of Transmittal (which, as amended and supplemented from time to time, together constitute the "Offer"). THE BOARD OF DIRECTORS OF THE COMPANY (THE "COMPANY BOARD") HAS, BY A VOTE OF ALL DIRECTORS AT A MEETING DULY CALLED AND HELD, UNANIMOUSLY (I) DETERMINED THAT EACH OF THE OFFER AND THE MERGER (AS HEREINAFTER DEFINED) IS FAIR TO, AND IN THE BEST INTERESTS OF, THE COMPANY'S STOCKHOLDERS, (II) APPROVED AND ADOPTED THE MERGER AGREEMENT (AS HEREINAFTER DEFINED) AND THE OPTION AND SUPPORT AGREEMENT (AS HEREINAFTER DEFINED) AND THE TRANSACTIONS CONTEMPLATED THEREBY, INCLUDING THE OFFER AND THE MERGER, (III) RECOMMENDED THAT THE COMPANY'S STOCKHOLDERS ACCEPT THE OFFER AND TENDER THEIR SHARES PURSUANT TO THE OFFER, AND (IV) TAKEN ALL ACTION NECESSARY TO RENDER SECTION 203 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE (THE "DGCL") AND OTHER STATE TAKEOVER STATUTES INAPPLICABLE TO THE OFFER, THE MERGER AND THE OPTION AND SUPPORT AGREEMENT. The Offer is conditioned upon, among other things, (i) there having been validly tendered pursuant to the Offer, and not validly withdrawn, a minimum of a majority of the Shares (determined on a fully diluted basis) (the "Minimum Condition"), (ii) the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the "HSR Act"), and the passage of certain statutory waiting periods relating to the Company's operating licenses, (iii) certain ancillary agreements and instruments having been obtained by the Company and Parent, and (iv) the satisfaction of certain other terms and conditions. See Section 15 of this Offer to Purchase. In order to induce Parent and Purchaser to enter into the Merger Agreement, the Company has granted Parent an irrevocable option to purchase, under certain conditions, newly issued Shares representing up to 19.9% of the outstanding Shares pursuant to and upon the terms set forth in an Option and Support Agreement dated March 27, 1998 (the "Option and Support Agreement") by and among the Company, Parent and each of Proactive Partners, L.P., Fremont Proactive Partners, L.P. and Lagunitas Partners, L.P. (collectively, the "Selling Stockholders"). In addition, pursuant to the Option and Support Agreement, the Selling Stockholders, owning in the aggregate approximately 20.2% of the issued and outstanding Shares, have agreed to tender and sell all of their Shares to Purchaser pursuant to the Offer and have granted Parent an irrevocable option to purchase, under certain conditions, all of the Shares owned by such Selling Stockholders upon the terms set forth in the Option and Support Agreement. See Section 13 of this Offer to Purchase. Advest, Inc. ("Advest") has delivered to the Company Board its opinion that, as of the date of such opinion, the consideration to be received by the stockholders of the Company in the Offer and the Merger is fair to the Company and its stockholders from a financial point of view. A copy of such opinion is contained in the Company's Solicitation/Recommendation Statement on Schedule 14D-9 (the "Company's Schedule 14D-9") which is being distributed to the Company's stockholders. Stockholders are urged to read the written opinion of Advest, dated March 18, 1998 in its entirety and the discussion thereof in the Company's Schedule 14D-9, which sets forth the procedures followed, assumptions and qualifications made, matters considered and limitations of the review undertaken by Advest in connection with the opinion. The Offer is being made pursuant to an Agreement and Plan of Merger, dated as of March 27, 1998 (the "Merger Agreement"), by and among Parent, Purchaser and the Company. The Merger Agreement provides that, among other things, as soon as practicable after the purchase of Shares pursuant to the Offer and the satisfaction or waiver of the conditions set forth in the Merger Agreement and in accordance with the relevant provisions of the DGCL, Purchaser (or such other subsidiary of Parent as described below) will be merged with the Company (the "Merger"). See Section 13 of this Offer to Purchase. Following consummation of the Merger, the surviving corporation in the Merger (the "Surviving Corporation") will be a wholly owned subsidiary of Parent. Pursuant to the Merger Agreement, at Parent's election, the Merger may be structured (i) as a merger of Purchaser and the Company, with either as the Surviving Corporation, (ii) such that any direct or indirect subsidiary of Parent is merged with and into the Company, with the Company as the Surviving Corporation, or (iii) such that the Company is merged with and into any such other subsidiary, with such other subsidiary as the Surviving Corporation. At the effective time of the Merger (the "Effective Time"), by virtue of the Merger and without any action on the part of the Company, Purchaser or the Surviving Corporation, each issued and outstanding Share (other than Shares owned by the Company, Parent, Purchaser or any direct or indirect wholly owned subsidiary of the Company, Parent or Purchaser, or Shares with respect to which appraisal rights are properly exercised under the DGCL) will be converted into and represent the right to receive $12.25 (or such other price that may be paid for each Share pursuant to the Offer, if amended) in cash, without interest thereon (the "Merger Consideration"). As of the Effective Time, all such converted Shares shall no longer be outstanding and will automatically be canceled and retired and will cease to exist, and each holder of a certificate representing any such Shares will, to the extent such certificate represents such Shares, cease to have any rights with respect thereto, except the right to receive the Merger Consideration in cash in consideration therefor upon surrender of such certificate. Pursuant to the Merger Agreement, no Shares held by the Company or any of its wholly owned subsidiaries will be tendered in the Offer. All Shares that are owned by the Company, Parent, Purchaser or any direct or indirect wholly owned subsidiary of the Company, Parent or Purchaser immediately prior to the Effective Time will be canceled and retired at the Effective Time, and no consideration will be delivered in exchange therefor. See Section 5 of this Offer to Purchase for a description of certain tax consequences of the Offer and the Merger and Section 13 of this Offer to Purchase with respect to the Merger Agreement. The Company has advised Parent and Purchaser that, as of March 27, 1998, (i) 6,744,499 Shares were validly issued and outstanding, fully paid and non-assessable and no Shares were held in the Company's treasury; (ii) no shares of preferred stock were issued and outstanding; and (iii) 928,565 Shares were reserved for issuance upon the exercise of outstanding options (the "Options") granted under the Company's stock option plans or otherwise. As of the date hereof, neither Parent nor Purchaser beneficially owns any Shares. Based on the foregoing and the expected tender of 1,363,700 Shares by the Selling Stockholders pursuant to the Option and Support Agreement, the Minimum Condition will be satisfied if 2,472,833 other Shares are validly tendered, and not validly withdrawn, prior to the Expiration Date. The number of Shares required to be validly tendered (and not validly withdrawn) in order to satisfy the Minimum Condition will increase to the extent additional Shares are deemed to be outstanding on a fully diluted basis under the Merger Agreement. For purposes of the Merger Agreement, "on a fully diluted basis" means, as of any date, the number of Shares outstanding, together with Shares issuable upon exercise of outstanding Options. Upon the satisfaction of the Minimum Condition, Purchaser will have the ability to acquire and control a majority of the outstanding Shares and will thus be able to approve the Merger without the vote of any other stockholder. In the event Purchaser acquires 90% or more of the outstanding Shares through the Offer or otherwise, Purchaser and Parent would be able to effect the Merger pursuant to the "short-form" merger provisions of the DGCL, without prior notice to, or any action by, any other stockholder of the Company. See Section 12 of this Offer to Purchase. Purchaser is not offering to acquire outstanding Options in the Offer. Pursuant to the Merger Agreement, the Company Board will, prior to the consummation of the Offer, cause all Options to become exercisable immediately prior to the Effective Time, subject to the consummation of the Merger. Further, prior to the consummation of the Offer, the Company will offer (the "Option Offer") to pay, subject to the consummation of the Merger, each holder of Options an amount equal to the aggregate Merger Consideration into which Shares issuable upon exercise of such holder's Options would have been 2 converted if such Options had been exercised immediately prior to the Effective Time reduced by (i) the aggregate exercise price for the Shares then issuable upon exercise of such Options, (ii) the amount of any withholding taxes which may be required thereon, and (iii) the amount of all outstanding loans, if any, from the Company to such holder, in return for the cancellation of such Options. In accordance with the Merger Agreement, the Option Offer must be accepted, if at all, irrevocably by the holders of Options prior to the consummation of the Offer and must provide that holders of Options subject to the Option Offer agree not to exercise such Options after accepting the Option Offer. It is a condition to the Offer that all holders of Options shall have irrevocably agreed to cancel such Options in return for the payment of consideration pursuant to the Option Offer. See Section 15 of this Offer to Purchase. THIS OFFER TO PURCHASE AND RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT INFORMATION WHICH SHOULD BE READ BEFORE ANY DECISION IS MADE WITH RESPECT TO THE OFFER. 1. TERMS OF THE OFFER Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any extension or amendment), Purchaser will accept for payment and pay for all Shares validly tendered prior to the Expiration Date, and not theretofore withdrawn in accordance with Section 4 of this Offer to Purchase, as soon as legally permitted and practicable after the commencement of the Offer. The term "Expiration Date" means 12:00 Midnight, New York City time, on Friday, May 1, 1998, unless Purchaser shall have extended the period of time for which the Offer is open, in which event the term "Expiration Date" shall mean the latest time and date as of which the Offer, as so extended by Purchaser, shall expire. UNDER NO CIRCUMSTANCES WILL ANY INTEREST BE PAID ON THE OFFER PRICE FOR TENDERED SHARES, REGARDLESS OF ANY EXTENSION OF THE OFFER OR ANY DELAY IN MAKING SUCH PAYMENT. THE OFFER IS CONDITIONED UPON, AMONG OTHER THINGS, SATISFACTION OF THE MINIMUM CONDITION. SEE SECTIONS 13 AND 15 OF THIS OFFER TO PURCHASE. THE OFFER IS ALSO SUBJECT TO OTHER TERMS AND CONDITIONS, INCLUDING THE EXPIRATION OR TERMINATION OF ANY APPLICABLE WAITING PERIOD UNDER THE HSR ACT, THE PASSAGE OF CERTAIN STATUTORY WAITING PERIODS RELATING TO THE COMPANY'S OPERATING LICENSES AND THE COMPANY AND PARENT HAVING OBTAINED CERTAIN ANCILLARY AGREEMENTS AND INSTRUMENTS. SEE SECTIONS 15 AND 16 OF THIS OFFER TO PURCHASE. Subject to the terms and conditions set forth in the Merger Agreement (including the right to terminate, extend or modify the Offer), and subject to the other conditions set forth in Section 15 of this Offer to Purchase, including, without limitation, the Minimum Condition, Purchaser will use its reasonable best efforts to consummate the Offer as soon as legally permissible in accordance with the Merger Agreement. Subject to the terms of the Merger Agreement and the applicable rules and regulations of the United States Securities and Exchange Commission (the "Commission"), Purchaser expressly reserves the right to modify the terms of the Offer, including, without limitation, to extend the period of time during which the Offer is open beyond the scheduled Expiration Date (including an extension of up to 20 business days beyond the initial scheduled Expiration Date notwithstanding the satisfaction of the conditions set forth in Section 15 of this Offer to Purchase), and thereby delay acceptance for payment of and the payment for any Shares, by giving oral or written notice of such extension to IBJ Schroder Bank and Trust Company, as Depositary (the "Depositary"). Notwithstanding the foregoing, the Minimum Condition may not be waived without the written consent of the Company. In addition, pursuant to the terms of the Merger Agreement, Purchaser may not, without the written consent of the Company, amend the Offer to decrease the Offer Price, decrease the number of Shares being sought in the Offer, change the form of consideration payable in the Offer or impose conditions to the Offer in addition to the conditions described in the Merger Agreement and in Section 15 of this Offer to Purchase. 3 Subject to the applicable rules and regulations of the Commission and notwithstanding any other provisions of the Offer or the Merger Agreement, Purchaser shall not be required to accept for payment or pay for any Shares tendered pursuant to the Offer and may terminate, withdraw or amend the Offer and may postpone acceptance of, and payment for, Shares, upon the occurrence of any of the conditions set forth in Section 15 of this Offer to Purchase, by giving oral or written notice of such delay or termination to the Depositary. Purchaser's right to delay payment for any Shares or not to pay for any Shares theretofore accepted for payment is subject to the applicable rules and regulations of the Commission, including Rule 14e-1(c) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), relating to Purchaser's obligation to pay for or return tendered Shares promptly after the termination or withdrawal of the Offer. If by 12:00 Midnight, New York City time, on Friday, May 1, 1998 (or any other date or time then set as the Expiration Date), any or all conditions to the Offer have not been satisfied or waived, Purchaser reserves the right (but shall not be obligated), subject to the terms and conditions contained in the Merger Agreement and to the applicable rules and regulations of the Commission, to (i) terminate the Offer and not accept for payment any Shares and return all tendered Shares to tendering stockholders, (ii) waive all the unsatisfied conditions to the Offer (other than the Minimum Condition, which may not be waived without the Company's consent) and, subject to complying with the terms of the Merger Agreement and the applicable rules and regulations of the Commission, accept for payment and pay for all Shares validly tendered prior to the Expiration Date and not theretofore withdrawn, (iii) extend the Offer and, subject to the right of stockholders to withdraw Shares until the Expiration Date, retain the Shares that have been tendered during the period or periods for which the Offer is extended, or (iv) amend the Offer. There can be no assurance that Purchaser will exercise its right to extend the Offer (including the right to extend the Offer pursuant to the Merger Agreement for up to 20 business days beyond the initial scheduled Expiration Date notwithstanding the satisfaction of the conditions set forth in Section 15 of this Offer to Purchase). See Section 15 of this Offer to Purchase. Any extension of the period during which the Offer is open, delay in acceptance for payment or payment, termination or amendment of the Offer will be followed, as promptly as practicable, by public announcement thereof, such announcement, in the case of an extension, to be issued not later than 9:00 a.m., New York City time, on the next business day after the previously scheduled Expiration Date in accordance with the public announcement requirements of Rules 14d-4(c), 14d-6(d) and 14e-1 under the Exchange Act (which, among other things, require that any material change in the information published, sent or given to stockholders in connection with the Offer be promptly disseminated to stockholders in a manner reasonably designed to inform stockholders of such change). Without limiting the obligations of Purchaser under such rules or the manner in which Purchaser may choose to make any public announcement, Purchaser currently intends to make announcements by issuing a press release to the Dow Jones News Service and making any appropriate filing with the Commission. As used in this Offer to Purchase, "business day" has the meaning set forth in Rule 14d-1 of the Exchange Act. If Purchaser makes a material change in the terms of the Offer or the information concerning the Offer, or if it waives a material condition of the Offer, Purchaser will disseminate additional tender offer materials and extend the Offer if and to the extent required by Rules 14d-4(c), 14d-6(d) and 14e-1 under the Exchange Act or otherwise. The minimum period during which a tender offer must remain open following material changes in the terms thereof or the information concerning such tender offer, other than a change in price or a change in percentage of securities sought, will depend upon the facts and circumstances, including the relative materiality of the terms or information changes. With respect to a change in price or a change in percentage of securities sought, a minimum ten business day period is generally required to allow for adequate dissemination to stockholders and investor response. The Company has provided Purchaser with the Company's list of stockholders and security position listings for the purpose of disseminating the Offer to holders of Shares. This Offer to Purchase and the Letter of Transmittal will be mailed to record holders of Shares and will be furnished to brokers, dealers, commercial banks, trust companies and similar persons whose names, or the names of whose nominees, 4 appear on the list of stockholders or, if applicable, who are listed as participants in a clearing agency's security position listing for subsequent transmittal to beneficial owners of Shares. Parent and Purchaser have been advised that each of the directors on the Company Board intend to tender all Shares beneficially owned or owned of record by such directors pursuant to the Offer. 2. ACCEPTANCE FOR PAYMENT AND PAYMENT FOR SHARES Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), Purchaser will accept for payment and will pay for, all Shares validly tendered prior to the Expiration Date, and not theretofore withdrawn in accordance with Section 4 of this Offer to Purchase, promptly after the later to occur of (a) the Expiration Date and (b) subject to compliance with the applicable rules and regulations of the Commission, including Rule 14e-1(c) under the Exchange Act, the satisfaction or waiver of the conditions set forth in Section 15 of this Offer to Purchase. Subject to such compliance, Purchaser expressly reserves the right to delay payment for Shares in order to comply in whole or in part with any applicable law, including the satisfaction of the statutory requirements with respect to the Pennsylvania Waiting Period (as defined in paragraph (c) of Section 15 of this Offer to Purchase). In all cases, payment for Shares accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of (i) certificates for such Shares or timely confirmation (a "Book-Entry Confirmation") of a book-entry transfer of such Shares into the Depositary's account at The Depository Trust Company (hereinafter referred to as the "Book-Entry Transfer Facility"), pursuant to the procedures set forth in Section 3 of this Offer to Purchase, (ii) a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof) with all required signature guarantees or, in the case of a book-entry transfer, an Agent's Message and (iii) any other documents required by the Letter of Transmittal. The term "Agent's Message" means a message transmitted by the Book-Entry Transfer Facility to, and received by, the Depositary and forming a part of a Book-Entry Confirmation, which states that such Book-Entry Transfer Facility has received an express acknowledgment from the participant in such Book-Entry Transfer Facility tendering the Shares that are the subject of the Book-Entry Confirmation that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and that Purchaser may enforce such agreement against the participant. See Section 3 of this Offer to Purchase. For purposes of the Offer, Purchaser will be deemed to have accepted for payment, and thereby purchased, Shares validly tendered, and not validly withdrawn, as, if and when Purchaser gives oral or written notice to the Depositary of Purchaser's acceptance of such Shares for payment. In all cases, payment for Shares purchased pursuant to the Offer will be made by deposit of the purchase price with the Depositary, which will act as agent for tendering stockholders for the purpose of receiving payment from Purchaser and transmitting such payment to tendering stockholders. Upon the deposit of funds with the Depositary for the purpose of making payments to tendering stockholders, Purchaser's obligation to make such payment shall be satisfied, and tendering stockholders must thereafter look solely to the Depositary for payment of amounts owed to them by reason of the acceptance for payment of Shares pursuant to the Offer. If, for any reason whatsoever, acceptance for payment of any Shares tendered pursuant to the Offer is delayed, or Purchaser is unable to accept for payment Shares tendered pursuant to the Offer, then, without prejudice to Purchaser's rights under this Offer to Purchase, the Depositary may nevertheless, on behalf of Purchaser, retain tendered Shares, and, subject to compliance with the applicable rules and regulations of the Commission, including Rule 14e-1(c) under the Exchange Act, such Shares may not be withdrawn, except to the extent that the tendering stockholders are entitled to withdrawal rights as described in Section 4 of this Offer to Purchase. UNDER NO CIRCUMSTANCES WILL INTEREST BE PAID BY PURCHASER, REGARDLESS OF ANY EXTENSION OF THE OFFER OR ANY DELAY IN MAKING SUCH PAYMENT. If any tendered Shares are not accepted for payment pursuant to the terms and conditions of the Offer for any reason, or if certificates are submitted representing more Shares than are tendered, certificates representing such unpurchased or untendered Shares will be returned, without expense to the 5 tendering stockholder (or, in the case of Shares delivered by book-entry transfer to the Book-Entry Transfer Facility, such Shares will be credited to an account maintained within such Book-Entry Transfer Facility), as promptly as practicable after the expiration, termination or withdrawal of the Offer. If, prior to the Expiration Date, Purchaser increases the price being paid for Shares accepted for payment pursuant to the Offer, such increased consideration will be paid to all stockholders whose Shares are purchased pursuant to the Offer. Purchaser reserves the right to transfer or assign, in whole or from time to time in part, to one or more of its affiliates the right to purchase Shares tendered pursuant to the Offer, but any such transfer or assignment will not relieve Purchaser of its obligations under the Offer or prejudice the rights of tendering stockholders to receive payment for Shares validly tendered and accepted for payment. 3. PROCEDURE FOR TENDERING SHARES VALID TENDERS. For Shares to be validly tendered pursuant to the Offer, a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof), with any required signature guarantees, or, in the case of a book-entry transfer, an Agent's Message, and any other required documents, must be received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase prior to the Expiration Date, or the tendering stockholder must comply with the guaranteed delivery procedures set forth below. In addition, either (i) certificates representing such Shares must be received by the Depositary along with the Letter of Transmittal or such Shares must be tendered pursuant to the procedure for book-entry transfer set forth below, and a Book-Entry Confirmation must be received by the Depositary, in each case prior to the Expiration Date or (ii) the guaranteed delivery procedure set forth below must be complied with. No alternative, conditional or contingent tenders will be accepted. DELIVERY OF DOCUMENTS TO THE BOOK-ENTRY TRANSFER FACILITY IN ACCORDANCE WITH SUCH BOOK-ENTRY TRANSFER FACILITY'S PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE DEPOSITARY. BOOK-ENTRY TRANSFER. The Depositary will make a request to establish an account with respect to the Shares at the Book-Entry Transfer Facility for purposes of the Offer within two business days after the date of this Offer to Purchase. Any financial institution that is a participant in the Book-Entry Transfer Facility's system may make book-entry delivery of Shares by causing the Book-Entry Transfer Facility to transfer such Shares into the Depositary's account at the Book-Entry Transfer Facility in accordance with such Book-Entry Transfer Facility's procedures for transfer. Although delivery of Shares may be effected through book-entry at the Book-Entry Transfer Facility prior to the Expiration Date, (i) the Letter of Transmittal (or a manually signed facsimile thereof), properly completed and duly executed, with any required signature guarantees, or an Agent's Message in connection with a book-entry transfer, and any other required documents, must, in any case, be transmitted to and received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase prior to the Expiration Date or (ii) the guaranteed delivery procedure described below must be complied with. SIGNATURE GUARANTEE. Signatures on the Letter of Transmittal must be guaranteed by a member in good standing of the Securities Transfer Agents Medallion Program, or by any other bank, broker, dealer, credit union, savings association or other entity which is an "eligible guarantor institution," as such term is defined in Rule 17Ad-15 under the Exchange Act (each of the foregoing being referred to as an "Eligible Institution" and, collectively, as "Eligible Institutions"), unless the Shares tendered thereby are tendered (i) by a registered holder of Shares who has not completed either the box labeled "Special Delivery Instructions" or the box labeled "Special Payment Instructions" on the Letter of Transmittal or (ii) for the account of any Eligible Institution. If the certificates evidencing Shares are registered in the name of a person or persons other than the signer of the Letter of Transmittal, or if payment is to be made, or delivered to, or certificates for unpurchased Shares are to be issued or returned to, a person other than the registered owner or owners, then the tendered certificates must be endorsed or accompanied by duly executed stock powers, in either case signed exactly as the name or names of the registered owner or 6 owners appear on the certificates, with the signatures on the certificates or stock powers guaranteed by an Eligible Institution as provided in the Letter of Transmittal. See Instructions 1 and 5 to the Letter of Transmittal. GUARANTEED DELIVERY. If a stockholder desires to tender Shares pursuant to the Offer and such stockholder's certificates for Shares are not immediately available or time will not permit all required documents to reach the Depositary prior to the Expiration Date or the procedure for book-entry transfer cannot be completed on a timely basis, such Shares may nevertheless be tendered if all of the following guaranteed delivery procedures are duly complied with: (i) the tender is made by or through an Eligible Institution; (ii) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form provided by Purchaser herewith, is received by the Depositary, as provided below, prior to the Expiration Date; and (iii) the certificates for all tendered Shares, in proper form for transfer (or a Book-Entry Confirmation), together with a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof), and any required signature guarantees, or, in the case of a book- entry transfer, an Agent's Message, and any other documents required by the Letter of Transmittal are received by the Depositary within three Nasdaq National Market ("NNM") trading days after the date of execution of such Notice of Guaranteed Delivery. A "trading day" is any day on which NNM is open for business. The Notice of Guaranteed Delivery may be delivered by hand or transmitted by telegram, facsimile transmission or mail to the Depositary and must include a guarantee by an Eligible Institution in the form set forth in the Notice of Guaranteed Delivery. THE METHOD OF DELIVERY OF SHARES, THE LETTER OF TRANSMITTAL AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH THE BOOK-ENTRY TRANSFER FACILITY, IS AT THE OPTION AND RISK OF THE STOCKHOLDER TENDERING SUCH SHARES. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. Notwithstanding any other provision hereof, payment for Shares accepted for payment pursuant to the Offer will in all cases be made only after timely receipt by the Depositary of (i) certificates for such Shares or a Book-Entry Confirmation, (ii) a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof), with all required signature guarantees, or, in the case of a book-entry transfer, an Agent's Message and (iii) any other documents required by the Letter of Transmittal. BACKUP FEDERAL INCOME TAX WITHHOLDING. To prevent backup federal income tax withholding with respect to the payment of the Offer Price for Shares purchased pursuant to the Offer, each tendering stockholder must generally provide the Depositary with his or her correct taxpayer identification number ("TIN") and certify that such stockholder is not subject to backup federal income tax withholding by completing the Substitute Form W-9 included in the Letter of Transmittal. See Section 5 of this Offer to Purchase and Instruction 8 to the Letter of Transmittal. If the stockholder is a nonresident alien or foreign entity not subject to back-up withholding, the stockholder must give the Depositary a completed Form W-8 Certificate of Foreign Status prior to receipt of any payments. DETERMINATION OF VALIDITY. All questions as to the form of documents and the validity, eligibility (including time of receipt) and acceptance for payment of any tender of Shares will be determined by Purchaser, in its sole discretion, and its determination will be final and binding on all parties. Purchaser reserves the absolute right to reject any or all tenders of any Shares that are determined by it not to be in proper form or the acceptance of or payment for which may, in the opinion of Purchaser, be unlawful. Purchaser also reserves the absolute right to waive any of the conditions of the Offer, or any defect or irregularity in the tender of any Shares. Purchaser's interpretation of the terms and conditions of the Offer 7 (including the Letter of Transmittal and the Instructions to the Letter of Transmittal) will be final and binding on all parties. No tender of Shares will be deemed to have been validly made until all defects and irregularities have been cured or waived. None of Purchaser, Parent, the Dealer Manager, the Depositary, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in tenders or incur any liability for failure to give any such notification. APPOINTMENT. By executing the Letter of Transmittal as set forth above (including through delivery of an Agent's Message), a tendering stockholder irrevocably appoints designees of Purchaser as such stockholder's attorneys-in-fact and proxies, each with full power of substitution, in the manner set forth in the Letter of Transmittal, to the full extent of such stockholder's right with respect to the Shares tendered by such stockholder and accepted for payment by Purchaser (and any and all other Shares or other securities or rights issued or issuable in respect of such Shares on or after March 27, 1998). All such powers of attorney and proxies shall be considered coupled with an interest in the tendered Shares. This appointment is effective upon the acceptance for payment of the Shares by Purchaser. Upon acceptance for payment, all prior powers of attorney and proxies given by the stockholder with respect to such Shares or other securities or rights will, without further action, be revoked and no subsequent proxies may be given or written consent executed (and, if given or executed, will not be deemed effective). The designees of Purchaser will, with respect to the Shares and other securities or rights, be empowered to exercise all voting and other rights of such stockholder as they in their sole judgment deem proper in respect of any annual or special meeting of the Company's stockholders, any adjournment or postponement thereof, actions by written consent in lieu of such meeting or otherwise. Purchaser reserves the right to require that, in order for Shares to be deemed validly tendered, immediately upon Purchaser's acceptance for payment of such Shares, Purchaser must be able to exercise full voting, consent and other rights with respect to such Shares and the other securities or rights issued or issuable in respect of such Shares, including voting at any meeting of stockholders (whether annual or special or whether or not adjourned) or acting by written consent without a meeting in respect of such Shares. A tender of Shares pursuant to any one of the procedures described above will constitute the tendering stockholder's acceptance of the terms and conditions of the Offer, as well as the tendering stockholder's representation and warranty that (i) such stockholder has the full power and authority to tender, sell, assign and transfer the tendered Shares (and any and all other Shares or other securities issued or issuable in respect of such Shares on or after March 27, 1998), and (ii) when the same are accepted for payment by Purchaser, Purchaser will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claims. Purchaser's acceptance for payment of Shares tendered pursuant to the Offer will constitute a binding agreement between the tendering stockholder and Purchaser upon the terms and subject to the conditions of the Offer. 4. WITHDRAWAL RIGHTS Except as otherwise provided in this section, tenders of Shares made pursuant to the Offer are irrevocable. Shares tendered pursuant to the Offer may be withdrawn at any time prior to the Expiration Date and, unless theretofore accepted for payment pursuant to the Offer, may also be withdrawn at any time after June 1, 1998. If purchase of or payment for Shares is delayed for any reason or if Purchaser is unable to purchase or pay for Shares for any reason, then, without prejudice to Purchaser's rights under the Offer, tendered Shares may be retained by the Depositary on behalf of Purchaser and may not be withdrawn except to the extent that tendering stockholders are entitled to withdrawal rights as set forth in this section, subject to Rule 14e-1(c) under the Exchange Act which provides that no person who makes a tender offer shall fail to pay the consideration offered or return the securities deposited by or on behalf of security holders promptly after the termination or withdrawal of the Offer. 8 For a withdrawal to be effective, a written, telegraphic, telex or facsimile transmission notice of withdrawal must be timely received by the Depositary at one of its addresses set forth on the back cover of this Offer to Purchase. Any notice of withdrawal must specify the name of the person who tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the name in which the certificates representing such Shares are registered, if different from that of the person who tendered the Shares. If certificates for Shares to be withdrawn have been delivered or otherwise identified to the Depositary, then, prior to the physical release of such certificates, the serial numbers shown on such certificates must be submitted to the Depositary and, unless such Shares have been tendered by an Eligible Institution, the signatures on the notice of withdrawal must be guaranteed by an Eligible Institution. If Shares have been tendered pursuant to the procedure for book-entry transfer set forth in Section 3 of this Offer to Purchase, any notice of withdrawal must also specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Shares. All questions as to the form and validity (including time of receipt) of notices of withdrawal will be determined by Purchaser, in its sole discretion, and its determination will be final and binding on all parties. None of Purchaser, Parent, the Dealer Manager, the Depositary, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in any notice of withdrawal or incur any liability for failure to give any such notification. Any Shares properly withdrawn will be deemed not validly tendered for purposes of the Offer, but may be retendered at any subsequent time prior to the Expiration Date by following any of the procedures described in Section 3 of this Offer to Purchase. 5. CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES The following is a summary of the principal federal income tax consequences of the Offer and the Merger to holders whose Shares are purchased pursuant to the Offer or whose Shares are converted to cash in the Merger (including pursuant to the exercise of appraisal rights). This summary does not, however, purport to be a complete analysis of all the potential tax effects of the Offer and the Merger. This summary is based on current provisions of the Internal Revenue Code of 1986, as amended (the "Code"), currently applicable Treasury regulations and judicial and administrative decisions and rulings. There can be no assurance that the Internal Revenue Service (the "IRS") will not take a contrary view, and no ruling from the IRS has been or will be sought. Legislative, judicial or administrative changes may be forthcoming that could alter or modify the statements and conclusions set forth herein. Any such changes or interpretations could be retroactive and could affect the tax consequences to holders whose Shares are purchased pursuant to the Offer. This discussion does not purport to deal with all aspects of United States federal income taxation that may affect any particular holder in light of such holder's individual circumstances, and is not intended for certain types of holders subject to special treatment under the United States federal income tax law (e.g., holders of Shares in whose hands Shares are not capital assets, holders who received their Shares pursuant to the exercise of employee stock options or otherwise as compensation, financial institutions, broker-dealers, insurance companies, tax-exempt organizations, non-United States persons or persons who hold their Shares as part of a hedge, straddle or conversion transaction). EACH HOLDER OF SHARES SHOULD CONSULT SUCH HOLDER'S OWN TAX ADVISOR TO DETERMINE THE APPLICABILITY OF THE RULES DISCUSSED BELOW TO SUCH HOLDER AND THE PARTICULAR TAX EFFECTS OF THE OFFER AND THE MERGER, INCLUDING THE APPLICATION AND EFFECT OF STATE, LOCAL, FOREIGN AND OTHER INCOME TAX LAWS. GAIN OR LOSS. The receipt of cash for Shares pursuant to the Offer or the Merger (including pursuant to the exercise of appraisal rights) will be a taxable transaction for federal income tax purposes. In general, a holder of Shares will recognize gain or loss equal to the difference between his or her adjusted tax basis in the Shares sold pursuant to the Offer or converted to cash in the Merger and the amount of cash received therefor. Gain or loss should generally be determined separately for each block of Shares (i.e., Shares acquired at the same cost in a single transaction) sold pursuant to the Offer or converted to 9 cash in the Merger. Such gain or loss generally will be capital gain or loss provided the Shares are a capital asset in the hands of the stockholders and will be long-term capital gain or loss if, on the date of sale (or, if applicable, the date of the Merger), the Shares were held for more than 12 months. The maximum capital gains tax rate currently applicable to noncorporate taxpayers is equal to 20% for Shares held more than 18 months at the time of disposition and is equal to 28% for Shares held more than 12 months but not more than 18 months. Corporate taxpayers are subject to a 35% capital gains tax rate. If a holder exercises such holder's appraisal rights and receives an amount treated as interest for federal income tax purposes, such amount will be taxed as ordinary income. BACKUP FEDERAL INCOME TAX WITHHOLDING. Payments in connection with the Offer or the Merger may be subject to "backup withholding" at a rate of 31%. Backup withholding generally applies if the holder (a) fails to furnish such holder's TIN, (b) furnishes an incorrect TIN, (c) is subject to backup withholding due to previous failures to file a federal income tax return including reportable interest or dividend payments, or (d) under certain circumstances, fails to provide a certified statement, signed under penalties of perjury, that such holder is not subject to backup withholding due to previous failures to file a federal income tax return including reportable interest or dividend payments. Backup withholding is not an additional tax, rather it is an advance tax payment that is subject to refund if, and to the extent that, it results in an overpayment of tax. Certain taxpayers are generally exempt from backup withholding, including corporations and financial institutions. Certain penalties apply for failure to furnish correct information and for failure to include reportable payments in income. Each holder of Shares should consult with his or her own tax advisor as to his or her qualification for exemption from backup withholding and the procedure for obtaining such exemption. Tendering holders of Shares may be able to prevent backup withholding by completing the Substitute Form W-9 included in the Letter of Transmittal. See Section 3 of this Offer to Purchase and Instruction 8 to the Letter of Transmittal. QUALIFIED SMALL BUSINESS STOCK. The Company has advised Purchaser that it believes that Shares issued by it on December 17, 1993 may constitute "qualified small business stock" under the Code. Qualified small business stock is generally stock issued after August 10, 1993 that is acquired by certain taxpayers at its original issue (directly or through an underwriter) from a corporation that is a "qualified small business" at the time of such issuance. Qualified small business stock retains its character after certain transfers, including gifts or transfers by reason of death. In addition, certain look-through rules apply for taxpayers holding qualified small business stock through a partnership, regulated investment company or certain other pass-through entities. Gain with respect to qualified small business stock held by non-corporate taxpayers may be eligible for a fifty percent exclusion from gross income (in addition to certain favorable capital gains rates generally permitted) if held for more than five years. In addition, such gain may generally be deferred by an electing individual that has directly held such stock for more than six months if the amount realized on the sale thereof is used to purchase other qualified small business stock within 60 days of such sale (but gain will have to be recognized to the extent that such sales proceeds are not so reinvested). Gain on Shares constituting qualified small business stock tendered pursuant to the Offer or converted to cash in the Merger likely will not be eligible for the fifty percent gross income exclusion, but may be eligible for deferral. If an individual elects to defer the recognition of gain on the sale of Shares, such individual will have to reduce such individual's basis in the other qualified small business stock acquired by the amount of such deferred gain, and the holding period of the acquired stock will include such individual's holding period of the Shares. EACH NON-CORPORATE HOLDER OF SHARES ACQUIRED ON ORIGINAL ISSUANCE ON DECEMBER 17, 1993 AND CERTAIN SUBSEQUENT HOLDERS THEREOF SHOULD CONSULT THEIR OWN TAX ADVISORS AS TO THE TAX CONSEQUENCES OF SELLING SUCH SHARES. 10 6. PRICE RANGE OF SHARES; DIVIDENDS The Shares are listed and trade on NNM under the symbol "CDCR." The following table sets forth for the quarterly fiscal periods ended March 31, June 30, September 30 and December 31 the high and low sales prices per Share as reported by NNM.
HIGH LOW --------- --------- 1996: First Quarter............................................................. $ 5.75 $ 4.00 Second Quarter............................................................ 8.63 4.63 Third Quarter............................................................. 7.00 5.00 Fourth Quarter............................................................ 8.13 4.75 1997: First Quarter............................................................. $ 7.00 $ 4.88 Second Quarter............................................................ 7.50 4.63 Third Quarter............................................................. 8.00 6.38 Fourth Quarter............................................................ 9.88 7.13 1998: First Quarter............................................................. $ 12.50 $ 9.13 Second Quarter through April 2, 1998...................................... 12.06 12.00
On March 27, 1998, the last full trading day prior to the date of the public announcement of the Merger Agreement, the last sales price per Share was $10.13. HOLDERS OF SHARES ARE URGED TO OBTAIN CURRENT MARKET QUOTATIONS FOR THE SHARES. The Company has publicly stated it has not paid, and does not intend to pay, any cash dividends on the Shares. See Section 14 of this Offer to Purchase. 7. CERTAIN EFFECTS OF THE TRANSACTION BOARD OF DIRECTORS OF THE COMPANY. The Merger Agreement requires the Company to use commercially reasonable efforts to obtain the resignation of each director on the Company Board, other than Dr. Elanna S. Yalow, prior to the consummation of the Offer, which resignations are to be effective immediately following the consummation of the Offer. See Section 13 of this Offer to Purchase. Pursuant to the Merger Agreement, promptly upon acceptance for payment and payment for Shares pursuant to the Offer, and from time to time thereafter, the Company and the Company Board shall, upon the request of Parent, promptly take all action, subject to compliance with applicable law, necessary to cause to be elected as directors of the Company a number of directors designated by Parent equal to the product, rounded up to the next whole number, of the total number of directors on the Company Board (giving effect to the directors so elected) multiplied by the percentage that the number of Shares accepted for payment and paid for by Purchaser bears to the number of Shares outstanding. The Company is further required to use its reasonable best efforts to cause Parent's designees to be so elected, including by accepting the resignations of certain incumbent directors or increasing the size of the Company Board and causing Parent's designees to be elected. Purchaser and Parent intend to take such steps as are necessary in accordance with the Merger Agreement to assure that Parent's designees constitute a majority or more of the directors on the Company Board immediately following the consummation of the Offer. EFFECT UPON THE SHARES. The purchase of the Shares by Purchaser pursuant to the Offer will reduce the number of Shares that might otherwise trade publicly and will reduce the number of holders of Shares, which could adversely affect the liquidity and market value of the remaining Shares held by holders of Shares other than Purchaser. According to the Company's Annual Report on Form 10-K for the fiscal year ended December 31, 1997 (the "Company's 10-K"), as of March 21, 1998 there were approximately 307 holders of record of the Shares. 11 Depending upon the number of Shares purchased pursuant to the Offer and the aggregate market value of any Shares not purchased pursuant to the Offer, the Shares may no longer meet the standards for continued listing on NNM and may be delisted from NNM. The published guidelines of NNM indicate that NNM would consider delisting the Shares if, among other things, either (i) the number of round lot holders of Shares should fall below 400, the number of publicly held Shares should fall below 750,000, the aggregate market value of the publicly held Shares should fall below $5,000,000, the minimum bid price for Shares should fall below $1 per Share, the net tangible assets of the Company should fall below $4,000,000 or there should be less than two registered and active market makers providing quotations for the Shares, or, alternatively, (ii) the market capitalization of the Company (or the Company's total assets and total revenue, respectively) should fall below $50,000,000, the number of round lot holders of Shares should fall below 400, the number of publicly held Shares should fall below 1,100,000, the aggregate market value of the publicly held Shares should fall below $15,000,000, the minimum bid price for Shares should fall below $5 per Share or there should be less than four registered and active market makers providing quotations for the Shares. If neither of the foregoing standards are met, the Shares would no longer be admitted to quotation on NNM. To the extent the Shares are delisted from NNM, the market for Shares could be adversely affected. If NNM were to delist the Shares, it is possible that the Shares would continue to trade in the over-the-counter market and that price quotations for the Shares would be reported by other sources. The extent of the public market for the Shares and the availability of such quotations would, however, depend on the number of holders of Shares remaining at such time, the interest in maintaining a market in the Shares on the part of securities firms, the possible termination of registration of the Shares under the Exchange Act (as described below) and other factors. Purchaser cannot predict whether the reduction in the number of Shares that might otherwise trade publicly, if any, effected by the Offer would have an adverse or beneficial effect on the market price for or marketability of the Shares or whether it would cause future market prices to be greater or less than the Offer Price. The Shares are currently registered under the Exchange Act. Such registration may be terminated upon application by the Company to the Commission if there are fewer than 300 holders of record of Shares. It is the intention of Purchaser to seek to cause an application for such termination to be made as soon after consummation of the Offer as the requirements for termination of registration of the Shares are met. If such registration were terminated, the Company would no longer legally be required to disclose publicly in proxy materials distributed to stockholders the information which it now must provide under the Exchange Act or to make public disclosure of financial and other information in annual, quarterly and other reports required to be filed with the Commission under the Exchange Act, and the executive officers and directors of the Company and beneficial owners of more than 10% of the Shares would no longer be subject to the "short-swing" insider trading reporting and profit recovery provisions of the Exchange Act. Furthermore, if such registration were terminated, "affiliates" of the Company and persons holding "restricted securities" of the Company may be deprived of their ability to dispose of such securities under Rule 144 or 144A promulgated under the Securities Act of 1933, as amended. If registration of the Shares is not terminated and the Shares are not delisted prior to the Merger, then the Shares will cease to be listed on NNM and the registration of the Shares under the Exchange Act will be terminated following the Merger. MARGIN REGULATIONS. The Shares are currently "margin securities" as such term is defined under the regulations of the Board of Governors of the Federal Reserve System (the "Federal Reserve Board"), which has the effect, among other things, of allowing brokers to extend credit on the collateral of such securities. Depending upon factors similar to those described above with respect to listing and market quotations, it is possible that, following the Offer, the Shares would no longer constitute "margin securities" for purposes of the margin regulations of the Federal Reserve Board, in which event such Shares could no longer be used as collateral for loans made by brokers. 12 8. CERTAIN INFORMATION CONCERNING THE COMPANY EXCEPT AS OTHERWISE SET FORTH HEREIN, THE INFORMATION CONCERNING THE COMPANY CONTAINED IN THIS OFFER TO PURCHASE, INCLUDING FINANCIAL INFORMATION, HAS BEEN FURNISHED BY THE COMPANY OR HAS BEEN TAKEN FROM OR BASED UPON PUBLICLY AVAILABLE DOCUMENTS AND RECORDS ON FILE WITH THE COMMISSION AND OTHER PUBLIC SOURCES. ALTHOUGH NONE OF PARENT, PURCHASER OR THE DEALER MANAGER HAS ANY KNOWLEDGE THAT WOULD INDICATE THAT STATEMENTS CONTAINED HEREIN BASED UPON SUCH DOCUMENTS ARE UNTRUE, NONE OF PARENT, PURCHASER OR THE DEALER MANAGER ASSUMES ANY RESPONSIBILITY FOR THE ACCURACY OR COMPLETENESS OF THE INFORMATION CONCERNING THE COMPANY, FURNISHED BY THE COMPANY OR CONTAINED IN SUCH DOCUMENTS AND RECORDS OR FOR ANY FAILURE BY THE COMPANY TO DISCLOSE EVENTS WHICH MAY HAVE OCCURRED OR MAY AFFECT THE SIGNIFICANCE OR ACCURACY OF ANY SUCH INFORMATION BUT WHICH ARE UNKNOWN TO PARENT, PURCHASER OR THE DEALER MANAGER. According to the Company's 10-K, the Company is a leading chain of preschools in the United States providing educational services for children of both preschool and elementary school age. As of December 31, 1997, the Company operated 248 preschools in 22 states and the District of Columbia with an aggregate licensed capacity of approximately 25,000 children. The Company provides programs to children primarily between 2 1/2 and six years of age as well as after school programs for school age children and infant care. The Company's school age programs include private academic programs for children in kindergarten through eighth grade, before and after school programs and summer camps. Set forth below is certain summary consolidated financial data with respect to the Company excerpted or derived in part from financial information contained in the Company's 10-K. More comprehensive financial information is included in such reports and other documents filed by the Company with the Commission. For the periods covered by such reports, the following summary is qualified in its entirety by reference to such reports and such other documents and all the financial information (including any related notes) contained therein. Such reports and other documents should be available for inspection and copies thereof should be obtainable in the manner set forth below. CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA (THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED DECEMBER 31, -------------------- 1997 1996 --------- --------- INCOME STATEMENT DATA: Revenue from Operations............................................................... $ 93,015 $ 87,480 Operating Expenses.................................................................... 88,530 85,037 Income from Operations................................................................ 4,485 2,443 Other Income (Expense)................................................................ (885) (1,317) Income Before Income Taxes............................................................ 3,600 1,126 Provision for Income Taxes............................................................ 1,100 225 Net Income............................................................................ $ 2,500 $ 901 --------- --------- --------- --------- PER SHARE DATA: Net Income per Share.................................................................. $ 0.37 $ 0.14
AT DECEMBER 31, -------------------- 1997 1996 --------- --------- BALANCE SHEET DATA: Total Assets.......................................................................... $ 77,740 $ 75,335 Total Liabilities..................................................................... 24,911 25,048 Stockholders' Equity.................................................................. 52,829 50,287
13 The Company is subject to the informational requirements of the Exchange Act and in accordance therewith files periodic reports, proxy statements and other information with the Commission relating to its business, financial condition and other matters. The Company is required to disclose in such proxy statements certain information, as of particular dates, concerning the Company's directors and officers, their remuneration, stock options granted to them, the principal holders of the Company's securities and any material interests of such persons in transactions with the Company. Such reports, proxy statements and other information may be inspected at the public reference facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the Commission located at Seven World Trade Center, 13th Floor, New York, New York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400, Chicago, Illinois 60601. The Commission also maintains a web site on the Internet at http://www.sec.gov that contains reports and other information regarding registrants that file electronically with the Commission. PROJECTIONS. Parent has received certain non-public information from the Company (the "Projections"). The non-public information included certain financial projections for the fiscal year 1998, including income statement and balance sheet projections which are summarized below. The Projections do not take into account any of the potential effects of the transactions contemplated by the Offer and the Merger. CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. BUDGET 1998 (THOUSANDS, EXCEPT PER SHARE DATA)
FISCAL QUARTER ENDING YEAR ENDING --------------------------------------------------- ------------ MARCH 31, JUNE 30, SEPTEMBER 30, DECEMBER 31, DECEMBER 31, 1998 1998 1998 1998 1998 ----------- --------- ------------- ------------ ------------ INCOME STATEMENT: Revenue from Operations..................... $ 23,862 $ 26,120 $ 25,051 $ 26,155 $ 101,188 Operating Expenses.......................... 20,802 22,351 22,486 22,478 88,116 Income from Operations...................... 3,060 3,769 2,565 3,678 13,072 Other Income (Expense)...................... 1,880 1,990 2,088 2,173 8,131 Income Before Income Taxes.................. 1,180 1,780 476 1,505 4,941 Provision for Income Taxes.................. 389 587 157 496 1,630 Net Income.................................. $ 791 $ 1,193 $ 319 $ 1,008 $ 3,310 ----------- --------- ------------- ------------ ------------ ----------- --------- ------------- ------------ ------------ Net Income per Share........................ $ 0.11 $ 0.17 $ 0.04 $ 0.14 $ 0.46
AT JUNE 30, AT SEPTEMBER 30, AT DECEMBER 31, AT MARCH 31, 1998 1998 1998 1998 ----------------- --------------- -------------------- ------------------- BALANCE SHEET: Total Assets.................... $ 78,864 $ 81,217 $ 81,396 $ 83,569 Total Liabilities............... $ 25,257 $ 26,418 $ 26,278 $ 27,443 Stockholders' Equity............ $ 53,607 $ 54,799 $ 55,118 $ 56,126
THE PROJECTIONS SET FORTH ABOVE WERE NOT PREPARED BY PARENT OR PURCHASER OR WITH A VIEW TO PUBLIC DISCLOSURE OR COMPLIANCE WITH PUBLISHED GUIDELINES OF THE COMMISSION OR THE AMERICAN INSTITUTE OF CERTIFIED PUBLIC ACCOUNTANTS REGARDING PROSPECTIVE FINANCIAL INFORMATION. THE PROJECTIONS REFLECT NUMEROUS ASSUMPTIONS, ALL MADE BY MANAGEMENT OF THE COMPANY, WITH RESPECT TO INDUSTRY PERFORMANCE, GENERAL BUSINESS, ECONOMIC, MARKET AND FINANCIAL CONDITIONS AND OTHER MATTERS, ALL OF WHICH ARE DIFFICULT TO PREDICT, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL AND NONE OF WHICH WERE SUBJECT TO APPROVAL BY PARENT OR PURCHASER. ACCORDINGLY, THERE CAN BE NO ASSURANCE THAT 14 THE ASSUMPTIONS MADE IN PREPARING THE PROJECTIONS WILL PROVE ACCURATE, AND ACTUAL RESULTS MAY BE MATERIALLY GREATER OR LESS THAN THOSE CONTAINED IN THE PROJECTIONS. THE PROJECTIONS ARE INCLUDED HEREIN SOLELY BECAUSE SUCH INFORMATION WAS FURNISHED TO PARENT IN JANUARY 1998. ACCORDINGLY, THE INCLUSION OF THE PROJECTIONS IN THIS OFFER TO PURCHASE SHOULD NOT BE REGARDED AS AN INDICATION THAT PARENT, PURCHASER OR THE COMPANY OR THEIR RESPECTIVE FINANCIAL ADVISORS, OR THEIR RESPECTIVE OFFICERS AND DIRECTORS, CONSIDER SUCH INFORMATION TO BE ACCURATE, RELIABLE OR ACHIEVABLE, AND NONE OF SUCH PERSONS OR ENTITIES ASSUMES ANY RESPONSIBILITY FOR THE ACCURACY THEREOF. 9. CERTAIN INFORMATION CONCERNING PARENT AND PURCHASER Purchaser is a Delaware corporation formed for the purpose of acquiring the Company and is a wholly owned subsidiary of Parent. To date, Purchaser has not conducted any business other than incident to its formation and the commencement of the Offer. The principal executive offices of Purchaser are located at 844 Moraga Drive, Los Angeles, California 90049. Parent is a Delaware corporation whose principal business is to acquire interests in, and/or operate, other companies and businesses, primarily, but not limited to, companies and businesses engaged in education. The principal executive offices of Parent are located at 844 Moraga Drive, Los Angeles, California 90049. Annex I to this Offer to Purchase sets forth certain information with respect to the executive officers and directors of Purchaser, Parent and certain related entities and persons with interests therein and certain persons who may be deemed to control Purchaser, Parent and such related entities. Neither Purchaser nor Parent are subject to the informational requirements of the Exchange Act and accordingly are not required to, and do not, file periodic reports and other information with the Commission relating to their respective businesses, financial condition and other matters. At April 2, 1998, Parent had in excess of approximately $85,000,000 in cash and cash equivalent assets and had no liabilities other than certain fees and expenses incurred in connection with the Offer and its obligations under the Parent Note (as defined in Section 10 of this Offer to Purchase). See Sections 10 and 17 of this Offer to Purchase. Except as otherwise set forth in this Offer to Purchase, none of Parent or Purchaser, nor, to the best knowledge of Parent and Purchaser, any of the persons or entities listed in Annex I hereto owns or has any right to acquire any Shares and none of them has effected any transaction in the Shares during the past sixty days. Except as set forth in this Offer to Purchase, none of Parent or Purchaser, nor, to the best knowledge of Parent and Purchaser, any of the persons or entities listed in Annex I hereto has any contract, arrangement, understanding or relationship with any other person with respect to any securities of the Company, including, without limitation, any contract, arrangement, understanding or relationship concerning the transfer or the voting of any securities of the Company, joint ventures, loan or option arrangements, puts or calls, guaranties of loans, guaranties against loss or the giving or withholding of proxies. Except as set forth in this Offer to Purchase, none of Parent or Purchaser, nor, to the best knowledge of Parent and Purchaser, any of the persons or entities listed in Annex I hereto has had any transactions with the Company, or any of its executive officers, directors or affiliates that would require reporting under the rules of the Commission. Except as set forth in this Offer to Purchase, there have been no contacts, negotiations or transactions between any of Parent or Purchaser or their respective subsidiaries or, to the best knowledge of Parent and Purchaser, any of the persons or entities listed in Annex I hereto, on the one hand, and the Company or its executive officers, directors or affiliates, on the other hand, concerning a merger, consolidation or acquisition, tender offer or other acquisition of securities, election of directors or a sale or other transfer of a material amount of assets. 15 10. SOURCE AND AMOUNT OF FUNDS The total amount of funds required by Purchaser to purchase all of the Shares pursuant to the Offer is estimated to be approximately $83,000,000. Fees and expenses related to the Offer and the Merger payable by Purchaser are estimated not to exceed an additional $2,000,000. Purchaser will obtain all of the funds necessary to consummate the Offer and the Merger from Parent in the form of (i) a $50,000,000 capital contribution and (ii) a $35,000,000 loan to be evidenced by a promissory note accruing interest at 8% per annum and maturing on April 2, 1999 (the "Purchaser Note"). Parent will fund its capital contribution and the loan to Purchaser entirely from its unrestricted working capital reserves, which exceed $85,000,000. On April 2, 1998, Parent borrowed $35,000,000 from Knowledge University Holdings, L.L.C., a Delaware limited liability company ("Lender") and an affiliate of Parent, pursuant to a promissory note (the "Parent Note") in favor of Lender in the aggregate principal amount of $35,000,000. The entire principal amount of the Parent Note and all accrued and unpaid interest thereon will become due on April 2, 1999 and the Parent Note bears interest at a rate of 8% per annum. The Parent Note is unsecured. No person or entity listed on Annex I to this Offer to Purchase (other than Parent) will be obligated under the Parent Note, will guarantee the Parent Note or will otherwise support the repayment of funds advanced pursuant to the Parent Note. Although no definitive plans or arrangements for the repayment of funds advanced pursuant to the Parent Note or the Purchaser Note have been established, Purchaser anticipates the Purchaser Note will be repaid after the Effective Time with the proceeds of future bank financings. Parent intends to repay the Parent Note with the proceeds from the repayment of the Purchaser Note. Such decision will be made based on Parent's and Purchaser's review from time to time of the advisability of particular actions with respect to such repayment, as well as prevailing interest rates, financial and other economic conditions and such other factors as Parent and Purchaser may deem appropriate. The Offer is not subject to any financing contingency. None of the persons or entities listed in Annex I to this Offer to Purchase is obligated to fund, nor does any such person or entity intend to fund, any portion of the Offer or the Merger. 11. BACKGROUND OF THE OFFER; PAST CONTACTS, TRANSACTIONS OR NEGOTIATIONS WITH THE COMPANY BACKGROUND OF THE OFFER. On November 11, 1997, Ronald J. Packard, Treasurer and Secretary of each of Parent and Purchaser, met with Richard A. Niglio, Chairman and Chief Executive Officer of the Company in San Rafael, California to initiate discussions regarding a possible merger or other combination involving the Company, Preschool Education Co., L.L.C., a Delaware limited liability company ("PEC"), a subsidiary of Knowledge Universe, L.L.C., a Delaware limited liability company ("Knowledge Universe"), and the direct parent of Parent and Knowledge Universe. Subsequent to the November 11, 1997 meeting, representatives of PEC and Knowledge Universe contacted representatives of DLJ to discuss the prospect of a potential acquisition of the Company. During November and December 1997, representatives of the Company, PEC and Knowledge Unviverse and their respective financial advisors, including McGettigan, Wick & Co. ("McGettigan, Wick") and DLJ, respectively, engaged in discussions regarding the economic and other terms of a possible transaction involving the Company and PEC or an affiliate of PEC. On December 22, 1997, PEC and Knowledge Universe, acting through DLJ, made a non-binding proposal for the acquisition of the Company, subject to customary financial, legal, accounting and other due diligence. In early January 1998, PEC, Knowledge Universe and DLJ commenced a comprehensive business due diligence investigation of the Company and its financial affairs, including physical inspections of a number of the Company's school facilities. In late January 1998, the Company was informed by PEC that it would need to undertake accounting and legal due diligence before it could make a firm proposal, and that such due diligence would only be undertaken by PEC on an exclusive basis, with economic protection should the Company enter into an 16 alternative transaction during, or within a limited period of time following, the conduct of such due diligence. At the request of PEC, the Company and PEC entered into an interim agreement on February 5, 1998 pursuant to which the Company agreed not to pursue alternative transactions with third parties during a limited period of time to permit further due diligence. Pursuant to such interim agreement, the Company also granted PEC a one year option with contingent exercise rights on 300,000 Shares at $9.50 per Share and agreed to reimburse PEC for certain due diligence expenses under certain circumstances. On February 27, 1998, PEC advised the Company that it and its affiliates had completed the due diligence review of the Company and that Parent was prepared to offer to acquire the Company for cash at a price of $12.25 per Share, subject to execution of a definitive agreement. From late February 1998 through late March 1998, Parent and the Company negotiated the terms and conditions of the Merger Agreement, the Option and Support Agreement and related documents. On March 18, 1998, all directors on the Company Board and certain representatives of Advest participated in a telephonic meeting of the Company Board at which time the Company Board, among other things, approved and adopted the Offer and the Merger and recommended that the Company's stockholders accept the Offer and tender their Shares pursuant to the Offer. The parties executed the Merger Agreement on March 27, 1998 and delivered the signature pages thereto into escrow pending the delivery of certain ancillary documents, which were delivered to Parent on March 29, 1998. The execution of the Merger Agreement was publicly announced prior to the opening of the financial markets on March 30, 1998. CERTAIN BUSINESS RELATIONSHIPS BETWEEN PARENT AND CERTAIN EXECUTIVE OFFICERS AND DIRECTORS OF THE COMPANY. Concurrent with the execution of the Merger Agreement, Parent and Dr. Yalow entered into an Employment Agreement (the "Yalow Employment Agreement") providing for the employment of Dr. Yalow by Parent. The Yalow Employment Agreement is contingent upon the consummation of the Offer and will become effective upon a date designated by Parent, which date will be on or after the consummation of the Offer and on or prior to the Effective Time. The terms and conditions of the Yalow Employment Agreement, once effective, will supersede the terms and conditions of Dr. Yalow's employment with the Company. Pursuant to the Yalow Employment Agreement, Dr. Yalow is required to serve Parent and/or its subsidiaries or affiliates in such executive capacity, and agrees to hold such office(s), as the Board of Directors of Parent shall from time to time designate. In consideration for such services, Dr. Yalow will receive base compensation of $200,000 per year during the term of the Yalow Employment Agreement and will be eligible, in the sole discretion of Parent, each fiscal year for a bonus of up to 50% of such base compensation in accordance with Parent's bonus policy in effect from time to time, as well as certain other benefits set forth in the Yalow Employment Agreement. In addition, at such time as Parent or the Surviving Corporation adopts an employee equity participation program, Dr. Yalow will be eligible to participate in such program and will be granted rights in an amount, at a stated price, on a vesting schedule and subject to such other terms and conditions as shall be determined by the Board of Directors of Parent or its compensation committee, if applicable. In accordance with the Yalow Employment Agreement, 10,000 Options held by Dr. Yalow will be canceled as of the Effective Time and will be replaced with options, stock appreciation or other rights (with the same vesting schedule as such Options) at exercise prices that will result in Dr. Yalow realizing an economic benefit substantially similar to such canceled Options (provided that such economic benefit does not constitute an "excess parachute payment" under Section 280G of the Code). The Yalow Employment Agreement further provides that, during the term thereof, Dr. Yalow will not compete with Parent and that during her employment with Parent and for two years after the date of termination of such employment, Dr. Yalow will not, among other things, interfere with Parent's business relationships with its customers or suppliers, employees or independent contractors. The Yalow Employment Agreement also provides that during the term thereof and, depending on the circumstances under which the Yalow Employment Agreement terminates, for an additional period of up to two years after such termination, Dr. Yalow will not be engaged in, or own or control, or be associated with, any business that operates preschools or elementary schools anywhere in the world or, under certain circumstances, any competitive business that involves any form of early childhood or 17 elementary education or that otherwise competes with Parent anywhere in the world. Pursuant to the Yalow Employment Agreement, the term of Dr. Yalow's employment with Parent commences upon the effective date thereof and terminates 3 years thereafter. As an inducement to entering into the Merger Agreement, Parent requested that the Company enter into a Consulting Agreement (the "Consulting Agreement") with Mr. Niglio concurrent with the execution of the Merger Agreement. The Consulting Agreement is contingent upon the consummation of the Offer and will become effective upon a date designated by Parent, which date will be on or after the consummation of the Offer and on or prior to the Effective Time. Pursuant to the Consulting Agreement, among other things, Mr. Niglio agrees to resign, as of the effective date of the Consulting Agreement, as an employee and an officer of the Company and the Company agrees to engage Mr. Niglio as a consultant to the Company upon the terms and conditions set forth therein. In consideration for such consulting services, Mr. Niglio will receive a consulting fee equal to $350,000 per annum. Pursuant to the Consulting Agreement, Mr. Niglio's engagement as a consultant to the Company commences upon the effective date thereof and terminates 2 years thereafter and the entire consulting fee for such 2-year term (equal to $700,000) shall be paid to Mr. Niglio as of the effective date of the Consulting Agreement. The Consulting Agreement provides that, during the term thereof, Mr. Niglio will not engage in any other business activity which would interfere with the performance of his duties under the Consulting Agreement, including engaging in any business that, as more than an incidental part of its business, operates preschools or elementary schools (a "Competitive Business). In addition, for two years after the effective date of the Consulting Agreement, even if terminated, Mr. Niglio agrees that he will not interfere with the Company's business relationships with its customers or suppliers, employees or independent contractors, and will not be engaged in, or own or control, or be associated with, any Competitive Business anywhere in North America. The Consulting Agreement supersedes any previous employment, consulting or similar agreement between the Company and Mr. Niglio. In addition to the foregoing and in order to induce Parent to enter into the Merger Agreement, Parent further requested that the Company enter into employment agreements (the "Employment Agreements") with certain officers of the Company concurrent with the execution of the Merger Agreement. The Employment Agreements are contingent upon the consummation of the Offer and will become effective upon a date designated by Parent, which date will be on or after the consummation of the Offer and on or prior to the Effective Time. Except as set forth below, the Employment Agreements have identical terms and generally provide for the continued employment, as of the effective date, respectively, thereof, of Frank A. Devine, Randall J. Truelove and Jane A. Delaney, each an officer of the Company (such individuals, together with Dr. Yalow and Mr. Niglio, hereinafter referred to as the "Named Officers") in consideration for the payment of base compensation of $110,000 per annum, in the case of Messrs. Devine and Truelove, and $90,000 per annum, in the case of Ms. Delaney, as well as certain other benefits set forth in their respective Employment Agreements. In addition, each of Messrs. Devine and Truelove and Ms. Delaney will be eligible, at the sole discretion of the Company, in accordance with their respective Employment Agreements for a bonus of up to 30% of such Named Officer's base compensation in accordance with the Company's bonus policy in effect from time to time. At such time as the Company adopts an employee equity participation program, each of the foregoing Named Officers will be eligible to participate in such program and will be granted rights in an amount, at a stated price, on a vesting schedule and subject to such other terms and conditions as shall be determined by the Company Board or its compensation committee, if applicable. Each of the Employment Agreements provides that, during the term thereof, the Named Officer party thereto will not compete with the Company and that, during the term thereof and for two years from the date of termination thereof, such Named Officer will not interfere with the Company's business relationships with its customers or suppliers, employees or independent contractors. Each Employment Agreement also provides that, during the term thereof and for two years from the date of termination thereof, the Named Officer party thereto will not be engaged in, or own or control, or be associated with, any business that involves any form of early childhood or elementary education or that otherwise competes with the Company anywhere in the world, except that this provision 18 will not apply to Ms. Delaney after termination of employment if her Employment Agreement is terminated by the Company without cause. Each of the Employment Agreements provides for a term of employment equal to 2 years after the effective date, respectively, thereof. McGettigan, Wick has provided certain financial advisory services to the Company in connection with the Merger Agreement. Following the consummation of the Merger, Parent may retain McGettigan, Wick as financial advisor to the Surviving Corporation in connection with the disposition of certain non-material, non-core assets of the Company. 12. PURPOSE OF THE OFFER AND THE MERGER; PLANS FOR THE COMPANY PURPOSE. The Offer is being made pursuant to the Merger Agreement. The purpose of the Offer, the Merger and the Merger Agreement and the transactions contemplated thereby is to enable Parent to acquire control of, and to own the entire equity interest in, the Company. Upon consummation of the Merger, the Surviving Corporation will become a wholly owned subsidiary of Parent. Under the DGCL and the Company's Certificate of Incorporation, the approval of the Company Board, and the affirmative vote of the holders of a majority of the outstanding Shares are required to approve and adopt the Merger Agreement and the transactions contemplated thereby, including the Merger. Section 203 of the DGCL prevents certain "business combinations" with an "interested stockholder" (generally, any person who owns or has the right to acquire 15% or more of a corporation's outstanding voting stock) for a period of three years following the time such person became an interested stockholder unless, among other things, prior to the time the interested stockholder became such, the board of directors of the corporation approved either the business combination or the transaction in which the interested stockholder became such. The Company Board is comprised of seven members. The Company Board has unanimously approved the Offer, the Merger, the Merger Agreement and the Option and Support Agreement and the transactions contemplated thereby for the purposes of Section 203 of the DGCL, and has taken all action necessary to render Section 203 of the DGCL and other state takeover statutes inapplicable to the Offer, the Merger and the Option and Support Agreement. Unless the Merger is consummated pursuant to the "short-form" merger provisions under the DGCL described below (in which case no further corporate action by the stockholders of the Company will be required to complete the Merger), the only remaining required corporate action of the Company will be the approval of the Merger by the affirmative vote of the holders of a majority of the Shares. If the Minimum Condition is satisfied, Purchaser will have the ability to approve and adopt the Merger by virtue of its ownership of a majority of the Shares without the affirmative vote of any other stockholder of the Company. PLANS FOR THE COMPANY AFTER THE OFFER. Once the Offer is consummated, if permitted by NNM and the Exchange Act, it is the intention of Purchaser and Parent to seek to cause the Company to file applications to withdraw the Shares from listing on NNM and to terminate the registration of the Shares under the Exchange Act. See Section 7 of this Offer to Purchase. In the event that the Shares are no longer included for quotation on NNM, it is possible that the Shares would continue to trade in the over-the-counter market and that price quotations would be reported by other sources. The extent of the public market for the Shares and the availability of such quotations would, however, depend on the number of holders of Shares remaining at such time, the interest in maintaining a market in Shares on the part of securities firms, the possible termination of registration of the Shares under the Exchange Act (as described below) and other factors. To the extent the Shares are delisted from NNM, the market for Shares could be adversely affected. Further, neither Parent nor Purchaser can predict whether the reduction in the number of Shares that might otherwise trade publicly, if any, effected by the Offer would have an adverse or beneficial effect on the market price for or marketability of the Shares or whether it would cause future market prices to be greater or less than the Offer Price. See Section 7 of this Offer to Purchase. 19 If, following consummation of the Offer, Purchaser owns 90% or more of the outstanding Shares, Purchaser intends, and Parent intends to cause Purchaser, to consummate the Merger as a "short-form" merger pursuant to Section 253 of the DGCL. Under such circumstances, neither the approval of any holder of Shares (other than Purchaser) or of the Company Board would be required. Assuming all outstanding Options are exercised and tendered pursuant to the Offer, upon the tender of all Shares owned by the Selling Stockholders in accordance with the Option and Support Agreement, Purchaser will need to acquire an additional 4,706,350 Shares pursuant to the Offer to reach the 90% ownership level necessary to effect such a "short-form" merger under the DGCL. Pursuant to the terms of the Merger Agreement, promptly upon acceptance for payment and payment for Shares pursuant to the Offer, and from time to time thereafter, the Company and the Company Board shall, upon the request of Parent, promptly take all action, subject to compliance with applicable law, necessary to cause to be elected as directors of the Company a number of directors designated by Parent equal to the product, rounded up to the next whole number, of the total number of directors on the Company Board (giving effect to the directors so elected) multiplied by the percentage that the number of Shares so accepted for payment and paid for by Purchaser bears to the number of Shares outstanding. The Company is required to use its reasonable best efforts to cause Parent's designees to be so elected, including by accepting the resignations of certain incumbent directors or increasing the size of the Company Board and causing Parent's designees to be elected. In accordance with the Merger Agreement, the Company is required to use commercially reasonable efforts to obtain, prior to the consummation of the Offer, the resignation of each of the directors on the Company Board, other than Dr. Yalow, which resignations are to be effective immediately following consummation of the Offer. See Sections 11 and 13 of this Offer to Purchase. After completion or termination of the Offer, Purchaser reserves the right, but has no current intention, to acquire or sell Shares in open market or negotiated transactions. There can be no assurance that Purchaser will acquire such additional Shares in such circumstances or over what period of time such additional Shares, if any, might be acquired. As a consequence, no assurance can be given as to when Purchaser will cause the Merger to be consummated, and similarly no assurance can be given as to when the Merger Consideration will be paid to stockholders who do not tender their Shares in the Offer. Pursuant to the Merger, each then-outstanding Share (other than Shares owned by the Company, Parent or Purchaser or any direct or indirect wholly owned subsidiary of the Company, Parent or Purchaser and Shares owned by stockholders who perfect any available appraisal rights under the DGCL) shall be converted into the right to receive an amount in cash equal to the Merger Consideration, without interest thereon. All Shares that are owned by the Company, Parent, Purchaser or any direct or indirect wholly owned subsidiary of the Company, Parent or Purchaser at the Effective Time shall be canceled, and no consideration shall be delivered in exchange therefor. Purchaser is not offering to acquire outstanding Options in the Offer. Pursuant to the Merger Agreement, subject to the consummation of the Merger, in exchange for the payment, pursuant to the Option Offer, of an amount equal to the aggregate Merger Consideration into which Shares issuable upon exercise of Options would have been converted if such Options had been exercised immediately prior to the Effective Time reduced by (i) the aggregate exercise price for the Shares then issuable upon exercise of such Options, (ii) the amount of any withholding taxes which may be required thereon, and (iii) the amount of all outstanding loans, if any, from the Company to such holder, all Options shall be canceled. In accordance with the Merger Agreement, the Option Offer must be accepted, if at all, irrevocably by the holders of Options prior to the consummation of the Offer and must provide that holders of Options subject to the Option Offer agree not to exercise such Options after accepting the Option Offer. It is a condition to the Offer that all holders of Options shall have irrevocably agreed to cancel such Options in return for the payment of consideration pursuant to the Option Offer. See Section 15 of this Offer to Purchase. The Company is required, pursuant to the Merger Agreement, to take such action as may be necessary to make the Option Offer to each holder of Options and shall use its best efforts to obtain acceptances of the Option Offer from all such holders. 20 Following the Merger, the Surviving Corporation will be a wholly owned subsidiary of Parent. Pursuant to the Merger Agreement, the officers of the Company immediately prior to the Effective Time shall be the initial officers of the Surviving Corporation until their successors are duly elected and qualified, or their earlier death, resignation or removal. Concurrent with the execution of the Merger Agreement, Parent has entered into the Yalow Employment Agreement to provide, among other things, for the employment of Dr. Yalow by Parent commencing on the effective date thereof, and the Company has entered into the Consulting Agreement with Mr. Niglio to provide for the resignation of Mr. Niglio as an employee and an officer of the Company and his engagement as a consultant to the Company commencing as of the effective date thereof. See Sections 11 and 13 of this Offer to Purchase. In addition, the Company has, concurrent with the execution of the Merger Agreement, entered into the Employment Agreements with certain of the Named Officers. See Sections 11 and 13 of this Offer to Purchase. Pursuant to the Merger Agreement, the Company is required to obtain releases, in form and substance satisfactory to Parent, from each of the Named Officers and from McGettigan, Wick prior to the consummation of the Offer. Except as set forth herein with respect to the Named Officers, neither Parent nor Purchaser has discussed with the Company's key management personnel, nor reached any agreement with respect to, the terms of future employment. Except as otherwise described in this Offer to Purchase, Purchaser has no current plans or proposals which relate to or would result in: (a) an extraordinary corporate transaction, such as a merger, reorganization or liquidation involving the Company; (b) a sale or transfer of a material amount of assets of the Company; (c) any change in the Company Board or management of the Company, including, but not limited to, any plan or proposal to change the number or term of directors, to fill any existing vacancy on the Company Board or any change any material term of the employment contract of any executive officer; (d) any material change in the present dividend rate or policy or indebtedness or capitalization of the Company; (e) any other material change in the Company's corporate structure or business; (f) a class of equity securities of the Company becoming eligible for termination of registration pursuant to Section 12(g)(4) of the Exchange Act; or (g) the suspension of the Company's obligation to file reports pursuant to Section 15(d) of the Exchange Act. 13. MERGER AGREEMENT AND OPTION AND SUPPORT AGREEMENT The following is a summary of the material terms of the Merger Agreement and the Option and Support Agreement. Such summary is not a complete description of such agreements and is qualified in its entirety by reference to the complete texts of the agreements, copies of which are filed as exhibits to the Tender Offer Statement on Schedule 14D-1 filed with the Commission with respect to the Offer, and are incorporated herein by reference. Capitalized terms not otherwise defined herein shall have the meanings set forth in the applicable agreement. THE MERGER AGREEMENT THE OFFER. The Merger Agreement provides for the making of the Offer by Purchaser. The obligation of Purchaser to accept for payment and pay for Shares tendered pursuant to the Offer is subject to the satisfaction of the Minimum Condition and certain other conditions that are described in Section 15 of this Offer to Purchase. Purchaser has agreed that, without the written consent of the Company, it may not waive the Minimum Condition or amend the Offer to decrease the Offer Price, decrease the number of Shares being sought in the Offer, change the form of consideration to be paid in the Offer or impose additional conditions to the Offer. Purchaser may, without the consent of the Company, modify the terms of the Offer, including, without limitation, to extend the Offer beyond the scheduled Expiration Date (including an extension of up to 20 business days beyond the initial scheduled Expiration Date notwithstanding the satisfaction of the conditions set forth in Section 15 of this Offer to Purchase). Subject to the terms and conditions set forth in the Merger Agreement (including the right to terminate, extend or modify the Offer), and subject to the other conditions set forth in Section 15 of this Offer to Purchase, including, without limitation, the Minimum Condition, Purchaser will use its reasonable best efforts to 21 consummate the Offer as soon as legally permissible in accordance with the Merger Agreement. The conditions described in Section 15 of this Offer to Purchase are for the sole benefit of Purchaser and may be asserted by Purchaser regardless of the circumstances giving rise to any such condition or may be waived by Purchaser, in whole or in part, at any time and from time to time, in its sole discretion. The Merger Agreement provides that, subject to compliance with applicable law, promptly upon the acceptance for payment and payment by Purchaser of Shares purchased pursuant to the Offer, and from time to time thereafter, Purchaser shall be entitled to designate certain directors to the Company Board and the Company and the Company Board shall, at such time, take all actions necessary to cause Purchaser's designees to be so elected. See Sections 7 and 12 of this Offer to Purchase. THE MERGER. The Merger Agreement provides that, subject to the terms and conditions therein, and in accordance with the DGCL, at the Effective Time, Purchaser (or such other subsidiary of Parent as described below) will be merged with the Company, the separate corporate existence of Purchaser shall cease and the Surviving Corporation will be a wholly owned subsidiary of Parent. Pursuant to the Merger Agreement, at Parent's election, the Merger may be structured (i) as a merger of Purchaser and the Company, with either as the Surviving Corporation, (ii) such that any direct or indirect subsidiary of Parent is merged with and into the Company, with the Company as the Surviving Corporation, or (iii) such that the Company is merged with and into any such other subsidiary, with such other subsidiary as the Surviving Corporation. The Merger will become effective at such time as a Certificate of Merger or, if applicable, a Certificate of Ownership and Merger, is filed with the Secretary of State of the State of Delaware. As a result of the Merger, all of the properties, rights, privileges and franchises of the Company and Purchaser will vest in the Surviving Corporation, and all debts, liabilities and duties of the Company and Purchaser will become the debts, liabilities and duties of the Surviving Corporation. At the Effective Time, by virtue of the Merger and without any action on the part of the Company, Parent or Purchaser (i) all Shares that are owned by the Company, Parent, Purchaser or any direct or indirect wholly owned subsidiary of the Company, Parent or Purchaser will be canceled, and no consideration will be delivered in exchange therefor, (ii) each Share outstanding immediately prior to the Effective Time will, except as otherwise provided in (i) above and except for Shares held by stockholders exercising appraisal rights pursuant to Section 262 of the DGCL, be converted into the right to receive the Merger Consideration, and (iii) the Surviving Corporation will become a wholly owned subsidiary of Parent. The Merger Agreement provides that the Certificate of Incorporation and the Bylaws of Purchaser at the Effective Time will be the Certificate of Incorporation and Bylaws of the Surviving Corporation. The Merger Agreement also provides that at the Effective Time the directors of Purchaser in office immediately prior to the Effective Time will remain in office and will be the initial directors of the Surviving Corporation, and the officers of the Company immediately prior to the Effective Time will be the officers of the Surviving Corporation, in each case until their successors are duly elected and qualified, or their earlier death, resignation or removal. STOCK OPTIONS. In accordance with the Merger Agreement, the Company shall, prior to the consummation of the Offer, cause all Options to become exercisable immediately prior to the Effective Time, subject to the consummation of the Merger. The Company is required to make the Option Offer to each holder of Options prior to the consummation of the Offer and, if such Option Offer is accepted, the Company shall pay, subject to consummation of the Merger, each such holder an amount equal to the aggregate Merger Consideration into which Shares issuable upon exercise of such holder's Options would have been converted if such Options had been exercised immediately prior to the Effective Time reduced by (i) the aggregate exercise price for the Shares then issuable upon exercise of such Options, (ii) the amount of any withholding taxes which may be required thereon, and (iii) the amount of all outstanding loans, if any, from the Company to such holder, in return for the cancellation of such Options. Pursuant to the Merger Agreement, the Option Offer must be accepted, if at all, irrevocably by the holders of Options prior to the consummation of the Offer and must provide that holders of Options subject to the Option Offer agree not to exercise such Options after accepting the Option Offer. The Company is required, 22 pursuant to the Merger Agreement, to take such action as may be necessary to make the Option Offer to each holder of Options and shall use its best efforts to obtain acceptances of the Option Offer from all such holders. RECOMMENDATION. The Company represents and warrants in the Merger Agreement that the Company Board has, by the unanimous vote of all directors at a meeting duly called and held: (i) determined that each of the Offer and the Merger is fair to, and in the best interests of, the holders of Shares; (ii) approved and adopted the Merger Agreement and the Option and Support Agreement and the transactions contemplated thereby, including the Offer and the Merger; (iii) recommended acceptance of the Offer, the tender of Shares pursuant to the Offer and approval and adoption of the Merger Agreement and the Merger by the stockholders of the Company; and (iv) taken all action necessary to render Section 203 of the DGCL and other state takeover statutes inapplicable to the Offer, the Merger and the Option and Support Agreement. Subject to the provisions of the Merger Agreement, the recommendation of the Company Board may be withdrawn, modified or amended to the extent that the Company Board deems it necessary to do so in the exercise of its fiduciary duty after being so advised in writing by outside counsel. Any withdrawal, modification or amendment of the recommendation of the Company Board by the Company Board or any committee thereof in any manner adverse to Parent or Purchaser, however, may give rise to certain termination rights on the part of Parent and Purchaser under the Merger Agreement and the right to receive certain termination fees as set forth therein. INTERIM AGREEMENTS OF PARENT, PURCHASER AND THE COMPANY. Pursuant to the Merger Agreement, the Company has covenanted and agreed that, between the date of the Merger Agreement and the Effective Time, unless Parent shall otherwise agree in writing, the business of the Company and its subsidiaries will be conducted only in, and the Company and its subsidiaries will not take any action except in, the ordinary course of business consistent with past practices. The Merger Agreement provides that the Company will use its reasonable best efforts to preserve intact and maintain the Company's business organization, its present relationships with customers, suppliers and other persons having business relations with the Company and its subsidiaries, assets, employees, regulatory licenses and approvals and advantageous business relationships. Except as otherwise contemplated by the Merger Agreement, the Company will not, nor will it permit any of its subsidiaries or other entities controlled by it, between the date of the Merger Agreement and the Effective Time, without the prior written consent of Parent, to, directly or indirectly: (i) Amend or propose to amend its Certificate of Incorporation, regulations or Bylaws, or equivalent organizational documents; (ii) (a) issue, sell, transfer, pledge, dispose of or encumber, or authorize, propose or agree to the issuance, sale, pledge, transfer, disposition or encumbrance of, any capital stock of the Company (except for shares issuable upon exercise of Options outstanding on the date of the Merger Agreement) or any of its subsidiaries; (b) issue, sell, pledge, transfer or dispose of, or authorize, propose or agree to the issuance, sale, pledge, transfer or disposition of any options, warrants or rights of any kind to acquire any shares of, or any securities convertible into or exchangeable for any shares of, any capital stock of any class or any other equity securities of the Company or any of its subsidiaries; (c) authorize, recommend or propose any change in its capitalization; or (d) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company or any of its subsidiaries (other than the Merger); (iii) (a) except in the ordinary course of business and consistent with past practice, sell, pledge, transfer, lease, sell and leaseback, assign, license, dispose of or encumber any assets of the Company or of any of its subsidiaries (including without limitation, any indebtedness owed to them or any claims held by them) or (b) whether or not in the ordinary course of business, sell, pledge, transfer, lease, sell and leaseback, assign, license, dispose of or encumber any material assets of the Company or any of its subsidiaries; 23 (iv) (a) split, combine or reclassify any shares of its capital stock or declare, set aside or pay any dividend or distribution, payable in cash, stock, property or otherwise with respect to any of its capital stock other than dividends and distributions by a subsidiary of the Company to the Company or to any other subsidiary all of the capital stock of which (other than directors' qualifying shares) is owned directly or indirectly by the Company, or (b) redeem, purchase or otherwise acquire or offer or agree to redeem, purchase or otherwise acquire any capital stock of the Company or any of its subsidiaries; (v) Except in the ordinary course of business and consistent with past practice, acquire (by merger, consolidation or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof or make any investment either by purchase of stock or securities, contributions to capital, loans, advances, property transfer or purchase of any amount of property or assets, in any other individual or entity (other than subsidiaries of the Company); (vi) Incur any indebtedness for borrowed money, issue any debt securities or enter into any capitalized leases or assume, guarantee, endorse, secure or otherwise as an accommodation become responsible for, the obligations of any other person (other than the Company and its subsidiaries); (vii) Take any action with respect to the grant of any severance or termination pay (other than pursuant to policies or written agreements of the Company in effect on the date of the Merger Agreement) or with respect to any increase of benefits payable under its severance or termination pay policies or written agreements in effect on the date of the Merger Agreement; (viii) Adopt, enter into or amend any bonus, profit sharing, compensation, stock option, pension, retirement, deferred compensation, employment, severance, retention or stay or other employee benefit plan, agreement, trust, fund or other arrangement for the benefit or welfare of any director, officer or employee or increase in any manner the compensation or fringe benefits of any director, officer or employee or pay any benefit not required by any plan, arrangement or agreement in effect on the date of the Merger Agreement; (ix) Make any tax election or settle or compromise any federal, state, local or foreign income tax liability; (x) Take any action or omit to take any action, which action or omission would reasonably be expected to result in a breach or inaccuracy of any of the representations and warranties set forth in the Merger Agreement in any material respect at, or as of any time prior to, the Effective Time; (xi) Enter into any contract or agreement other than in the ordinary course of business or amend, terminate or modify any Material Contract or enter into any contract or agreement which would have been a Material Contract if entered into prior to the date of the Merger Agreement; (xii) Enter into, amend, modify or terminate any contract or agreement with, or make any payment other than pursuant to a written agreement existing on the date of the Merger Agreement to, any affiliate (other than the Company or any of its subsidiaries) of the Company or its subsidiaries, including releasing Shares under pledge agreements; (xiii) Settle or compromise any pending or threatened suit, action or claim for an amount in excess of $25,000 per suit, action or claim or which relates to the transactions contemplated by the Merger Agreement; (xiv) Authorize or make any expenditure for capital or acquisitions which are not specifically provided for in the Company's capital budget; (xv) Incur costs, fees and expenses in connection with the Offer, the Merger and the other transactions contemplated by the Merger Agreement in excess of (i) $1,000,000 for the costs, fees and expenses of financial advisors, including, without limitation, McGettigan, Wick and Advest and (ii) those costs, fees and expenses reasonable and necessary, including, without limitation, fees and expenses of attorneys, accountants, and other representatives and advisors (excluding financial 24 advisors), costs of preparing, printing and mailing materials to stockholders, filing fees and other out-of-pocket costs, which shall be evidenced by detailed invoices submitted to the Company and which shall be payable by the Company in accordance with its standard accounts payable practices; or (xvi) Offer or propose to take or agree or commit to take any of the foregoing actions. OTHER AGREEMENTS OF PARENT, PURCHASER AND THE COMPANY. In the Merger Agreement, the Company has agreed that, prior to the Effective Time, it will not, nor will it authorize or permit any of its subsidiaries or any of its subsidiaries' directors, officers, employees, agents or representatives, to, directly or indirectly: (i) solicit, initiate, facilitate or encourage any inquiries or the making of any proposal with respect to any tender offer, exchange offer, merger, consolidation, sale of assets, sales of capital stock or other business combination involving the Company or its subsidiaries or the acquisition of 20% or more of the assets or capital stock of the Company and its subsidiaries taken as a whole (an "Acquisition Transaction"); (ii) negotiate, explore or otherwise communicate in any way with, or provide or furnish any information to, any person (other than Parent or Purchaser) with respect to any Acquisition Transaction; or (iii) enter into any agreement, arrangement or understanding requiring the Company to abandon, terminate or fail to consummate the Offer or the Merger or any other transaction contemplated by the Merger Agreement; provided, however, that the Company may, in response to an unsolicited written binding offer with respect to an Acquisition Transaction from a person with sufficient financial resources available to it to consummate such transaction which contains no financing condition, (i) furnish or disclose non-public information to such third party and (ii) negotiate, explore or otherwise communicate with such third party, in each case only if the Company Board determines in good faith (A) after consultation with its outside counsel and financial advisors, that the Acquisition Transaction would, upon consummation thereof, result in a transaction which is more favorable to the Company's stockholders from a financial point of view than the Offer and the Merger and that such Acquisition Transaction is likely to be consummated and (B) after advice of outside counsel, that failing to take such action would constitute a breach of the Company Board's fiduciary duties. The Company is required to advise Parent in writing of the receipt by the Company, any of its subsidiaries or any or their respective officers, directors, employees, agents or representatives of any request for information, inquiries, indications of interest, offers or proposals relating to any Acquisition Transaction and any actions taken with respect to such Acquisition Transaction, which notice shall include the terms and conditions of such Acquisition Transaction and the identity of the person making such request, inquiry, indication of interest, offer or proposal. Pursuant to the Merger Agreement, between the date of the Merger Agreement and the Effective Time, the Company is required to, and will cause its subsidiaries, officers, directors, employees, and agents to, afford the officers, employees, counsel, investment bankers and agents of Parent and its affiliates complete access at all reasonable times to its officers, employees, agents, properties, books, records and contracts and shall furnish to Parent and its affiliates all financial, operating and other data and information as Parent or its affiliates, through their respective officers, employees or agents, may reasonably request for such purposes as may be necessary or desirable. The Company will, subject to the terms of the Merger Agreement, endorse the Offer and the Merger and recommend to its stockholders the approval and adoption of the Merger Agreement, the Merger and the transactions to be consummated thereunder; and will use its reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by the Offer and the Merger Agreement, and to cooperate with Parent and Purchaser in connection with the foregoing, including using reasonable best efforts to obtain all necessary waivers, consents and approvals, including by the Company's stockholders, if required, of the Merger Agreement and the Merger. Pursuant to the Merger Agreement, the Company must take all action necessary to cause a meeting of its stockholders (the "Company Stockholder Meeting"), if required by the DGCL, to be duly called and held as promptly as practicable after the consummation of the Offer (provided Purchaser shall have accepted for payment Shares tendered pursuant to the Offer) for the purposes of voting on the approval 25 and adoption of the Merger Agreement, the Merger and the transactions contemplated thereby. The Company is also required to use its reasonable efforts to solicit from stockholders of the Company proxies in favor of such adoption and approval and to take all other action necessary or, in the reasonable judgment of Parent, helpful to secure the vote or consent of the Company's stockholders, if required by the DGCL, to effect the Merger. The Merger Agreement provides that, if the Company Stockholder Meeting is required by the DGCL, as promptly as practicable following consummation of the Offer, the Company will prepare and file with the Commission a proxy statement under the Exchange Act relating to the Company Stockholder Meeting (the "Proxy Statement") and will cause the Proxy Statement, subject to compliance with the rules and regulations of the Commission, to be mailed to its stockholders as promptly as practicable thereafter and will use its reasonable best efforts to secure all necessary approvals by its stockholders of the Merger Agreement and the Merger. Notwithstanding the foregoing, in the event that Purchaser acquires at least 90% of the outstanding Shares and Parent so requests, Parent, Purchaser and the Company will take all actions necessary and appropriate to cause the Merger to become effective without a meeting of the stockholders of the Company in accordance with Section 253 of the DGCL. For a period of six years after the Effective Time, the Surviving Corporation shall indemnify, defend and hold harmless the officers and directors of the Company as of the date of the Merger Agreement against all losses, claims, damages, expenses or liabilities arising out of actions or omissions or alleged actions or omissions occurring at or prior to the Effective Time to the same extent and on the same terms and conditions (including with respect to advancement of expenses) provided for in the Company's Certificate of Incorporation and Bylaws in effect at the date of the Merger Agreement (to the extent consistent with applicable law). The Surviving Corporation shall maintain in effect the Company's existing policies of directors' and officers' liability insurance with respect to claims arising from facts or events which occurred prior to the Effective Time for a period of six years from and after the Effective Time (provided that Parent or the Surviving Corporation may substitute therefor policies of at least the same coverage and amounts containing terms and conditions no less advantageous to such directors or officers); provided, however, that the Surviving Corporation shall not be obligated to make annual premium payments for such insurance to the extent such premiums exceed 150% of the premiums paid by the Company as of the date of the Merger Agreement for such insurance. Pursuant to the Merger Agreement, the Company is required to use commercially reasonable efforts to obtain employment or consulting agreements and noncompete agreements, in form and substance satisfactory to Parent, from the Named Officers, releases, in form and substance satisfactory to Parent, from each Named Officer and from McGettigan, Wick and a fully executed copy of the Excess Payment Agreement dated March 27, 1998 by and between the Company and Dr. Yalow, prior to the consummation of the Offer. In addition, the Company is required to use commercially reasonable efforts to obtain, prior to the consummation of the Offer, the resignation of each director of the Company, other than Dr. Yalow, which resignations are to be effective immediately following the consummation of the Offer. REPRESENTATIONS AND WARRANTIES. The Merger Agreement contains various customary representations and warranties of the parties thereto, including, without limitation, representations by the Company as to corporate status and good standing, subsidiaries, power and authority, enforceability, capitalization, no violation, reports and financial statements, no commissions, material developments and absence of undisclosed liabilities, compliance with law, taxes, employee benefit plans, litigation and environmental liabilities. In addition, the Company represented to Parent and Purchaser that the Company Board, by a vote of all directors at a meeting duly called and held, has unanimously (i) determined that each of the Offer, the Merger and the Option and Support Agreement is fair to, and in the best interests of, the holders of Shares; (ii) approved and adopted the Option and Support Agreement and the Merger Agreement and the transactions contemplated thereby, including the Offer and the Merger; (iii) resolved to recommend acceptance of the Offer, the tender of Shares pursuant to the Offer and approval and adoption of the Merger Agreement and the Merger by the stockholders of the Company; and (iv) taken all 26 action necessary to render Section 203 of the DGCL and other state takeover statutes inapplicable to the Offer, the Merger, the Merger Agreement and the Option and Support Agreement. CONDITIONS TO THE MERGER. The respective obligations of the Company, Parent and Purchaser to effect the Merger are subject to the satisfaction, at or prior to the Effective Time, of the conditions that (i) Purchaser (or a subsidiary or an affiliate of Parent) shall have accepted for payment and paid for Shares tendered pursuant to the Offer in accordance with the terms of the Offer, (ii) to the extent required by the DGCL, the Merger and the Merger Agreement shall have been approved and adopted by the requisite vote or consent of the Company's stockholders, and (iii) no permanent injunction, order, decree or ruling issued by a court of competent jurisdiction in the United States or by a domestic governmental, regulatory or administrative agency or commission nor any statute, rule, regulation or executive order promulgated or enacted by any domestic governmental authority shall be in effect which would make the acquisition or holding by Parent, Purchaser or the subsidiaries or affiliates of Parent of the shares of common stock of the Surviving Corporation illegal or otherwise prevent the consummation of the Merger (provided that the Company, Parent and Purchaser shall have used all reasonable efforts to prevent such event). The obligation of Purchaser and Parent to effect the Merger is further subject to satisfaction of the conditions, unless waived by Parent or Purchaser, that (i) Parent, Purchaser and the Company shall have obtained such licenses, permits, consents, waivers, approvals, authorizations, qualifications, orders, actions and non-actions from all third parties, including governmental authorities and agencies, as are necessary for consummation of the Merger and the consummation of the Merger will not result in the loss of any material license, permit, authorization, approval or registration of the Company or any of its subsidiaries, (ii) the Company shall not have breached or failed to perform in any material respect any of its obligations in the Merger Agreement or failed to comply in any material respect with any of its agreements or covenants in the Merger Agreement, (iii) each of the representations and warranties of the Company set forth in the Merger Agreement that are subject to, or qualified by, any materiality qualification shall be true and correct and each such representation and warranty that is not so qualified shall be true and correct in all material respects, in each case at the date of the Merger Agreement and as of the Effective Time, except as to each such representation or warranty which speaks as of a specific date which must be true and correct in the foregoing respects as of such date, (iv) no event, condition or change (or any development involving a prospective event, condition or change) shall have occurred or be threatened which has had or is reasonably likely to have a Material Adverse Effect on the Company and its subsidiaries taken as a whole, and (v) there shall not have occurred (A) any general suspension of, or limitation on prices for, trading in securities on any United States stock exchange, (B) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (C) the commencement of a war, armed hostilities or other international or national calamity materially affecting the United States, (D) any limitation by any governmental authority or any other event which is reasonably likely to affect the extension of credit by banks or other lending institutions, or (E) in the case of any of the foregoing existing at the date of this Agreement, any material acceleration or worsening thereof. For purposes of the Merger Agreement, the term "Material Adverse Effect" means a material adverse effect on the assets, liabilities, condition (financial or otherwise), results of operations, business, operations or prospects of the Company and its subsidiaries taken as a whole or on the ability of the Company, Parent or Purchaser to consummate the transactions contemplated by the Merger Agreement. TERMINATION. The Merger Agreement may be terminated at any time prior to the Effective Time, whether prior to or after approval by the stockholders of the Company, by mutual written consent duly authorized by the Company Board and the Board of Directors of Parent. The Merger Agreement may also be terminated by the Company, upon delivery of notice to Parent, (i) if Purchaser or any of its or Parent's subsidiaries or affiliates shall have (A) failed to commence the Offer within the time period specified in the Merger Agreement, (B) terminated the Offer, or (C) failed to pay for Shares tendered pursuant to the Offer within 120 days after the commencement of the Offer, provided that such failure to commence or termination or failure to pay for Shares does not arise from, is not in connection with, or related to a breach of a representation or warranty of the Company or the failure to perform in any material respect 27 any of its obligations under the Merger Agreement; (ii) if, prior to the purchase of any Shares tendered pursuant to the Offer, Purchaser or Parent fails to perform in any material respect any of their respective obligations under the Merger Agreement or comply in any material respects with their respective agreements and covenants under the Merger Agreement and such failure shall not have been cured within ten days following notice from the Company to Parent of such failure and the Company's intent to terminate the Merger Agreement; (iii) at any time prior to the purchase of any Shares tendered pursuant to the Offer, to allow the Company to enter into an agreement in respect of an Acquisition Transaction if the Company Board determines in good faith, after advice of outside counsel, that such Acquisition Transaction is reasonably capable of being completed on the terms proposed and would, if consummated, result in a transaction more favorable to the stockholders of the Company than the transactions contemplated by the Merger Agreement and that such action is necessary in order to fulfill the fiduciary duty of the Company Board to the Company's stockholders; provided that the Company Board is then in receipt of a written opinion from its financial advisor that such Acquisition Transaction would, if consummated, result in a transaction more favorable to the Company's stockholders from a financial point of view than the transaction contemplated by the Offer, the Merger and the Merger Agreement; provided, further, that prior to any such termination, the Company notifies Parent promptly of its intention to terminate the Merger Agreement and enter into an agreement with respect to an Acquisition Transaction, which notice shall include the terms of such Acquisition Transaction and shall be given at least 48 hours prior to the termination of the Merger Agreement; provided, further, that such termination shall not be effective until the Company pays Parent all termination fees described in the Merger Agreement; or (iv) if any court of competent jurisdiction in the United States or a domestic governmental, regulatory or administrative agency or commission shall have issued a nonappealable final order, decree or ruling or taken any other action having the effect of permanently restraining, enjoining or otherwise prohibiting the purchase of the Shares pursuant to the Offer or the Merger; provided that the Company shall have used its reasonable best efforts to remove or lift such order, decree or ruling. In addition, the Merger Agreement may be terminated by Parent, upon delivery of notice to the Company, (i) if Purchaser or any of its or Parent's subsidiaries or affiliates shall have (A) failed to commence the Offer within the time period specified in the Merger Agreement, (B) terminated the Offer, or (C) failed to pay for Shares pursuant to the Offer within 120 days after the commencement of the Offer; provided that such failure to commence, or termination or failure to pay for Shares does not arise from, is not in connection with, or related to a breach of a representation or warranty of Parent or Purchaser or their failure to perform in any pertinent aspect any of their obligations under the Merger Agreement; (ii) if (A) the Company Board or any committee thereof shall have withdrawn or modified (including by amendment of the Company's Schedule 14D-9) in any manner adverse to Parent or Purchaser its approval or recommendation of the Offer, the Merger or the Merger Agreement, or approved or recommended any Acquisition Transaction, or Parent requests in writing that the Company Board reconfirm its recommendation of the Offer, the Merger and the Merger Agreement to the Company's stockholders and the Company Board fails to do so within five days after its receipt of Parent's request, (B) any Person shall have entered into an agreement, an agreement in principle or letter of intent with the Company or any of its subsidiaries with respect to an Acquisition Transaction, or (C) the Company Board or any committee thereof shall have resolved to take any of the foregoing actions; (iii) if the Company fails to perform in any material respect any of its obligations under the Merger Agreement or comply in any material respects with its agreements and covenants under the Merger Agreement and such failure shall not have been cured within ten days following notice from Parent to the Company of such failure and Parent's intent to terminate the Merger Agreement; or (iv) if any court of competent jurisdiction in the United States or a domestic governmental, regulatory or administrative agency or commission shall have issued a nonappealable final order, decree or ruling or taken any other action having the effect of permanently restraining, enjoining or otherwise prohibiting the purchase of the Shares pursuant to the Offer or the Merger; provided that Parent and Purchaser shall have used their reasonable best efforts to remove or lift such order, decree or ruling. 28 Except as otherwise provided in the Merger Agreement, in the event of termination of the Merger Agreement, the Merger Agreement shall, upon receipt of notice of termination, forthwith become void and of no further force and effect, and the Company, Parent and Purchaser (and their respective directors, officers, employees, stockholders, affiliates, agents and advisors) shall be released from any and all liability thereunder; provided, however, that nothing shall relieve the Company, Parent or Purchaser from liability for any breach of any agreement, covenant, representation or warranty set forth in the Merger Agreement. Notwithstanding the termination of the Merger Agreement, the Option and Support Agreement and certain provisions of the Merger Agreement shall remain in full force and effect and shall survive any such termination of the Merger Agreement. TERMINATION FEE AND EXPENSES. Upon termination of the Merger Agreement for any reason, in addition to any other amounts which may be payable or become payable pursuant to the Merger Agreement, the Company shall (provided that neither Parent nor Purchaser is then in material breach of their respective obligations under the Merger Agreement) reimburse Parent and Purchaser for the reasonable costs, expenses and fees incurred by them and their subsidiaries and affiliates (including, without limitation, out-of-pocket fees and expenses payable to all banks and other financial institutions and investment bankers and reasonable allocations of corporate overhead and salary and payroll expenses of their employees) or on their behalf in connection with their due diligence investigation of the Company, the Merger Agreement, the Offer, the Merger and the consummation of all the transactions contemplated by the Merger Agreement; provided, however, that the Company shall not be obligated to reimburse Parent or Purchaser for any costs, fees and expenses of its financial advisors (including, without limitation, DLJ) in excess of $250,000. Upon termination of the Merger Agreement as a result of the failure by Parent or Purchaser to perform (or to cure in accordance with the Merger Agreement) in any material respect any of their respective obligations under the Merger Agreement or comply in any material respects with their respective agreements and covenants under the Merger Agreement, Parent shall (provided that the Company is not then in material breach of its obligations under the Merger Agreement) reimburse the Company for the reasonable costs, expenses and fees incurred by it and its subsidiaries or on their behalf in connection with the Merger Agreement or the Offer, subject to the limitations set forth in the Merger Agreement; provided, however, that Parent shall not be obligated to reimburse the Company for any costs, expenses or fees of its financial advisors (including, without limitation, McGettigan, Wick and Advest) in excess of $250,000. If the Merger Agreement shall have been terminated (i) by Parent due to (A)(x) the withdrawal or modification (including by amendment of the Company's Schedule 14D-9) by the Company Board or any committee thereof, in any manner adverse to Parent or Purchaser, of the approval or recommendation of the Company Board of the Offer, the Merger or the Merger Agreement, (y) the approval or recommendation by the Company Board of any Acquisition Transaction, or (z) the failure of the Company Board to reconfirm its recommendation of the Offer, the Merger and the Merger Agreement to the Company's stockholders within five days of receipt of a request for such reconfirmation by Parent, (B) the Company or any of its subsidiaries entering into an agreement, agreement in principle or letter of intent with any person with respect to an Acquisition Transaction, or (C) the Company Board or any committee thereof resolving to take any of the foregoing actions; or (ii) by the Company due to a determination by the Company Board, at any time prior to the purchase of any Shares pursuant to the Offer, in good faith, after advice of outside counsel, that an Acquisition Transaction is reasonably capable of being completed on the terms proposed and would, if consummated, result in a transaction more favorable to the stockholders of the Company than the transactions contemplated by the Merger Agreement and that such action is necessary in order to fulfill the fiduciary duty of the Company Board to the Company's stockholders (provided that, as described above, the Company is then in receipt of a written opinion from its financial advisor that such Acquisition Transaction would, if consummated, result in a transaction more favorable to the Company's stockholders from a financial point of view than the transactions contemplated by the Offer, the Merger and the Merger Agreement and otherwise in accordance with the terms of the Merger Agreement); or (iii) for any other reason (other than by the Company as a result of failure by Parent or Purchaser to 29 perform (or to cure in accordance with the Merger Agreement) in any material respect any of their respective obligations under the Merger Agreement or to comply in any material respects with their respective agreements and covenants thereunder) and during the period commencing on the date of the Merger Agreement and ending on, and including, the date which is nine months after the date of the Merger Agreement is terminated an Alternative Transaction is consummated, then, in any such case, the Company shall pay Parent $4,000,000 (the "Termination Fee"). For purposes of the Merger Agreement, an "Alternative Transaction" means either (A) a transaction pursuant to which any person other than Parent, Purchaser or their affiliates (a "Third Party") acquires beneficial ownership of more than 25% of the outstanding Shares or other equity securities, whether from the Company, its stockholders or pursuant to a tender or exchange offer or otherwise, (B) a merger or other business combination involving the Company pursuant to which any Third Party acquires beneficial ownership of more than 25% of the outstanding Shares or other equity securities of the Company or the entity surviving such merger or business combination, or (C) any other transaction, or series of transactions, pursuant to which any Third Party acquires control of assets of the Company or any of its subsidiaries having a fair market value equal to more than 25% of the fair market value of all the assets of the Company and its subsidiaries, taken as a whole, immediately prior to such transaction. The Termination Fee shall be paid to the Company on the date (the "Fee Payment Date") which is (a) immediately prior to the termination of the Merger Agreement in the case of payment pursuant to (ii) above, (b) within two business days of the termination of this Agreement in the case of payment pursuant to (i) above, and (c) immediately prior to the later to occur of the termination of the Merger Agreement and the consummation of an Alternative Transaction, in the case of payment pursuant to (iii) above. Notwithstanding the foregoing, if and to the extent that Parent has purchased Shares from the Company pursuant to the Option and Support Agreement ("Company Option Shares") or elected to exercise its right under the Option and Support Agreement to receive cash rather than Shares (the "Cash Conversion") prior to the Fee Payment Date, the sum of, (i) the Termination Fee, PLUS (ii) the net cash amount received by Parent prior to the Fee Payment Date pursuant to the Cash Conversion under the Option and Support Agreement, PLUS (iii)(x) the amount received by Parent prior to the Fee Payment Date pursuant to the sale of Company Option Shares (or any other securities into which such Company Option Shares are converted or exchanged), less (y) Parent's purchase price for such Shares, MINUS (iv) any amounts paid or Shares (valued at the closing sales price of the Shares on NNM on the day of delivery) delivered to the Company pursuant to the Option and Support Agreement or pursuant to any other reimbursement obligations, including without limitation, pursuant to Section 16 of the Exchange Act, shall not exceed $5,000,000. Pursuant to the Merger Agreement, if the Company fails to promptly pay the Termination Fee, the Company shall pay to Parent its costs and expenses (including attorneys' fees) incurred in connection with collecting such amount, together with interest, from the date when such amount was due, on the amount of the fee at the rate of 10% per annum Except as otherwise described herein, each of the parties hereto shall pay all the fees and expenses incurred by it incident to preparing for, entering into and carrying into effect the Merger Agreement and the transactions contemplated therein; provided that the Company covenants and represents and warrants that such fees and expenses incurred by the Company and its subsidiaries for costs, fees and expenses of financial advisors (including, without limitation, McGettigan, Wick and Advest) associated with the Offer, the Merger, the Merger Agreement and the transactions contemplated herein, will not exceed $1,000,000. AMENDMENTS; WAIVER. Subject to applicable law, the Merger Agreement may not be modified, amended or supplemented prior to the Effective Time except by the written agreement of the Company, Parent and Purchaser. Any failure by the Company, Parent or Purchaser to comply with any obligation, covenant, agreement or condition in the Merger Agreement may be waived by the Company, Purchaser or Parent, respectively, only by a written instrument signed by the party granting such waiver, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not 30 operate as a waiver of, or estoppel with respect to, any subsequent or other failure. No extension of time for performance of any obligations or other acts thereunder or under any other agreement shall be deemed to be an extension of the time for performance of any other obligations or any other acts. THE OPTION AND SUPPORT AGREEMENT Concurrently with the execution of the Merger Agreement, the Company, Parent and the Selling Stockholders have entered into the Option and Support Agreement. Pursuant to the Option and Support Agreement, the Company has granted Parent an irrevocable option (the "Company Option") to purchase 1,342,155 Shares, representing 19.9% of the outstanding Shares, at a per Share cash purchase price of $10.125 per Share (as adjusted pursuant to the Option and Support Agreement). In addition, pursuant to the Option and Support Agreement, each Selling Stockholder has agreed to tender and sell all of the Shares owned by such Selling Stockholder to Purchaser pursuant to and in accordance with the terms of the Offer and has granted to Parent an irrevocable option (the "Stockholder Option") to purchase, in whole but not in part, all Shares owned by such Selling Stockholders at a purchase price of $12.25 per Share. THE COMPANY OPTION. The Company Option may be exercised by Parent, in whole or in part, at any time, or from time to time, during the period commencing immediately after the occurrence of a Trigger Event and ending on, and including, the date which is nine months after the termination of the Merger Agreement. For purposes of the Option and Support Agreement, the term "Trigger Event" means (i) the termination of the Merger Agreement due to the withdrawal or modification (including by amendment of the Company's Schedule 14D-9) of the approval or recommendation of the Company Board of the Offer, the Merger or the Merger Agreement in any manner adverse to Parent or Purchaser or the approval or recommendation by the Company Board of any Acquisition Transaction, or related actions as described above or due to a determination by the Company Board, in good faith, after advice of outside counsel, that an Acquisition Transaction is reasonably capable of being completed on the terms proposed and would, if consummated, result in a transaction more favorable to the stockholders of the Company than the transactions contemplated by the Merger Agreement and that such action is necessary in order to fulfill the fiduciary duty of the Company Board to the Company's stockholders, in accordance with the terms of the Merger Agreement, as described above, or (ii) the termination of the Merger Agreement for any other reason (other than as a result of failure by Parent or Purchaser to perform (or to cure in accordance with the Merger Agreement) in any material respect any of their respective obligations under the Merger Agreement or comply in any material respects with their respective agreements and covenants under the Merger Agreement), and during the period commencing on the date of the Option and Support Agreement and ending on, and including, the date which is nine months after the termination of the Merger Agreement, an Alternative Transaction (as defined in the Merger Agreement) is consummated. The number of Shares subject to the Company Option and the purchase price thereof are subject to adjustment, in accordance with the terms of the Option and Support Agreement, in the event of any stock dividend, stock split, split-up, reclassification, recapitalization, merger or other change in the corporate or capital structure of the Company, to restore Parent to its rights under the Option and Support Agreement, including its right to purchase Shares representing 19.9% of the capital stock of the Company entitled to vote for the election of directors of the Company. In the event that any additional Shares are issued after the date of the Option and Support Agreement (other than pursuant to an event described in the preceding sentence), the number of Shares subject to the Company Option shall be increased by 19.9% of the number of additional Shares so issued (and such additional Shares subject to the Company Option shall be exercisable upon the same terms and conditions as the Company Option). If at any time the Company Option is then exercisable pursuant to the terms of the Option and Support Agreement, Parent may elect, in lieu of exercising the Company Option to purchase Shares, to send written notice to the Company (the "Cash Exercise Notice") specifying a date not later than twenty business days and not earlier than ten business days following the date such notice is given on which date the Company shall pay to Parent an amount in cash equal to the Spread (as hereinafter defined) multiplied 31 by all or such portion of the Shares subject to the Company Option as Parent shall specify. As used in the Option and Support Agreement, "Spread" shall mean the excess, if any, over the exercise price of the Company Option (as adjusted, if applicable) of the HIGHER of (x) if applicable, the highest price per Share (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by any person in an Acquisition Transaction (the "Alternative Purchase Price") or (y) the closing sales price of the Shares on NNM on the last trading day immediately prior to the date of the Cash Exercise Notice (the "Closing Price"). If the Alternative Purchase Price includes any property other than cash, the Alternative Purchase Price shall be the sum of (i) the fixed cash amount, if any, included in the Alternative Purchase Price plus (ii) the fair market value of such other property. If such other property consists of securities with an existing public trading market, the average of the closing sales prices (or the average of the closing bid and asked prices if closing sales prices are unavailable) for such securities in their principal public trading market on the five trading days ending five days prior to the date of the Cash Exercise Notice shall be deemed to equal the fair market value of such property. If such other property consists of property other than cash or securities with an existing public trading market and, as of the payment date for the Spread, agreement on the value of such other property has not been reached, the Alternative Purchase Price shall be deemed to equal the Closing Price. Upon exercise of Parent's right to receive cash pursuant to the Option and Support Agreement as described above and the payment of such cash to Parent, the obligations of the Company to deliver Shares pursuant to the Company Option shall be terminated with respect to such number of Shares for which Parent shall have elected to be paid the cash Spread. Notwithstanding any other provision of the Option and Support Agreement, in no event shall Parent's Total Profit (as defined below) exceed $5,000,000 and, if such Total Profit does exceed such amount, Parent, at its sole election, shall, within five business days, either (a) deliver to the Company for cancellation Shares (valued at the closing sales price of the Shares on NNM on the day of delivery) previously purchased by Parent, (b) pay cash or other consideration to the Company or (c) undertake any combination thereof, so that Parent's Total Profit shall not exceed $5,000,000 after taking into account the foregoing actions. As used in the Option and Support Agreement, the term "Total Profit" shall mean the aggregate amount (before taxes) of the following: (i) the aggregate amount of cash received by Parent as a Termination Fee (as such may be adjusted in accordance with the Merger Agreement) and pursuant to any cash conversion of the Company Option in accordance with the Option and Support Agreement, plus (ii)(x) the amount received by Parent pursuant to the sale of Shares acquired upon exercise of the Company Option (or any other securities into which such Shares are converted or exchanged), less (y) Parent's purchase price for such Shares, less (iii) any amounts paid or Shares (valued at the closing sales price of the Shares on NNM on the day of delivery) delivered to the Company pursuant to the Option and Support Agreement or pursuant to any other reimbursement obligation, including, without limitation, pursuant to Section 16 of the Exchange Act. THE STOCKHOLDER OPTION. The Stockholder Option may be exercised by Parent, in whole or in part, at any time, or from time to time, during the period commencing immediately after the occurrence of a Trigger Event and ending on, and including, the date which is nine months after the termination of the Merger Agreement. The number of Shares subject to the Stockholder Option and the purchase price thereof are subject to adjustment, in accordance with the terms of the Option and Support Agreement, in the event of a stock dividend or distribution, or any change in the Shares by reason of any stock dividend, stock split, spin-off, reorganization, recapitalization, reclassification, consolidation, combination, exchange of shares or the like, any merger or consolidation of the Company into another corporation, the exchange of all or substantially all of the assets of the Company for the securities of another corporation, or the recapitalization, reclassification, liquidation or dissolution of the Company, or other adjustment or event which results in Shares being exchanged for or converted into cash, securities or other property. 32 AGREEMENT TO TENDER SHARES. Pursuant to the Option and Support Agreement, each Selling Stockholder agrees to validly tender (and not withdraw) pursuant to and in accordance with the terms of the Offer (provided that the Offer is not amended in a manner prohibited by the Merger Agreement), in a timely manner for acceptance by Purchaser of the Offer, its respective Shares. In addition, each Selling Stockholder agrees that, until the first to occur of the Effective Time or the date the Merger Agreement is terminated in accordance with the terms thereof, at any meeting of the stockholders of the Company, however called, or in connection with any written consent of the stockholders of the Company, such Selling Stockholder shall vote (or cause to be voted), including by way of written consent, all Shares held of record or beneficially owned, from time to time by such Selling Stockholder (i) in favor of the Merger, the adoption of the Merger Agreement and the approval of the terms thereof and each of the other actions contemplated by the Merger Agreement and the Option and Support Agreement and any actions required in furtherance thereof; (ii) against any action or agreement that would result in a breach of any covenant, representation or warranty or any other obligation or agreement of the Company under the Merger Agreement or the Option and Support Agreement; and (iii) except as specifically requested in writing by Parent in advance, against the following actions (other than the Merger and the transactions contemplated by the Merger Agreement): (A) any Acquisition Transaction, including without limitation, any extraordinary corporate transaction, such as a merger, consolidation or other business combination involving the Company or any of its subsidiaries, a sale, lease or transfer of a material amount of assets of the Company or any of its subsidiaries or a reorganization, recapitalization, dissolution or liquidation of the Company or any of its subsidiaries or (B) (1) the election of any person to, or other change in the size or composition of, the Company Board; (2) any material change in the present capitalization of the Company or any amendment of the Company's Certificate of Incorporation or Bylaws; (3) any other material change in the Company's corporate structure or business; or (4) any other action which is intended, or could reasonably be expected, to impede, interfere with, delay, postpone, discourage or materially adversely affect the Offer, the Merger or the transactions contemplated by the Merger Agreement or the Option and Support Agreement or the contemplated economic benefits of any of the foregoing. Moreover, such Selling Stockholder shall not enter into any agreement or understanding which is inconsistent with clauses (i), (ii) or (iii) of the preceding sentence Until the earlier to occur of the Effective Time and the termination of the Merger Agreement pursuant to its terms, no Selling Stockholder shall (a) except pursuant to the terms of the Merger Agreement and the Option and Support Agreement, offer for sale, sell, transfer, tender, pledge, encumber, assign or otherwise dispose of (including by merger or otherwise by operation of law) or enter into any contract, option or other arrangement or understanding with respect to, or consent to the offer for sale, sale, transfer, tender, pledge, encumbrance, assignment or other disposition of, or exercise any discretionary powers to distribute, any or all of such Selling Stockholder's Shares or any interest therein; (ii) grant any proxies or powers of attorney with respect to any Shares beneficially owned by such Selling Stockholder, deposit any Shares beneficially owned by such Selling Stockholder into a voting trust or enter into a voting agreement with respect to any Shares beneficially owned by such Selling Stockholder; or (iii) take any action that would make any representation or warranty of such Selling Stockholder contained in the Option and Support Agreement untrue or incorrect or have the effect of preventing or disabling such Selling Stockholder from performing such Selling Stockholder's obligations under the Option and Support Agreement. Until the earlier to occur of the Effective Time and the termination of the Merger Agreement pursuant to its terms, no Selling Stockholder shall, in its capacity as such, directly or indirectly solicit, initiate, facilitate or encourage any inquiries or the making of any Acquisition Transaction, or negotiate, explore or otherwise communicate in any way with, or provide or furnish any information to, any person (other than Parent or Purchaser) with respect to any Acquisition Transaction or enter into any agreement, arrangement or understanding requiring it to abandon, terminate or fail to consummate the Offer or the Merger or any other transaction contemplated by the Merger Agreement or the Option and Support Agreement; provided, however, that the foregoing shall not restrict a Selling Stockholder who is also a 33 director of the Company from taking actions in such Selling Stockholder's capacity as a director to the extent and in the circumstances permitted under the Merger Agreement with respect to an Acquisition Transaction. Such Selling Stockholder shall immediately advise Parent in writing of the receipt by such Selling Stockholder or any of its agents or representatives of any request for information, inquiries, indications of interest, offers or proposals relating to an Acquisition Transaction and any actions taken with respect to such Acquisition Transaction pursuant to the Merger Agreement, which notice shall include the identity of the person making such request, inquiry, indication of interest, offer or proposal and the terms, if any, of such Acquisition Transaction. Under the Option and Support Agreement, each Selling Stockholder and its agents and representatives is required, upon the execution thereof, to cease any discussions or negotiations with, and shall cease to provide any information to or otherwise cooperate or encourage, any person with respect to an Acquisition Transaction. 14. DIVIDENDS AND DISTRIBUTIONS The Company has not paid and does not intend to pay dividends on the Shares. The Merger Agreement provides that the Company will not, among other things, (i) split, combine or reclassify any shares of its capital stock or declare, set aside or pay any dividend or distribution, payable in cash, stock, property or otherwise with respect to any of its capital stock other than dividends and distributions by a subsidiary of the Company to the Company or to any other subsidiary all of the capital stock of which (other than directors' qualifying shares) is owned directly or indirectly by the Company, or (ii) redeem, purchase or otherwise acquire or offer or agree to redeem, purchase or otherwise acquire any capital stock of the Company or any of its subsidiaries. 15. CERTAIN CONDITIONS OF THE OFFER Notwithstanding any other provisions of the Offer or the Merger Agreement, Purchaser shall not be required to accept for payment or, subject to any applicable rules and regulations of the Commission, including Rule 14e-1(c) under the Exchange Act (relating to Purchaser's obligation to pay for or return tendered Shares after the termination or withdrawal of the Offer), pay for any Shares tendered pursuant to the Offer, and may terminate, withdraw or amend the Offer and may postpone the acceptance of, and payment for the Shares, if the Minimum Condition shall not have been satisfied. Furthermore, notwithstanding any other term of the Offer or the Merger Agreement, Purchaser shall not be required to accept for payment or, subject as aforesaid, to pay for any Shares tendered pursuant to the Offer, and may terminate, withdraw or amend the Offer and may postpone the acceptance of, and payment for, the Shares if, at any time on or after the date of the Merger Agreement and before the time for payment for any of the Shares (whether or not any Shares shall have theretofore been accepted for payment or paid for pursuant to the Offer), any of the following conditions exists: (a) There shall have been instituted or pending any action or proceeding before any domestic or foreign court, legislative body or governmental agency or other regulatory or administrative agency or commission (i) challenging the acquisition in whole or in part of the Shares by Parent or Purchaser, seeking to restrain or prohibit the making or consummation of the Offer or the Merger or seeking to obtain any material damages or otherwise, directly or indirectly, relating to the transaction contemplated by the Offer or the Merger Agreement, (ii) seeking to prohibit or restrict the ownership or operation by Parent, Purchaser or the Company (or any of their respective affiliates or subsidiaries) of any material portion of Parent's or Purchaser's or the Company's business or assets, or to compel the Company, Parent or Purchaser (or any of their respective affiliates or subsidiaries) to dispose of or hold separate all or any of the Shares or all or any material portion of the Company's, Parent's or Purchaser's (or any of their respective affiliates' or subsidiaries') business or assets as a result of the Offer, the Merger or any of the other transactions contemplated by the Merger Agreement, (iii) seeking to prohibit or materially delay or make illegal the purchase of, or payment for, some or all of the Shares pursuant to the Offer or Merger, (iv) seeking to impose material limitations on the 34 ability of Parent or Purchaser (or any of their respective affiliates or subsidiaries) to acquire or to hold or to exercise full rights of ownership of the Shares, including, without limitation, the right to vote the Shares on all matters properly presented to the stockholders of the Company, (v) seeking to impose any limitations on the ability of Parent or Purchaser (or any of their respective affiliates or subsidiaries) effectively to control in any material respect any material portion of the business and operations of the Company and its subsidiaries; or (vi) which may result in a material limitation on the benefits expected to be derived by Parent and Purchaser as a result of the Offer, including without limitation, any limitation on the ability to consummate the Merger; or (b) Any statute, rule, regulation or order shall have been enacted, promulgated, entered, enforced or deemed applicable to the Offer or the Merger, or any other action shall have been taken, proposed or threatened, by any domestic or foreign government or governmental authority or by any court, domestic or foreign, which is reasonably likely to result, directly or indirectly, in any of the consequences referred to in clauses (i) through (vi) of subsection (a) above; or (c) Parent, Purchaser or the Company and its subsidiaries shall not have obtained any license, permit, waiver, consent, approval, authorization, qualification, order, action or non-action from any third party, including any governmental authority or agency, which is necessary to consummate the Offer and the Merger, including, without limitation, the termination or expiration of the waiting period under the HSR Act and the passage of 30 days after the filing of an initial application for a license to operate from the State Board of Private Academic Schools, the Commonwealth of Pennsylvania (the "Pennsylvania Waiting Period"), or the consummation of the Offer and the Merger will result in the loss of any material license, permit, authorization, approval or registration of the Company or any of its subsidiaries; or (d) Any event, condition or change (or any development involving a prospective event, condition or change) shall have occurred or be threatened which has had or is reasonably likely to have a Material Adverse Effect (as defined in the Merger Agreement) on the Company and its subsidiaries taken as a whole; or (e) There shall have occurred (i) any general suspension of, or limitation on prices for, trading in securities on any United States stock exchange, (ii) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) the commencement of a war, armed hostilities or other international or national calamity materially affecting the United States, (iv) any limitation by any governmental authority or any other event which is reasonably likely to affect the extension of credit by banks or other lending institutions, or (v) in the case of any of the foregoing existing at the time of the commencement of the Offer, any material acceleration or worsening thereof; or (f) (i) the Company Board or any committee thereof shall have withdrawn or modified in a manner adverse to Parent or Purchaser its approval or recommendation of the Offer, the Merger or the Merger Agreement, or approved or recommended any Acquisition Transaction or Parent requests in writing that the Company Board reconfirm its recommendation of the Offer, the Merger and the Merger Agreement and the Company Board fails to do so within five days after its receipt of Parent's request, (ii) any corporation, partnership, person or other entity or group shall have entered into an agreement, an agreement in principle or letter of intent with the Company or any of its subsidiaries with respect to an Acquisition Transaction, or (iii) the Company Board or any committee thereof shall have resolved to take any of the foregoing actions; or (g) The Company shall have breached or failed to perform in any material respect any of its obligations in the Merger Agreement or failed to comply in any material respect with any of its agreements or covenants in the Merger Agreement; or 35 (h) Any of the representations and warranties of the Company set forth in the Merger Agreement that are subject to, or qualified by, any materiality qualification shall not be true and correct or any such representations and warranties that are not so qualified shall not be true and correct in any material respect, in each case at the date of the Merger Agreement and at the time of such determination except as to any such representation or warranty which speaks as of a specific date which must be untrue or incorrect in the foregoing respects as of such specific date; or (i) The Merger Agreement shall have been terminated by the Company, Parent or Purchaser pursuant to its terms; or (j) The affirmative vote of the holders of more than a majority of the outstanding Shares shall be required to consummate the Merger, Purchaser is not entitled to vote its Shares for the Merger, or the affirmative vote of the holders of any securities of the Company other than the Shares is required to consummate the Merger; or (k) The holders of all Options shall not have irrevocably agreed to cancel such Options in return for the payment set forth in the Merger Agreement; (l) Parent shall not have received the employment and consulting agreements, noncompete agreements, releases, excess payment agreement and resignations from the persons contemplated by the Merger Agreement; or (m) The Company shall not have obtained the insurance contemplated by the Merger Agreement; which, in the reasonable judgment of Purchaser, in any such case and regardless of the circumstances giving rise to any such condition, makes it inadvisable to proceed with the Offer or with the acceptance for payment or payment for Shares pursuant to the Offer. The foregoing conditions (including those set forth in the opening paragraph above) are for the sole benefit of Purchaser and may be asserted or waived by Purchaser in whole or in part at any time and from time to time in its sole discretion. The failure by Purchaser at any time to exercise any of the foregoing rights shall not be deemed a waiver of any such right, and each right shall be deemed a continuing right which may be asserted at any time and from time to time. Any determination by Purchaser concerning the events described above shall be final and binding upon all parties. Should the Offer be terminated pursuant to the foregoing provisions, all tendered Shares not theretofore accepted for payment shall forthwith be returned by the Depositary to the tendering stockholders. 16. CERTAIN REGULATORY AND LEGAL MATTERS Except as set forth in this Section 16, based on a review of publicly available filings made by the Company with the Commission and other publicly available information concerning the Company, as well as certain representations made to Purchaser and Parent in the Merger Agreement by the Company, neither Purchaser nor Parent is aware of any license or regulatory permit that appears to be material to the business of the Company and its subsidiaries, taken as a whole, that might be adversely affected by Purchaser's acquisition of Shares as contemplated herein or of any approval or other action by any governmental entity that would be required for the acquisition or ownership of Shares by Purchaser as contemplated herein. Should any such approval or other action be required, Purchaser and Parent currently contemplate that such approval or other action will be sought, except as described below. Except as specified in this Section 16, Purchaser has no current intention to delay the purchase of Shares tendered pursuant to the Offer pending the outcome of any such matter, subject, however, to Purchaser's right to decline to purchase Shares if any of the conditions specified in Section 15 of this Offer to Purchase shall have occurred. There can be no assurance that any such approval or other action, if needed, would be 36 obtained or would be obtained without substantial conditions, or that adverse consequences might not result to the Company's business or that certain parts of the Company's business might not have to be disposed of if any such approvals were not obtained or other action taken. If certain types of adverse action are taken with respect to the matters discussed below, Purchaser could decline to accept for payment or pay for any Shares tendered. See Section 15 of this Offer to Purchase for certain conditions of the Offer. STATE TAKEOVER LAWS. The Company is incorporated under the laws of the State of Delaware and operations are conducted throughout the United States. A number of states throughout the United States have enacted takeover statutes that purport, in varying degrees, to be applicable to attempts to acquire securities of corporations that are incorporated or have assets, stockholders, executive offices or principal places of business in such states. In EDGAR V. MITE CORP., the Supreme Court of the United States held that the Illinois Business Takeover Act, which involved state securities laws that made the takeover of certain corporations more difficult, imposed a substantial burden on interstate commerce and therefore was unconstitutional. In CTS CORP. V. DYNAMICS CORP. OF AMERICA, however, the Supreme Court of the United States held that a state may, as a matter of corporate law and, in particular, those laws concerning corporate governance, constitutionally disqualify a potential acquirer from voting on the affairs of a target corporation without prior approval of the remaining stockholders, provided that such laws were applicable only under certain conditions. Subsequently, a number of Federal courts ruled that various state takeover statutes were unconstitutional insofar as they apply to corporations incorporated outside the state of enactment. The Company is subject to the provisions of Section 203 of the DGCL with respect to restrictions upon business combinations involving the Company. In general, Section 203 of the DGCL prevents an "interested stockholder" (generally, a person who owns or has the right to acquire 15% or more of a corporation's outstanding voting stock) from engaging in a "business combination" (defined to include mergers and certain other transactions) with a Delaware corporation for a period of three years following the time such person became an interested stockholder unless, among other things, the corporation's board of directors approves such business combination or the transaction in which the interested stockholder becomes such prior to the time the interested stockholder becomes such. The Company Board has approved the Offer, the Merger, the Merger Agreement and the Option and Support Agreement for the purposes of Section 203 of the DGCL. Except as described above with respect to Section 203 of the DGCL, Parent and Purchaser have not attempted to comply with any other state takeover laws in connection with the Offer and believes none of such laws to be applicable to the Offer. Should any person seek to apply any state takeover law, Parent and Purchaser reserve the right to take such action as then appears desirable, which may include challenging the validity or applicability of any such statute allegedly applicable to the Offer in appropriate court proceedings. Nothing in this Offer to Purchase nor any action taken in connection herewith is intended as a waiver of that right. In the event it is asserted that one or more state takeover laws is applicable to the Offer or the Merger, and an appropriate court does not determine that it is inapplicable or invalid as applied to the Offer, Parent and Purchaser might be required to file certain information with, or receive approvals from, the relevant state authorities. In addition, if enjoined, Purchaser might be unable to accept for payment or pay for any Shares tendered pursuant to the Offer, or be delayed in continuing or consummating the Offer and the Merger. In such case, Purchaser may not be obligated to accept for payment or pay for any Shares tendered. See Section 15 of this Offer to Purchase. ANTITRUST. Under the provisions of the HSR Act applicable to the Offer, the acquisition of Shares under the Offer may be consummated only following the expiration or early termination of the applicable waiting period under the HSR Act. Under the provisions of the HSR Act applicable to the purchase of Shares pursuant to the Offer, such purchase may not be made until the expiration of a 15-calendar day waiting period following the required filing of a Notification Report Form under the HSR Act by the ultimate parent entity of Purchaser, which will be submitted on April 3, 1998. Accordingly, the waiting period under the HSR Act will expire at 37 11:59 P.M., New York City time, on April 18, 1998, unless early termination of the waiting period is granted by the Federal Trade Commission ("FTC") and the Department of Justice, Antitrust Division (the "Antitrust Division"), or the ultimate parent entity of Purchaser receives a request for additional information or documentary material prior thereto. If either the FTC or the Antitrust Division issues a request for additional information or documentary material prior to the expiration of the 15-day waiting period, the waiting period will be extended and will expire at 11:59 P.M., New York City time, on the tenth calendar day after the date of substantial compliance by the ultimate parent entity of Purchaser with such request unless terminated earlier by the FTC and the Antitrust Division. If such a request is issued, the purchase of and payment for Shares pursuant to the Offer will be deferred until the additional waiting period expires or is terminated. Only one extension of such waiting period pursuant to a request for additional information or documentary material is authorized by the rules promulgated under the HSR Act. Thereafter, the waiting period can be extended only by court order or by consent of the ultimate parent entity of Purchaser. Although the Company is required to file certain information and documentary material with the Antitrust Division and the FTC in connection with the Offer, neither the Company's failure to make such filings nor a request to the Company from the Antitrust Division or the FTC for additional information or documentary material will extend the waiting period. The Antitrust Division and the FTC frequently scrutinize the legality under the antitrust laws of transactions such as the proposed acquisition of the Company pursuant to the Offer. At any time before or after Purchaser's acquisition of Shares pursuant to the Offer, the Antitrust Division or the FTC could take such action under the antitrust laws as either deems necessary or desirable in the public interest, including seeking to enjoin the purchase of Shares pursuant to the Offer or the consummation of the Merger or seeking the divestiture of Shares acquired by Purchaser or the divestiture of substantial assets of the Company or its subsidiaries or Parent and Purchaser or their subsidiaries. Private parties and states Attorneys General may also bring legal action under the antitrust laws under certain circumstances. There can be no assurance that a challenge to the Offer on antitrust grounds will not be made, or, if such a challenge is made, of the result thereof. If the Antitrust Division, the FTC, a state or a private party raises antitrust concerns in connection with a proposed transaction, Parent and Purchaser may engage in negotiations with the relevant governmental agency or party concerning possible means of addressing these issues and may delay consummation of the Offer or the Merger while such discussions are ongoing. APPRAISAL RIGHTS. Holders of Shares do not have appraisal rights as a result of the Offer. However, if the Merger is consummated, holders of Shares will have certain rights pursuant to the provisions of Section 262 of the DGCL to dissent and demand appraisal of their Shares in connection with the Merger. Under Section 262, dissenting stockholders who comply with the applicable statutory procedures will be entitled to receive a judicial determination of the fair value of their Shares (exclusive of any element of value arising from the accomplishment or expectation of the Merger) and to receive payment of such fair value in cash, together with a fair rate of interest, if any. Any such judicial determination of the fair value of the Shares could be based upon factors other than, or in addition to, the price per share to be paid in the Merger or the market value of the Shares. The value so determined could be more or less than the price per share to be paid in the Merger. See Annex II to this Offer to Purchase for the complete text of Section 262 of the DGCL. LEGAL PROCEEDINGS. Parent and Purchaser are not aware of any pending or overtly threatened legal proceedings, actions or suits, including, without limitation, any such proceedings, actions or suits against the Company or any of its subsidiaries, which would affect the Offer or the Merger. If any such matters were to arise, Purchaser could decline to accept for payment or pay for any Shares tendered in the Offer. See Section 15 of this Offer to Purchase. LICENSING. Each preschool or school operated by the Company must be licensed under applicable state or local licensing laws and is subject to a variety of state and local regulations. Although these 38 regulations vary greatly from jurisdiction to jurisdiction, governmental agencies generally review, with respect to a preschool, the safety, fitness and adequacy of the buildings and equipment; the ratio of staff to children; the dietary program; the daily curriculum and compliance with health standards. In most jurisdictions, these agencies conduct scheduled and unscheduled inspections of the preschools, and licenses must be renewed periodically. Repeated failures by a preschool to comply with applicable regulations may subject it to sanctions, including probation or, in more serious cases, suspension or revocation of the preschool's license to operate. The Company has informed Parent and Purchaser that all preschools and schools operated by the Company have received all required approvals of governmental authorities required in connection with the operation thereof and have been operated and maintained in all material respects in compliance with all applicable regulations. The Company has further represented and warranted in the Merger Agreement that all material licenses, permits, authorizations, approvals and registrations required under any statute, law, ordinance, regulation, rule or order of any federal, state, local or foreign governmental authority or agency are renewable by their terms or in the ordinary course of business without the need to comply with any special qualification procedures or to pay any amounts other than routine filing fees and will not be adversely affected by the consummation of the Offer and the Merger. The Company is required to file an initial application for a license to operate certain of its facilities in the Commonwealth of Pennsylvania with the State Board of Private Academic Schools, the Commonwealth of Pennsylvania, thirty days prior to the consummation of the Offer. The Company filed the necessary application on April 2, 1998. Accordingly, the Pennsylvania Waiting Period is scheduled to expire as of the initial scheduled Expiration Date. FEDERAL RESERVE BOARD REGULATIONS. Regulations T, U and X (the "Margin Regulations") promulgated by the Federal Reserve Board restrict the extension or maintenance of credit for the purpose of purchasing or carrying margin stock, including the Shares, if such credit is secured directly or indirectly by margin stock. Such secured credit may not be extended or maintained in an amount that exceeds the maximum loan value of all the direct and indirect collateral securing the credit, including margin stock and other collateral. The Parent Note and the Purchaser Note are structured so as to be in full compliance with the Margin Regulations. 17. FEES AND EXPENSES Parent and Purchaser have engaged DLJ as the Dealer Manager in connection with the Offer. In addition, DLJ is acting as exclusive financial advisor to Parent and PEC in connection with the proposed acquisition of the Company. Pursuant to the terms of DLJ's engagement, DLJ will be paid an aggregate fee of approximately $1,300,000 in connection with its services as exclusive financial advisor and as the Dealer Manager. DLJ will also be reimbursed for travel and other out-of-pocket expenses, including reasonable legal fees and expenses, and DLJ and certain related parties will be indemnified against certain liabilities, including liabilities under the federal securities laws, arising out of DLJ's engagement. In the ordinary course of business, the Dealer Manager and its affiliates may actively trade or hold the securities of the Company for their own account or for the account of customers and, accordingly, may at any time hold a long or short position in such securities. Parent and Purchaser have retained MacKenzie Partners, Inc., as Information Agent, and IBJ Schroder Bank & Trust Company, as Depositary, in connection with the Offer. The Information Agent and the Depositary will receive reasonable and customary compensation for their services hereunder and reimbursement for their reasonable out-of-pocket expenses. The Information Agent and the Depositary will also be indemnified by Purchaser against certain liabilities in connection with the Offer. Neither Purchaser nor Parent, nor any officer, director, stockholder, agent or other representative of Purchaser or Parent, will pay any fees or commissions to any broker, dealer or other person (other than the Dealer Manager and the Information Agent) for soliciting tenders of Shares pursuant to the Offer. 39 Brokers, dealers, commercial banks, trust companies and other nominees will, upon request, be reimbursed by Purchaser for customary mailing and handling expenses incurred by them in forwarding materials to their customers. 18. MISCELLANEOUS Purchaser is not aware of any state where the making of the Offer is prohibited by administrative or judicial action pursuant to any valid state statute. If Purchaser becomes aware of any valid state statute prohibiting the making of the Offer or the acceptance of Shares pursuant thereto, Purchaser will make a good faith effort to comply with such state statute. If, after such good faith effort, Purchaser cannot comply with such state statute, the Offer will not be made to (nor will tenders be accepted from or on behalf of) the holders of Shares in such state. In any jurisdiction where the securities, blue sky or other laws require the offer to be made by a licensed broker or dealer, the Offer shall be deemed to be made on behalf of Purchaser by DLJ or one or more registered brokers or dealers licensed under the laws of such jurisdiction. NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY REPRESENTATION ON BEHALF OF PURCHASER OTHER THAN AS CONTAINED IN THIS OFFER TO PURCHASE OR IN THE LETTER OF TRANSMITTAL, AND, IF ANY SUCH INFORMATION OR REPRESENTATION IS GIVEN OR MADE, IT SHOULD NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY PURCHASER. Purchaser and Parent have jointly filed a Tender Offer Statement on Schedule 14D-1 with the Commission, pursuant to Rule 14d-1 of the Exchange Act, together with exhibits furnishing certain information with respect to the Offer. Such Schedule 14D-1 and any amendments thereto, including all exhibits, may be examined and copies may be obtained at the same places and in the same manner as set forth with respect to the Company in Section 8 of this Offer to Purchase (except that copies thereof may not be available at the regional offices of the Commission). KBI ACQUISITION CORP.
April 3, 1998 40 ANNEX I CERTAIN INFORMATION CONCERNING CERTAIN ENTITIES AND CERTAIN OF THEIR DIRECTORS AND EXECUTIVE OFFICERS Certain information is provided herein with respect to Purchaser, Parent, PEC, Knowledge Universe, EDU, L.L.C., a Delaware limited liability company ("EDU"), ET Holdings, L.L.C., a Delaware limited liability company ("ET Holdings"), ET Consolidated, L.L.C., a Delaware limited liability company ("ET Consolidated"), Hampstead Associates, L.L.C., a Delaware limited liability company ("Hampstead"), Mollusk Holdings, LLC, a California limited liability company ("Mollusk"), Cephalopod Corporation, a California corporation ("Cephalopod"), Lawrence Investments, LLC, a California limited liability company ("Lawrence"), Lawrence J. Ellison, an individual, Ridgeview Associates, LLC, a California limited liability company ("Ridgeview"), Michael R. Milken, an individual, and Lowell J. Milken, an individual (collectively, the "Named Persons"). Except as otherwise indicated below, the principal executive offices of each Named Person are located at 844 Moraga Drive, Los Angeles, California 90049, and each natural person is a citizen of the United States. Parent is a wholly owned subsidiary of PEC. PEC is a holding company with no operations or assets other than its ownership of 100% of the stock of Parent. Knowledge Universe is a member of PEC owning 99.9% of the outstanding membership interests of PEC and is also the manager of PEC. The principal business of Knowledge Universe is to acquire interests in, and/or operate, other companies and businesses, primarily, but not limited to, companies and businesses engaged in education. EDU is a member of PEC owning 0.1% of the membership interests of PEC. The principal business of EDU is to act as a member of PEC and other affiliated companies. ET Holdings is the manager of Knowledge Universe. The principal business of ET Holdings is to act as the manager and as a member of Knowledge Universe. ET Consolidated is the manager of ET Holdings. The principal business of ET Consolidated is to act as the manager and as a member of ET Holdings. Hampstead is the manager of each of ET Consolidated and EDU. The principal business of Hampstead is to act as the manager and as a member of ET Consolidated, EDU and other affiliated companies. Ridgeview is the manager of Hampstead. The principal business of Ridgeview is to act as the manager and as a member of Hampstead and other affiliated companies. Michael R. Milken and Lowell J. Milken are the managers of Ridgeview. The principal business of Mollusk is to act as a member of Hampstead and affiliated companies. Mollusk may also act as, or appoint, a co-manager of Hampstead. The principal executive offices of Mollusk are located at 351 California Street, 15th Floor, San Francisco, California 94104. Cephalopod and Lawrence are the managers of Mollusk. The principal business of Cephalopod is to act as a manager and member of Mollusk and other entities. The principal executive offices of Cephalopod are located at 500 Oracle Parkway, Redwood Shores, California 94065. Mr. Ellison owns all of the outstanding equity interests in Cephalopod. The principal business of Lawrence is to act as a manager and member of Mollusk and other entities. Mr. Ellison and Mr. Philip B. Simon are the managers of Lawrence. The principal executive offices of Lawrence are located at 101 Ygnacio Valley Road, Suite 310, Walnut Creek, California 94596. Messrs. Michael and Lowell Milken and Mr. Ellison may each be deemed a controlling person of Hampstead, ET Holdings, ET Consolidated, Knowledge Universe, PEC, Parent and Purchaser. In addition, Messrs. Michael and Lowell Milken may each be deemed to be a controlling person of Ridgeview. Mr. Ellison may be deemed to be a controlling person of Mollusk, Cephalopod and Lawrence. During the past five years, none of the Named Persons nor, to the best knowledge of each of the Named Persons, any of the members, directors or executive officers of the Named Persons has been I-1 convicted in a criminal proceeding (excluding traffic violations or similar misdemeanors) nor has been a party to a civil proceeding of a judicial or administrative body of competent jurisdiction as a result of which such person was or is subject to a judgment, decree or final order enjoining future violations of, or, prohibiting or mandating activities subject to federal or state securities laws or finding any violation of such laws, except that on February 24, 1998, without admitting or denying any liability, Michael R. Milken consented to the entry of a final judgment in the U.S. District Court for the Southern District of New York in SECURITIES AND EXCHANGE COMMISSION V. MICHAEL R. MILKEN ET AL., which judgment was entered on February 26, 1998, restraining and enjoining Michael R. Milken from associating with any broker, dealer, investment adviser, investment company, or municipal securities dealer and from violating Section 15(a) of the Exchange Act. On March 11, 1991, in the action entitled IN THE MATTER OF MICHAEL R. MILKEN, the Commission instituted a proceeding pursuant to Section 15(b)(6) of the Exchange Act and ordered that Michael R. Milken be barred from association with any broker, dealer, investment advisor, investment company or municipal securities dealer. On April 24, 1990, Michael R. Milken consented to the entry of a final judgment in the U.S. District Court for the Southern District of New York in SECURITIES AND EXCHANGE COMMISSION V. DREXEL BURNHAM LAMBERT INCORPORATED, ET AL., restraining and enjoining Michael Milken from engaging in transactions, acts, practices and courses of business which constitute or would constitute violations of, or which aid and abet or would aid and abet violations of, Sections 7(c), 7(f), 9(a)(2), 10(b), 13(d), 14(e), 15(c)(3) and 17(a)(1) of the Exchange Act, and Regulations T and X and Rules 10b-5, 10b-6, 13d-1, 13d-2, 14c-3, 15c3-1, 17a-3 and 17a-4 promulgated thereunder and Section 17(a) of the Securities Act of 1933, as amended. I-2 The following table sets forth names, present principal occupation or employment, and material occupations, positions, offices, or employments during the last five years of each director and executive officer of Parent, Purchaser and Knowledge Universe, and for the individuals above who are Named Persons. Unless otherwise noted, the executive officers, directors and Named Persons set forth below have held the positions indicated below with Parent, Purchaser or Knowledge Universe, respectively, for the last five years or have served such entities in various administrative or executive capacities for at least that long. Unless otherwise set forth below, the business address of each person listed below is 844 Moraga Drive, Los Angeles, California 90049, and each person is a citizen of the United States. I. EXECUTIVE OFFICERS AND DIRECTORS OF PARENT AND PURCHASER
PRESENT PRINCIPAL OCCUPATION AND NAME TITLE FIVE YEAR EMPLOYMENT HISTORY - --------------------------------- -------------------------- -------------------------------------------------- Thomas J. Kalinske Director; President Mr. Kalinske has served as President of each of 1350 Old Bayshore, Suite 260 Parent and Purchaser and as a director of each of Burlingame, California 94010 Parent and Purchaser since their incorporation. Since September 1996, Mr. Kalinske's principal occupation has been to serve as President of Knowledge Universe. From September 1990 to September 1996, Mr. Kalinske served as President and Chief Executive Officer of Sega of America, located at 255 Shoreline Drive, Redwood Shores, California. Mr. Kalinske is a director of the National Foundation for the Improvement of Education and UCLA's Graduate School of Education and Information Services and is a trustee of the RAND Corporation's Institute on Education and Training. Mr. Kalinske is also a director of The Milken Family Foundation, located at 1250 Fourth Street, Santa Monica, California. Ronald J. Packard Director; Treasurer Mr. Packard has served as Treasurer and Secretary and Secretary of each of Parent and Purchaser and as a director of each of Parent and Purchaser since their incorporation. Since March 1998, Mr. Packard's principal business occupation has been to serve as a Vice President of Knowledge Universe. Prior thereto, Mr. Packard had served as an executive employee of Knowledge Universe since March 1997. From January 1995 to March 1997, Mr. Packard was President and General Manager of Forestal Trillium, located at 1860 11 de Septiembre, Santiago, Chile. Prior thereto, Mr. Packard had been employed as a consultant by McKinsey & Co. at 400 South Hope Street, Los Angeles, California, from September 1989 to January 1995.
I-3
PRESENT PRINCIPAL OCCUPATION AND NAME TITLE FIVE YEAR EMPLOYMENT HISTORY - --------------------------------- -------------------------- -------------------------------------------------- Deborah Bond-Upson Director Mrs. Bond-Upson has served as a director of each 1350 Old Bayshore, Suite 260 of Parent and Purchaser since their incorporation. Burlingame, California 94010 Since March 1998, Mrs. Bond-Upson's principal business occupation has been to serve as a Vice President of Knowledge Universe. Prior thereto, Mrs. Bond-Upson had served as an executive employee of Knowledge Universe since November 1997. From January 1993 to November 1997, Mrs. Bond-Upson served as Vice President of Kaplan Educational Centers and Vice President of The Landrah Corporation, each located at 888 Seventh Avenue, New York, New York.
II. EXECUTIVE OFFICERS AND DIRECTORS OF KNOWLEDGE UNIVERSE
PRESENT PRINCIPAL OCCUPATION AND NAME TITLE FIVE YEAR EMPLOYMENT HISTORY - --------------------------------- -------------------------- -------------------------------------------------- Michael R. Milken Director Mr. Milken's principal business occupation has been to serve as a director of Knowledge Universe since January 1996. Mr. Milken has also served as President and a director of MC Group since December 1993. Since July 1993, Mr. Milken has served as President and a director of EEN Communications Network. Mr. Milken has also served as a director of The Milken Institute for Job and Capital Formation since May 1993, as President and a director of the Association for the Cure of Cancer of the Prostate, since April 1993 and as a director of The Milken Family Foundation, each located at 1250 Fourth Street, Santa Monica, California. Lowell J. Milken Director Mr. Milken's principal business occupation has been to serve as a director of Knowledge Universe since January 1996. Since prior to 1993, Mr. Milken has served as President and a director of The Milken Family Foundation, located at 1250 Fourth Street, Santa Monica, California.
I-4
PRESENT PRINCIPAL OCCUPATION AND NAME TITLE FIVE YEAR EMPLOYMENT HISTORY - --------------------------------- -------------------------- -------------------------------------------------- Lawrence J. Ellison Director Mr. Ellison has served as a director of Knowledge 500 Oracle Parkway Universe since January 1996. Mr. Ellison's Redwood Shores, California 94065 principal business occupation has been to serve as Chief Executive Officer of Oracle Corporation, located at 500 Oracle Parkway, Redwood Shores, California, since May 1977, as Chairman of the Board of Oracle Corporation since June 1995 and as a member of its Executive Committee since 1986. Mr. Ellison also served as the President of Oracle Corporation until June 1996. From December 1995 through May 1997, Mr. Ellison served as President, Chief Financial Officer and Secretary of Cephalopod. Since May 1997, Mr. Ellison has served as Chairman and Chief Executive Officer of Cephalopod. Mr. Ellison has been a member of Lawrence since April 1997. Steven B. Fink Vice Chairman Mr. Fink's principal business occupation has been to serve as Vice Chairman of Knowledge Universe since August 1997. Mr. Fink has served as a Vice President of MC Group since December 1993. Prior thereto, Mr. Fink served as President of East West Capital, located at 10900 Wilshire Boulevard, Los Angeles, California. Thomas J. Kalinske President Mr. Kalinske has served as President of Knowledge Universe since September 1996. In addition, Mr. Kalinske has held the positions set forth above. Stanley E. Maron Secretary Mr. Maron has served as Secretary of Knowledge Universe since December 1996. Mr. Maron's principal business occupation has been to serve as an attorney and shareholder of Maron & Sandler, a professional corporation, located at 844 Moraga Drive, Los Angeles, California, since 1994. Prior thereto, Mr. Maron had been an attorney and shareholder of Buchalter, Nemer, Fields & Younger, located at 601 S. Figueroa, Suite 2400, Los Angeles, California, since 1975. Ronald J. Packard Vice President Mr. Packard has served as a Vice President of Knowledge Universe since March 1998. In addition, Mr. Packard has held the positions set forth above. Deborah Bond-Upson Vice President Mrs. Bond-Upson has served as a Vice President of Knowledge Universe since March 1998. In addition, Mrs. Bond-Upson has held the positions set forth above.
I-5 ANNEX II Set forth below is Section 262 of the General Corporation Law of the State of Delaware regarding appraisal rights, which rights will only be available in connection with the Merger. SECTION 262 OF THE GENERAL CORPORATION LAW OF THE STATE OF DELAWARE SECTION 262 APPRAISAL RIGHTS--(a) Any stockholder of a corporation of this State who holds shares of stock on the date of the making of a demand pursuant to subsection (d) of this section with respect to such shares, who continuously holds such shares through the effective date of the merger or consolidation, who has otherwise complied with subsection (d) of this section and who has neither voted in favor of the merger or consolidation nor consented thereto in writing pursuant to 228 of this title shall be entitled to an appraisal by the Court of Chancery of the fair value of his shares of stock under the circumstances described in subsections (b) and (c) of this section. As used in this section, the word "stockholder" means a holder of record of stock in a stock corporation and also a member of record of a nonstock corporation; the words "stock" and "share" mean and include what is ordinarily meant by those words and also membership or membership interest of a member of a nonstock corporation; and the words "depository receipt" mean a receipt or other instrument issued by a depository representing an interest in one or more shares, or fractions thereof, solely of stock of a corporation, which stock is deposited with the depository. (b) Appraisal rights shall be available for the shares of any class or series of stock of a constituent corporation in a merger or consolidation to be effected pursuant to Section Section 251 (other than a merger effected pursuant to subsection (g) of Section 251), 252, 254, 257, 258, 263 or 264 of this title: (1) Provided, however, that no appraisal rights under this section shall be available for the shares of any class or series of stock, which stock, or depository receipts in respect thereof, at the record date fixed to determine the stockholders entitled to receive notice of and to vote at the meeting of stockholders to act upon the agreement of merger or consolidation, were either (i) listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or (ii) held of record by more than 2,000 holders; and further provided that no appraisal rights shall be available for any shares of stock of the constituent corporation surviving a merger if the merger did not require for its approval the vote of the holders of the surviving corporation as provided in subsection (f) of Section 251 of this title. (2) Notwithstanding paragraph (1) of this subsection, appraisal rights under this section shall be available for the shares of any class or series of stock of a constituent corporation if the holders thereof are required by the terms of an agreement of merger or consolidation pursuant to Section ! 251, 252, 254, 257, 258, 263 and 264 of this title to accept for such stock anything except: a. Shares of stock of the corporation surviving or resulting from such merger or consolidation, or depository receipts in respect thereof; b. Shares of stock of any other corporation, or depository receipts in respect thereof, which shares of stock (or depository receipts in respect thereof) or depository receipts at the effective date of the merger or consolidation will be either listed on a national securities exchange or designated as a national market system security on an interdealer quotation system by the National Association of Securities Dealers, Inc. or held of record by more than 2,000 holders; c. Cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a. and b. of this paragraph; or d. Any combination of the shares of stock, depository receipts and cash in lieu of fractional shares or fractional depository receipts described in the foregoing subparagraphs a., b. and c. of this paragraph. II-1 (3) In the event all of the stock of a subsidiary Delaware corporation party to a merger effected under 253 of this title is not owned by the parent corporation immediately prior to the merger, appraisal rights shall be available for the shares of the subsidiary Delaware corporation. (c) Any corporation may provide in its certificate of incorporation that appraisal rights under this section shall be available for the shares of any class or series of its stock as a result of an amendment to its certificate of incorporation, any merger or consolidation in which the corporation is a constituent corporation or the sale of all or substantially all of the assets of the corporation. If the certificate of incorporation contains such a provision, the procedures of this section, including those set forth in subsections (d) and (e) of this section, shall apply as nearly as is practicable. (d) Appraisal rights shall be perfected as follows: (1) If a proposed merger or consolidation for which appraisal rights are provided under this section is to be submitted for approval at a meeting of stockholders, the corporation, not less than 20 days prior to the meeting, shall notify each of its stockholders who was such on the record date for such meeting with respect to shares for which appraisal rights are available pursuant to subsections (b) or (c) hereof that appraisal rights are available for any or all of the shares of the constituent corporations, and shall include in such notice a copy of this section. Each stockholder electing to demand the appraisal of his shares shall deliver to the corporation, before the taking of the vote on the merger or consolidation, a written demand for appraisal of his shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of his shares. A proxy or vote against the merger or consolidation shall not constitute such a demand. A stockholder electing to take such action must do so by a separate written demand as herein provided. Within 10 days after the effective date of such merger or consolidation, the surviving or resulting corporation shall notify each stockholder of each constituent corporation who has complied with this subsection and has not voted in favor of or consented to the merger or consolidation of the date that the merger or consolidation has become effective; or (2) If the merger or consolidation was approved pursuant to Section 228 or Section 253 of this title, each constituent corporation, either before the effective date of the merger or consolidation or within ten days thereafter, shall notify each of the holders of any class or series of stock of such constituent corporation who are entitled to appraisal rights of the approval of the merger or consolidation and that appraisal rights are available for any or all shares of such class or series of stock of such constituent corporation, and shall include in such notice a copy of this section, provided that, if the notice is given on or after the effective date of the merger or consolidation, such notice shall be given by the surviving or resulting corporation to all such holders of any class or series of stock of a constituent corporation that are entitled to appraisal rights. Such notice may, and, if given on or after the effective date of the merger or consolidation, shall, also notify such stockholders of the effective date of the merger or consolidation. Any stockholder entitled to appraisal rights may, within twenty days after the date of mailing of such notice, demand in writing from the surviving or resulting corporation the appraisal of such holder's shares. Such demand will be sufficient if it reasonably informs the corporation of the identity of the stockholder and that the stockholder intends thereby to demand the appraisal of such holder's shares. If such notice did not notify stockholders of the effective date of the merger or consolidation, either (i) each such constituent corporation shall send a second notice before the effective date of the merger or consolidation notifying each of the holders of any class or series of stock of such constituent corporation that are entitled to appraisal rights of the effective date of the merger or consolidation or (ii) the surviving or resulting corporation shall send such a second notice to all such holders on or within 10 days after such effective date; provided, however, that if such second notice is sent more than 20 days following the sending of the first notice, such second notice need only be sent to each stockholder who is entitled to appraisal rights and who has demanded appraisal of such holder's shares in accordance with this subsection. An affidavit of the II-2 secretary or assistant secretary or of the transfer agent of the corporation that is required to give either notice that such notice has been given shall, in the absence of fraud, be prima facie evidence of the facts stated therein. For purposes of determining the stockholders entitled to receive either notice, each constituent corporation may fix, in advance, a record date that shall be not more than 10 days prior to the date the notice is given; provided that, if the notice is given on or after the effective date of the merger or consolidation, the record date shall be such effective date. If no record date is fixed and the notice is given prior to the effective date, the record date shall be the close of business on the day next preceding the day on which the notice is given. (e) Within 120 days after the effective date of the merger or consolidation, the surviving or resulting corporation or any stockholder who has complied with subsections (a) and (d) hereof and who is otherwise entitled to appraisal rights, may file a petition in the Court of Chancery demanding a determination of the value of the stock of all such stockholders. Notwithstanding the foregoing, at any time within 60 days after the effective date of the merger or consolidation, any stockholder shall have the right to withdraw his demand for appraisal and to accept the terms offered upon the merger or consolidation. Within 120 days after the effective date of the merger or consolidation, any stockholder who has complied with the requirements of subsections (a) and (d) hereof, upon written request, shall be entitled to receive from the corporation surviving the merger or resulting from the consolidation a statement setting forth the aggregate number of shares not voted in favor of the merger or consolidation and with respect to which demands for appraisal have been received and the aggregate number of holders of such shares. Such written statement shall be mailed to the stockholder within 10 days after his written request for such a statement is received by the surviving or resulting corporation or within 10 days after expiration of the period for delivery of demands for appraisal under subsection (d) hereof, whichever is later. (f) Upon the filing of any such petition by a stockholder, service of a copy thereof shall be made upon the surviving or resulting corporation, which shall within 20 days after such service file in the office of the Register in Chancery in which the petition was filed a duly verified list containing the names and addresses of all stockholders who have demanded payment for their shares and with whom agreements as to the value of their shares have not been reached by the surviving or resulting corporation. If the petition shall be filed by the surviving or resulting corporation, the petition shall be accompanied by such a duly verified list. The Register in Chancery, if so ordered by the Court, shall give notice of the time and place fixed for the hearing of such petition by registered or certified mail to the surviving or resulting corporation and to the stockholders shown on the list at the addresses therein stated. Such notice shall also be given by 1 or more publications at least 1 week before the day of the hearing, in a newspaper of general circulation published in the City of Wilmington, Delaware or such publication as the Court deems advisable. The forms of the notices by mail and by publication shall be approved by the Court, and the costs thereof shall be borne by the surviving or resulting corporation. (g) At the hearing on such petition, the Court shall determine the stockholders who have complied with this section and who have become entitled to appraisal rights. The Court may require the stockholders who have demanded an appraisal for their shares and who hold stock represented by certificates to submit their certificates of stock to the Register in Chancery for notation thereon of the pendency of the appraisal proceedings; and if any stockholder fails to comply with such direction, the Court may dismiss the proceedings as to such stockholder. (h) After determining the stockholders entitled to an appraisal, the Court shall appraise the shares, determining their fair value exclusive of any element of value arising from the accomplishment or expectation of the merger or consolidation, together with a fair rate of interest, if any, to be paid upon the amount determined to be the fair value. In determining such fair value, the Court shall take into account all relevant factors. In determining the fair rate of interest, the Court may consider all relevant factors, including the rate of interest which the surviving or resulting corporation would have had to pay to borrow money during the pendency of the proceeding. Upon application by the surviving or resulting corporation or by any stockholder entitled to participate in the appraisal proceeding, the Court may, in its discretion, II-3 permit discovery or other pretrial proceedings and may proceed to trial upon the appraisal prior to the final determination of the stockholder entitled to an appraisal. Any stockholder whose name appears on the list filed by the surviving or resulting corporation pursuant to subsection (f) of this section and who has submitted his certificates of stock to the Register in Chancery, if such is required, may participate fully in all proceedings until it is finally determined that he is not entitled to appraisal rights under this section. (i) The Court shall direct the payment of the fair value of the shares, together with interest, if any, by the surviving or resulting corporation to the stockholders entitled thereto. Interest may be simple or compound, as the Court may direct. Payment shall be so made to each such stockholder, in the case of holders of uncertificated stock forthwith, and the case of holders of shares represented by certificates upon the surrender to the corporation of the certificates representing such stock. The Court's decree may be enforced as other decrees in the Court of Chancery may be enforced, whether such surviving or resulting corporation be a corporation of this State or of any state. (j) The costs of the proceeding may be determined by the Court and taxed upon the parties as the Court deems equitable in the circumstances. Upon application of a stockholder, the Court may order all or a portion of the expenses incurred by any stockholder in connection with the appraisal proceeding, including, without limitation, reasonable attorney's fees and the fees and expenses of experts, to be charged pro rata against the value of all the shares entitled to an appraisal. (k) From and after the effective date of the merger or consolidation, no stockholder who has demanded his appraisal rights as provided in subsection (d) of this section shall be entitled to vote such stock for any purpose or to receive payment of dividends or other distributions on the stock (except dividends or other distributions payable to stockholders of record at a date which is prior to the effective date of the merger or consolidation); provided, however, that if no petition for an appraisal shall be filed within the time provided in subsection (e) of this section, or if such stockholder shall deliver to the surviving or resulting corporation a written withdrawal of his demand for an appraisal and an acceptance of the merger or consolidation, either within 60 days after the effective date of the merger or consolidation as provided in subsection (e) of this section or thereafter with the written approval of the corporation, then the right of such stockholder to an appraisal shall cease. Notwithstanding the foregoing, no appraisal proceeding in the Court of Chancery shall be dismissed as to any stockholder without the approval of the Court, and such approval may be conditioned upon such terms as the Court deems just. (l) The shares of the surviving or resulting corporation to which the shares of such objecting stockholders would have been converted had they assented to the merger or consolidation shall have the status of authorized and unissued shares of the surviving or resulting corporation. II-4 Facsimile copies (with manual signatures) of the Letter of Transmittal will be accepted. The Letter of Transmittal and certificates for Shares and any other required documents should be sent or delivered by each stockholder of the Company or such stockholder's broker, dealer, commercial bank, trust company or other nominee to the Depositary at one of the addresses set forth below: THE DEPOSITARY FOR THE OFFER IS: IBJ SCHRODER BANK & TRUST COMPANY BY MAIL: BY FACSIMILE TRANSMISSION: BY HAND OR OVERNIGHT DELIVERY: P.O. Box 84 (212) 858-2611 One State Street Bowling Green Station Attn: Reorganization Dept. New York, New York 10004 New York, New York 10274-0084 Attn: Reorganization Dept. Attn: Reorganization Dept. Securities Processing Window SC-1 CONFIRM RECEIPT OF FACSIMILE BY TELEPHONE: (212) 858-2103
Any questions or requests for assistance or additional copies of the Offer to Purchase and the related Letter of Transmittal, and other tender offer materials, may be directed to the Dealer Manager or the Information Agent at their respective addresses and telephone numbers listed below. Stockholders may also contact their broker, dealer, commercial bank, trust company or other nominee for assistance concerning the Offer. THE DEALER MANAGER FOR THE OFFER IS: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION 2121 Avenue of the Stars, Suite 3200 Los Angeles, California 90067 (310) 282-7449 (call collect) THE INFORMATION AGENT FOR THE OFFER IS: [MACKENZIE PARTNERS, INC. LOGO] 156 Fifth Avenue New York, New York 10010 (212) 929-5500 (call collect) or Call Toll Free (800) 322-2885 EX-99.A2 3 EXHIBIT 99-A2 LETTER OF TRANSMITTAL TO TENDER SHARES OF COMMON STOCK OF CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. PURSUANT TO THE OFFER TO PURCHASE DATED APRIL 3, 1998 OF KBI ACQUISITION CORP. A WHOLLY OWNED SUBSIDIARY OF KNOWLEDGE BEGINNINGS, INC. THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON FRIDAY, MAY 1, 1998, UNLESS THE OFFER IS EXTENDED. THE DEPOSITARY FOR THE OFFER IS: IBJ SCHRODER BANK & TRUST COMPANY BY MAIL: BY FACSIMILE BY HAND OR OVERNIGHT DELIVERY: TRANSMISSION: P.O. Box 84 (212) 858-2611 One State Street Bowling Green Station Attn: Reorganization New York, New York 10004 New York, New York 10274-0084 Dept. Attn: Reorganization Dept. Attn: Reorganization Dept. Securities Processing Window SC-1 CONFIRM RECEIPT OF FACSIMILE BY TELEPHONE: (212) 858-2103
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. YOU MUST SIGN THIS LETTER OF TRANSMITTAL WHERE INDICATED BELOW AND COMPLETE THE SUBSTITUTE FORM W-9 PROVIDED HEREIN. THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ CAREFULLY BEFORE THIS LETTER OF TRANSMITTAL IS COMPLETED. This Letter of Transmittal is to be completed by stockholders of Children's Discovery Centers of America, Inc., a Delaware corporation (the "Company"), if certificates representing Shares (as defined below) ("Share Certificates") are to be forwarded herewith or, unless an Agent's Message (as defined in the Offer to Purchase (as defined below)) is utilized, if delivery of Shares is to be made by book-entry transfer to the Depositary's account at The Depository Trust Company (hereinafter referred to as the "Book-Entry Transfer Facility") pursuant to the procedures set forth in Section 3 of the Offer to Purchase. Stockholders whose Share Certificates are not immediately available or who cannot deliver their Share Certificates and all other documents required hereby to the Depositary prior to the Expiration Date (as defined in the Offer to Purchase), or who cannot comply with the book-entry transfer procedures on a timely basis, may nevertheless tender their Shares pursuant to the guaranteed delivery procedure set forth in Section 3 of the Offer to Purchase. See Instruction 2. Delivery of documents to the Book-Entry Transfer Facility in accordance with the Book-Entry Transfer Facility's procedures does not constitute delivery to the Depositary. / / CHECK HERE IF SHARES ARE BEING DELIVERED BY BOOK-ENTRY TRANSFER TO THE DEPOSITARY'S ACCOUNT AT THE BOOK-ENTRY TRANSFER FACILITY AND COMPLETE THE FOLLOWING: Name of Tendering Institution: Account Number: Transaction Code Number: / / CHECK HERE IF SHARES ARE BEING TENDERED PURSUANT TO A NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE DEPOSITARY AND COMPLETE THE FOLLOWING: Name(s) of Registered Holder(s): Window Ticket No. (if any): Date of Execution of Notice of Guaranteed Delivery: Name of Institution which Guaranteed Delivery:
- --------------------------------------------------------------------------------------------------------- Name(s) and Address(es) of Holder(s) (Please fill in, if blank, exactly as Share Certificate(s) and Share(s) Tendered name(s) appear(s) on Share Certificate(s) (Attach additional list, if necessary) - --------------------------------------------------------------------------------------------------------- Total Number Share of Shares Number of Certificate Evidenced by Shares Number(s)* Share Tendered** Certificate(s) ---------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------------------------- ---------------------------------------------------------- Total Shares - --------------------------------------------------------------------------------------------------------- * Need not be completed by stockholders delivering Shares by book-entry transfer. ** Unless otherwise indicated, it will be assumed that all Shares evidenced by each Share Certificate delivered to the Depositary are being tendered hereby. See Instruction 4. - ---------------------------------------------------------------------------------------------------------
NOTE: SIGNATURES MUST BE PROVIDED BELOW PLEASE READ THE ACCOMPANYING INSTRUCTIONS CAREFULLY Ladies and Gentlemen: The undersigned hereby tenders to KBI Acquisition Corp., a Delaware corporation ("Purchaser") and a wholly owned subsidiary of Knowledge Beginnings, Inc., a Delaware corporation, the above-described shares of common stock, par value $.01 per share (the "Shares"), of Children's Discovery Centers of America, Inc., a Delaware corporation (the "Company"), pursuant to Purchaser's offer to purchase any and all outstanding Shares at a purchase price of $12.25 per Share (the "Offer Price"), net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer to Purchase dated April 3, 1998 (the "Offer to Purchase"), receipt of which is hereby acknowledged, and in this Letter of Transmittal (which, together with the Offer to Purchase, as each may be amended and supplemented from time to time, constitute the "Offer"). Subject to, and effective upon, acceptance for payment of the Shares tendered herewith, the undersigned hereby sells, assigns and transfers to or upon the order of Purchaser all right, title and interest in and to all the Shares that are being tendered hereby and any and all other Shares or other securities issued or issuable in respect thereof on or after March 27, 1998 (a "Distribution") and appoints the Depositary the true and lawful agent and attorney-in-fact of the undersigned with respect to such Shares (and any Distributions), with full power of substitution (such power of attorney being deemed to be an irrevocable power coupled with an interest), to (a) deliver Share Certificates (and any Distributions), or transfer ownership of such Shares (and any Distributions) on the account books maintained by the Book-Entry Transfer Facility, together, in any such case, with all accompanying evidences of transfer and authenticity, to or upon the order of Purchaser, (b) present such Shares (and any Distributions) for transfer on the books of the Company, and (c) receive all benefits and otherwise exercise all rights of beneficial ownership of such Shares (and any Distributions), all in accordance with the terms and subject to the conditions of the Offer. The undersigned hereby irrevocably appoints designees of Purchaser as the attorneys and proxies of the undersigned, each with full power of substitution, to exercise all voting and other rights of the undersigned in such manner as each such attorney and proxy or his substitute shall in his sole judgment deem proper, with respect to all of the Shares tendered hereby which have been accepted for payment by Purchaser prior to the time of any vote or other action (and any Distributions), at any meeting of stockholders of the Company (whether annual or special and whether or not an adjourned meeting) or otherwise. This power of attorney and proxy are irrevocable, are coupled with an interest in the Shares tendered hereby, and are granted in consideration of, and effective upon, the acceptance for payment of such Shares by Purchaser in accordance with the terms of the Offer. Such acceptance for payment shall revoke any other proxy or written consent granted by the undersigned at any time with respect to such Shares (and any Distributions), and no subsequent proxies will be given or written consents executed by the undersigned (and if given or executed, will not be deemed effective). The undersigned hereby represents and warrants that the undersigned has full power and authority to tender, sell, assign and transfer the Shares tendered hereby (and any Distributions) and that when the same are accepted for payment by Purchaser, Purchaser will acquire good and unencumbered title thereto, free and clear of all liens, restrictions, charges and encumbrances and not subject to any adverse claims. The undersigned will, upon request, execute and deliver any additional documents deemed by the Depositary or Purchaser to be necessary or desirable to complete the sale, assignment and transfer of the Shares tendered hereby (and any Distributions). All authority herein conferred or agreed to be conferred shall survive the death or incapacity of the undersigned, and any obligation of the undersigned hereunder shall be binding upon the heirs, personal representatives, successors and assigns of the undersigned. Except as stated in the Offer, this tender is irrevocable. The undersigned understands that the tender of Shares pursuant to any one of the procedures described in Section 3 of the Offer to Purchase and in the instructions hereto will constitute an agreement between the undersigned and Purchaser upon the terms and subject to the conditions of the Offer. The undersigned acknowledges that no interest will be paid on the Offer Price for tendered Shares regardless of any extension of the Offer or any delay in making such payment. Unless otherwise indicated in the box entitled "Special Payment Instructions," please issue the check for the purchase price of any Shares purchased, and return any Share Certificates evidencing any Shares not tendered or not purchased, in the name(s) of the undersigned (and, in the case of Shares tendered by book-entry transfer, by credit to the account at the Book-Entry Transfer Facility). Similarly, unless otherwise indicated in the box entitled "Special Delivery Instructions," please mail the check for the purchase price of any Shares purchased and return any Share Certificates evidencing any Shares not tendered or not purchased (and accompanying documents, as appropriate) to the undersigned at the address shown below the undersigned's signature(s). In the event that the boxes entitled "Special Payment Instructions" and "Special Delivery Instructions" are both completed, please issue the check for the purchase price of any Shares purchased and return any Share Certificates evidencing any Shares not tendered or not purchased in the name(s) of, and mail said check and Share Certificates to, the person(s) so indicated. The undersigned acknowledges that Purchaser has no obligation, pursuant to the "Special Payment Instructions," to transfer any Shares from the name of the registered holder(s) thereof if Purchaser does not accept for payment any of the Shares so tendered. - -------------------------------------------------- SPECIAL PAYMENT INSTRUCTIONS (SEE INSTRUCTIONS 1, 5, 6, AND 7) To be completed ONLY if the check for the purchase price of Shares purchased or Share Certificates evidencing Shares not tendered or not purchased are to be issued in the name of someone other than the undersigned, or if Shares tendered hereby and delivered by book-entry transfer which are not purchased are to be returned by credit to an account at the Book-Entry Transfer Facility other than that designated above. Issue: / / Check / / Share Certificate(s) to: Name _________________________________________________________________________ (Please Print) Address ______________________________________________________________________ ______________________________________________________________________________ (Zip Code) ______________________________________________________________________________ (Taxpayer Identification or Social Security No.) (See Substitute Form W-9 on reverse side) Credit Shares delivered by book-entry transfer and not purchased to the account set forth below: ____________________________________________________________ (Account Number) - -------------------------------------------------- - -------------------------------------------------- SPECIAL DELIVERY INSTRUCTIONS (SEE INSTRUCTIONS 1, 5, 6 AND 7) To be completed ONLY if the check for the purchase price of Shares purchased or Share Certificates evidencing Shares not tendered or not purchased are to be mailed to someone other than the undersigned, or to the undersigned at an address other than that shown under the undersigned's signature. Mail: / / Check / / Share Certificate(s) to: Name _________________________________________________________________________ (Please Print) Address ______________________________________________________________________ ______________________________________________________________________________ (Zip Code) ______________________________________________________________________________ (Taxpayer Identification or Social Security No.) (See Substitute Form W-9 on reverse side) - ------------------------------------------ - -------------------------------------------------------------------------------- IMPORTANT STOCKHOLDERS SIGN HERE (PLEASE COMPLETE SUBSTITUTE FORM W-9 ON REVERSE) ______________________________________________________________________________ ______________________________________________________________________________ Signature(s) of Holder(s) Dated: __ (Must be signed by the registered holder(s) exactly as such holder(s) name(s) appear(s) on the Share Certificate(s) or on a security position listing or by a person(s) authorized to become the registered holder(s) of such Share Certificate(s) by certificates and documents transmitted herewith. If signature is by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, please provide the following information and see Instruction 5.) Name(s): _____________________________________________________________________ (Please Type or Print) Capacity (full title): _______________________________________________________ Address: _____________________________________________________________________ (Include Zip Code) Area Code and Telephone No.: _________________________________________________ Tax Identification or Social Security Nos.: __________________________________ (See Substitute Form W-9 on reverse side) GUARANTEE OF SIGNATURE(S) (SEE INSTRUCTIONS 1 AND 5) Authorized Signature: ________________________________________________________ Name: ________________________________________________________________________ (Please Type or Print) Title: _______________________________________________________________________ Name of Firm: ________________________________________________________________ Address: _____________________________________________________________________ (Include Zip Code) Area Code and Telephone No.: _________________________________________________ Dated: __ - -------------------------------------------------------------------------------- INSTRUCTIONS FORMING PART OF THE TERMS AND CONDITIONS OF THE OFFER 1. GUARANTEE OF SIGNATURES. Except as otherwise provided below, signatures on all Letters of Transmittal must be guaranteed by a firm that is a bank, broker, dealer, credit union, savings association or other entity which is a member in good standing of the Securities Transfer Agents Medallion Program or by any other bank, broker, dealer, credit union, savings association or other entity which is an "eligible guarantor institution," as such term is defined in Rule 17Ad-5 under the Securities Exchange Act of 1934, as amended (each of the foregoing constituting an "Eligible Institution"), unless the Shares tendered thereby are tendered (i) by a registered holder of Shares who has not completed either the box labeled "Special Payment Instructions" or the box labeled "Special Delivery Instructions" on this Letter of Transmittal or (ii) for the account of an Eligible Institution. See Instruction 5. If Share Certificates are registered in the name of a person or persons other than the signer of this Letter of Transmittal, or if payment is to be made or delivered to, or certificates evidencing unpurchased Shares are to be issued or returned to, a person other than the registered owner or owners, then the tendered Share Certificates must be endorsed or accompanied by duly executed stock powers, in either case signed exactly as the name or names of the registered owner or owners appear on the Share Certificates, with the signatures on the Share Certificates or stock powers guaranteed by an Eligible Institution as provided herein. See Instruction 5. 2. DELIVERY OF LETTER OF TRANSMITTAL AND SHARE CERTIFICATES. This Letter of Transmittal is to be used if Share Certificates are to be forwarded herewith or, unless an Agent's Message is utilized, if the delivery of Shares is to be made by book-entry transfer pursuant to the procedures set forth in Section 3 of the Offer to Purchase. Certificates for all physically delivered Shares, or a confirmation of a book-entry transfer into the Depositary's account at the Book-Entry Transfer Facility of all Shares delivered electronically, as well as a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof) and any other documents required by this Letter of Transmittal, or an Agent's Message in the case of a book-entry transfer, must be received by the Depositary at one of its addresses set forth on the front page of this Letter of Transmittal by the Expiration Date (as defined in the Offer to Purchase). Stockholders who cannot deliver their Share Certificates and all other required documents to the Depositary by the Expiration Date must tender their Shares pursuant to the guaranteed delivery procedure set forth in Section 3 of the Offer to Purchase. Pursuant to such procedure: (a) such tender must be made by or through an Eligible Institution; (b) a properly completed and duly executed Notice of Guaranteed Delivery, substantially in the form provided by Purchaser, must be received by the Depositary prior to the Expiration Date; and (c) Share Certificates for all tendered Shares, in proper form for tender, or a confirmation of a book-entry transfer into the Depositary's account at the Book-Entry Transfer Facility of all Shares delivered electronically, as well as a properly completed and duly executed Letter of Transmittal (or a manually signed facsimile thereof), and any other documents required by this Letter of Transmittal, must be received by the Depositary within three Nasdaq National Market trading days after the date of execution of such Notice of Guaranteed Delivery, all as provided in Section 3 of the Offer to Purchase. THE METHOD OF DELIVERY OF THIS LETTER OF TRANSMITTAL, SHARE CERTIFICATES AND ALL OTHER REQUIRED DOCUMENTS, INCLUDING DELIVERY THROUGH THE BOOK-ENTRY TRANSFER FACILITY, IS AT THE OPTION AND RISK OF THE TENDERING STOCKHOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE DEPOSITARY. IF DELIVERY IS BY MAIL, REGISTERED MAIL WITH RETURN RECEIPT REQUESTED, PROPERLY INSURED, IS RECOMMENDED. IN ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY. No alternative, conditional or contingent tenders will be accepted. By execution of this Letter of Transmittal (or a manually signed facsimile thereof), all tendering stockholders waive any right to receive any notice of the acceptance of their Shares for payment. 3. INADEQUATE SPACE. If the space provided herein is inadequate, the Share Certificate numbers and/or the number of Shares should be listed on a separate schedule attached hereto. 4. PARTIAL TENDERS. If fewer than all of the Shares represented by any Share Certificate delivered to the Depositary are to be tendered, fill in the number of Shares which are to be tendered in the box entitled "Number of Shares Tendered." In such case, a new Share Certificate for the remainder of the Shares represented by the old Share Certificate will be sent to the person(s) signing this Letter of Transmittal, unless otherwise provided in the box entitled "Special Delivery Instructions," as promptly as practicable following the expiration or termination of the Offer. All Shares represented by Share Certificates delivered to the Depositary will be deemed to have been tendered unless otherwise indicated. 5. SIGNATURES ON LETTER OF TRANSMITTAL; STOCK POWERS AND ENDORSEMENTS. If this Letter of Transmittal is signed by the registered holder(s) of the Shares tendered hereby, the signature(s) must correspond with the name(s) as written on the face of the Share Certificate(s) without alteration, enlargement or any other change whatsoever. If any of the Shares tendered hereby are owned of record by two or more persons, all such persons must sign this Letter of Transmittal. If any of the Shares tendered hereby are registered in different names on different Share Certificates, it will be necessary to complete, sign and submit as many separate Letters of Transmittal as there are different registrations of Share Certificates. If this Letter of Transmittal is signed by the registered holder(s) of the Shares tendered hereby, no endorsements of Share Certificate(s) or separate stock powers are required, unless payment of the purchase price is to be made, or Share Certificate(s) evidencing Shares not tendered or not purchased are to be returned, in the name of any person other than the registered holder(s). Signatures on any such Share Certificate(s) or stock powers must be guaranteed by an Eligible Institution. If this Letter of Transmittal is signed by a person other than the registered holder(s) of the Shares tendered hereby, the Share Certificate(s) evidencing the Shares tendered hereby must be endorsed or accompanied by appropriate stock powers, in either case signed exactly as the name(s) of the registered holder(s) appear(s) on such Share Certificate(s). Signature(s) on any such Share Certificate(s) or stock powers must be guaranteed by an Eligible Institution. If this Letter of Transmittal or any Share Certificate or stock power is signed by a trustee, executor, administrator, guardian, attorney-in-fact, officer of a corporation or other person acting in a fiduciary or representative capacity, such person should so indicate when signing and proper evidence satisfactory to Purchaser of the authority of such person to so act must be submitted. 6. STOCK TRANSFER TAXES. Purchaser will pay any stock transfer taxes with respect to the sale and transfer of any Shares to it or its order pursuant to the Offer. If, however, payment of the purchase price is to be made to, or Share Certificates evidencing Shares not tendered or not purchased are to be returned in the name of, any person other than the registered holder(s) of such Shares, then the amount of any stock transfer taxes (whether imposed on the registered holder(s), such other person or otherwise) payable on account of the transfer to such person will be deducted from the purchase price unless satisfactory evidence of the payment of such taxes, or exemption therefrom, is submitted. EXCEPT AS PROVIDED IN THIS INSTRUCTION 6, IT WILL NOT BE NECESSARY FOR TRANSFER TAX STAMPS TO BE AFFIXED TO THE SHARE CERTIFICATE(S) LISTED IN THIS LETTER OF TRANSMITTAL. 7. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS. If the check for the purchase price of any Shares purchased is to be issued, or any Share Certificate(s) evidencing Shares not tendered or not purchased are to be returned, in the name of a person other than the person(s) signing this Letter of Transmittal or if the check or any Share Certificate(s) evidencing Shares not tendered or not purchased are to be mailed to someone other than the person(s) signing this Letter of Transmittal or to the person(s) signing this Letter of Transmittal at an address other than that shown above, the appropriate boxes on this Letter of Transmittal should be completed. Shareholders tendering Shares by book-entry transfer may request that Shares not purchased be credited to such account at the Book-Entry Transfer Facility as such stockholder may designate in the box entitled "Special Payment Instructions." If no such instructions are given, any such Shares not purchased will be returned by crediting the account at the Book-Entry Transfer Facility. 8. SUBSTITUTE FORM W-9. The tendering holder of Shares is required to provide the Depositary with such holder's correct taxpayer identification number ("TIN") on Substitute Form W-9, which is provided below, unless an exemption applies. In the case of any holder who has completed the box entitled "Special Payment Instructions," however, the correct TIN on Substitute Form W-9 should be provided for the recipient of the payment pursuant to such instructions. Failure to provide the information on the Substitute Form W-9 may subject the tendering holder of Shares to a $50 penalty and to 31% federal income tax backup withholding on the payment of the purchase price for the Shares. 9. QUESTIONS AND REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES. Questions and requests for assistance may be directed to the Dealer Manager or the Information Agent at their respective addresses and telephone numbers set forth on the back cover of the Offer to Purchase. Additional copies of the Offer to Purchase, the Letter of Transmittal, the Notice of Guaranteed Delivery and other related materials may be obtained from the Dealer Manager, the Information Agent or from brokers, dealers, commercial banks and trust companies. THIS LETTER OF TRANSMITTAL OR A MANUALLY SIGNED FACSIMILE COPY HEREOF (TOGETHER WITH SHARE CERTIFICATES OR CONFIRMATION OF BOOK-ENTRY TRANSFER AND ALL OTHER REQUIRED DOCUMENTS) OR A NOTICE OF GUARANTEED DELIVERY MUST BE RECEIVED BY THE DEPOSITARY ON OR PRIOR TO THE EXPIRATION DATE (AS DEFINED IN THE OFFER TO PURCHASE). IMPORTANT TAX INFORMATION Under the federal income tax law, a holder of Shares whose tendered Shares are accepted for payment is generally required by law to provide the Depositary (as payer) with such holder's correct TIN on Substitute Form W-9 below (unless an exemption from backup withholding applies). The holder of Shares must also state that (i) such holder has not been notified by the Internal Revenue Service that such holder is subject to backup withholding as a result of a failure to report all interest or dividends or (ii) the Internal Revenue Service has notified such holder that such holder is no longer subject to backup withholding. If the Depositary is not provided with the correct TIN, the holder of Shares may be subject to a $50 penalty imposed by the Internal Revenue Service and payments made to such holder may be subject to backup withholding. Certain holders of Shares (including, among others, all corporations and certain foreign individuals) are not subject to these backup withholding and reporting requirements. In order for a foreign individual to qualify as an exempt recipient, such individual must submit a statement, signed under penalties of perjury, attesting to such individual's exempt status. Forms of such statements can be obtained from the Depositary. See the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional instructions. If backup withholding applies, the Depositary is required to withhold 31% of any payments made to the holder of Shares. Backup withholding is not an additional tax. Rather, the tax withheld pursuant to backup withholding rules will be available as a credit against such holder's tax liabilities. If withholding results in an overpayment of taxes, a refund may be obtained from the Internal Revenue Service. WHAT NUMBER TO GIVE THE DEPOSITARY If the holder of Shares is an individual, the correct TIN is his or her social security number. In other cases, the correct TIN may be the employer identification number of the record holder of the Shares tendered hereby. If the Shares are in more than one name or are not in the name of the actual owner, consult the enclosed Guidelines for Certification of Taxpayer Identification Number on Substitute Form W-9 for additional guidance on which number to report. If the tendering holder of Shares has not been issued a TIN and has applied for a number or intends to apply for a number in the near future, the holder should write "Applied For" in the space provided for the TIN in Part I of the Substitute Form W-9, and sign and date the Substitute Form W-9. If "Applied For" is written in Part I of the Substitute Form W-9 and the Depositary is not provided with a TIN within thirty (30) days, the Depositary may withhold 31% of all payments of the purchase price to such holder until a TIN is provided to the Depositary. PAYER'S NAME: IBJ SCHRODER BANK & TRUST COMPANY - -------------------------------------------------------------------------------------------------------- SUBSTITUTE PART I--Taxpayer Identification Number--For ------------------------ FORM W-9 all accounts, enter taxpayer identification Social Security Number Department of the Treasury number in the box at right. (For most OR Internal Revenue Service individuals this is your social security ------------------------ PAYER'S REQUEST FOR TAXPAYER number. If you do not have a number, see Employer Identification IDENTIFICATION NUMBER (TIN) Obtaining a Number in the enclosed Number GUIDELINES.) Certify by signing and dating (If awaiting TIN write below. "Applied For") Note: If the account is in more than one name, see chart in the enclosed GUIDELINES to determine which number to give the payer ------------------------------------------------------------------------- PART II--For Payees exempt from backup withholding, see the enclosed GUIDELINES and complete as instructed therein. - -------------------------------------------------------------------------------------------------------- CERTIFICATION--Under penalties of perjury, I certify that: (1) The number shown on this form is my correct Taxpayer Identification Number (or I am waiting for a number to be issued to me); and (2) I am not subject to backup withholding either because (a) I have not been notified by the Internal Revenue Service (IRS) that I am subject to backup withholding as a result of a failure to report all interest or dividends, or (b) the IRS has notified me that I am no longer subject to backup withholding. CERTIFICATION INSTRUCTIONS--You must cross out item (2) above if you have been notified by the IRS that you are subject to backup withholding because of underreporting interest or dividends on your tax return. However, if, after being notified by the IRS that you were subject to backup withholding, you received another notification from the IRS that you were no longer subject to backup withholding, do not cross out item (2). (Also see instructions in the enclosed GUIDELINES.) - -------------------------------------------------------------------------------------------------------- SIGNATURE: ------------------------------------------------ DATE: ------------ - --------------------------------------------------------------------------------------------------------
NOTE: FAILURE TO COMPLETE AND RETURN THIS FORM MAY RESULT IN BACKUP WITHHOLDING OF 31% OF ANY PAYMENTS MADE TO YOU PURSUANT TO THE OFFER. PLEASE REVIEW THE ENCLOSED GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 FOR ADDITIONAL DETAILS. YOU MUST COMPLETE THE FOLLOWING CERTIFICATE IF YOU ARE AWAITING (OR WILL SOON APPLY FOR) A TAXPAYER IDENTIFICATION NUMBER. CERTIFICATE OF AWAITING TAXPAYER IDENTIFICATION NUMBER I certify under penalties of perjury that a taxpayer identification number has not been issued to me and either (a) I have mailed or delivered an application to receive a taxpayer identification number to the appropriate Internal Revenue Service Center or Social Security Administration Office or (b) I intend to mail or deliver an application in the near future. I understand that, notwithstanding the information I provided in Part I of the Substitute Form W-9 (and the fact that I have completed this Certificate of Awaiting Taxpayer Identification Number), if I do not provide a correct taxpayer identification number to the Depositary within thirty (30) days, 31% of all reportable payments made to me pursuant to the Offer and Merger may be withheld. SIGNATURE: DATE: THE INFORMATION AGENT FOR THE OFFER IS: [MACKENZIE PARTNERS, INC. LOGO] THE DEALER MANAGER FOR THE OFFER IS: DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION EX-99.A3 4 EXHIBIT 99-A3 NOTICE OF GUARANTEED DELIVERY FOR TENDER OF SHARES OF COMMON STOCK OF CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. This Notice of Guaranteed Delivery, or one substantially in the form hereof, must be used to accept the Offer (as defined below) if certificates evidencing shares of common stock, par value $.01 per share (the "Shares"), of Children's Discovery Centers of America, Inc., a Delaware corporation (the "Company"), are not immediately available, or if the procedure for book-entry transfer cannot be completed on a timely basis or time will not permit all required documents to reach the Depositary on or prior to the Expiration Date (as defined in the Offer to Purchase dated April 3, 1998 (the "Offer to Purchase")). Such form may be delivered by hand or facsimile transmission or mail to the Depositary. See Section 3 of the Offer to Purchase. THE DEPOSITARY FOR THE OFFER IS: IBJ SCHRODER BANK & TRUST COMPANY BY MAIL: BY FACSIMILE TRANSMISSION: BY HAND OR OVERNIGHT DELIVERY: P.O. Box 84 (212) 858-2611 One State Street Bowling Green Station Attn: Reorganization Dept. New York, New York 10004 New York, New York 10274-0084 Attn: Reorganization Dept. Attn: Reorganization Dept. Securities Processing Window SC-1 CONFIRM RECEIPT OF FACSIMILE BY TELEPHONE: (212) 858-2103
DELIVERY OF THIS NOTICE OF GUARANTEED DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TRANSMISSION OTHER THAN AS SET FORTH ABOVE WILL NOT CONSTITUTE A VALID DELIVERY. Ladies and Gentlemen: The undersigned hereby tenders to KBI Acquisition Corp., a Delaware corporation and a wholly owned subsidiary of Knowledge Beginnings, Inc., a Delaware corporation, upon the terms and subject to the conditions set forth in the Offer to Purchase and the related Letter of Transmittal (which, as amended and supplemented from time to time, together constitute the "Offer"), receipt of which is hereby acknowledged, the number of Shares specified below pursuant to the guaranteed delivery procedure described in Section 3 of the Offer to Purchase. - --------------------------------------- --------------------------------------- Signature(s): - --------------------------------------- If Shares will be delivered by book-entry transfer, provide the following information: - --------------------------------------- Name(s) of Record Holder(s): - --------------------------------------- PLEASE TYPE OR PRINT Account Number: --------------------------------------- - --------------------------------------- Date: --------------------------------------- Certificate Nos. (if available): - --------------------------------------- - --------------------------------------- Address: - --------------------------------------- - --------------------------------------- ZIP CODE Area Code and Telephone No.: - --------------------------------------- - --------------------------------------- ---------------------------------------
GUARANTEE (NOT TO BE USED FOR A SIGNATURE GUARANTEE) THE UNDERSIGNED, A BANK, BROKER, DEALER, CREDIT UNION, SAVINGS ASSOCIATION OR OTHER ENTITY WHICH IS A MEMBER IN GOOD STANDING OF THE SECURITIES TRANSFER AGENTS MEDALLION PROGRAM OR A BANK, BROKER, DEALER, CREDIT UNION, SAVINGS ASSOCIATION OR OTHER ENTITY WHICH IS AN "ELIGIBLE GUARANTOR INSTITUTION," AS SUCH TERM IS DEFINED IN RULE 17AD-15 UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED (EACH OF THE FOREGOING CONSTITUTING AN "ELIGIBLE INSTITUTION"), GUARANTEES THE DELIVERY TO THE DEPOSITARY OF THE SHARES TENDERED HEREBY, TOGETHER WITH A PROPERLY COMPLETED AND DULY EXECUTED LETTER OF TRANSMITTAL (OR A MANUALLY SIGNED FACSIMILE THEREOF) AND ANY OTHER REQUIRED DOCUMENTS, OR AN AGENT'S MESSAGE (AS DEFINED IN THE OFFER TO PURCHASE) IN THE CASE OF A BOOK-ENTRY TRANSFER OF SHARES, ALL WITHIN THREE NASDAQ NATIONAL MARKET TRADING DAYS OF THE DATE HEREOF. The Eligible Institution that completes this form must communicate the guarantee to the Depositary and must deliver the Letter of Transmittal and certificates representing Shares to the Depositary within the time period set forth herein. Failure to do so could result in a financial loss to such Eligible Institution. - --------------------------------------- --------------------------------------- Name of Firm: - --------------------------------------- --------------------------------------- AUTHORIZED SIGNATURE Address: - --------------------------------------- Name: --------------------------------------- PLEASE PRINT - --------------------------------------- ZIP CODE Title: --------------------------------------- Area Code and Telephone No.: Date: - --------------------------------------- --------------------------------------- - --------------------------------------- ---------------------------------------
NOTE: DO NOT SEND SHARE CERTIFICATES WITH THIS FORM. CERTIFICATES FOR SHARES SHOULD BE SENT WITH YOUR LETTER OF TRANSMITTAL. EX-99.A4 5 EXHIBIT 99-A4 OFFER TO PURCHASE FOR CASH ANY AND ALL OUTSTANDING SHARES OF COMMON STOCK OF CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AT $12.25 NET PER SHARE BY KBI ACQUISITION CORP. A WHOLLY OWNED SUBSIDIARY OF KNOWLEDGE BEGINNINGS, INC. - -------------------------------------------------------------------------------- THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON FRIDAY, MAY 1, 1998, UNLESS THE OFFER IS EXTENDED. - -------------------------------------------------------------------------------- April 3, 1998 To Brokers, Dealers, Commercial Banks, Trust Companies and Other Nominees: Donaldson, Lufkin & Jenrette Securities Corporation is acting as Dealer Manager to KBI Acquisition Corp., a Delaware corporation ("Purchaser") and a wholly owned subsidiary of Knowledge Beginnings, Inc., a Delaware corporation ("Parent"), in connection with Purchaser's offer to purchase any and all outstanding shares of common stock, par value $.01 per share (the "Shares"), of Children's Discovery Centers of America, Inc., a Delaware corporation (the "Company"), at a purchase price of $12.25 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer to Purchase dated April 3, 1998 (the "Offer to Purchase") and in the related Letter of Transmittal (which, as amended and supplemented from time to time, together constitute the "Offer") enclosed herewith. The Offer is being made pursuant to an Agreement and Plan of Merger, dated as of March 27, 1998, by and among Parent, Purchaser and the Company. All capitalized terms used but not defined herein shall have the meaning ascribed to them in the Offer to Purchase. Please furnish copies of the enclosed materials to those of your clients for whose accounts you hold Shares in your name or in the name of your nominee. Enclosed herewith for your information and forwarding to your clients are copies of the following documents: 1. The Offer to Purchase dated April 3, 1998. 2. The Letter of Transmittal to tender Shares for your use and for the information of your clients. Facsimile copies of the Letter of Transmittal (with manual signatures) may be used to tender Shares. 3. A letter to the stockholders of the Company from Mr. Richard A. Niglio, Chairman and Chief Executive Officer of the Company, together with a Solicitation/Recommendation Statement on Schedule 14D-9 filed with the Securities and Exchange Commission by the Company and mailed to the stockholders of the Company, each recommending that the Company's stockholders accept the Offer and tender their Shares. 4. The Notice of Guaranteed Delivery to be used to tender Shares pursuant to the Offer if none of the procedures for tendering Shares set forth in the Offer to Purchase can be completed on a timely basis. 5. A printed form of letter which may be sent to your clients for whose accounts you hold Shares registered in your name or in the name of your nominee, with space provided for obtaining such clients' instructions with regard to the Offer. 6. Guidelines of the Internal Revenue Service for Certification of Taxpayer Identification Number on Substitute Form W-9. 7. A return envelope addressed to IBJ Schroder Bank & Trust Company, as Depositary (the "Depositary"). YOUR PROMPT ACTION IS REQUESTED. WE URGE YOU TO CONTACT YOUR CLIENTS AS PROMPTLY AS POSSIBLE. PLEASE NOTE THAT THE OFFER AND WITHDRAWAL RIGHTS EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON FRIDAY, MAY 1, 1998, UNLESS THE OFFER IS EXTENDED. Please note the following: 1. The tender price is $12.25 per Share, net to the seller in cash, without interest thereon. 2. The Offer is being made for any and all outstanding Shares. 3. The Offer is conditioned upon, among other things, (i) there having been validly tendered pursuant to the Offer, and not validly withdrawn, a minimum of a majority of the Shares (determined on a fully diluted basis), (ii) the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the passage of certain statutory waiting periods relating to the Company's operating licenses, (iii) certain ancillary agreements and instruments having been obtained by the Company, and (iv) the satisfaction of certain other terms and conditions set forth in the Offer to Purchase. 4. Tendering stockholders will not be obligated to pay brokerage fees or commissions or, except as set forth in the Letter of Transmittal, stock transfer taxes on the transfer of Shares pursuant to the Offer. Upon the terms and subject to the conditions of the Offer (including, if the Offer is extended or amended, the terms and conditions of any such extension or amendment), Purchaser will accept for payment and pay for all Shares which are validly tendered and not validly withdrawn on or prior to the Expiration Date. In order to take advantage of the Offer, (i) a duly executed and properly completed Letter of Transmittal (or a manually signed facsimile thereof) and any required signature guarantees or, in the case of a book-entry transfer, an Agent's Message, and any other required documents should be sent to the Depositary and (ii) certificates representing tendered Shares ("Share Certificates") or a timely Book-Entry Confirmation should be delivered to the Depositary in accordance with the instructions set forth in the Offer to Purchase and the Letter of Transmittal. Holders of Shares whose Share Certificates are not immediately available or who cannot deliver their Share Certificates and all other required documents to the Depositary or complete the procedures for book-entry transfer prior to the Expiration Date must tender their Shares according to the guaranteed delivery procedures set forth in Section 3 of the Offer to Purchase. None of Purchaser, Parent nor any officer, director, stockholder, agent or other representative of Purchaser will pay any fees or commissions to any broker, dealer or other person (other than the Dealer Manager and the Information Agent as described in the Offer to Purchase) for soliciting tenders of Shares pursuant to the Offer. Purchaser will, however, upon request, reimburse you for customary mailing and handling expenses incurred by you in forwarding any of the enclosed materials to your clients. Purchaser will pay or cause to be paid any stock transfer taxes payable on the transfer of Shares to it, except as otherwise provided in Instruction 6 to the Letter of Transmittal. Any inquiries you may have with respect to the Offer should be addressed to Donaldson, Lufkin & Jenrette Securities Corporation, as Dealer Manager, 2121 Avenue of the Stars, Suite 3200, Los Angeles, California 90067, (310) 282-7449, or to MacKenzie Partners, Inc., as Information Agent, 156 Fifth Avenue, New York, New York 10010, (212) 929-5500 or (800) 322-2885. Requests for copies of the enclosed materials may be directed to the Dealer Manager or the Information Agent at the above address and telephone number. Very truly yours, DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION NOTHING CONTAINED HEREIN OR IN THE ENCLOSED DOCUMENTS SHALL CONSTITUTE YOU OR ANY OTHER PERSON AS THE AGENT OF PARENT, PURCHASER, THE DEALER MANAGER, THE DEPOSITARY, THE INFORMATION AGENT OR ANY AFFILIATE OF ANY OF THE FOREGOING, OR AUTHORIZE YOU OR ANY OTHER PERSON TO MAKE ANY STATEMENT OR USE ANY DOCUMENT ON BEHALF OF ANY OF THEM IN CONNECTION WITH THE OFFER OTHER THAN THE ENCLOSED DOCUMENTS AND THE STATEMENTS CONTAINED THEREIN. EX-99.A5 6 EXHIBIT 99-A5 OFFER TO PURCHASE FOR CASH ANY AND ALL OUTSTANDING SHARES OF COMMON STOCK OF CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AT $12.25 NET PER SHARE BY KBI ACQUISITION CORP. A WHOLLY OWNED SUBSIDIARY OF KNOWLEDGE BEGINNINGS, INC. - -------------------------------------------------------------------------------- THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON FRIDAY, MAY 1, 1998, UNLESS THE OFFER IS EXTENDED. - -------------------------------------------------------------------------------- April 3, 1998 To Our Clients: Enclosed for your consideration are the Offer to Purchase dated April 3, 1998 (the "Offer to Purchase") and the related Letter of Transmittal (which, as amended or supplemented from time to time, together constitute the "Offer") relating to an offer by KBI Acquisition Corp., a Delaware corporation ("Purchaser") and a wholly owned subsidiary of Knowledge Beginnings, Inc., a Delaware corporation ("Parent"), to purchase any and all outstanding shares of common stock, par value $.01 per share (the "Shares"), of Children's Discovery Centers of America, Inc., a Delaware corporation (the "Company"), at a purchase price of $12.25 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer. The Offer is being made pursuant to an Agreement and Plan of Merger, dated as of March 27, 1998, by and among Parent, Purchaser and the Company. This material is being forwarded to you as the beneficial owner of Shares carried by us in your account but not registered in your name. A TENDER OF SUCH SHARES CAN BE MADE ONLY BY US AS THE HOLDER OF RECORD AND PURSUANT TO YOUR INSTRUCTIONS. THE LETTER OF TRANSMITTAL IS FURNISHED TO YOU FOR YOUR INFORMATION ONLY AND CANNOT BE USED BY YOU TO TENDER SHARES HELD BY US FOR YOUR ACCOUNT. Accordingly, we request instructions as to whether you wish to tender any or all of the Shares held by us for your account, upon the terms and subject to the conditions set forth in the Offer to Purchase. Please note the following: 1. The tender price is $12.25 per Share, net to the seller in cash, without interest thereon. 2. The Offer is being made for any and all outstanding Shares. 3. The Offer and withdrawal rights will expire at 12:00 midnight, New York City time, on Friday, May 1, 1998, unless the Offer is extended. 4. The Offer is conditioned upon (i) there having been validly tendered pursuant to the Offer, and not validly withdrawn, a minimum of a majority of the Shares (determined on a fully diluted basis), (ii) the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the passage of certain statutory waiting periods relating to the Company's operating licenses, (iii) certain ancillary agreements and instruments having been obtained by the Company, and (iv) the satisfaction of certain other terms and conditions set forth in the Offer to Purchase. 5. The Board of Directors of the Company has, by a vote of all directors at a meeting duly called and held, unanimously (i) determined that each of the Offer and the Merger is fair to, and in the best interests of, the Company's stockholders, (ii) approved and adopted the Merger Agreement and the Option and Support Agreement (each as defined in the Offer to Purchase) and the transactions contemplated thereby, including the Offer and the Merger, (iii) recommended that the Company's stockholders accept the Offer and tender their Shares pursuant to the Offer, and (iv) taken all action necessary to render Section 203 of the General Corporation Law of the State of Delaware and other state takeover statutes inapplicable to the Offer, the Merger and the Option and Support Agreement. 6. Tendering stockholders will not be obligated to pay brokerage fees or commissions or, except as set forth in the Letter of Transmittal, stock transfer taxes on the transfer of Shares pursuant to the Offer. If you wish to have us tender any or all of your Shares, please so instruct us by completing, executing, detaching and returning to us the instruction form contained in this letter. An envelope to return your instruction to us is enclosed. If you authorize tender of your Shares, all such Shares will be tendered unless otherwise indicated in such instruction form. PLEASE FORWARD YOUR INSTRUCTIONS TO US AS SOON AS POSSIBLE TO ALLOW US AMPLE TIME TO TENDER YOUR SHARES ON YOUR BEHALF PRIOR TO THE EXPIRATION OF THE OFFER. The Offer is made solely pursuant to the Offer to Purchase and the related Letter of Transmittal and any supplements or amendments thereto. The Offer is not being made to, nor will tenders be accepted from or on behalf of, holders of Shares residing in any jurisdiction in which the making of the Offer or acceptance thereof would not be in compliance with the securities laws of such jurisdiction. INSTRUCTIONS WITH RESPECT TO THE OFFER TO PURCHASE FOR CASH ANY AND ALL OUTSTANDING SHARES OF COMMON STOCK OF CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. The undersigned acknowledge(s) receipt of your letter and the enclosed Offer to Purchase dated April 3, 1998 (the "Offer to Purchase") and the related Letter of Transmittal (which together constitute the "Offer") in connection with the offer by KBI Acquisition Corp., a Delaware corporation ("Purchaser") and a wholly owned subsidiary of Knowledge Beginnings, Inc., a Delaware corporation, to purchase any and all outstanding shares of common stock, par value $.01 per share (the "Shares"), of Children's Discovery Centers of America, Inc., a Delaware corporation. This will instruct you to tender to Purchaser the number of Shares indicated below (or if no number is indicated below, all Shares) which are held by you for the account of the undersigned, upon the terms and subject to the conditions set forth in the Offer to Purchase. - ------------------------------------------- Number of Shares to be Tendered: SIGN HERE - ---------------------------------- Shares* - ------------------------------------------- ------------------------------------------- ------------------------------------------- Dated: ----------------------------------- Signature(s) ------------------------------------------- ------------------------------------------- Print Name(s) ------------------------------------------- ------------------------------------------- Print Address(es) ------------------------------------------- Area Code and Telephone Number(s) ------------------------------------------- Taxpayer Identification or Social Security Number(s)
- ------------------------ * Unless otherwise indicated, it will be assumed that all Shares held by us for your account are to be tendered. EX-99.A6 7 EXHIBIT 99-A6 GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER ON SUBSTITUTE FORM W-9 GUIDELINES FOR DETERMINING THE PROPER IDENTIFICATION NUMBER TO GIVE THE PAYER--Social Security Numbers have nine digits separated by two hyphens: I.E., 000-00-0000. Employer Identification Numbers have nine digits separated by only one hyphen: I.E., 00-0000000. The table below will help determine the type of number to give the payer. - --------------------------------------------------------------- FOR THIS TYPE OF ACCOUNT: GIVE THE SOCIAL SECURITY NUMBER OF-- - --------------------------------------------------------------- 1. Individual The individual 2. Two or more individuals The actual owner of the (joint account) account or, if combined funds, the first individual on the account(1) 3. Husband and wife (joint The actual owner of the account) account or, if joint funds, either person(1) 4. Custodian account of a The minor(2) minor (Uniform Gift to Minors Act) 5. Adult and minor (joint The adult or, if the account) minor is the only contributor, the minor(1) 6. Account in the name of The ward, minor or guardian or committee for incompetent person(3) a designated ward, minor or incompetent person 7. a. The usual revocable The grantor-trustee(1) savings trust account (grantor is also trustee) b. So-called trust The actual owner(1) account that is not a legal or valid trust under State law - --------------------------------------------------------------- FOR THIS TYPE OF ACCOUNT: GIVE THE EMPLOYER IDENTIFICATION NUMBER OF-- - --------------------------------------------------------------- 8. Sole proprietorship The owner(4) 9. A valid trust, estate or The legal entity(5) pension trust 10. Corporate The corporation 11. Religious, charitable or The organization educational organization 12. Partnership account held The partnership in the name of the business 13. Association, club or The organization other tax-exempt organization 14. A broker or registered The broker or nominee nominee 15. Account with the Depart- The public entity ment of Agriculture in the name of a public entity (such as a State or local government, school district, or prison) that receives agricultural program payments
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(1) List first and circle the name of the person whose number you furnish. (2) Circle the minor's name and furnish the minor's social security number. (3) Circle the ward's, minor's or incompetent person's name and furnish such person's social security number. (4) The name of the owner must be shown. (5) List first and circle the name of the legal trust, estate or pension trust. Do not furnish the identification number of the personal representative or trustee unless the legal entity itself is not designated in the account title. NOTE: If no name is circled when there is more than one name, the number will be considered to be that of the first name listed. GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER OF SUBSTITUTE FORM W-9 PAGE 2 OBTAINING A NUMBER If you don't have a taxpayer identification number or you don't know your number, obtain Form SS-5, Application for a Social Security Number Card (for individuals), or Form SS-4, Application for Employer Identification Number (for businesses and all other entities), at the local office of the Social Security Administration or the Internal Revenue Service and apply for a number. PAYEES EXEMPT FROM BACKUP WITHHOLDING Payees generally exempted from backup withholding on payments include the following: - - A corporation. - - A financial institution. - - An organization exempt from tax under section 501(a) of the Internal Revenue Code of 1986, as amended (the "Code"), or an individual retirement plan. - - The United States or any agency or instrumentality thereof. - - A State, the District of Columbia, a possession of the United States or any political subdivision or instrumentality thereof. - - A foreign government, a political subdivision of a foreign government or any agency or instrumentality thereof. - - An international organization or any agency or instrumentality thereof. - - A dealer in securities or commodities required to register in the United States or a possession thereof. - - A real estate investment trust. - - A common trust fund operated by a bank under Section 584(a) of the Code. - - An entity registered at all times during the tax year under the Investment Company Act of 1940. - - A foreign central bank of issue. Payments of dividends and patronage dividends generally not subject to backup withholding include the following: - - Payments to nonresident aliens subject to withholding under Section 1441 of the Code. - - Payments to partnerships not engaged in a trade or business in the United States and which have at least one nonresident partner. - - Payments of patronage dividends where the amount received is not paid in money. - - Payments made by certain foreign organizations. Payments of interest generally not subject to backup withholding include the following: - - Payments of interest on obligations issued by individuals. Note: Payees may be subject to backup withholding if this interest is $600 or more and is paid in the course of the payer's trade or business and the payee has not provided his or her correct taxpayer identification number to the payer. - - Payments of tax-exempt interest (including exempt-interest dividends under Section 852 of the Code). - - Payments described in Section 6049(b)(5) of the Code to nonresident aliens. - - Payments on tax-free covenant bonds under Section 1451 of the Code. - - Payments made by certain foreign organizations. Exempt payees described above must still complete the Substitute Form W-9 enclosed herewith to avoid possible erroneous backup withholding. FILE SUBSTITUTE FORM W-9 WITH THE PAYER, REMEMBERING TO CERTIFY YOUR TAXPAYER IDENTIFICATION NUMBER ON THE FORM AND WRITE 'EXEMPT' ON THE FACE OF THE FORM. Payments that are not subject to information reporting are also not subject to backup withholding. For details, see the regulations under sections 6041, 6041A(a), 6042, 6044, 6045, 6049, 6050A and 6050N of the Code. PRIVACY ACT NOTICE.--Section 6109 of the Code requires most recipients of dividend, interest or other payments to give taxpayer identification numbers to payers who must report the payments to the Internal Revenue Service. The Internal Revenue Service uses the numbers for identification purposes. Payers must be given the numbers whether or not recipients are required to file tax returns. Payers must generally withhold 31% of taxable interest, dividend and certain other payments to a payee who does not furnish a taxpayer identification number to a payer. Certain penalties may also apply. PENALTIES (1) PENALTY FOR FAILURE TO FURNISH TAXPAYER IDENTIFICATION NUMBER--If you fail to furnish your correct taxpayer identification number to a payer, you may be subject to a penalty of $50 for each such failure unless your failure is due to reasonable cause and not to willful neglect. (2) CIVIL PENALTY FOR FALSE INFORMATION WITH RESPECT TO WITHHOLDING--If you make a false statement with no reasonable basis which results in no imposition of backup withholding, you may be subject to a penalty of $500. (3) CRIMINAL PENALTY FOR FALSIFYING INFORMATION--Willfully falsifying certifications or affirmations may subject you to criminal penalties including fines and/or imprisonment. FOR ADDITIONAL INFORMATION CONTACT YOUR TAX CONSULTANT OR THE INTERNAL REVENUE SERVICE. EX-99.A7 8 EXHIBIT 99-A7 Contact: Susan Carlson/Zoe Arden Access Communications (415) 904-7070, ext. 231, 287 scarlson@accesspr.com zarden@accesspr.com KNOWLEDGE BEGINNINGS, A SUBSIDIARY OF KNOWLEDGE UNIVERSE, ACQUIRES CHILDREN'S DISCOVERY CENTERS BURLINGAME, Calif., March 30 -- Knowledge Beginnings, Inc., a subsidiary of Knowledge Universe, L.L.C., and Children's Discovery Centers of America, Inc. ("CDC") announced today that they have signed a definitive merger agreement pursuant to which Knowledge Beginnings will acquire CDC. Headquartered in San Rafael, California, Children's Discovery Centers (Nasdaq: CDCR) is one of the nation's largest providers of educational programs and services for infants through school-age children. Revenues from its 248 schools totaled over $93 million in 1997. Under the terms of the agreement announced today, Knowledge Beginnings, a privately held company, will pay $12.25 per share for all of the outstanding shares of CDC. Tom Kalinske, president of Knowledge Universe, said, "Adding Children's Discovery Centers to our growing educational enterprise is in keeping with our overall mission to improve the quality of education to people of all ages. CDC is an excellent company, and we hope to continue its traditions and perhaps to accelerate its growth." "We are delighted to align ourselves with Knowledge Beginnings," said Dr. Elanna S. Yalow, president and chief operating officer of CDC, and the daughter of Nobel Prize winner Dr. Rosalyn Yalow. "CDC will benefit greatly from the extensive experience that Knowledge Beginnings brings to addressing the educational challenges facing our nation. Working in concert, we will make a difference in the lives of millions of American children by helping them get started on the road to lifelong learning." Richard A. Niglio, chairman and CEO of CDC, announced that he will resign at the consummation of the tender offer, but will continue as a consultant to the company for the next two years. Mr. Niglio said, "Building this company from its humble beginnings these past 11 years has been a very gratifying experience. I am looking forward to a new challenge in the future that I hope will be equally as rewarding." Under the terms of the merger agreement, a subsidiary of Knowledge Beginnings will promptly commence a tender offer for all outstanding shares of CDC at a net price of $12.25 per share in cash. In connection with the execution of the merger agreement, Knowledge Beginnings entered into an Option and Support Agreement with three partnerships owning a total of 1,363,700 shares of CDC common stock pursuant to which such stockholders agreed, among other things, to tender their shares and under certain conditions to sell their shares to Knowledge Beginnings for $12.25 per share in cash. In addition, Knowledge Beginnings entered into an agreement to purchase from CDC, under certain conditions, 1,342,155 previously unissued shares of CDC common stock at a price of $10.125 per share. Completion of the tender offer is subject to a number of conditions, including the acquisition of Knowledge Beginnings of a majority of CDC's common stock. Founded in 1983, CDC operates preschool and elementary schools in 22 states and the District of Columbia, serving approximately 25,000 children ranging from infants through grade eight. CDC also provides employer-sponsored programs through affiliations with over 50 governmental agencies, hospitals, and private corporations such as Amoco and GE Capital Services Corporation. Market Trends Current demographic and social trends indicate a growing need for child care and educational services such as those provided by companies such as CDC. Also, educational researchers stress the need for quality education and learning experiences for children beginning in infancy and through out their preschool years and that these are crucial years in a child's development. These two trends present an excellent opportunity for CDC and Knowledge Beginnings to offer parents the highest quality early childhood education for their children. About Knowledge Beginnings Knowledge Beginnings, Inc. is a subsidiary of Knowledge Universe, L.L.C. Knowledge Universe is an education company that offers a full array of products and services designed to meet the educational and knowledge management needs of organizations and individuals. Founded in 1996, the privately held company is headquartered in Burlingame, California. EX-99.A8 9 EXHIBIT 99-A8 THIS ANNOUNCEMENT IS NEITHER AN OFFER TO PURCHASE NOR A SOLICITATION OF AN OFFER TO SELL SHARES. THE OFFER (AS DEFINED BELOW) IS MADE SOLELY BY THE OFFER TO PURCHASE DATED APRIL 3, 1998 AND THE RELATED LETTER OF TRANSMITTAL, AND ANY AMENDMENTS OR SUPPLEMENTS THERETO, AND IS BEING MADE TO ALL HOLDERS OF SHARES (AS DEFINED BELOW). KBI ACQUISITION CORP. IS NOT AWARE OF ANY STATE WHERE THE MAKING OF THE OFFER IS PROHIBITED BY ADMINISTRATIVE OR JUDICIAL ACTION PURSUANT TO ANY VALID STATE STATUTE. IF IT BECOMES AWARE OF ANY VALID STATE STATUTE PROHIBITING THE MAKING OF THE OFFER OR THE ACCEPTANCE OF SHARES PURSUANT THERETO, KBI ACQUISITION CORP. WILL MAKE A GOOD FAITH EFFORT TO COMPLY WITH SUCH STATE STATUTE. IF, AFTER SUCH GOOD FAITH EFFORT, KBI ACQUISITION CORP. CANNOT COMPLY WITH SUCH STATE STATUTE, THE OFFER WILL NOT BE MADE TO (NOR WILL TENDERS BE ACCEPTED FROM OR ON BEHALF OF) THE HOLDERS OF SHARES IN SUCH STATE. IN ANY JURISDICTION WHERE THE SECURITIES, BLUE SKY OR OTHER LAWS REQUIRE THE OFFER TO BE MADE BY A LICENSED BROKER OR DEALER, THE OFFER SHALL BE DEEMED TO BE MADE ON BEHALF OF KBI ACQUISITION CORP. BY DONALDSON, LUFKIN & JENRETTE SECURITIES CORPORATION OR ONE OR MORE REGISTERED BROKERS OR DEALERS LICENSED UNDER THE LAWS OF SUCH JURISDICTION. NOTICE OF OFFER TO PURCHASE FOR CASH ANY AND ALL OUTSTANDING SHARES OF COMMON STOCK OF CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. AT $12.25 NET PER SHARE IN CASH BY KBI ACQUISITION CORP. A WHOLLY OWNED SUBSIDIARY OF KNOWLEDGE BEGINNINGS, INC. KBI Acquisition Corp., a Delaware corporation ("Purchaser") and a wholly owned subsidiary of Knowledge Beginnings, Inc., a Delaware corporation ("Parent"), is offering to purchase any and all outstanding shares of common stock, par value $.01 per share (the "Shares"), of Children's Discovery Centers of America, Inc., a Delaware corporation (the "Company"), at a price of $12.25 per Share, net to the seller in cash, without interest thereon, upon the terms and subject to the conditions set forth in the Offer to Purchase, dated April 3, 1998 (the "Offer to Purchase"), and in the related Letter of Transmittal (which, as amended and supplemented from time to time, together constitute the "Offer"). Following the Offer, Purchaser intends to effect the merger described below. All capitalized terms used but not otherwise defined herein shall have the meaning ascribed to them in the Offer to Purchase. - -------------------------------------------------------------------------------- THE OFFER AND WITHDRAWAL RIGHTS WILL EXPIRE AT 12:00 MIDNIGHT, NEW YORK CITY TIME, ON FRIDAY, MAY 1, 1998, UNLESS THE OFFER IS EXTENDED. - -------------------------------------------------------------------------------- The Offer is conditioned upon, among other things, (i) there having been validly tendered pursuant to the Offer, and not validly withdrawn, a minimum of a majority of the Shares (determined on a fully diluted basis) (the "Minimum Condition"), (ii) the expiration or termination of any applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the passage of certain statutory waiting periods relating to the Company's operating licenses, (iii) certain ancillary agreements and instruments having been obtained by the Company and Parent, and (iv) the satisfaction of certain other conditions set forth in the Offer to Purchase. The Board of Directors of the Company has, by a vote of all directors at a meeting duly called and held, unanimously (i) determined that each of the Offer and the Merger is fair to, and in the best interests of, the Company's stockholders, (ii) approved and adopted the Merger Agreement and the Option and Support Agreement (each as defined below) and the transactions contemplated thereby, including the Offer and the Merger, (iii) recommended that the Company's stockholders accept the Offer and tender their Shares pursuant to the Offer, and (iv) taken all action necessary to render Section 203 of the General Corporation Law of the State of Delaware (the "DGCL") and other state takeover statutes inapplicable to the Offer, the Merger and the Option and Support Agreement. The Company has granted Parent an irrevocable option to purchase newly issued Shares representing up to 19.9% of the outstanding Shares pursuant to and upon the terms set forth in an Option and Support Agreement, dated as of March 27, 1998 (the "Option and Support Agreement"), by and among the Company, Parent and certain stockholders of the Company (the "Selling Stockholders"). In addition, pursuant to the Option and Support Agreement, the Selling Stockholders, owning in the aggregate approximately 20.2% of the issued and outstanding Shares, have agreed to tender and sell all of their Shares to Purchaser pursuant to the Offer and have granted Parent an irrevocable option to purchase all of the Shares owned by such Selling Stockholders upon the terms set forth in the Option and Support Agreement. The Offer is being made pursuant to an Agreement and Plan of Merger, dated as of March 27, 1998 (the "Merger Agreement"), by and among Parent, Purchaser and the Company. The Merger Agreement provides, among other things, that as soon as practicable after the purchase of the Shares pursuant to the Offer and the satisfaction or waiver of the conditions set forth in the Merger Agreement and in accordance with relevant provisions of the DGCL, Purchaser (or such other subsidiary of Parent as described below) will be merged with the Company (the "Merger"). Following consummation of the Merger, the surviving corporation in the Merger (the "Surviving Corporation") will be a wholly owned subsidiary of Parent. Pursuant to the Merger Agreement, at Parent's election, the Merger may be structured (i) as a merger of Purchaser and the Company, with either as the Surviving Corporation, (ii) such that any direct or indirect subsidiary of Parent is merged with and into the Company, with the Company as the Surviving Corporation, or (iii) such that the Company is merged with and into any such other subsidiary, with such other subsidiary as the Surviving Corporation. At the effective time of the Merger (the "Effective Time"), each issued and outstanding Share (other than Shares owned by the Company, Parent, Purchaser or Shares with respect to which appraisal rights are properly exercised under the DGCL) will be converted into and represent the right to receive $12.25 (or such other price that may be paid for each Share pursuant to the Offer, if amended) in cash, without interest thereon (the "Merger Consideration"). For purposes of the Offer, Purchaser will be deemed to have accepted for payment (and thereby purchased) Shares validly tendered and not properly withdrawn if and when Purchaser gives oral or written notice to IBJ Schroder Bank & Trust Company (the "Depositary") of Purchaser's acceptance for payment of such Shares pursuant to the Offer. Upon the terms and subject to the conditions of the Offer, payment for Shares accepted for payment pursuant to the Offer will be made by deposit of the purchase price therefor with the Depositary, which will act as agent for all tendering stockholders for the purpose of receiving payments from Purchaser and transmitting such payments to tendering stockholders whose Shares have been accepted for payment. In all cases, payment for Shares tendered and accepted for payment pursuant to the Offer will be made only after timely receipt by the Depositary of (i) the certificates evidencing such Shares (the "Share Certificates") or timely confirmation (a "Book-Entry Confirmation") of a book-entry transfer of such Shares into the Depositary's account at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the procedures set forth in Section 3 of the Offer to Purchase, (ii) the Letter of Transmittal (or a manually signed facsimile thereof), properly completed and duly executed, with any required signature guarantees, or an Agent's Message (as defined below) in connection with a book-entry transfer, and (iii) any other documents required under the Letter of Transmittal. The term "Agent's Message" means a message transmitted by the Book-Entry Transfer Facility to, and received by, the Depositary and forming a part of a Book-Entry Confirmation, which states that such Book-Entry Transfer Facility has received an express acknowledgment from the participant in such Book-Entry Transfer Facility tendering the Shares that are the subject of such Book-Entry Confirmation that such participant has received and agrees to be bound by the terms of the Letter of Transmittal and that Purchaser may enforce such agreement against such participant. Subject to the terms and conditions set forth in the Merger Agreement (including the right to terminate, extend or modify the Offer), and, subject to the other conditions set forth in Section 15 of the Offer to Purchase, including, without limitation, the Minimum Condition, Purchaser will use its reasonable best efforts to consummate the Offer as soon as legally permissible in accordance with the Merger Agreement. Subject to the terms and conditions of the Merger Agreement and the applicable rules of the Securities and Exchange Commission, Purchaser expressly reserves the right, at any time and from time to time, to modify the terms of the Offer, including, without limitation, to extend the Offer (including an extension of up to 20 business days beyond the initial scheduled expiration date of the Offer notwithstanding the satisfaction of the conditions set forth in Section 15 of the Offer to Purchase), and thereby delay acceptance for payment and payment for tendered Shares, by giving oral or written notice of such extension to the Depositary. Any such extension will be followed as promptly as practicable by public announcement thereof, such announcement to be made not later than 9:00 a.m., New York City time, on the next business day after the previously scheduled expiration date of the Offer. During any such extension, all Shares previously tendered and not withdrawn will remain subject to the Offer and to the rights of a tendering stockholder to withdraw such stockholder's Shares. Under no circumstances will any interest be paid on the purchase price for tendereed Shares, regardless of any extension of the Offer or any delay in acceptance for payment and payment for tendered Shares. Tenders of Shares made pursuant to the Offer are irrevocable except that such Shares may be withdrawn at any time prior to 12:00 Midnight, New York City time, on Friday, May 1, 1998 (or the latest time and date at which the Offer, if extended by Purchaser, shall expire) and, unless theretofore accepted for payment by Purchaser pursuant to the Offer, may also be withdrawn at any time after June 1, 1998. For any such withdrawal to be effective, a written, telegraphic, telex or facsimile transmission notice of withdrawal must be timely received by the Depositary at its address set forth on the back cover page of the Offer to Purchase. Any such notice of withdrawal must specify the name of the person who tendered the Shares to be withdrawn, the number of Shares to be withdrawn and the name of the registered holder of such Shares, if different from that of the person who tendered such Shares. If Share Certificates evidencing Shares to be withdrawn have been delivered or otherwise identified to the Depositary, then, prior to the physical release of such Share Certificates, the serial numbers shown on such Share Certificates must be submitted to the Depositary and the signature(s) on the notice of withdrawal must be guaranteed by an Eligible Institution, unless such Shares have been tendered for the account of an Eligible Institution. If Shares have been tendered pursuant to the procedures for book-entry transfer as set forth in Section 3 of the Offer to Purchase, any notice of withdrawal must specify the name and number of the account at the Book-Entry Transfer Facility to be credited with the withdrawn Shares and must otherwise comply with such Book-Entry Transfer Facility's procedures. All questions as to the form and validity (including the time of receipt) of any notice of withdrawal will be determined by Purchaser, in its sole discretion, whose determination will be final and binding. None of Parent, Purchaser, the Company, the Dealer Manager, the Depositary, the Information Agent or any other person will be under any duty to give notification of any defects or irregularities in any tender or notice of withdrawal or incur any liability for failure to give any such notification. The information required to be disclosed by Rule 14d-6(e)(1)(vii) of the General Rules and Regulations under the Securities Exchange Act of 1934, as amended, is contained in the Offer to Purchase and is incorporated herein by reference. The Company has provided Purchaser with the Company's stockholder list and security position listings for the purpose of disseminating the Offer to holders of Shares. The Offer to Purchase and the related Letter of Transmittal will be mailed to record holders of Shares whose names appear on the Company's stockholder list and will be furnished to brokers, dealers, commercial banks, trust companies and similar persons whose names, or the names of whose nominees, appear on the stockholder list or, if applicable, who are listed as participants in a clearing agency's security position listing for subsequent transmittal to beneficial owners of Shares. The Offer to Purchase and the related Letter of Transmittal contain important information which should be read before any decision is made with respect to the Offer. Questions and requests for assistance or for copies of the Offer to Purchase and the related Letter of Transmittal, and other Offer materials, may be directed to the Dealer Manager or the Information Agent as set forth below, and copies will be furnished promptly at Purchaser's expense. No fees or commissions will be paid to brokers, dealers or other persons (other than the Dealer Manager and the Information Agent) for soliciting tenders of Shares pursuant to the Offer. THE INFORMATION AGENT FOR THE OFFER IS: [MACKENZIE PARTNERS, INC. LOGO] 156 Fifth Avenue New York, New York 10010 (212) 929-5500 (Call Collect) or CALL TOLL-FREE (800) 322-2885 THE DEALER MANAGER FOR THE OFFER IS: DONALDSON, LUFKIN & JENRETTE SECURITIIES CORPORATION 2121 Avenue of the Stars, Suite 3000 Los Angeles, CA 90067 (310) 282-7449 (Call Collect) April 3, 1998 EX-99.B1 10 EXHIBIT 99-B1 PROMISSORY NOTE $35,000,000 Los Angeles, California April 2, 1998 FOR VALUE RECEIVED, the undersigned, KNOWLEDGE BEGINNINGS, INC., a Delaware corporation ("Beginnings"), hereby promises to pay to KNOWLEDGE UNIVERSITY HOLDINGS, L.L.C., a Delaware limited liability company ("Holdings"), at its address at 844 Moraga Drive, Los Angeles, California 90049-1639, or at such other place as Holdings may designate from time to time in writing, in lawful money of the United States of America and in immediately available funds, the aggregate principal amount of THIRTY-FIVE MILLION AND NO/100 DOLLARS ($35,000,000.00). The maturity date (the "Maturity Date") of this Promissory Note shall be April 2, 1999, at which time the then-outstanding principal balance hereof, together with all accrued and unpaid interest at a rate of 8% per annum through the Maturity Date, shall become immediately due and payable. At any time prior to the Maturity Date, Beginnings shall have the right to pay Holdings all or any portion of the then-outstanding principal balance of this Promissory Note, together with any accrued and unpaid interest, without penalty. Time is of the essence in this Promissory Note. Demand, presentment, protest and notice of nonpayment and protest are hereby waived by Beginnings. THIS PROMISSORY NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA APPLICABLE TO CONTRACTS MADE AND PERFORMED IN THAT STATE. KNOWLEDGE BEGINNINGS, INC. By: /s/ RONALD J. PACKARD -------------------------------- Name: Ronald J. Packard ------------------------------ Title: Treasurer ----------------------------- EX-99.C1 11 EXHIBIT 99-C1 EXECUTION COPY AGREEMENT AND PLAN OF MERGER BY AND AMONG KNOWLEDGE BEGINNINGS, INC., KBI ACQUISITION CORP. AND CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. TABLE OF CONTENTS
Page ---- 1. THE OFFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 1.1. THE OFFER . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .2 1.2. COMPANY ACTION. . . . . . . . . . . . . . . . . . . . . . . . . . . .3 1.3. DIRECTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 2. THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 2.1. THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .4 2.2. EFFECT OF THE MERGER. . . . . . . . . . . . . . . . . . . . . . . . .5 2.3. CONSUMMATION OF THE MERGER. . . . . . . . . . . . . . . . . . . . . .5 2.4. CERTIFICATE OF INCORPORATION; BYLAWS; DIRECTORS AND OFFICERS . . . . . . . . . . . . . . . . . . . . . . . . . . . .5 2.5. CONVERSION OF SECURITIES. . . . . . . . . . . . . . . . . . . . . . .5 2.6. DISSENTING STOCK. . . . . . . . . . . . . . . . . . . . . . . . . . .5 2.7. COMPANY STOCK OPTIONS AND RELATED MATTERS . . . . . . . . . . . . . .6 2.8. EXCHANGE OF CERTIFICATES. . . . . . . . . . . . . . . . . . . . . . .7 2.9. PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 2.10. NO FURTHER RIGHTS OF TRANSFERS . . . . . . . . . . . . . . . . . . .8 2.11. CLOSING. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .8 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER . . . . . . . . . . . . .9 3.1. ORGANIZATION AND QUALIFICATION. . . . . . . . . . . . . . . . . . . .9 3.2. AUTHORITY RELATIVE TO THIS AGREEMENT. . . . . . . . . . . . . . . . .9 3.3. COMPLIANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . .9 3.4. BROKERS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 3.5. FINANCIAL CAPABILITY. . . . . . . . . . . . . . . . . . . . . . . . 10 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY . . . . . . . . . . . . . . . . . 10 4.1. ORGANIZATION AND QUALIFICATION. . . . . . . . . . . . . . . . . . . 10 4.2. SUBSIDIARIES. . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 4.3. CAPITALIZATION. . . . . . . . . . . . . . . . . . . . . . . . . . . 11 4.4. COMPANY INVESTMENTS . . . . . . . . . . . . . . . . . . . . . . . . 11 4.5. AUTHORITY RELATIVE TO THIS AGREEMENT. . . . . . . . . . . . . . . . 12 4.6. COMPLIANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12 4.7. COMMISSION FILINGS. . . . . . . . . . . . . . . . . . . . . . . . . 13 4.8. ABSENCE OF UNDISCLOSED LIABILITIES. . . . . . . . . . . . . . . . . 13 4.9. LITIGATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.10. COMPLIANCE WITH LAW. . . . . . . . . . . . . . . . . . . . . . . . 14 4.11. CHANGES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 4.12. TAXES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16 4.13. TITLE TO PROPERTIES; CONDITION OF PROPERTIES . . . . . . . . . . . 19 4.14. CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20 4.15. EMPLOYEE BENEFIT PLANS . . . . . . . . . . . . . . . . . . . . . . 21 4.16. COMPLIANCE WITH LEGISLATION REGULATING ENVIRONMENTAL QUALITY. . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.17. LABOR MATTERS. . . . . . . . . . . . . . . . . . . . . . . . . . . 23 4.18. INTELLECTUAL PROPERTY. . . . . . . . . . . . . . . . . . . . . . . 24 4.19. PERMITS; LICENSES. . . . . . . . . . . . . . . . . . . . . . . . . 25 4.20. INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25 4.21. SCHOOLS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 4.22. OPINION OF FINANCIAL ADVISOR . . . . . . . . . . . . . . . . . . . 26 TABLE OF CONTENTS (Continued) (Page) 4.23. BROKERS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 4.24. SETTLEMENT OF FAIR LABOR STANDARDS ACT VIOLATIONS. . . . . . . . . 26 4.25. ACCOUNTING AND LEGAL FEES. . . . . . . . . . . . . . . . . . . . . 27 5. CONDUCT OF BUSINESS PENDING THE MERGER. . . . . . . . . . . . . . . . . . . . . 27 5.1. ORDINARY COURSE OF BUSINESS . . . . . . . . . . . . . . . . . . . . 27 5.2. PRESERVATION OF ORGANIZATION. . . . . . . . . . . . . . . . . . . . 27 5.3. CAPITALIZATION CHANGES. . . . . . . . . . . . . . . . . . . . . . . 27 5.4. SALE OF ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . 28 5.5. DIVIDENDS AND REPURCHASES . . . . . . . . . . . . . . . . . . . . . 28 5.6. ACQUISITIONS; INVESTMENTS . . . . . . . . . . . . . . . . . . . . . 28 5.7. INDEBTEDNESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 28 5.8. SEVERANCE AND TERMINATION PAY . . . . . . . . . . . . . . . . . . . 28 5.9. EMPLOYEE BENEFITS . . . . . . . . . . . . . . . . . . . . . . . . . 28 5.10. TAX ELECTION; ACCOUNTING . . . . . . . . . . . . . . . . . . . . . 29 5.11. SUBSEQUENT FINANCIALS. . . . . . . . . . . . . . . . . . . . . . . 29 5.12. REPRESENTATIONS AND WARRANTIES . . . . . . . . . . . . . . . . . . 29 5.13. CONTRACTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 5.14. AFFILIATES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 5.15. LITIGATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 5.16. CAPITAL EXPENDITURES . . . . . . . . . . . . . . . . . . . . . . . 29 5.17. TRANSACTION EXPENSES . . . . . . . . . . . . . . . . . . . . . . . 29 5.18. COMMITMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 6. ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 6.1. PROXY STATEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 30 6.2. MEETING OF STOCKHOLDERS OF THE COMPANY; VOTING AND DISPOSITION OF THE SHARES. . . . . . . . . . . . . . . . . . . 30 6.3. STOCK OPTIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 6.4. ADDITIONAL AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . 31 6.5. NO SOLICITATION OF TRANSACTIONS . . . . . . . . . . . . . . . . . . 32 6.6. NOTIFICATION OF CERTAIN MATTERS . . . . . . . . . . . . . . . . . . 33 6.7. ACCESS TO INFORMATION . . . . . . . . . . . . . . . . . . . . . . . 33 6.8. TAKEOVER LAWS . . . . . . . . . . . . . . . . . . . . . . . . . . . 33 6.9. EMPLOYMENT AGREEMENTS; NONCOMPETE AGREEMENTS ; RELEASES AND EXCESS PAYMENT AGREEMENT . . . . . . . . . . . . . . . . . . . 33 6.10. OTHER AGREEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 34 6.11. INDEMNIFICATION AND INSURANCE. . . . . . . . . . . . . . . . . . . 34 7. CONDITIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35 7.1. CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER . . . . 35 7.2. ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF PURCHASER . . . . . . . 35 8. TERMINATION, AMENDMENT AND WAIVER . . . . . . . . . . . . . . . . . . . . . . . 36 8.1. TERMINATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36 8.2. EFFECT OF TERMINATION . . . . . . . . . . . . . . . . . . . . . . . 38 9. GENERAL PROVISIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 ii TABLE OF CONTENTS (Continued) (Page) 9.1. AMENDMENT; MODIFICATION; WAVIER; CONSENTS . . . . . . . . . . . . . 40 9.2. PUBLIC STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . 40 9.3. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40 9.4. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41 9.5. INTERPRETATION; SEVERABILITY. . . . . . . . . . . . . . . . . . . . 42 9.6. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . 42 9.7. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . 42
iii AGREEMENT AND PLAN OF MERGER THIS AGREEMENT AND PLAN OF MERGER (this "AGREEMENT"), dated as of March 27, 1998, is by and among Knowledge Beginnings, Inc., a Delaware corporation ("PARENT"), KBI Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of Parent ("PURCHASER") and Children's Discovery Centers of America, Inc., a Delaware corporation ("COMPANY"). RECITALS WHEREAS, the respective Boards of Directors of Parent, Purchaser and the Company have each determined that it is in the best interests of their respective stockholders for the Company to be acquired pursuant to the terms and subject to the conditions of this Agreement. WHEREAS, in furtherance of such acquisition it is proposed that Purchaser will make a tender offer (the "OFFER") to purchase all of the issued and outstanding shares of common stock, par value $0.01 per share, of the Company (the "COMMON STOCK"), subject to the terms and conditions of this Agreement and ANNEX I hereto, for $12.25 per share net to the tendering stockholder in cash, without interest thereon. The Common Stock is sometimes hereinafter referred to as the "SHARES." WHEREAS, to complete such acquisition, the respective Boards of Directors of Parent, Purchaser and the Company have each duly approved the merger of Purchaser and the Company (the "MERGER") following consummation of the Offer, in accordance with the terms of this Agreement and the General Corporation Law of the State of Delaware (the "DELAWARE LAW"). WHEREAS, Parent and the Company have also entered into an Option and Support Agreement dated as of the date hereof, in the form attached as EXHIBIT A hereto (the "OPTION AGREEMENT"), providing for the grant by the Company to Parent of an option to purchase, under certain circumstances, 19.9% of the outstanding Shares at $10.125 per Share. WHEREAS, Parent and Proactive Partners, L.P., Fremont Proactive Partners, L.P. and Lagunitas Partners, L.P. have entered into the Option Agreement providing for, among other things, the agreement of each such stockholder to tender all Shares owned by it pursuant to the Offer and the grant by each such stockholder to Parent of an option to purchase, under certain circumstances, all Shares owned by such stockholder at $12.25 per Share. WHEREAS, the Board of Directors of the Company unanimously (i) determined that the Offer and the Merger is fair to, and in the best interests of, the stockholders of the Company, (ii) approved and adopted this Agreement, the Option Agreement and the transactions contemplated hereby and thereby, and (iii) recommends acceptance of the Offer and approval and adoption by the stockholders of the Company of this Agreement and the Merger. 1 AGREEMENT NOW, THEREFORE, in consideration of the premises and the mutual covenants herein contained and for other good and valuable consideration the receipt and adequacy of which are hereby acknowledged, Parent, Purchaser and the Company hereby agree as follows: 1. THE OFFER 1.1. THE OFFER. (a) Provided that nothing shall have occurred which would result in a failure to satisfy any of the conditions set forth in ANNEX I hereto, Purchaser shall, as soon as practicable after the date hereof, but in no event later than the fifth business day after the date of this Agreement, commence (within the meaning of Rule 14d-2(a) of the Securities Exchange Act of 1934, as amended (the "EXCHANGE ACT")) the Offer. Subject to the terms and conditions set forth in this Agreement (including the right to terminate, extend or modify the Offer), and subject to the other conditions set forth in ANNEX I hereto, including, without limitation, a minimum of a majority of the Shares (determined on a fully diluted basis) being validly tendered and not withdrawn prior to the expiration or termination of the Offer (the "MINIMUM CONDITION"), Purchaser shall use its reasonable efforts to consummate the Offer as soon as legally permissible. As used herein "on a fully diluted basis" means, as of any date, the number of Shares outstanding, together with Shares issuable upon exercise of outstanding Company Options (as hereafter defined). Notwithstanding any provision of this Agreement, Purchaser expressly reserves the right to modify the terms of the Offer, including, without limitation, to extend the Offer beyond the scheduled expiration date (including an extension of up to 20 business days beyond the initial scheduled expiration date whether or not the conditions set forth in ANNEX I hereto have been satisfied); provided that the Offer shall not, without the written consent of the Company, be amended to decrease the price per Share or change the form of consideration payable in the Offer, decrease the number of Shares sought, waive the Minimum Condition or impose additional conditions to the Offer. The Company agrees that no Shares held by the Company or any of its wholly-owned subsidiaries will be tendered pursuant to the Offer. (b) As soon as practicable on the date of commencement of the Offer, Purchaser shall file with the Securities and Exchange Commission (the "COMMISSION") with respect to the Offer a Schedule 14D-1 (the "SCHEDULE 14D-1") which will contain an offer to purchase and forms of the related letter of transmittal and summary advertisement (which documents, together with any supplements or amendments thereto, are referred to herein collectively as the "OFFER DOCUMENTS"). Each of Parent and Purchaser, on the one hand, and the Company, on the other hand, agrees promptly to correct any information provided by it for use in the Offer Documents if and to the extent that it shall have become false or misleading in any material respect, and Parent and Purchaser further agree to take all steps necessary to cause the Offer Documents as so corrected to be filed with the Commission and to be disseminated to the 2 stockholders of the Company, in each case as and to the extent required by applicable federal securities laws. 1.2. COMPANY ACTION. (a) The Company approves and consents to the Offer, the Merger and the Option Agreement and represents that the Board of Directors of the Company has, by a vote of all directors at a meeting duly called and held, unanimously (i) determined that each of the Offer and the Merger is fair to, and in the best interests of, the stockholders of the Company, (ii) approved and adopted the Option Agreement and this Agreement and the transactions contemplated hereby and thereby, including the Offer and the Merger, (iii) recommended acceptance of the Offer and approval and adoption of this Agreement and the Merger by the stockholders of the Company, and (iv) taken all action necessary to render Section 203 of the Delaware Law and other state takeover statutes inapplicable to the Offer, the Merger and the Option Agreement. The Company further represents that Advest, Inc. has rendered to the Board of Directors of the Company its opinion that the consideration to be received by the stockholders of the Company pursuant to the Offer and the Merger is fair to such stockholders from a financial point of view. (b) The Company agrees to promptly prepare, and after review by Purchaser, file with the Commission on the same date the Offer Documents are filed with the Commission and to mail to its stockholders a Solicitation/Recommendation Statement on Schedule 14D-9 with respect to the Offer (the "SCHEDULE 14D-9") containing the recommendation described in Section 1.2(a) hereof and to disseminate the Schedule 14D-9 as required by Rule 14d-9 promulgated under the Exchange Act. The Company agrees to provide Parent and its counsel with any comments that the Company or its counsel may receive from the Commission or its staff with respect to the Schedule 14D-9 promptly after the receipt of such comments and shall provide Parent and its counsel an opportunity to participate, including by way of discussion with the Commission or its staff, in the response of the Company to such comments. Each of the Company, on the one hand, and Parent and Purchaser, on the other hand, agrees promptly to correct any information provided by it for use in the Schedule 14D-9 if and to the extent that it shall have become false or misleading in any material respect, and the Company further agrees to take all steps necessary to cause the Schedule 14D-9 as so corrected to be filed with the Commission and to be disseminated to the stockholders of the Company, in each case as and to the extent required by applicable federal securities laws; PROVIDED, HOWEVER, that subject to the provisions of Article 8, such recommendation may be withdrawn, modified or amended to the extent that the Board of Directors of the Company deems it necessary to do so in the exercise of its fiduciary duty after being so advised in writing by outside counsel. (c) The Company will promptly furnish Purchaser with mailing labels containing the names and addresses of the record holders of Shares and lists of securities positions of Shares held in stock depositories, each as of a recent date, and shall furnish 3 Purchaser with such additional information, including updated lists of stockholders, mailing labels and lists of securities positions, and assistance as Purchaser or its agents or representatives may reasonably request in connection with the Offer. The Company has been advised that each of its directors intends to tender pursuant to the Offer all shares of Common Stock owned of record or beneficially by him or her. 1.3. DIRECTORS. Subject to compliance with applicable law, promptly upon the acceptance for payment and payment by Purchaser for Shares purchased pursuant to the Offer, and from time to time thereafter, the Company and its Board of Directors shall, upon request of Parent, promptly take all actions necessary to cause to be elected as directors of the Company a number of Parent's designees which equals the product, rounded up to the next whole number, of the total number of directors on the Board of Directors (giving effect to the directors elected pursuant to this sentence) multiplied by the percentage that such number of Shares so accepted for payment and paid for by Purchaser bears to the number of Shares outstanding, and the Company shall, at such time, use its reasonable best efforts to cause Parent's designees to be so elected, including by accepting resignations of those incumbent directors designated by the Company or increasing the size of the Board of Directors of the Company and causing Parent's designees to be elected. Subject to applicable law, the Company shall take all action necessary to effect any such election, including mailing to its stockholders the information required by Section 14(f) of the Exchange Act and Rule 14f-1 promulgated thereunder. 2. THE MERGER 2.1. THE MERGER. (a) At the Effective Date (as defined in Section 2.3), in accordance with this Agreement and the Delaware Law, Purchaser shall be merged with and into the Company, the separate corporate existence of Purchaser shall cease, and the Company shall continue as the surviving corporation under the corporate name it possesses immediately prior to the Effective Date. The Company hereinafter sometimes is referred to as the "SURVIVING CORPORATION." At the Effective Date, the separate corporate existence of Purchaser shall cease. (b) If Parent so elects, the Merger may alternatively be structured with Purchaser as the Surviving Corporation or so that any direct or indirect subsidiary of Parent is merged with and into the Company or the Company is merged with and into any such other subsidiary. In the event of such an election, the parties agree to execute an appropriate amendment to this Agreement in order to reflect such election. If Parent elects to structure the Merger so that the Company is not the Surviving Corporation, the inaccuracy of any representation or warranty of the Company which is premised on the assumption that the Company shall be the Surviving Corporation, which representation or warranty becomes inaccurate solely as a result of the Company not being the Surviving Corporation, shall not be deemed to be a breach of such representation or warranty. 4 2.2. EFFECT OF THE MERGER. From and after the Effective Date, the Merger shall have the effects set forth in Section 259 of the Delaware Law. 2.3. CONSUMMATION OF THE MERGER. As soon as is practicable after the satisfaction or waiver of the conditions hereinafter set forth, the parties hereto will cause the Merger to be consummated by filing with the Secretary of State of Delaware a certificate of merger or a certificate of ownership and merger, as applicable, in such form as required by, and executed in accordance with, the relevant provisions of the Delaware Law. The Merger shall become effective upon the filing of such certificate with the Secretary of State of Delaware in accordance with the provisions and requirements of the Delaware Law (the time of such effectiveness is hereinafter referred to as the "EFFECTIVE DATE"). 2.4. CERTIFICATE OF INCORPORATION; BYLAWS; DIRECTORS AND OFFICERS. The Certificate of Incorporation and Bylaws of Purchaser shall be the Certificate of Incorporation and Bylaws of the Surviving Corporation, as in effect immediately prior to the Effective Date, until thereafter amended as provided therein and under the Delaware Law. The directors of Purchaser immediately prior to the Effective Date will be the initial directors of the Surviving Corporation, and the officers of the Company immediately prior to the Effective Date will be the initial officers of the Surviving Corporation, in each case until their successors are elected and qualified, or their earlier death, resignation or removal. 2.5. CONVERSION OF SECURITIES. At the Effective Date, by virtue of the Merger and without any action on the part of Purchaser, the Company, the Surviving Corporation or the holder of any of the following securities: (a) Each Share issued and outstanding immediately prior to the Effective Date (other than Shares to be canceled pursuant to Section 2.5(b) hereof and Shares held by Dissenting Stockholders (as defined in Section 2.6)) shall be canceled and extinguished and be converted into and become a right to receive $12.25 in cash, without interest (the "MERGER CONSIDERATION"). (b) Each Share which is issued and outstanding immediately prior to the Effective Date and owned by Purchaser, Parent or the Company or any direct or indirect wholly-owned subsidiary of Purchaser, Parent or the Company, shall be canceled and retired, and no payment shall be made with respect thereto. (c) Each share of common stock, par value $0.01 per share, of Purchaser issued and outstanding immediately prior to the Effective Date shall be converted into and become one validly issued, fully paid and nonassessable share of common stock, par value $0.01 per share, of the Surviving Corporation. 2.6. DISSENTING STOCK. Notwithstanding anything in this Agreement to the contrary but only to the extent required by the Delaware Law, Shares that are issued and outstanding immediately prior to the Effective Date and are held by holders who comply with all the 5 provisions of the Delaware Law concerning the right of holders of common stock to dissent from the Merger and require appraisal of their shares of Common Stock ("DISSENTING STOCKHOLDERS") shall not be converted into the right to receive the Merger Consideration but shall become the right to receive such consideration as may be determined to be due such Dissenting Stockholders pursuant to the Delaware Law; PROVIDED, HOWEVER, that (i) if any Dissenting Stockholder shall subsequently deliver a written withdrawal of his or her demand for appraisal (with the written approval of the Surviving Corporation, if such withdrawal is not tendered within 60 days after the Effective Date), or (ii) if any Dissenting Stockholder fails to establish and perfect his or her entitlement to appraisal rights as provided by applicable law, or (iii) if within 120 days of the Effective Date neither any Dissenting Stockholder nor the Surviving Corporation has filed a petition demanding a determination of the value of all Shares outstanding at the Effective Date and held by Dissenting Stockholders in accordance with applicable law, then such Dissenting Stockholder or Stockholders, as the case may be, shall forfeit the right to appraisal of such Shares and such Shares shall thereupon be deemed to have been converted into the right to receive, as of the Effective Date, the Merger Consideration, without interest. The Company shall give Parent and Purchaser (A) prompt notice of any written demands for appraisal, withdrawals of demands for appraisal and any other related instruments received by the Company, and (B) the opportunity to direct all negotiations and proceedings with respect to demands for appraisal. The Company will not voluntarily make any payment with respect to any demands for appraisal and will not, except with the prior written consent of Parent, settle or offer to settle any demand. 2.7. COMPANY STOCK OPTIONS AND RELATED MATTERS. Prior to the consummation of the Offer, the Board of Directors of the Company shall cause each option issued under the Company's Employee Stock Option Plan, the Non-Employee Director Stock Option Plan and options issued to employees not under either of such plans (collectively, the "COMPANY OPTIONS"), to become exercisable immediately prior to the Effective Date, subject to the consummation of the Merger. Prior to the consummation of the Offer, the Company shall offer (the "OPTION OFFER") to pay, subject to consummation of the Merger, each holder of a Company Option an amount equal to (x) the aggregate Merger Consideration into which the shares of Common Stock issuable upon exercise of such Company Option would have been converted if such option had been exercised immediately prior to the Effective Date, reduced by (y)(I) the aggregate exercise price for the shares of Common Stock then issuable upon exercise of such Company Option, (II) the amount of any withholding taxes which may be required thereon and (III) the amount of all outstanding loans from the Company to such holder, in return for the cancellation of such Company Option. The Option Offer shall be accepted, if at all, irrevocably by the holders of the Company Options prior to the consummation of the Offer. The Option Offer shall provide that the holder of the Company Option shall agree not to exercise the Company Option after accepting the Option Offer. 6 2.8. EXCHANGE OF CERTIFICATES. (a) Prior the Effective Date, Parent shall designate a bank or trust company to act as exchange agent (the "EXCHANGE AGENT") in effecting the exchange for the Merger Consideration of stock certificates (the "CERTIFICATES") which, prior to the Effective Date, represented Shares entitled to payment pursuant to Section 2.5. Upon the surrender for cancellation to the Exchange Agent of such Certificates, together with a letter of transmittal, duly executed and completed in accordance with the instructions thereon, and any other items specified in the letter of transmittal, the Exchange Agent shall promptly pay to the Person entitled thereto the Merger Consideration deliverable in respect thereto and such Certificates shall be canceled. Until so surrendered and exchanged, each such Certificate (other than Certificates representing Shares to be canceled pursuant to Section 2.5(b) and Shares held by Dissenting Stockholders) shall represent solely the right to receive the Merger Consideration multiplied by the number of Shares represented by such Certificate. If any cash is to be paid to a Person other than the Person in which the Certificate representing Shares surrendered in exchange therefor is registered, it shall be a condition to such payment that the Certificates so surrendered shall be properly endorsed or accompanied by appropriate stock powers and otherwise in proper form for transfer, that such transfer otherwise be proper and that the Person requesting such payment shall pay to the Exchange Agent any transfer or other taxes required by reason of the payment of such cash to a Person other than that of the registered holder of the Certificate surrendered, or such Person shall establish to the satisfaction of the Exchange Agent that such tax has been paid or is not applicable. Notwithstanding anything in this Agreement, neither the Exchange Agent nor any party hereto shall be liable to a holder of Shares for any Merger Consideration delivered to a public official pursuant to applicable abandoned property laws. In the event 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, the Exchange Agent will issuein exchange for such lost, stolen or destroyed Certificate the Merger Consideration deliverable in respect thereof as determined in accordance with this Article 2, provided that, the Person to whom the Merger Consideration is paid shall, as a condition precedent to the payment thereof, give the Surviving Corporation a bond in such amount as it may direct or otherwise indemnify the Surviving Corporation in a manner satisfactory to it against any claim that may be made against the Surviving Corporation with respect to the Certificate claimed to have been lost, stolen or destroyed. (b) Promptly following the date which is six months after the Effective Date, the Exchange Agent shall return to the Surviving Corporation all cash and property in its possession relating to the transactions described in this Agreement, and the Exchange Agent's duties shall terminate. Thereafter, each holder of a Certificate representing a Share may surrender such Certificate to the Surviving Corporation and (subject to applicable abandoned property, escheat and similar laws) receive in exchange therefor the Merger Consideration, without any interest thereon, but shall have no greater rights against the Surviving Corporation than may be accorded to general creditors of the Surviving Corporation under applicable law. 7 (c) Promptly after the Effective Date, Parent shall cause the Exchange Agent to mail or make available to each record holder of Certificates which immediately prior to the Effective Date represented Shares (other than Shares to be canceled pursuant to Section 2.5(b)) a letter of transmittal (which shall specify that delivery shall be effected, and risk of loss and title to the Certificate shall pass, only upon proper delivery of the Certificates to the Exchange Agent) and instructions for use in surrendering such Certificates and receiving the Merger Consideration therefor. 2.9. PAYMENT. Concurrently with or immediately prior to the Effective Date, Parent or Purchaser shall deposit in trust with the Exchange Agent cash in United States dollars in an aggregate amount equal to the product of (i) the number of Shares outstanding immediately prior to the Effective Date (other than Shares to be canceled pursuant to Section 2.5(b) or a Shares held by a Person known at the time of such deposit to be a Dissenting Stockholder) and (ii) the Merger Consideration (such amount being hereinafter referred to as the "PAYMENT FUND"). The Payment Fund shall be invested by the Exchange Agent as directed by Parent in direct obligations of the United States, obligations for which the full faith and credit of the United States is pledged to provide for the payment of principal and interest, commercial paper rated of the highest quality of Moody's Investors Services, Inc. or Standard & Poor's Ratings Group or certificates of deposit, bank repurchase agreements or bankers' acceptances of a commercial bank having at least $500,000,000 in assets (collectively, "PERMITTED INVESTMENTS") or in money market funds which are invested in Permitted Investments, and any net earnings with respect thereto shall be paid to Parent as and when requested by Parent. The Exchange Agent shall, pursuant to irrevocable instructions, make the payments referred to in Section 2.5(a) hereof out of the Payment Fund. The Payment Fund shall not be used for any other purpose except as otherwise agreed to by Parent. 2.10. NO FURTHER RIGHTS OF TRANSFERS. At and after the Effective Date, each holder of a Certificate shall cease to have any rights as a stockholder of the Company, except for, in the case of a holder of a Certificate (other than shares to be canceled pursuant to Section 2.5(b) hereof and other than shares held by Dissenting Stockholders), the right to surrender his or her Certificate in exchange for payment of the Merger Consideration or, in the case of a Dissenting Stockholder, to perfect his or her right to receive payment for his or her Shares pursuant to the Delaware Law if such holder has validly perfected and not withdrawn his or her right to receive payment for his or her Shares, and no transfer of Shares shall be made on the stock transfer books of the Surviving Corporation. Certificates presented to the Surviving Corporation after the Effective Date shall be canceled and exchanged for cash as provided in this Article 2. At the close of business on the day of the Effective Date, the stock ledger of the Company with respect to Common Stock shall be closed. 2.11. CLOSING. The closing of the Merger (the "CLOSING") shall take place at the offices of Latham & Watkins, San Francisco, California, on the date on which the Effective Date occurs, or at such other time and place as Parent and the Company may mutually agree. 8 3. REPRESENTATIONS AND WARRANTIES OF PARENT AND PURCHASER Each of Parent and Purchaser represents and warrants to the Company as follows: 3.1. ORGANIZATION AND QUALIFICATION. Each of Parent and Purchaser is a corporation duly organized, validly existing and in good standing under the laws of Delaware and has the requisite corporate power to carry on its respective business as now conducted. 3.2. AUTHORITY RELATIVE TO THIS AGREEMENT. Each of Parent and Purchaser has the requisite corporate power and authority to enter into this Agreement, to perform its obligations hereunder and to consummate the transactions contemplated hereunder. The execution and delivery of this Agreement by Parent and Purchaser and the consummation by Parent and Purchaser of the transactions contemplated hereby have been duly authorized by the respective Boards of Directors of Parent and Purchaser and Parent as the sole stockholder of Purchaser and no other corporate proceeding on the part of Parent and Purchaser is necessary to authorize the execution, delivery and performance of this Agreement and the transactions contemplated hereby. This Agreement has been duly executed and delivered by Parent and Purchaser and, assuming the due authorization, execution and delivery hereof by the Company, constitutes a valid and binding obligation of each, enforceable against each in accordance with its terms, except to the extent that its enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other laws affecting the enforcement of creditors' rights generally or by general equitable principles, regardless of whether such enforceability is considered in a proceeding in equity or at law. 3.3. COMPLIANCE. (a) Neither the execution and delivery of this Agreement by Parent or Purchaser, nor the consummation by Parent or Purchaser of the transactions contemplated hereby, nor compliance by Parent or Purchaser with any of the provisions hereof will (i) conflict with or result in any breach of any provision of its certificate of incorporation or bylaws, (ii) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination or cancellation of, or accelerate the performance required by, or result in a right of termination or acceleration or give rise to any obligation to make any payment, or require any consent, under any of the terms, conditions or provisions of any material note, bond, mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which Parent and Purchaser is a party, or to which any of them, or any of their respective properties or assets may be subject; (iii) result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of Parent and Purchaser; or (iv) subject to compliance with the statutes and regulations referred to in the next paragraph, violate any judgment, ruling, order, writ, injunction, decree, statute, rule or regulation applicable to Parent or Purchaser or any of their respective properties or assets. 9 (b) Other than in connection with or in compliance with the provisions of the Delaware Law, the Exchange Act, the "takeover" or "blue sky" laws of various states, the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the rules and regulations thereunder (the "HART-SCOTT-RODINO ACT"), and any required foreign regulatory approvals, no notice or reports to, filing with, or registrations, authorization, consent or approval of, any domestic or foreign public body or authority is required to be obtained by Parent or Purchaser in connection with the execution and delivery of this Agreement by Parent and Purchaser and the consummation by Parent or Purchaser of the transactions contemplated by this Agreement. 3.4. BROKERS. No broker, finder or investment banker (other than Donaldson, Lufkin & Jenrette) is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by and on behalf of Parent or Purchaser. 3.5. FINANCIAL CAPABILITY. As of the date hereof, Parent and/or Purchaser have unrestricted cash and/or cash equivalents of at least $50,000,000 and will have unrestricted cash and/or cash equivalents of at least $50,000,000 until consummation of the Offer. 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company represents and warrants to Parent and Purchaser, except as set forth on a Disclosure Schedule previously delivered to Parent (the "DISCLOSURE SCHEDULE"), the following: 4.1. ORGANIZATION AND QUALIFICATION. The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power to carry on its business as it is now being conducted. The Company is duly qualified as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of its properties owned or leased or the nature of its activities makes such qualification necessary, except for failures to be so qualified or in good standing which would not have a Material Adverse Effect on the Company and its subsidiaries taken as a whole. Copies of the Certificate of Incorporation, as amended, and Bylaws, as amended, of the Company heretofore delivered to Parent are accurate and complete as of the date hereof. 4.2. SUBSIDIARIES. The only subsidiaries of the Company are those listed in the Disclosure Schedule (the "COMPANY SUBSIDIARIES"). Except as set forth in such Disclosure Schedule, the Company is, directly or indirectly, the record and beneficial owner of all of the outstanding shares of capital stock of each of the Company Subsidiaries and there are no irrevocable proxies with respect to such shares, and no equity securities of any of the Company Subsidiaries are or may become required to be issued by reason of any options, warrants, rights to subscribe to, calls or commitments or rights of any character whatsoever relating to, or securities or rights convertible into or exchangeable for, the issuance, sale delivery or transfer of shares of any capital stock of any Company Subsidiary. There are no contracts, commitments, 10 understandings or arrangements by which any the Company or any Company Subsidiary is bound to transfer shares or issue additional shares of capital stock of a Company Subsidiary or options, warrants or other rights to purchase or securities convertible into or exchangeable for such shares. All of the shares of capital stock of each Company Subsidiary are fully paid and nonassessable and are owned by the Company or a Company Subsidiary free and clear of any claim, lien, encumbrance, restrictions or agreement with respect thereto. Each Company Subsidiary is a corporation duly organized, validly existing and in good standing under the laws of its jurisdiction of incorporation and has the requisite corporate power to carry on its business as it is now being conducted. Each Company Subsidiary is duly qualified as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of its properties owned or leased or the nature of its activities makes such qualification necessary, except for failures to be so qualified or in good standing which would not have a Material Adverse Effect on the Company and its subsidiaries taken as a whole. Copies of the charter documents, bylaws and regulations of each Company Subsidiary, which have been heretofore delivered to Parent, are accurate and complete. 4.3. CAPITALIZATION. The authorized capital stock of the Company consists of 20,000,000 Shares and 5,000,000 shares of Special Stock, par value $0.01 per share (the "PREFERRED STOCK"). As of the date of this Agreement, (i) 6,744,499 Shares are validly issued and outstanding, fully paid and nonassessable and no Shares are held in the Company's treasury and (ii) no shares of Preferred Stock are issued and outstanding. All outstanding Shares have been duly authorized and validly issued, and are fully paid, nonassessable and free of preemptive rights. As of the date of this Agreement, 928,565 Shares are issuable upon exercise of outstanding Company Options. Except as contemplated by clauses (i) and (ii) above, there are not now and at the Effective Date there will not be, any other shares of capital stock, or other equity securities of the Company outstanding, or any other outstanding options, warrants, rights to subscribe to (including any preemptive rights), calls or commitments of any character whatsoever to which the Company or any Company Subsidiaries is a party or may be bound, requiring the issuance, transfer or sale of, shares of any capital stock or other equity securities of the Company or securities or rights convertible into or exchangeable for such shares or other equity securities. There are no contracts, commitments, understandings or arrangements by which the Company is or may become bound to issue additional shares of its capital stock or other equity securities or options, warrants or rights to purchase or acquire any additional shares of its capital stock or other equity securities or securities convertible into or exchangeable for such shares or other equity securities. There are no outstanding contracts, commitments, understandings or arrangements of the Company to repurchase, redeem or otherwise acquire any Shares. The Disclosure Schedule contains a complete and accurate list of all holders of Company Options and the number of such Company Options and the terms of such Company Options held by each such holder. 4.4. COMPANY INVESTMENTS. Except for interest in the Company Subsidiaries and except as set forth on the Disclosure Schedule, neither the Company nor any of the Company 11 Subsidiaries owns or has the right to acquire, directly or indirectly, any interest or investment (whether equity, debt, loan or advance) in any Person, other than investments of less than $100,000 in the aggregate. 4.5. AUTHORITY RELATIVE TO THIS AGREEMENT. The Company has the requisite corporate power and authority to execute and deliver this Agreement and the Option Agreement, to perform its obligations hereunder and thereunder and to consummate the transactions contemplated hereunder and thereunder. The execution and delivery of this Agreement and the Option Agreement by the Company and the consummation by the Company of the transactions contemplated hereby and thereby have been duly authorized by the Board of Directors of the Company and no other corporate proceeding on the part of the Company is necessary to authorize the execution, delivery and performance of this Agreement or the Option Agreement and the transactions contemplated hereby or thereby, including the acquisition of the Shares pursuant to the Offer and the Merger, except for the approval of the Company's stockholders owning at least a majority of the outstanding Shares of the Merger, if required, pursuant to the Delaware Law as set forth in Section 6.2 of this Agreement. The Company has taken all action necessary to render the prohibitions of Section 203 of the Delaware Law to be inapplicable to the execution and delivery of this Agreement and the Option Agreement, and the transactions contemplated hereby and thereby, including the acquisition of the Shares pursuant to the Offer and the Merger. To the knowledge of the Company, no other "fair price'" "merger moratorium," "control share acquisition" or other anti-takeover statute or similar statute or regulation applies or purports to apply to the Merger, this Agreement the Option Agreement or any of the transactions contemplated hereby or thereby. This Agreement and the Option Agreement have been duly executed and delivered by the Company and, assuming due authorization, execution and delivery by Parent and Purchaser, each constitutes a valid and binding obligation of the Company, enforceable against the Company in accordance with its respective terms, except to the extent that enforceability may be limited by applicable bankruptcy, insolvency, reorganization or other laws affecting the enforcement of creditors rights generally or by general equitable principles, regardless of whether such enforceability is considered in a proceeding in equity or at law. 4.6. COMPLIANCE. (a) Neither the execution and delivery of this Agreement or the Option Agreement by the Company, nor the consummation of the transactions contemplated hereby (including the acquisition of the Shares pursuant to the Offer and the Merger) or thereby, nor compliance by the Company with any of the provisions hereof or thereof will (i) conflict with or result in any breach of any provision of the certificate of incorporation, charter documents or bylaws of the Company or any Company Subsidiary; (ii) violate, conflict with, or result in a breach of any provision of, or constitute a default (or an event which, with notice or lapse of time or both, would constitute a default) under, or result in the termination of, or accelerate the performance required by, or result in the loss of any material benefit under, or result in a right of termination or acceleration under, any of the terms, conditions or provisions of any note, bond, 12 mortgage, indenture, deed of trust, license, lease, agreement or other instrument or obligation to which the Company or any such Company Subsidiary is a party, or to which any of them or any of their respective properties or assets may be subject; (iii) result in the creation of any lien, security interest, charge or encumbrance upon any of the properties or assets of the Company or any Company Subsidiaries; or (iv) subject to compliance with the statutes and regulations referred to in the next paragraph, violate any judgment, ruling, order, writ, injunction, decree, statute, rule or regulation applicable to the Company or any Company Subsidiary or any of their respective properties or assets. (b) Other than in connection with or in compliance with the provisions of the Delaware Law, the Exchange Act, the "takeover" or "blue sky" laws of various states, the Hart-Scott-Rodino Act, and any required foreign regulatory approvals, no notice or report to, filing with, or authorization, permits, registration, consent or approval of, any domestic or foreign public body or authority is necessary for the execution and delivery of this Agreement or the Option Agreement or the consummation by the Company of the transactions contemplated by this Agreement or the Option Agreement. 4.7. COMMISSION FILINGS. The Company has filed with the Commission all reports, forms, registration statements, definitive proxy statements and documents required to be filed with the Commission since January 1, 1995 (the "SEC REPORTS"). The Company has delivered to Parent a complete and correct copy of the SEC Reports and any amendments thereto filed prior to the date hereof. As of their respective dates, the SEC Reports (including all financial statements, exhibits and schedules thereto and documents incorporated by reference therein) did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading. The audited consolidated financial statements and unaudited consolidated interim financial statements of the Company and the Company Subsidiaries (including the consolidated financial statements for the year ended December 31, 1997) included or incorporated by reference in the SEC Reports, and in the Company's Annual Reports for the years ended December 31, 1994, 1995 and 1996 heretofore delivered to Parent, have been prepared in accordance with generally accepted accounting principles applied on a consistent basis during the periods involved (except as may be indicated in the notes thereto), and fairly present the consolidated assets, liabilities and financial position of the Company and its consolidated subsidiaries as of the dates thereof and the consolidated results of their operations and changes in financial position for the periods then ended (subject, in the case of any unaudited interim financial statements, to normal year-end adjustments). 4.8. ABSENCE OF UNDISCLOSED LIABILITIES. Except as set forth on the Disclosure Schedule, neither the Company nor any of its subsidiaries has any liabilities of any nature, whether absolute, contingent or otherwise, and whether due or to become due (including, without limitation, all tax liabilities) which would be required to be disclosed in financial statements, including the footnotes thereto, prepared in accordance with generally accepted accounting 13 principles, and which are not adequately reflected or reserved against in the Company's balance sheet as of December 31, 1997, including the footnotes thereto (the "BALANCE SHEET"), except such as have arisen in the ordinary course of business since such date. Except as set forth in the Disclosure Schedule, the Company has not engaged, and prior to the Effective Date will not engage, in any hedging transactions or transactions in derivative securities. 4.9. LITIGATION. (a) Except as set forth on the Disclosure Schedule, there are no material actions, suits, proceedings, arbitration, meditation or investigations pending or, to the knowledge of the Company, threatened against the Company or any of its subsidiaries, nor is the Company or any Company Subsidiary subject to any order, judgment, writ, injunction or decree of any court or governmental or regulatory authority or body. (b) Any losses, damages, liabilities, judgments, costs or expenses arising out of those claims set forth on Section 4.9(b) of the Disclosure Schedule will be covered by the Company's general liability insurance, subject to the deductible of such policies. 4.10. COMPLIANCE WITH LAW. Each of the Company and its subsidiaries has not violated or failed to comply in any material respect with any material statute, law, ordinance, regulation, rule or order of any foreign, federal, state or local government or any other governmental department or agency, or any judgment, decree or order of any court, applicable to its business, operations, properties and assets. The conduct of the Company's and its subsidiaries' business is in material conformity with all material labor, energy, public utility, zoning, building code, health, OSHA and environmental requirements and all other foreign, federal, state and local governmental and regulatory requirements. Except as set forth on the Disclosure Schedule, neither the Company nor any of its subsidiaries has received any notice asserting a failure to comply with any such statute, law, ordinance, regulation, rule, judgment, decree or order. 4.11. CHANGES. Except as contemplated by this Agreement, or as set forth on the Disclosure Schedule, since September 30, 1997, none of the following have occurred: (a) any change, event or condition (or any development involving a prospective change, event or condition) shall have occurred or be threatened which is, or is reasonably likely to have, a Material Adverse Effect on the Company and its subsidiaries taken as a whole; (b) any change in accounting methods, principles or practices by the Company affecting its assets, liabilities or business; (c) any revaluation by the Company or any of its subsidiaries of any of their assets, including without limitation, writing off notes; 14 (d) any damage, destruction or loss having a Material Adverse Effect on the Company and its subsidiaries taken as a whole; (e) any cancellation of any material debts or waiver or release of any material right or claim of the Company relating to its business activities or properties; (f) any declaration, setting aside or payment of dividends or distributions in respect of the Shares or any redemption, purchase or other acquisition of any of any securities of the Company or its subsidiaries; (g) any issuance by the Company or any of its subsidiaries of, or commitment of the Company or any of its subsidiaries to issue, any shares of stock, options, warrants or other equity securities or obligations or securities convertible into or exchangeable for shares of stock, options, warrants or other equity securities, other than upon exercise of Company Options; (h) negotiation or execution of any material arrangement, agreement or understanding to which the Company or any of its subsidiaries is a party which cannot be terminated by it on notice of 30 days or less without cost or penalty; (i) the making of any loan or payment, the entering into of any arrangement, agreement or understanding or similar transaction with any Person who is an officer, director or stockholder of the Company or any of its subsidiaries, or who is an affiliate or associate of such a Person; (j) any capital expenditures other than in the ordinary course of business and consistent with past practice by the Company or any of its subsidiaries in an aggregate amount that exceeds $100,000; (k) any adoption of a plan of liquidation or resolutions providing for the liquidation, dissolution, merger, consolidation or other reorganization of the Company or any of its subsidiaries; (l) any increase in salary, bonus, fringe benefit, severance, retention bonus or incentive or other compensation payable or to become payable to any officer, director, employee or other Person receiving compensation of any nature from the Company or any of its subsidiaries; any increase in the number of shares obtainable under, or the acceleration or creation of any rights of any Person to benefits under, any Employee Plan (including, without limitation, the acceleration of the vesting or exercisability of any stock options, the acceleration of the vesting of any restricted stock, the acceleration of the accrual or vesting of any benefits under any Pension Plan or the acceleration or creation of any rights under any severance, parachute or change in control agreement), or the entering into of any employment, consulting, severance or other employee related agreement, arrangement or understanding with the Company or any of its subsidiaries; 15 (m) any delay or failure to repay when due any material obligation of the Company or any of its subsidiaries; or (n) any agreement by the Company or any subsidiary to do any of the things described in the preceding clauses (a) through (m) other than as expressly provided for herein. 4.12. TAXES. (a) FILING OF TAX RETURNS. The Company (including, for purposes of this Section 4.12, each of its subsidiaries from time to time) has timely filed with the proper taxing or other governmental authorities all returns (including, without limitation, information returns, estimated Tax filing and other Tax-related information) in respect of Taxes (as such term is defined in Section 4.12(f)) required to be filed through the date hereof. Such returns, filings and information filed are complete, correct and accurate in all material respects. The Company has delivered to Parent complete and accurate copies of all of the Company's federal, state and local Tax returns filed for its taxable years ended December 31, 1994, 1995 and 1996. The Company has not filed any federal, state or local tax returns for its taxable year ended December 31, 1997, or has delivered to Parent complete and accurate copies of all such returns that have been filed for such taxable year. (b) PAYMENT OF TAXES. All Taxes for which the Company shown as owing on any Tax return for any period or portion thereof ending on or before the Effective Date, shall have been paid, or an adequate reserve (in conformity with generally accepted accounting principles applied on a consistent basis and the Company's past custom and practice) has been established therefor, and the Company has no material liability for Taxes in excess of the amounts so paid or reserves so established. All Taxes that the Company has been required to collect or withhold have been duly collected or withheld and, to the extent required when due, have been or will be duly paid to the proper taxing or other governmental authority. (c) AUDIT HISTORY. Except as set forth in the Disclosure Schedule: (i) No deficiencies for Taxes of the Company have been claimed, proposed or assessed by any taxing or other governmental authority. (ii) There are no pending or, to the best of the Company's knowledge, threatened audits, investigations or claims for or relating to any liability in respect of Taxes of the Company, and there are no matters under discussion with any taxing or other governmental authority with respect to Taxes of the Company. (iii) All audits of federal, state and local returns for Taxes by the relevant taxing or other governmental authority have been completed for all periods. 16 (iv) The Company has not been notified that any taxing or other governmental authority intends to audit a return for any other period. (v) No extension of a statute of limitations relating to Taxes is in effect with respect to the Company. (d) TAX ELECTIONS. Except as set forth in the Disclosure Schedule: (i) There are no material elections with respect to Taxes affecting the Company. (ii) The Company has not made an election, and is not required, to treat any asset of the Company as owned by another person or as tax-exempt bond financed property or tax-exempt use property within the meaning of Section 168 of the Internal Revenue Code of 1986, as amended (the "CODE") or under any comparable state or local income Tax or other Tax provision. (iii) The Company is not a party to or bound by any binding tax sharing, tax indemnity or tax allocation agreement or other similar arrangement with any other person or entity. (iv) The Company has not filed a consent pursuant to the collapsible corporation provisions of Section 341(f) of the Code (or any corresponding provision of state or local law) or agreed to have Sections 341(f)(2) of the Code (or any corresponding provision of state or local law) apply to any disposition of any asset owned by it. (e) ADDITIONAL REPRESENTATIONS. Except as set forth in the Disclosure Schedule: (i) There are no liens for Taxes (other than for Taxes not yet delinquent) upon the assets of the Company. (ii) The Company has never been a member of an affiliated group of corporations within the meaning of Section 1504 of the Code, nor has the Company or any present or former subsidiary, or any predecessor or affiliate of any of them, become liable (whether by contract, as transferee or successor, by law or otherwise) for the Taxes of any other person or entity under Treasury Regulation Section 1.1502-6 or any similar provision of state, local or foreign law. (iii) The Company has not made, requested or agreed to make, nor is it required to make, any adjustment under Section 481(a) of the Code by reason of a change in accounting method or otherwise for any taxable year. 17 (iv) The Company is not a party to any agreement, contract, arrangement or plan that has resulted or would result, separately or in the aggregate, in the payment of any amount as to which a deduction may be denied under Section 162(m) of the Code. (v) The Company is not a party to any joint venture, partnership, or other arrangement or contract which could be treated as a partnership for federal, state, local or foreign Tax purposes. (vi) The Company has prepared and made available to Parent all of the Company's books and working papers that clearly demonstrate the income and activities of the Company for the last full reporting period ending prior to the date hereof. (vii) The Company has not been a "United States real property holding corporation" within the meaning of Section 897(c)(2) of the Code during the applicable period specified in Section 897(c)(1)(A)(ii). (viii) The Company has properly requested, received and retained all necessary exemption certificates and other documentation supporting any claimed exemption or waiver of Taxes on sales or other transactions as to which the Company would have been obligated to collect or withhold Taxes except for any failure to do so which would not be expected to have a Material Adverse Effect on the Company and its subsidiaries taken as a whole. (ix) Assuming the effectiveness of and compliance with the Excess Payment Agreement between Dr. Elanna S. Yalow and the Company dated March 27, 1998 and the provisions regarding reimbursement of excess parachute payments in the Consulting Agreement between Richard A. Niglio and the Company dated March 27, 1998, each in the form reviewed by Parent and Purchaser, there is no agreement, plan or arrangement, including, but not limited to, any agreement or bonus plan entered into by the Company or any of its subsidiaries in connection with the Offer, the Merger or the other transactions contemplated by this Agreement, covering any employee or former employee of the Company that, individually or collectively, provides for the payment of any compensation, benefit or other amount that is an "excess parachute payment" under Section 280G of the Code; provided that the foregoing does not apply to any agreement, plan or arrangement with regard to compensation, benefits or other payments which was reached before or exists on the date of consummation of the Offer or the Effective Date between Parent or Purchaser, or any representative or affiliate of either of them (excluding the Company and its subsidiaries) and any employee or former employee of the Company, or which is reached after the date of consummation of the Offer or the Effective Date between Parent, Purchaser or the Company, or any representative or affiliate of any of them, and any employee of former employee of the Company. 18 (f) DEFINITION OF TAXES. For purposes of this Agreement, the term "Taxes" shall mean all federal, state, local, foreign and other taxes, assessments or other governmental charges, including, without limitation, income, estimated income, gross receipts, profits, occupation, franchise, capital stock, real or personal property, sales, use, value added, transfer, license, commercial rent, payroll, employment or unemployment, social security, disability, withholding, alternative or add-on minimum, customs, excise, stamp or environmental taxes, and further including all interest, penalties and additions in connection therewith for which the Company may be liable. 4.13. TITLE TO PROPERTIES; CONDITION OF PROPERTIES. (a) The Company and each of its subsidiaries has good, valid and marketable title (in fee simple absolute in the case of real property) to all properties and assets used in its business, except for leased properties and assets; none of those owned properties is subject to any mortgage, deed of trust, pledge, lien, claim, charge, equity, covenant, condition, restriction, easement, right-of-way or encumbrance, except (i) liens, claims, charges and encumbrances disclosed, or reserved against, in the Balance Sheet, (ii) liens for current taxes not yet due and payable, and (iii) minor imperfections of title not material (individually or in the aggregate) and not materially detracting from the value, or the use (either actual or intended) the Company and its subsidiaries make, of the property in question. All of the buildings, fixtures, machinery and equipment owned or used by the Company and its subsidiaries are in good operating condition and repair, and comply in all material respects with applicable zoning, building, fire and safety codes. (b) The Disclosure Schedule lists all leases (the "LEASES") pursuant to which the Company and its subsidiaries lease real property (the "LEASED PROPERTY"), including without limitation a general description of the Leased Property, the terms, the applicable rent and any and all renewal options. All such Leases are valid, binding and enforceable in accordance with their terms and are in full force and effect and no event of default has occurred which (whether with or without notice, lapse of time or both or the happening or occurrence of any other event) would constitute a default thereunder on the part of the Company or its subsidiaries. To the Company's knowledge, each Lease that terminates within two years of the date hereof and which does not provide for a renewal term, will be renewed. (c) There are no pending, or to the knowledge of the Company, threatened condemnation proceedings with respect to the Leased Property, or pending or, or to the knowledge of the Company, threatened litigation or administrative actions relating to the Leased Property. (d) There are no subleases, licenses, options, rights, concessions or other agreements or arrangements, written or oral, granting to any Person the right to use or occupy the Leased Property or any portion thereof or interest therein. 19 4.14. CONTRACTS. (a) The Disclosure Schedule lists all Material Contracts. For purposes of this Agreement, "Material Contracts" means all contracts of the following types to which the Company or any of its subsidiaries is a party or by which the Company or any of its subsidiaries or any of their respective properties is bound as of the date hereof and will be bound following the Closing, including real property leases, labor or employment-related agreements, and contracts relating to intellectual property: (a) joint venture and limited or general partnership agreements, shareholder agreements with respect to the Company's subsidiaries, joint ventures or partnerships or other contracts involving sharing of profits, losses, costs or liabilities, (b) mortgages, indentures, loan or credit agreements, letters of credit, reimbursement agreements, personal property leases, security agreements and other agreements and instruments relating to the borrowing of money or extension of credit in any case in excess of $100,000, (c) other contracts which are not cancelable by the Company or any of its subsidiaries on notice of sixty (60) days or less and which require payment by the Company after the date hereof of more than $100,000 in any one calendar year, (d) material license or royalty agreements, whether the Company or any of its subsidiaries is the licensor or licensee thereunder, (e) confidentiality and non-disclosure agreements (whether the Company or any of its subsidiaries is the beneficiary or the obligated party thereunder), other than such agreements entered into with consultants to the Company and its subsidiaries, (f) contracts for the Company's or its subsidiaries' employer-sponsored centers under which the employer-sponsor is to make a payment after the date hereof of $100,000 or more in any one calendar year, (g) contracts containing covenants limiting the freedom of the Company or its subsidiaries or any of their respective officers to engage in any line of business or compete with any Person that relates directly or indirectly to the Company's business, (h) indemnification agreements with respect to any acquisition or disposition of assets, securities or business, whether the Company and its subsidiaries is the indemnitor or indemnitee, (i) contracts with any Person known to be an affiliate of the Company (other than the Company and its subsidiaries), and (j) any executory contract relating to any material acquisitions or dispositions of assets, securities or businesses by the Company or its subsidiaries. The Company and its subsidiaries have made available to Parent a true and correct copy of each Material Contract. Except as set forth in the Disclosure Schedule, (a) the Company and its subsidiaries are in compliance in all material respects with their respective obligations under the Material Contracts, (b) all of the Material Contracts are in full force and effect, are valid and binding obligations of the Company and its subsidiaries and enforceable in all material respects by the Company and its subsidiaries in accordance with their terms except to the extent that such enforceability may be limited by bankruptcy, reorganization, insolvency, fraudulent conveyance, moratorium, receivership or similar laws affecting creditors' rights generally and by general principles of equity (whether considered at law or in equity), and (c) to the knowledge of the Company, the other party to a Material Contract is in compliance with its material obligations thereunder. 20 (b) To the Company's knowledge, that certain agreement between the Company and the Office of School Readiness, dated April 3, 1997, will be renewed at the conclusion of the current agreement term. 4.15. EMPLOYEE BENEFIT PLANS. (a) The Disclosure Schedule lists every Employee Plan (as defined below) that has been maintained (as defined below) by the Company or any of its subsidiaries at any time during the three-year period ending on the Effective Date. (b) Each Employee Plan that has ever been maintained by the Company or any of its subsidiaries and that has at any time been intended to qualify under Section 401(a) or 501(c)(9) of the Code has received a favorable determination or approval letter from the Internal Revenue Service ("IRS") regarding its qualification under such section and has, in fact, been qualified under the applicable section of the Code from the effective date of such Employee Plan through and including the Effective Date (or, if earlier, the date that all of such Employee Plan's assets were distributed). No event or omission has occurred which would cause any such Employee Plan to lose its qualification under the applicable Code section. (c) Neither the Company nor any of its subsidiaries knows and has reason to know, of any failure of any party to comply with any laws applicable to the Employee Plan that have been maintained by the Company or any of its subsidiaries. With respect to any Employee Plan ever maintained by the Company or any of its subsidiaries, there has occurred no "prohibited transaction," as defined in Section 406 of the Employee Retirement Income Security Act of 1974, as amended ("ERISA") or Section 4975 of the Code, or breach of any duty under ERISA or other applicable law (including, without limitation, any health care continuation requirements or any other tax law requirements, or conditions to favorable tax treatment, applicable to such plan), which could result, directly or indirectly, in any taxes, penalties or other liability to the Company, any of its subsidiaries, Parent or Purchaser. No litigation, arbitration, or governmental administrative proceeding (or investigation) or other proceeding (other than those relating to routine claims for benefits) is pending or threatened with respect to any such Employee Plan. (d) Neither the Company, nor any of its subsidiaries or Affiliates (as defined below) (i) has ever maintained any Employee Plan which has been subject to Title IV of ERISA, Section 302 of ERISA or Section 412 of the Code (including, but not limited to, any Multiemployer Plan (as defined below)), (ii) has ever maintained any other Multiemployer Plan, or (iii) has ever provided health care or any other non-pension benefits to any employees after their employment is terminated (other than as required by part 6 of subtitle B of title I of ERISA) or has ever promised to provide such post-termination benefits. 21 (e) With respect to each Employee Plan maintained by the Company or any of its subsidiaries within the three years preceding the Effective Date, complete and correct copies of the following documents (if applicable to such Employee Plan) have previously been delivered to Parent: (i) all documents embodying or governing such Employee Plan, and any funding medium for the Employee Plan (including, without limitation, trust agreements) as they may have been amended; (ii) the most recent IRS determination or approval letter with respect to such Employee Plan under Code Sections 401 or 501(c)(9), and any applications for determination or approval subsequently filed with the IRS; (iii) the three most recently filed IRS Forms 5500, with all applicable schedules and accountants' opinions attached thereto; (iv) the summary plan description for such Employee Plan (or other descriptions of such Employee Plan provided to employees) and all modifications thereto; (v) any insurance policy (including any fiduciary liability insurance policy) related to such Employee Plan; (vi) any documents evidencing any loan to an Employee Plan that is a leveraged employee stock ownership plan; and (vii) all other materials reasonably necessary for Parent or Purchaser to perform any of its responsibilities with respect to any Employee Plan subsequent to the Closing (including, without limitation, health care continuation requirements). (f) Each Employee Plan listed on the Disclosure Schedule may be amended, terminated, modified or otherwise revised prospectively by the Company or any of its subsidiaries, as applicable, including the elimination of any and all future benefit accruals under any Employee Plan. (g) For purposes of this section: (i) "Employee Plan" means (A) all employee benefit plans within the meaning of ERISA Section 3(3), including, but not limited to, multiple employer welfare arrangements (within the meaning of ERISA Section 3(4)), plans to which more than one unaffiliated employer contributes and employee benefit plans (such as foreign or excess benefit plans) which are not subject to ERISA; and (B) all stock option plans, bonus or incentive award plans, severance pay policies or agreements, deferred compensation agreements, supplemental income arrangements, vacation plans, and all other employee benefit plans, agreements, and arrangements not described in (A) above. In the case of an Employee Plan funded through an organization described in Code Section 501(c)(9), each reference to such Employee Plan shall include a reference to such organization. (ii) An entity "maintains" an Employee Plan if such entity sponsors, contributes to, or provides (or has promised to provide) benefits under such Employee Plan, or has any obligation (by agreement or under applicable law) to contribute to or provide benefits under such Employee Plan, or if such Employee Plan provides benefits to or otherwise covers employees of such entity, or their spouses, dependents, or beneficiaries. 22 (iii) For purposes of this Section 4.15, an entity is an "Affiliate" of the Company or any of its subsidiaries if it would have ever been considered a single employer with the Company or any of its subsidiaries, respectively, under ERISA Section 4001(b) or part of the same "controlled group" as the Company or any of its subsidiaries or any of their respective subsidiaries for purposes of ERISA Section 302(d)(8)(C). (iv) "Multiemployer Plan" means a (pension or non-pension) employee benefit plan to which more than one employer contributes and which is maintained pursuant to one or more collective bargaining agreements. 4.16. COMPLIANCE WITH LEGISLATION REGULATING ENVIRONMENTAL QUALITY. All plants, offices, manufacturing facilities, stores, warehouses, improvements, administration buildings, and real property and related facilities of the Company and its subsidiaries, whether currently or previously owned, operated or leased by the Company and its subsidiaries (collectively, the "FACILITIES") are and at all times have been maintained and operated in material compliance with all applicable federal, state and local environmental protection, occupational, health and safety or similar laws, ordinances, restrictions, orders, regulations and licenses (collectively "ENVIRONMENTAL LAWS") including but not limited to the Federal Water Pollution Control Act (33 U.S.C Section 1251 ET SEQ. ), Resource Conservation & Recovery Act (42 U.S.C. Section 6901 ET SEQ.), Safe Drinking Water Act (21 U.S.C. Section 349, 42 U.S.C. Sections 201, 300f), Toxic Substances Control Act (15 U.S.C. Section 2601 ET SEQ.), Clean Air Act (42 U.S.C. Section 7401 ET SEQ.), and Comprehensive Environmental Response, Compensation and Liability Act (42 U.S.C. Section 9601 ET SEQ.). No materials, substances, or products have been at any time been placed, held, located, disposed of or released on, under, at, within, or about the Facilities which may reasonably be expected to result in a regulatory agency or other governmental entity requiring clean up, removal or other remedial action by the Company or any of its subsidiaries under Environmental Laws. No hazardous or toxic substance, waste or material (collectively "HAZARDOUS MATERIALS") has at any time been used, stored, treated, transported or handled by the Company or any of its subsidiaries or any of its consultants, contractors or agents on, under, at, within, or about the Facilities except Hazardous Materials that are used, stored, treated, transported or handled on, under, at, within or about the Facilities in material compliance with Environmental Laws. No litigation, administrative enforcement actions, proceedings or notices of potential liability have been (x) received, served or, to the knowledge of the Company, filed or threatened against the Company or any of its subsidiaries or (y) to the knowledge of the Company, received, served, filed or threatened against any predecessor business or landowner or with respect to any Facility, in each case, relating to damage, contribution, cost recovery, compensation, loss or injury resulting from any Hazardous Materials or arising out of the use, generation, storage, treatment, release, discharge, transportation, handling or disposal of Hazardous Materials or resulting from a violation or alleged violation of Environmental Laws. 4.17. LABOR MATTERS. Except as set forth on the Disclosure Schedule, the Company and its subsidiaries are not a party to any labor agreement with respect to its employees with any 23 labor organization, group or association. Except as set forth on the Disclosure Schedule, the Company and its subsidiaries has not experienced any attempt by organized labor or its representatives to make the Company or its subsidiaries conform to demands of organized labor relating to its employees or to enter into a binding agreement with organized labor that would cover the employees of the Company and its subsidiaries. The Company and its subsidiaries are in compliance in all material respects with all applicable laws respecting employment practices, terms and conditions of employment and wages and hours and is not engaged in any unfair labor practice. There is no unfair labor practice charge or complaint against the Company or any of its subsidiaries pending before the National Labor Relations Board or any other governmental agency, and the Company has no knowledge of any facts or information which would give rise thereto. There is no labor strike or labor disturbance pending or threatened against the Company or any of its subsidiaries nor is any grievance currently being asserted; and the Company and its subsidiaries have not experienced a work stoppage or other labor difficulty. 4.18. INTELLECTUAL PROPERTY. (a) The Company (including, for purposes of this Section 4.18, each of its subsidiaries from time to time) owns the Intellectual Property, as defined below, used by the Company in its business including but not limited to the patents, trademarks, copyrights, and trade secrets and confidential information set forth in the Disclosure Schedule and as defined below (collectively, the "COMPANY'S INTELLECTUAL PROPERTY"). The term "Intellectual Property" shall mean patents, trademarks, copyrights, trade secrets and confidential information, as defined below. The term "patents" shall mean inventions, discoveries, applications for patent, issued patents, whether domestic or foreign. The term "trademarks" shall mean marks, trademarks, service marks, brand names, trade names, whether domestic or foreign, registered or unregistered, including any registrations thereof and applications for registrations. The term "copyrights" shall mean copyrights, domestic or foreign, registrations thereof, and applications for registration. The terms "trade secrets and confidential information" shall mean business, financial, customer, and other information used by a company in its business which is not generally known or used by competitors and which is recognized by law as being the type of information which can be protected from unauthorized use or disclosure. (b) Except as set forth in the Disclosure Schedule, the Company owns, and has the right to use, the Company's Intellectual Property used in its business as presently conducted, free and clear of any liens, licenses, restrictions on use or alienation, encumbrances, or security interests. To the extent the Company uses Intellectual Property, which it does not own, such Intellectual Property is used under valid license and such Intellectual Property and its license are identified and described in the Disclosure Schedule. (c) Except as set forth on the Disclosure Schedule, the Company has not been sued, charged, or threatened for having infringed the Intellectual Property rights of any third party. Except as set forth in the Disclosure Schedule, the Company is not aware of any conduct 24 it has engaged in which could in good faith be considered a violation of the Intellectual Property rights of a third party. To the Company's knowledge, the Company has not engaged in and/or is not engaging in any conduct which violates the Intellectual Property rights of a third party. (d) The Company is aware of no facts or information which would adversely affect its ownership of and/or the validity of the Company's Intellectual Property; and except as set forth in the Disclosure Schedule, there have been no and there are no proceedings brought by third parties challenging the Company's ownership and/or the validity of the Company's Intellectual Property. (e) Except as set forth in the Disclosure Schedule, the Company has not sued, charged, or threatened any third party regarding the ownership of and/or violation of the Company's Intellectual Property. Except as set forth in the Disclosure Schedule, the Company is not aware of any conduct engaged in by a third party which could in good faith be considered a violation of the Company's Intellectual Property rights (excluding any Intellectual Property rights related to the Company's trademarks) 4.19. PERMITS; LICENSES. The Company and each of its subsidiaries has, and at all times has had, all material licenses, permits, authorizations, approvals and registrations (collectively, "PERMITS") required under any statute, law, ordinance, regulation, rule or order of any foreign, federal, state or local government or any other governmental department or agency in the operation of the business and owns or possesses such Permits free and clear of all encumbrances. Except as set forth in the Disclosure Schedule, the Company and each of its subsidiaries is in material compliance with all Permits and neither the Company nor any of its subsidiaries is in default or received any notice of any claim of default with respect to any such Permit. There are no proceedings, investigations or audits pending, or to the Company's knowledge, threatened against the Company or any of its subsidiaries by any governmental agency relating to any Permit. All such Permits are renewable by their terms or in the ordinary course of business without the need to comply with any special qualification procedures or to pay any amounts other than routine filing fees and will not be adversely affected by the completion of the Offer, the Merger or the transactions contemplated hereby. Except as set forth on the Disclosure Schedule, no present or former stockholder, director, officer or employee of the Company or any affiliate thereof, or any other person, firm, corporation or other entity, owns or has any proprietary, financial or other interest (direct or indirect) in any Permit which the Company owns, possesses or uses. 4.20. INSURANCE. The Disclosure Schedule sets forth a complete and accurate list, as of the date hereof, of the material policies of insurance maintained by the Company and its subsidiaries with respect to the products, properties, assets, operations and business of the Company and its subsidiaries since 1995. All insurance coverage applicable to the Company and its subsidiaries is in full force and effect, insures the Company and its subsidiaries in sufficient amounts (consistent with industry standards) against all risks usually insured against by Persons 25 operating similar businesses or properties of similar size in the localities where such businesses or properties are located, provides coverage as may be required by all regulations which the Company and its subsidiaries is subject and has been issued by insurers of recognized responsibility. There is no default under any such coverage nor has there been any failure to give notice or present any claim under any such coverage in a due and timely fashion. There are no outstanding unpaid premiums except in the ordinary course of business and no notice of cancellation or nonrenewal or any such coverage has been received. Except as set forth on the Disclosure Schedule, there are no provisions in such insurance policies for retroactive or retrospective premium adjustments. There are no facts upon which an insurer might be justified in reducing coverage or increasing premiums on existing policies or binders. There are no outstanding unpaid claims under any such policies or binders. 4.21. SCHOOLS. The Disclosure Schedule lists all of the schools (the "SCHOOLS") operated by the Company and its subsidiaries as of the date of this Agreement. Each of the Schools has received all required approvals of governmental authorities required in connection with the operation thereof and has been operated and maintained in all material respects in accordance with all applicable regulations. Except as set forth on Disclosure Schedule 4.9, there are no material actions, suits or proceedings pending or, to the knowledge of the Company, threatened against any of the Schools or any employees thereof. 4.22. OPINION OF FINANCIAL ADVISOR. The Board of Directors of the Company has received the opinion of Advest, Inc., dated on or before the date of this Agreement, to the effect that the consideration to be received pursuant to the Offer and the Merger by the Company's stockholders is fair to such stockholders from a financial point of view. 4.23. BROKERS. No broker, finder or investment banker (other than McGettigan, Wick & Co., Inc. and Advest, Inc.) is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated by this Agreement based upon arrangements made by and on behalf of the Company or any of its subsidiaries. The Company has heretofore furnished to Parent a complete and correct copy of all agreements between the Company and Advest, Inc. pursuant to which such firm would be entitled to any payment relating to the transactions contemplated hereby. 4.24. SETTLEMENT OF FAIR LABOR STANDARDS ACT VIOLATIONS. The Company has reached an agreement with the United States Department of Labor (the "LABOR DEPARTMENT") regarding alleged violations of the Fair Labor Standards Act (the "FLSA") at five of the Company's schools in Connecticut, the terms of which are set forth in that certain letter dated May 6, 1997 from Baker & Daniels to the Labor Department. The Company and its subsidiaries are in material compliance with the FLSA. There are no additional proceedings, investigations or audits pending or, to the Company's knowledge, threatened against the Company or any of its subsidiaries by any governmental agency relating to the FLSA, and the Company and its 26 subsidiaries have not received any notices with respect to any such audits, investigations or proceedings 4.25. ACCOUNTING AND LEGAL FEES. As of the date of this Agreement, the Company has incurred fees less than $66,750 and $41,000 payable to the Company's accountants and attorneys, respectively, in connection with the Offer, the Merger and the other transactions contemplated by this Agreement. The Disclosure Schedule sets forth a complete and accurate budget of the costs, fees and expenses, including, without limitation, fees and expenses of attorneys, accountants, and other representatives and advisors (excluding financial advisors), costs of preparing, printing and mailing materials to stockholders, filing fees and other out-of-pocket costs the Company expects to incur from the date hereof in connection with the Offer, the Merger and the other transactions contemplated by this Agreement. 5. CONDUCT OF BUSINESS PENDING THE MERGER The Company covenants and agrees that, prior to the Effective Date, unless Parent shall otherwise agree in writing or except as otherwise expressly contemplated by this Agreement: 5.1. ORDINARY COURSE OF BUSINESS. The business of the Company and its subsidiaries shall be conducted only in, and the Company and its subsidiaries shall not take any action except in, the ordinary course of business and consistent with past practices. 5.2. PRESERVATION OF ORGANIZATION. The Company shall use its reasonable best efforts to maintain and preserve its business organization, present relationships with customers, suppliers and others having business dealings with the Company and its subsidiaries, assets, employees, regulatory licenses and approvals and advantageous business relationships. Neither the Company nor any of its subsidiaries shall, directly or indirectly, amend or propose to amend its charter, regulations or bylaws or similar organizational documents. 5.3. CAPITALIZATION CHANGES. Neither the Company nor any of its subsidiaries shall directly or indirectly (i) issue, sell, transfer, pledge, dispose of or encumber, or authorize, propose or agree to the issuance, sale, pledge, transfer, disposition or encumbrance of, any capital stock of the Company (except for shares issuable upon exercise of Company Options outstanding on the date hereof) or any of its subsidiaries; (ii) issue, sell, pledge, transfer or dispose of, or authorize, propose or agree to the issuance, sale, pledge, transfer or disposition of any options, warrants or rights of any kind to acquire any shares of or any securities convertible into or exchangeable for any shares of, any capital stock of any class or any other equity securities of the Company or any of its subsidiaries; (iii) authorize, recommend or propose any change in its capitalization; or (iv) adopt a plan of complete or partial liquidation, dissolution, merger, consolidation, restructuring, recapitalization or other reorganization of the Company or any of its subsidiaries (other than the Merger). 27 5.4. SALE OF ASSETS. Neither the Company nor any of its subsidiaries shall directly or indirectly (i) except in the ordinary course of business and consistent with past practices, sell, pledge, transfer, lease, sell and leaseback, assign, license, dispose of or encumber any assets of the Company or of any of its subsidiaries (including without limitation, any indebtedness owed to them or any claims held by them) or (ii) whether or not in the ordinary course of business, sell, pledge, transfer, lease, sell and leaseback, assign, license, dispose of or encumber any material assets of the Company or any of its subsidiaries. 5.5. DIVIDENDS AND REPURCHASES. Neither the Company nor any of its subsidiaries shall directly or indirectly (i) split, combine or reclassify any shares of its capital stock or declare, set aside or pay any dividend or distribution, payable in cash, stock, property or otherwise with respect to any of its capital stock other than, dividends and distributions by a subsidiary of the Company to the Company or to any other subsidiary all of the capital stock of which (other than directors' qualifying shares) is owned directly or indirectly by the Company, or (ii) redeem, purchase or otherwise acquire or offer or agree to redeem, purchase or otherwise acquire any capital stock of the Company or any of its subsidiaries. 5.6. ACQUISITIONS; INVESTMENTS. Neither the Company nor any of its subsidiaries shall, directly or indirectly, except in the ordinary course of business and consistent with past practices, acquire (by merger, consolidation or acquisition of stock or assets) any corporation, partnership or other business organization or division thereof or make any investment either by purchase of stock or securities, contributions to capital, loans, advances, property transfer or purchase of any amount of property or assets, in any other individual or entity (other than subsidiaries of the Company). 5.7. INDEBTEDNESS. Neither the Company nor any of its subsidiaries shall, directly or indirectly, incur any indebtedness for borrowed money, issue any debt securities or enter into any capitalized leases or assume, guarantee, endorse, secure or otherwise as an accommodation become responsible for, the obligations of any other Person (other than the Company and its subsidiaries). 5.8. SEVERANCE AND TERMINATION PAY. Neither the Company nor any of its subsidiaries shall take any action with respect to the grant of any severance or termination pay (otherwise than pursuant to policies or written agreements of the Company in effect on the date hereof) or with respect to any increase of benefits payable under its severance or termination pay policies or written agreements in effect on the date hereof. 5.9. EMPLOYEE BENEFITS. Neither the Company nor any of its subsidiaries shall adopt, enter into or amend any bonus, profit sharing, compensation, stock option, pension, retirement, deferred compensation, employment, severance, retention or stay or other employee benefit plan, agreement, trust, fund or other arrangement for the benefit or welfare of any director, officer or employee or increase in any manner the compensation or fringe benefits of any director, officer 28 or employee or pay any benefit not required by any plan, arrangement or agreement in effect on the date hereof. 5.10. TAX ELECTION; ACCOUNTING. Neither the Company nor any of its subsidiaries shall make any tax election or settle or compromise any federal, state, local or foreign income tax liability. Each of the Company and its subsidiaries shall maintain its books of account and records in its usual, regular and ordinary manner, consistent with its past practices, and except as may be required as a result of a change in law or in generally accepted accounting principles shall not make any change in any accounting principle or accounting practice. 5.11. SUBSEQUENT FINANCIALS. The Company shall deliver to Parent all of the Company's monthly and quarterly, if any, financial statements for periods and dates subsequent to the date hereof, as soon as the same are available to the Company. 5.12. REPRESENTATIONS AND WARRANTIES. The Company and its subsidiaries will not take any action or omit to take any action, which action or omission would reasonably be expect to result in a breach or inaccuracy of any of the representations and warranties set forth in this Agreement in any material respect at, or as of any time prior to, the Effective Date. 5.13. CONTRACTS. The Company and its subsidiaries will not enter into any contract or agreement other than in the ordinary course of business. The Company and its subsidiaries will not amend, terminate or modify any Material Contract and will not enter into any contract or agreement which would have been a Material Contract if entered into prior to the date of this Agreement. 5.14. AFFILIATES. Without Parent's written consent, the Company and its subsidiaries will not enter into, amend, modify or terminate any contract or agreement with, or make any payment other than pursuant to a written agreement existing on the date hereof to, any affiliate (other than the Company or any of its subsidiaries) of the Company or its subsidiaries; including releasing Shares under pledge agreements. 5.15. LITIGATION. The Company and its subsidiaries will not settle or compromise any pending or threatened suit, action or claim for an amount in excess of $25,000 per suit, action or claim or which relates to the transactions contemplated hereby. 5.16. CAPITAL EXPENDITURES. The Company and its subsidiaries will not authorize or make any expenditure for capital or acquisitions which are not specifically provided for in the Company's capital budget (a true and correct copy of which has been delivered to Parent and is set forth in the Disclosure Schedule). 5.17. TRANSACTION EXPENSES. The Company and its subsidiaries will not incur costs, fees and expenses in connection with the Offer, the Merger and the other transactions contemplated by this Agreement, in excess of (i) $1,000,000 for the costs, fees and expenses of 29 financial advisors, including, without limitation, McGettigan, Wick & Co., Inc. and Advest, Inc. and (ii) those costs, fees and expenses reasonable and necessary, including, without limitation, fees and expenses of attorneys, accountants, and other representatives and advisors (excluding financial advisors), costs of preparing, printing and mailing materials to stockholders, filing fees and other out-of-pocket costs, which shall be evidenced by detailed invoices submitted to the Company and which shall be payable by the Company in accordance with its standard accounts payable practices. 5.18. COMMITMENTS. The Company and its subsidiaries will not offer or propose to take or agree or commit to take any of the foregoing referred to in this Article 5. 6. ADDITIONAL AGREEMENTS 6.1. PROXY STATEMENT. If a meeting of the Company's stockholders (or written consent in place of a meeting) is required by Delaware Law to approve this Agreement and the Merger, then promptly after consummation of the Offer, the Company shall prepare and shall file with the Commission as promptly as practicable a preliminary proxy statement, together with a form of proxy, with respect to the meeting (or written consent in place thereof) of the Company's stockholders at which the stockholders of the Company will be asked to vote upon and approve this Agreement and the Merger. As promptly as practicable after such filing, subject to compliance with the rules and regulations of the Commission, the Company shall prepare and file a definitive Proxy Statement and form of proxy with respect to such meeting (or written consent in place thereof) (the "PROXY STATEMENT") and shall use all reasonable efforts to have the Proxy Statement cleared by the Commission as promptly as practicable, and promptly thereafter shall mail the Proxy Statement to stockholders of the Company. The term "Proxy Statement" shall mean such proxy or information statement at the time it initially is mailed to the Company's stockholders and all amendments or supplements thereto, if any, similarly filed and mailed. The information provided and to be provided by Parent, Purchaser and the Company, respectively, for use in the Proxy Statement shall, on the date the Proxy Statement is first mailed to the Company's stockholders and on the date of the Special Meeting (as defined in Section 6.2) shall be true and correct in all material respects and shall not omit to state any material fact necessary in order to make such information not misleading, and Parent, Purchaser and the Company each agree to correct any information provided by it for use in the Proxy Statement which shall have become false or misleading in any material respect. The Proxy Statement shall comply as to form in all material respects with all applicable requirements of federal securities laws. 6.2. MEETING OF STOCKHOLDERS OF THE COMPANY; VOTING AND DISPOSITION OF THE SHARES. If a meeting of the Company's stockholders (or written consent in lieu thereof) is required by Delaware Law to approve this Agreement and the Merger, then as promptly as practicable after consummation of the Offer the Company shall take all action necessary, in accordance with the Delaware Law and its Certificate of Incorporation and Bylaws, to convene a meeting of (or obtain the written consents from) its stockholders (the "SPECIAL MEETING") to consider and vote 30 upon this Agreement and the Merger. The Proxy Statement shall contain the recommendation of the Board of Directors that the stockholders of the Company vote to adopt and approve this Agreement and the Merger and the Company shall use its reasonable efforts to solicit from stockholders of the Company proxies in favor of such adoption and approval (and Purchaser shall vote all Shares purchased by it in favor of such adoption and approval) and to take all other action necessary or, in the reasonable judgment of Parent, helpful to secure the vote or consent of stockholders required by the Delaware Law to effect the Merger. 6.3. STOCK OPTIONS. The Company and its subsidiaries shall take such action as may be necessary to make the Option Offer to each holder of a Company Option as described in Section 2.7 and shall use its best efforts to obtain acceptances of the Option Offer from all such holders. 6.4. ADDITIONAL AGREEMENTS. (a) Subject to the terms and conditions herein provided, each of the parties hereto agrees to use all reasonable best efforts to take, or cause to be taken, all actions and to do, or cause to be done, all things necessary, proper or advisable to consummate and make effective as promptly as practicable the transactions contemplated by the Offer, this Agreement, and to cooperate with each other in connection with the foregoing, including using reasonable best efforts (A) to obtain all necessary waivers, consents and approvals from other parties to material loan agreements, leases, licenses and other contracts; provided that without the consent of Parent, the Company shall not make any economic or monetary concession, or pay any amounts, to obtain such waivers, consents and approvals, (B) to obtain all necessary consents, approvals and authorizations as are required to be obtained under any federal, state or foreign law or regulations, (C) to defend all lawsuits or other legal proceedings challenging this Agreement, or the consummation of the transactions contemplated hereby, (D) to lift or rescind any injunction or restraining order or other order adversely affecting the ability of the parties to consummate the transactions contemplated hereby, (E) to effect all necessary registrations and filings, including, but not limited to, filings under the Hart-Scott-Rodino Act, and submissions of information requested by governmental authorities; and (F) to fulfill all conditions to the Offer and the Merger; PROVIDED, HOWEVER, that nothing in this Section 6.4 will require any party hereto to waive any condition contained in ANNEX I or this Agreement. The Company and Parent will file, or cause to be filed, as promptly as possible, but in no event later than ten days after the date hereof, with the United States Federal Trade Commission and the Antitrust Division of the United States Department of Justice pursuant to the Hart-Scott-Rodino Act the notification required by the Hart-Scott-Rodino Act, including all requested documents, materials and information therefor, and request early termination of the waiting period under the Hart-Scott-Rodino Act. Each of the Company and Parent shall furnish the other such necessary information and reasonable assistance as the other may request in connection with its preparation of any filing or submission which is necessary under the Hart-Scott-Rodino Act. The Company shall file as soon as possible, but no later than five days after the date hereof, an initial application for a license to operate from the 31 State Board of Private Academic Schools, the Commonwealth of Pennsylvania. The Company and Parent shall each keep the other apprised of the status of any inquiries or requests for additional information made by any governmental authority and shall comply promptly with such inquiry or request. (b) Notwithstanding anything in this Agreement to the contrary, the Company shall use its commercially reasonable efforts to obtain all necessary waivers, consents and approvals necessary under those agreements listed on Section 4.6 of the Disclosure Schedule. 6.5. NO SOLICITATION OF TRANSACTIONS. The Company agrees that, prior to the Effective Date, it shall not authorize or permit any of its subsidiaries or any of its or its subsidiaries' directors, officers, employees, agents or representatives to, directly or indirectly, solicit, initiate, facilitate or encourage any inquiries or the making of any proposal with respect to any tender offer, exchange offer, merger, consolidation, sale of assets, sales or capital stock or other business combination involving the Company or its subsidiaries or the acquisition of 20% or more of the assets or capital stock of the Company and its subsidiaries taken as a whole (an "ACQUISITION TRANSACTION"), or negotiate, explore or otherwise communicate in any way with, or provide or furnish any information to, any Person (other than Parent or the Purchaser) with respect to any Acquisition Transaction or enter into any agreement, arrangement or understanding requiring it to abandon, terminate or fail to consummate the Offer or the Merger or any other transaction contemplated by this Agreement; provided that the Company may, in response to an unsolicited written binding offer with respect to an Acquisition Transaction from a Person with sufficient financial resources available to it to consummate such transaction which contains no financing condition (i) furnish or disclose non-public information to such third party, and (ii) negotiate, explore or otherwise communicate with such third party, in each case only if the Board of Directors of the Company determines in good faith, (A) after consultation with its outside counsel and financial advisors, that the Acquisition Transaction would, upon consummation thereof, result in a transaction which is more favorable to the Company's stockholders from a financial point of view than the Offer and the Merger and that such transaction is likely to be consummated, and (B) after advice of outside counsel, that failing to take such action would constitute a breach of the Company's Board of Directors' fiduciary duties. The Company shall immediately advise Parent in writing of the receipt by the Company, any of its subsidiaries or any of their respective officers, directors, employees, agents or representatives of any request for information, inquiries, indications of interest, offers or proposals relating to an Acquisition Transaction and any actions taken pursuant to this Section 6.5, which notice shall include the identity of the Person making such request, inquiry, indication of interest, offer or proposal and the terms, if any, of such Acquisition Transaction. The Company and its subsidiaries and their respective directors, officers, employees, agents and representatives will upon the execution of this Agreement, cease any discussion or negotiations with, and shall cease to provide any information to or otherwise cooperate or encourage, any Person with respect to an Acquisition Transaction. 32 6.6. NOTIFICATION OF CERTAIN MATTERS. The Company shall give prompt notice to Parent, and Parent shall give prompt notice to the Company, of (i) the occurrence, or failure to occur, of any event which occurrence or failure would be likely to cause either (x) any representation or warranty contained in this Agreement, the Disclosure Schedule or any written certificate or schedule delivered pursuant hereto to be untrue or inaccurate in any respect at any time from the date hereof to the Effective Date, or (y) any condition set forth in ANNEX I or this Agreement to be unsatisfied in any material respect at any time from the date hereof to the Effective Date, and (ii) any material failure of the Company, or Parent or any of its affiliates, as the case may be, or of any officer, director, employee or agent thereof, to comply with or satisfy any covenant, condition or agreement to be complied with or satisfied by it under this Agreement; PROVIDED, HOWEVER, that no such notification shall affect the representations or warranties of the parties or the conditions to the obligations to the parties hereunder. 6.7. ACCESS TO INFORMATION. The Company shall, and shall cause its subsidiaries, officers, directors, employees and agents to, afford the officers, employees and agents (including, without limitation, lawyers and investment bankers) of Parent and its affiliates complete access at all reasonable times to, from the date hereof to the Effective Date, its officers, employees, agents, properties, books, records and contracts, and shall furnish to Parent and its affiliates all financial, operating and other data and information as Parent or its affiliates, through their respective officers, employees or agents, may reasonably request. Subject to the requirements of law, Parent and its affiliates shall, and shall use its reasonable efforts to cause their officers, employees and agents, to hold in confidence all such nonpublic information until such time as such information is otherwise publicly available, and, if this Agreement is terminated, Parent and its affiliates will, and will use its reasonable efforts to cause their officers, employees and agents, to deliver to the Company all documents, work papers and other material (including copies, extracts and summaries thereof) obtained by or on behalf of any of them directly or indirectly from the Company as a result of this Agreement or in connection herewith, whether so obtained before or after the execution hereof. No investigation pursuant to this Section 6.7 shall affect any representations or warranties of the parties herein or the conditions to the obligations of the parties hereto. 6.8. TAKEOVER LAWS. The Company shall, upon the request of Parent, take all reasonable steps to assist in any challenge by Parent or Purchaser to the validity or applicability to the transactions contemplated by this Agreement and the Option Agreement, including the Offer and the Merger, of any state takeover law. 6.9. EMPLOYMENT AGREEMENTS; NONCOMPETE AGREEMENTS; RELEASES AND EXCESS PAYMENT AGREEMENT. The Company shall use commercially reasonable efforts to obtain prior to consummation of the Offer employment or consulting agreements and noncompete agreements, in form and substance satisfactory to Parent, from Richard Niglio, Elanna Yalow, Randall Truelove, Frank Devine and Jane Delaney (the "NAMED OFFICERS") and releases, in form and substance satisfactory to Parent, from each Named Officer and McGettigan, Wick & Co., Inc. 33 The Company shall use commercially reasonable efforts to obtain prior to consummation of the Offer a resignation from each director, other than Elanna Yalow, which resignation shall be effective immediately after consummation of the Offer. The Company shall use commercially reasonable efforts to obtain prior to consummation of the Offer a fully executed copy of the Excess Payment Agreement between the Company and Elanna Yalow. 6.10. OTHER AGREEMENTS. (a) Prior to consummation of the Offer, the Company shall obtain a written agreement from KidActive LLC (d/b/a Girl Tech) in the form attached hereto as Schedule 6.10(a). The Company shall use commercially reasonable efforts to obtain a demand promissory note from Janese Swanson in favor of the Company in the amount of $56,500 with interest at a rate of 10% per annum in lieu of her personal guaranty referred to in the second to last paragraph of Schedule 6.10(a). (b) The Company shall use commercially reasonable efforts to obtain prior to the consummation of the Offer from Frontier Insurance the letter attached hereto as Schedule 6.10(b). (c) The Company shall use commercially reasonable efforts to obtain prior to the consummation of the Offer the insurance coverage set forth in Schedule 6.10(c) from J&H Marsh & McLeanan. 6.11. INDEMNIFICATION AND INSURANCE. (a) For a period of six years after the Effective Date, the Surviving Corporation shall indemnify, defend and hold harmless the officers and directors of the Company as of the date hereof against all losses, claims, damages, expenses or liabilities arising out of actions or omissions or alleged actions or omissions occurring at or prior to the Effective Date to the same extent and on the same terms and conditions (including with respect to advancement of expenses) provided for in the Company's Certificate of Incorporation and Bylaws in effect at the date hereof (to the extent consistent with applicable law). (b) From and after the Effective Date until the sixth anniversary thereof, the Surviving Corporation shall maintain in effect the current policies of directors' and officers' liability insurance maintained by the Company (provided that the Parent or the Surviving Corporation may substitute therefor policies of at least the same coverage and amounts containing terms and conditions which are no less advantageous) with respect to claims arising from facts or events which occurred before the Effective Date; PROVIDED, HOWEVER, that the Surviving Corporation shall not be obligated to make annual premium payments for such insurance to the extent such premiums exceed 150% of the premiums paid as of the date hereof by the Company for such insurance. 34 7. CONDITIONS 7.1. CONDITIONS TO OBLIGATION OF EACH PARTY TO EFFECT THE MERGER. The respective obligations of each party to effect the Merger shall be subject to the fulfillment at or prior to the Effective Date of the following conditions: (a) The Purchaser (or a subsidiary or an affiliate of Parent) shall have accepted for payment and paid for Shares pursuant to the Offer in accordance with the terms thereof; (b) To the extent required by the Delaware Law, this Agreement and the Merger shall have been approved and adopted by the requisite vote or consent of the stockholders of the Company; and (c) No permanent injunction or other order, decree or ruling issued by a court of competent jurisdiction in the United States or by a domestic governmental, regulatory or administrative agency or commission nor any statute, rule, regulation or executive order promulgated or enacted by any domestic governmental authority shall be in effect, which would make the acquisition or holding by Parent, its subsidiaries or affiliates of the shares of common stock of the Surviving Corporation illegal or otherwise prevent the consummation of the Merger; PROVIDED, HOWEVER, that the parties shall have used all reasonable efforts to prevent such event. 7.2. ADDITIONAL CONDITIONS TO THE OBLIGATIONS OF PURCHASER. The obligations of Parent and Purchaser to effect the Merger are also subject to the following conditions: (a) Parent, Purchaser and the Company shall have obtained such licenses, permits, consents, waivers, approvals, authorizations, qualifications, orders, actions and non-actions from all third parties, including governmental authorities and agencies, as are necessary for consummation of the Merger and the consummation of the Merger will not result in the loss of any Permit of the Company or any of its subsidiaries; (b) The Company shall not have breached or failed to perform in any material respect any of its obligations in this Agreement or failed to comply in any material respect with any of its agreements or covenants in this Agreement; (c) Each of the representations and warranties of the Company set forth in this Agreement that are subject to, or qualified by, any materiality qualification shall be true and correct and each such representations and warranties that is not so qualified shall be true and correct in all material respect, in each case at the date of this Agreement and as of the Effective Date, except as to each such representation or warranty which speaks as of a specific date which must be true and correct in the foregoing respects as of such date; 35 (d) No event, condition or change (or any development involving a prospective event, condition or change) shall have occurred or be threatened which has had or is reasonably likely to have a Material Adverse Effect on the Company and its subsidiaries taken as a whole; and (e) There shall not have occurred (i) any general suspension of, or limitation on prices for, trading in securities on any United States stock exchange, (ii) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) the commencement of a war, armed hostilities or other international or national calamity materially affecting the United States, (iv) any limitation by any governmental authority or any other event which is reasonably likely to affect the extension of credit by banks or other lending institutions, or (v) in the case of any of the foregoing existing at the date of this Agreement, any material acceleration or worsening thereof. 8. TERMINATION, AMENDMENT AND WAIVER 8.1. TERMINATION. This Agreement may be terminated at any time prior to the Effective Date, whether prior to or after approval by the stockholders of the Company: (a) By mutual written consent duly authorized by the Boards of Directors of Parent and the Company; or (b) By the Company, by providing notice to Parent: (i) If Purchaser or any of its or Parent's subsidiaries or affiliates shall have (A) failed to commence the Offer within the time period specified in Section 1.1; (B) terminated the Offer; or (C) failed to pay for Shares pursuant to the Offer within 120 days after the commencement of the Offer, PROVIDED, HOWEVER, that such failure to commence, or termination or failure to pay for Shares does not arise from, is not in connection with, or related to a breach of a representation or warranty of the Company or the Company's failure to perform in any material respect any of its obligations under this Agreement; (ii) If, prior to the purchase of any Shares pursuant to the Offer, Purchaser or Parent fails to perform in any material respect any of its obligations under this Agreement or comply in any material respects with its agreements and covenants under this Agreement and such failure shall not have been cured within ten days following notice from the Company to Parent of notice of such failure and the Company's intent to terminate pursuant to this provision; (iii) At any time prior to the purchase of any Shares pursuant to the Offer, to allow the Company to enter into an agreement in respect of an Acquisition Transaction if the Board of Directors of the Company determines in good faith, after advice of outside counsel, that such Acquisition Transaction is reasonably capable of being completed on the terms 36 proposed and would, if consummated result in a transaction more favorable to the stockholders of the Company than the transactions contemplated by this Agreement and that such action is necessary in order to fulfill its fiduciary duty to stockholders; provided that such Board of Directors is then in receipt of a written opinion from its financial advisor that such Acquisition Transaction would, if consummated, result in a transaction more favorable to the Company's stockholders from a financial point of view than the transaction contemplated by the Offer, the Merger and this Agreement; provided, further, that prior to any such termination, the Company notifies Parent promptly of its intention to terminate this Agreement and enter into an agreement with respect to an Acquisition Transaction, which notice shall include the terms of such Acquisition Transaction and shall be given at least 48 hours prior to the termination of this Agreement; provided, further, that such termination shall not be effective until the Company pays Parent the fee described in Section 8.2(b) hereof; or (iv) If any court of competent jurisdiction in the United States or a domestic governmental, regulatory or administrative agency or commission shall have issued a nonappealable final order, decree or ruling or taken any other action having the effect of permanently restraining, enjoining or otherwise prohibiting the purchase of the Shares pursuant to the Offer or the Merger; provided that the Company shall have used its reasonable best efforts to remove or lift such order, decree or ruling. (c) By Parent, by providing notice to the Company: (i) If Purchaser or any of its or Parent's subsidiaries or affiliates shall have (A) failed to commence the Offer within the time period specified in Section 1.1; (B) terminated the Offer; or (C) failed to pay for Shares pursuant to the Offer within 120 days after the commencement of the Offer; PROVIDED, HOWEVER, that such failure to commence, or termination or failure to pay for Shares does not arise from, is not in connection with, or related to a breach of a representation or warranty of Parent or Purchaser or their failure to perform in any pertinent aspect any of its obligations under this Agreement; (ii) If (i) the Board of Directors of the Company or any committee thereof shall have withdrawn or modified (including by amendment of the Schedule 14D-9) in any manner adverse to Parent or the Purchaser its approval or recommendation of the Offer, the Merger or this Agreement, or approved or recommended any Acquisition Transaction, or Parent requests in writing that the Board of Directors of the Company reconfirm its recommendation of the Offer, the Merger and this Agreement to the Company's stockholders and the Board of Directors of the Company fails to do so within 5 days after its receipt of Parent's request, (ii) any Person shall have entered into an agreement, an agreement in principle or letter of intent with the Company or any of its subsidiaries with respect to an Acquisition Transaction, or (iii) the Board of Directors of the Company or any committee thereof shall have resolved to take any of the foregoing actions; 37 (iii) If the Company fails to perform in any material respect any of its obligations under this Agreement or comply in any material respects with its agreements and covenants under this Agreement and such failure shall not have been cured within ten days following notice from Parent to the Company of notice of such failure and Parent's intent to terminate pursuant to this provision; or (iv) If any court of competent jurisdiction in the United States or a domestic governmental, regulatory or administrative agency or commission shall have issued a nonappealable final order, decree or ruling or taken any other action having the effect of permanently restraining, enjoining or otherwise prohibiting the purchase of the Shares pursuant to the Offer or the Merger; provided that Parent and Purchaser shall have used its reasonable best efforts to remove or lift such order, decree or ruling. 8.2. EFFECT OF TERMINATION. (a) In the event of the termination of this Agreement as provided in Section 8.1, except as otherwise provided in Section 8.1, this Agreement shall forthwith become void upon receipt of notice of termination, and there shall be no liability on the part of Parent, Purchaser or the Company (or any of their respective directors, officers, employees, stockholders, affiliates, agents or advisors), except as set forth in this Section 8.2; provided that nothing shall relieve any party from liability for any breach of any agreement, covenant, representation or warranty contained in this Agreement; and provided further that the provisions of Article 9 and Sections 6.7 (solely with respect to the confidentiality provisions thereof) and 8.2 hereof and the Option Agreement shall remain in full force and effect and shall survive any termination of this Agreement. Upon termination of this Agreement, Purchaser shall terminate the Offer, if still pending, without purchasing any Shares pursuant to the Offer. (b) If: (i) Parent shall have terminated this Agreement pursuant to Section 8.1(c)(ii) hereof; (ii) the Company shall have terminated this Agreement pursuant to Section 8.1(b)(iii) hereof; or (iii) this Agreement is terminated for any other reason (other than pursuant to Section 8.1(b)(ii)) and during the period commencing on the date hereof and ending on, and including, the date which is nine months after the date this Agreement is terminated an Alternative Transaction is consummated; then in any such case the Company shall pay Parent $4,000,000. As used herein "Alternative Transaction" means either (a) a transaction pursuant to which any Person other than Parent, Purchaser or their affiliates (a "THIRD PARTY") acquires beneficial ownership of more than 38 25% of the outstanding shares of Common Stock or other equity securities, whether from the Company, its stockholders or pursuant to a tender or exchange offer or otherwise, (b) a merger or other business combination involving the Company pursuant to which any Third Party acquires beneficial ownership of more than 25% of the outstanding common stock or other equity securities of the Company or the entity surviving such merger or business combination, or (c) any other transaction, or series of transactions, pursuant to which any Third Party acquires control of assets of the Company or any of its subsidiaries having a fair market value equal to more than 25% of the fair market value of all the assets of the Company and its subsidiaries, taken as a whole, immediately prior to such transaction. Notwithstanding the foregoing, if and to the extent that Parent has purchased shares of the Common Stock from the Company ("OPTION SHARES") pursuant to the Option Agreement or elected to exercise the Option Agreement for cash rather than the Company Shares prior to the payment of the $4,000,000 fee provided for herein (the "FEE PAYMENT DATE") the sum of, (i) the amount payable to Parent under this Section 8.2(b), PLUS (ii) the net cash amount received by Parent prior to the Fee Payment Date pursuant to Section 6(e) of the Option Agreement, PLUS (iii)(x) the amount received by Parent prior to the Fee Payment Date pursuant to the sale of Option Shares (or any other securities into which such Option Shares are converted or exchanged), less (y) Parent's purchase price for such Shares. LESS (iv) any amounts paid or Company Shares (valued at the closing sales price of the Common Stock on NASDAQ on the day of delivery) delivered to the Company pursuant to Section 8 of the Option Agreement or pursuant to any other reimbursement obligations, including without limitation, pursuant to Section 16 of the Exchange Act, shall not exceed $5,000,000. The amounts owed by the Company to Parent pursuant to this Section 8.2(b) shall be paid to the Company (i) immediately prior to the termination of this Agreement in the case of payment pursuant to Section 8.2(b)(ii), (ii) within two business days of the termination of this Agreement in the case of payment pursuant to Section 8.2(b)(i), and (iii) immediately prior to the later to occur of termination of this Agreement and the consummation of an Alternative Transaction, in the case of payment pursuant to Section 8.2(b)(iii). The Company acknowledges that the agreements contained in this Section 8.2 are an integral part of the transactions contemplated in this Agreement, and that, without these agreements, Parent would not enter into this Agreement; accordingly, if the Company fails to promptly pay the amount due pursuant to this Section 8.2, the Company shall pay to Parent its costs and expenses (including attorneys' fees) incurred in connection with collecting such amount, together with interest, from the date when such amount was due, on the amount of the fee at the rate of 10% per annum. (c) In addition, upon the termination of this Agreement for any reason, the Company shall (provided that Parent and Purchaser are not then in material breach of their respective obligations hereunder) reimburse Parent and Purchaser for the reasonable costs, expenses and fees incurred by them and their subsidiaries and affiliates (including, without limitation, out-of-pocket fees and expenses payable to all banks and other financial institutions and investment bankers and reasonable allocations of corporate overhead and salary and payroll expenses of their employees) or on their behalf in connection with their due diligence investigation of the Company, this Agreement, the Offer, the Merger and the consummation of 39 all the transactions contemplated by this Agreement; PROVIDED, HOWEVER, that the Company shall not be obligated to reimburse the Parent or Purchaser for any costs, fees and expenses of its financial advisors (including, without limitation, Donaldson, Lufkin & Jenrette) in excess of $250,000. (d) Upon termination of this Agreement pursuant to Section 8.1(b)(ii), Parent shall (provided that the Company is not then in material breach of its obligations hereunder) reimburse the Company for the reasonable costs, expenses and fees incurred by it and its subsidiaries or on their behalf in connection with this Agreement or the Offer and in accordance with Section 5.17 hereof; PROVIDED, HOWEVER, that Parent shall not be obligated to reimburse the Company for any costs, expenses or fees of its financial advisors (including, without limitation, McGettigan, Wick & Co., Inc. and Advest, Inc.) in excess of $250,000. The parties hereto acknowledge that the costs, fees and expenses reimbursable by Parent pursuant to this Section 8.2(d) will be less than the costs, fees and expenses reimbursable by the Company pursuant to Section 8.2(c). 9. GENERAL PROVISIONS 9.1. AMENDMENT; MODIFICATION; WAVIER; CONSENTS. Subject to applicable law, this Agreement may be amended, modified or supplemented only by written agreement of the Company, Parent and Purchaser at any time prior to the Effective Date with respect to any of the terms contained herein. Any failure of the Company, Parent or Purchaser to comply with any obligation, covenant, agreement or condition herein may be waived by the Company, Purchaser or Parent, respectively, only by a written instrument signed by the party granting such waiver, but such waiver or failure to insist upon strict compliance with such obligation, covenant, agreement or condition shall not operate as a waiver of, or estoppel with respect to, any subsequent or other failure. Whenever this Agreement requires or permits consent by or on behalf of any party hereto, such consent shall be given in writing in a manner consistent with the requirements for a waiver of compliance as set forth in this Section 9.1. 9.2. PUBLIC STATEMENTS. Before issuing any press release or otherwise making any public statements with respect to this Agreement, the Offer or the Merger, Parent and the Company shall agree upon its form and substance and shall not issue any such press release or make any such public statement prior to such agreement. 9.3. NOTICES. All notices and other communications hereunder shall be in writing and shall be delivered personally, by next-day courier or mailed by registered or certified mail (return receipt requested), first class postage prepaid, or telecopied with confirmation of receipt to the parties at the addresses specified below (or at such other addresses as shall be specified by the parties by like notice; PROVIDED, HOWEVER, that notices of a change of address shall be effective only upon receipt thereof). Any such notice shall be effective upon receipt, if personally 40 delivered or telecopied, one day after delivery to a courier for next-day delivery, or three days after mailing, if deposited in the U.S. mail, first class postage prepaid. (a) If to Parent or Purchaser: Knowledge Beginnings, Inc. 844 Moraga Drive Los Angeles, California 90049 Telecopy: (310) 440-3669 Attention: Ron Packard with a copy to: Latham & Watkins 75 Willow Road Menlo Park, California 94025 Telecopy: (650) 463-2600 Attention: Peter F. Kerman, Esq. (b) If to the Company: Children's Discovery Centers of America, Inc. 851 Irwin Street San Rafael, California 94901 Telecopy: (415) 459-1374 Attention: Richard A. Niglio with a copy to: Farella, Braun & Martel LLP Thirtieth Floor, Russ Building 235 Montgomery Street San Francisco, California 94104 Telecopy: (415) 954-4480 Attention: Bruce Maximov, Esq. 9.4. DEFINITIONS. As used herein, the following terms have the following meanings: (a) "AFFILIATE" or "AFFILIATE" with respect to a Person, shall mean any other Person that directly or indirectly controls, is controlled by, or is under common control with, the first Person. 41 (b) "MATERIAL ADVERSE EFFECT" shall mean a material adverse effect on the assets, liabilities, condition (financial or otherwise), results of operations, business, operations or prospects of the Company and its subsidiaries taken as a whole or on the ability of the Company, Parent or Purchaser to consummate the transactions contemplated by this Agreement. (c) "PERSON" shall mean and include an individual, a partnership, a limited liability company, a joint venture, a corporation, a trust, an unincorporated organization, a group or other legal entity and a government or a department or agency thereof. (d) "SUBSIDIARY" or "SUBSIDIARY" shall mean with respect to any Person any corporation more than 50 percent of whose outstanding voting securities, or any partnership, joint venture or other entity more than 50 percent of whose total equity interest, is directly or indirectly owned by such Person. 9.5. INTERPRETATION; SEVERABILITY. For purposes of this Agreement, the Company shall not be deemed to be an affiliate or subsidiary of Purchaser or Parent. The headings contained in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement. In case any one or more of the provisions contained in this Agreement should be invalid, illegal or unenforceable in any respect against a party hereto, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby and such invalidity, illegality or unenforceability shall only apply as to such party in the specific jurisdiction where such judgment shall be made. 9.6. REPRESENTATIONS AND WARRANTIES. The respective representations and warranties of the Company, Purchaser and Parent contained herein or in any certificates or other documents delivered prior to or as of the Effective Date shall not be deemed waived or otherwise affected by any investigation made by any party thereto and shall expire with, and be terminated and extinguished upon, consummation of the Merger, and thereafter neither the Company, Parent nor Purchaser nor any officer, director or principal thereof shall be under any liability whatsoever with respect to any such representation or warranty. This Section 9.6 shall have no effect upon any other obligation of the parties hereto, whether to be performed before or after the consummation of the Offer or the Merger. 9.7. MISCELLANEOUS. This Agreement (including the Disclosure Schedule and ANNEX I: referred to herein) (i) along with the Option Agreement, constitutes the entire agreement and supersedes all other prior agreements and undertakings, both written and oral, among the parties, or any of them, with respect to the subject matter hereof; (ii) is not intended to confer upon any other Person any rights or remedies hereunder; (iii) shall be governed in all respects, including validity, interpretation and effect, by the internal laws of the State of Delaware, without giving effect to the principles of conflict of laws thereof; and (iv) shall inure to the benefit of and be binding upon the parties hereto and their respective successors and assigns. This Agreement may 42 be executed in one or more counterparts, each of which shall be deemed an original, and all of which together shall constitute a single agreement. 43 IN WITNESS WHEREOF, each of Parent, Purchaser and the Company have caused this Agreement to be executed as of the date first written above by their respective officers thereunder duly authorized. KNOWLEDGE BEGINNINGS, INC. /s/ Ronald J. Packard ----------------------------------- Name: Ronald J. Packard Title: Treasurer KBI ACQUISITION CORP. /s/ Ronald J. Packard ----------------------------------- Name: Ronald J. Packard Title: Treasurer CHILDREN'S DISCOVERY CENTERS OF AMERICA, INC. /s/ Randall J. Truelove ----------------------------------- Name: Randall J. Truelove Title: Vice President ANNEX I CERTAIN CONDITIONS OF THE OFFER. Notwithstanding any other provisions of the Offer or the Agreement and Plan of Merger by and among Knowledge Beginnings, Inc., KBI Acquisition Corp. and Children's Discovery Centers of America, Inc., dated as of March 27, 1998 (the "MERGER AGREEMENT"), Purchaser shall not be required to accept for payment or, subject to any applicable rules and regulations of the Commission, including Rule 14e-1(c) under the Exchange Act (relating to the Purchaser's obligation to pay for or return tendered Shares (as defined in the Merger Agreement) after the termination or withdrawal of the Offer), pay for any Shares tendered pursuant to the Offer, and may terminate, withdraw or amend the Offer and may postpone the acceptance of, and payment for the Shares, unless there shall have been validly tendered and not withdrawn prior to the expiration of the Offer such number of Shares which would constitute a majority of the outstanding shares, determined on a fully diluted basis, of the Company Common Stock (the "MINIMUM CONDITION"). "On a fully diluted basis" means, as of any date, the number of Shares outstanding, together with Shares issuable upon exercise of outstanding Company Options. Furthermore, notwithstanding any other term of the Offer or the Merger Agreement, the Purchaser shall not be required to accept for payment or, subject as aforesaid, to pay for any Shares tendered pursuant to the Offer, and may terminate, withdraw or amend the Offer and may postpone the acceptance of, and payment for the Shares if, at any time on or after the date of the Merger Agreement and before the time for payment for any of the Shares (whether or not any Shares shall have theretofore been accepted for payment or paid for pursuant to the Offer), any of the following conditions exists: (a) There shall be instituted or pending any action or proceeding before any domestic or foreign court, legislative body or governmental agency or other regulatory or administrative agency or commission (i) challenging the acquisition in whole or in part of the Shares by Parent or Purchaser, seeking to restrain or prohibit the making or consummation of the Offer or the Merger or seeking to obtain any material damages or otherwise, directly or indirectly, relating to the transaction contemplated by the Offer or the Merger Agreement, (ii) seeking to prohibit or restrict the ownership or operation by Parent, Purchaser or the Company (or any of their respective affiliates or subsidiaries) of any material portion of the Parent's or Purchaser's or the Company's business or assets, or to compel the Company, Parent or Purchaser (or any of their respective affiliates or subsidiaries) to dispose of or hold separate all or any of the Shares or all or any material portion of the Company's, Parent's or Purchaser's (or any of their respective affiliates or subsidiaries) business or assets as a result of the Offer, the Merger or any of the other transactions contemplated by the Merger Agreement, (iii) seeking to prohibit or materially delay or make illegal the purchase of, or payment for, some or all of the Shares pursuant to the Offer or Merger, (iv) seeking to impose material limitations on the ability of Parent or Purchaser (or any of their respective affiliates or subsidiaries) to acquire or to hold or to exercise full rights of ownership of the Shares, including, without limitation, the right to vote the Shares on all matters properly presented to the stockholders of the Company, (v) seeking to impose any limitations on the ability of Parent or Purchaser (or any of their respective affiliates or subsidiaries) effectively to control in any material respect any material portion of the business and operations of the Company and its subsidiaries, or (vi) which may result in a material limitation on the benefits expected to be derived by Parent and Purchaser as a result of the Offer, including without limitation, any limitation on the ability to consummate the Merger; or (b) Any statute, rule, regulation or order shall be enacted, promulgated, entered, enforced or deemed applicable to the Offer or the Merger, or any other action shall have been taken, proposed or threatened, by any domestic or foreign government or governmental authority or by any court, domestic or foreign, which is reasonably likely to result, directly or indirectly, in any of the consequences referred to in Subsection (i) through (vi) of subsection (a) above; or (c) Parent, Purchaser or the Company and its subsidiaries shall not have obtained any license, permit, waiver, consent, approval, authorization, qualification, order, action or non-action from any third party, including any governmental authority or agency, which is necessary to consummate the Offer and the Merger, including, without limitation, the termination or expiration of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the passage of 30 days after the filing of an initial application for a license to operate from the State Board of Private Academic Schools, the Commonwealth of Pennsylvania, or the consummation of the Offer and the Merger will result in the loss of any Permit (as defined in the Merger Agreement) of the Company or any of its subsidiaries; or (d) Any event, condition or change (or any development involving a prospective event, condition or change) shall have occurred or be threatened which has had or is reasonably likely to have a Material Adverse Effect (as defined in the Merger Agreement) on the Company and its subsidiaries taken as a whole; or (e) There shall have occurred (i) any general suspension of, or limitation on prices for, trading in securities on any United States stock exchange, (ii) the declaration of a banking moratorium or any suspension of payments in respect of banks in the United States, (iii) the commencement of a war, armed hostilities or other international or national calamity materially affecting the United States, (iv) any limitation by any governmental authority or any other event which is reasonably likely to affect the extension of credit by banks or other lending institutions, or (v) in the case of any of the foregoing existing at the time of the commencement of the Offer, any material acceleration or worsening thereof; or (f) (i) the Board of Directors of the Company or any committee thereof shall have withdrawn or modified (including by amendment of the Company's Schedule 14D-9) in a manner adverse to Parent or the Purchaser its approval or recommendation of the Offer, the Merger or the Merger Agreement, or approved or recommended any Acquisition Transaction (as defined in the Merger Agreement), or Parent requests in writing that the Board of Directors of the Company reconfirm its recommendation of the Offer, the Merger and the Merger Agreement and the Board of Directors of the Company fails to do so within 5 days after its receipt of Parent's 2 request, (ii) any corporation, partnership, person or other entity or group shall have entered into an agreement, an agreement in principle or letter of intent with the Company or any of its subsidiaries with respect to an Acquisition Transaction, or (iii) the Board of Directors of the Company or any committee thereof shall have resolved to take any of the foregoing actions; or (g) The Company shall have breached or failed to perform in any material respect any of its obligations in the Merger Agreement or failed to comply in any material respect with any of its agreements or covenants in the Merger Agreement; or (h) Any of the representations and warranties of the Company set forth in the Merger Agreement that are subject to, or qualified by, any materiality qualification shall not be true and correct or any such representations and warranties that are not so qualified shall not be true and correct in any material respect, in each case at the date of the Merger Agreement and at the time of such determination except as to any such representation or warranty which speaks as of a specific date which must be untrue or incorrect in the foregoing respects as of such specific date; or (i) The Merger Agreement shall have been terminated by the Company, Parent or Purchaser pursuant to its terms; or (j) The affirmative vote of the holders of more than a majority of the outstanding Shares is required to consummate the Merger, Purchaser is not entitled to vote its shares of the Company Common Stock for the Merger, or the affirmative vote of the holders of any securities of the Company other than the Shares is required to consummate the Merger; or (k) The holders of all Company Options (as defined in the Merger Agreement) shall not have irrevocably agreed to cancel such Company Options in return for the payment set forth in Section 2.7; or (l) Parent shall not have received the noncompete agreements, employment and consulting agreements, releases, excess payment agreement and resignations from the Persons contemplated by Section 6.9 of the Merger Agreement; or (m) The Company shall not have obtained the insurance contemplated by Section 6.10(c) of the Merger Agreement; which, in the reasonable judgment of Purchaser, in any such case and regardless of the circumstances giving rise to any such condition, makes it inadvisable to proceed with the Offer or with such acceptance for payment or payment. The foregoing conditions (including those set forth in the opening paragraph above) are for the sole benefit of Purchaser and may be asserted or waived by the Purchaser in whole or in part at any time and from time to time in its sole discretion. The failure by Purchaser at any time 3 to exercise any of the foregoing rights shall not be deemed a waiver of any such right, and each right shall be deemed a continuing right which may be asserted at any time and from time to time. Any determination by Purchaser concerning the events described in this ANNEX I shall be final and binding upon all parties. 4 EX-99.C2 12 EXHIBIT 99-C2 OPTION AND SUPPORT AGREEMENT OPTION AND SUPPORT AGREEMENT dated as of March 27, 1998 (this "AGREEMENT") by and among Knowledge Beginnings, Inc., a Delaware corporation ("PARENT"), Children's Discovery Centers of America, Inc., a Delaware corporation (the "COMPANY"), and the other parties signatory hereto (each a "STOCKHOLDER"). RECITALS A. Concurrently herewith, Parent, KBI Acquisition Corp., a Delaware corporation and wholly-owned subsidiary of Parent ("PURCHASER"), and the Company are entering into an Agreement and Plan of Merger of even date herewith (as such agreement may be amended from time to time, the "MERGER AGREEMENT"; terms used but not defined herein which are defined in the Merger Agreement shall have the meanings set forth in the Merger Agreement) pursuant to which (and subject to the terms and conditions specified therein) Purchaser will be merged with and into the Company (the "MERGER"), whereby each share of common stock, par value $.01 per share, of the Company ("COMMON STOCK") issued and outstanding immediately prior to the effective time of the Merger will be converted into the right to receive $12.25 in cash, other than (i) shares of Common Stock owned, directly or indirectly, by the Company, Parent or Purchaser or any of their wholly-owned subsidiaries and (ii) any shares of Common Stock owned by Dissenting Stockholders. B. In furtherance of the Merger, Parent and the Company desire that as soon as practicable (and no later than five business days) after the execution and delivery of the Merger Agreement, Purchaser commence a cash tender offer to purchase all outstanding shares of Common Stock, including all of the Shares (as defined in Section 1(a) below) on the terms and subject to the conditions set forth in the Merger Agreement. C. As a condition and inducement to its willingness to enter into the Merger Agreement, Parent has required that the Company grant to Parent an option to purchase 1,342,155 shares of Common Stock, upon the terms and subject to the conditions hereof. D. As a condition to Parent's entering into the Merger Agreement, Parent has required that each Stockholder enter into, and each such Stockholder has agreed to enter into, this Agreement with Parent providing, among other things, for such Stockholder's agreement to tender pursuant to the Offer all shares of Common Stock owned by it and to support the Merger and the grant by each such Stockholder to Parent of an option to purchase such Stockholder's shares of Common Stock, in each case upon the terms and subject to the conditions hereof. AGREEMENT To implement the foregoing and in consideration of the mutual agreements contained herein and in the Merger Agreement, the parties hereby agree as follows: 1. REPRESENTATIONS AND WARRANTIES OF STOCKHOLDERS. Each Stockholder severally and not jointly hereby represents and warrants to Parent as follows: (a) OWNERSHIP OF SHARES. (i) Such Stockholder is the record holder or beneficial owner (as defined in Section 14(j) hereof) of the number of shares of Common Stock as is set forth opposite such Stockholder's name on Schedule I hereto (as to each Stockholder, such shares shall constitute the "EXISTING SHARES," and together with any shares of Common Stock acquired of record or beneficially by such Stockholder in any capacity after the date hereof and prior to the termination hereof, whether upon exercise of options, warrants or rights, conversion of convertible securities, purchase, exchange, dividend, distribution or otherwise, shall constitute the "SHARES"). (ii) On the date hereof, the Existing Shares constitute all of the shares of Common Stock owned of record or beneficially by such Stockholder, and such Stockholder does not own or have the right to acquire any options, warrants, convertible or exchangeable securities or other rights to acquire any shares of Common Stock. (iii) Such Stockholder has sole power of disposition, sole voting power, sole power to issue instructions with respect to the matters set forth in Sections 5, 10 and 11 hereof and sole power to demand dissenter's or appraisal rights, in each case with respect to all of the Existing Shares, with no restrictions on such rights, subject to applicable federal securities laws and the terms of this Agreement. (iv) Such Stockholder will have sole power of disposition, sole voting power, sole power to issue instructions with respect to the matters set forth in Sections 5, 10 and 11 hereof and sole power to demand dissenter's or appraisal rights, in each case with respect to all Shares other than Existing Shares, if any, which become beneficially owned by such Stockholder with no restrictions on such rights, subject to applicable federal securities laws and the terms of this Agreement. (b) ORGANIZATION. Such Stockholder has been duly organized and is validly existing and in good standing under the laws of the jurisdiction of its formation. Page 2 (c) POWER; BINDING AGREEMENT. Such Stockholder has the organizational power and authority to enter into and perform all of such Stockholder's obligations under this Agreement. This Agreement has been duly and validly authorized, executed and delivered by such Stockholder and constitutes a valid and binding agreement of such Stockholder, enforceable against such Stockholder in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. (d) NO CONFLICTS. (A) No filing with, and no permit, authorization, consent or approval of, any state or federal public body or authority by such Stockholder is necessary for the execution of this Agreement by such Stockholder and the consummation by such Stockholder of the transactions contemplated hereby and (B) neither the execution and delivery of this Agreement by such Stockholder nor the consummation by such Stockholder of the transactions contemplated hereby nor compliance by such Stockholder with any of the provisions hereof shall (x) conflict with or result in any breach of any partnership agreement or other organizational documents applicable to such Stockholder, (y) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any third party right of termination, cancellation, material modification or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, commitment, arrangement, understanding, agreement or other instrument or obligation of any kind to which such Stockholder is a party or by which such Stockholder or any of such Stockholder's properties or assets may be bound or (z) violate any order, writ, injunction, decree, judgment, statute, rule or regulation applicable to such Stockholder. (e) ENCUMBRANCES. Such Stockholder's Shares and the certificates representing such Shares are now and at all times during the term hereof will be held by such Stockholder, or by a nominee or custodian for the benefit of such Stockholder, free and clear of all liens, claims, security interests, proxies, voting trusts or agreements, understandings or arrangements or any other encumbrances whatsoever, except for any such encumbrances arising hereunder. The transfer by such Stockholder of its Shares in the Offer or hereunder shall pass to and unconditionally vest in Purchaser good and valid title to all Shares, free and clear of all claims, liens, restrictions, security interests, pledges, limitations and encumbrances whatsoever. (f) FEES. Except as set forth in the Merger Agreement, no broker, investment banker, financial adviser or other Person is entitled to any broker's, finder's, financial advisor's or other similar fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of such Stockholder in its capacity as such. Page 3 (g) RELIANCE. Such Stockholder understands and acknowledges that Parent and Purchaser are entering into the Merger Agreement and commencing the Offer in reliance upon such Stockholder's execution and delivery of this Agreement. 2. REPRESENTATIONS AND WARRANTIES OF PARENT TO THE COMPANY AND THE STOCKHOLDERS. Parent hereby represents and warrants to the Company and each Stockholder as follows: (a) ORGANIZATION. Parent is a corporation duly incorporated, validly existing and in good standing under the laws of the jurisdiction of its formation. (b) POWER; BINDING AGREEMENT. Parent has the corporate power and authority to enter into and perform all of Parent's obligations under this Agreement. This Agreement has been duly and validly authorized, executed and delivered by Parent and constitutes a valid and binding agreement of Parent, enforceable against Parent in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. (c) NO CONFLICTS. (A) Other than in connection with or in compliance with the provisions of the Hart-Scott-Rodino Antitrust Improvement Act of 1976, as amended, and the rules and regulations thereunder (the "HART-SCOTT-RODINO ACT"), the Securities Act of 1933, as amended, and the rules and regulations thereunder (the "SECURITIES ACT"), the Securities Exchange Act of 1934, as amended, and the rules and regulations thereunder (the "EXCHANGE ACT"), the blue sky laws of any State or the rules and regulations of NASDAQ, no filing with, and no permit, authorization, consent or approval of, any state or federal public body or authority by Parent is necessary for the execution of this Agreement by Parent and the consummation by Parent of the transactions contemplated hereby and (B) neither the execution and delivery of this Agreement by Parent nor the consummation by Parent of the transactions contemplated hereby nor compliance by Parent with any of the provisions hereof shall (x) conflict with or result in any breach of the certificate of incorporation or bylaws of Parent, (y) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any third party right of termination, cancellation, material modification or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, commitment, arrangement, understanding, agreement or other instrument or obligation of any kind to which Parent is a party or by which Parent or any of Parent's properties or assets may be bound or (z) violate any order, writ, injunction, decree, judgment, statute, rule or regulation applicable to Parent. 3. REPRESENTATIONS AND WARRANTIES OF PARENT TO THE COMPANY. Parent hereby represents and warrants to the Company that if and when Parent exercises the Company Option, it will be acquiring the Company Shares issuable upon the exercise thereof for its own account Page 4 and not with a view to distribution or resale in any manner which would be in violation of the Securities Act. 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY TO PARENT. The Company hereby represents and warrants to Parent as follows: (a) The Company is a corporation duly organized, validly existing and in good standing under the laws of the State of Delaware and has the requisite corporate power and authority to enter into and perform this Agreement. (b) The execution and delivery of this Agreement by the Company and the consummation by it of the transactions contemplated hereby have been duly authorized by the Board of Directors of the Company, which constitutes the only corporate actions necessary to authorize the execution and delivery of this Agreement and consummation of the transactions contemplated hereby. This Agreement has been duly executed and delivered by a duly authorized officer of the Company and constitutes a valid and binding obligation of the Company, enforceable in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles. (c) The Company has taken all necessary corporate action to authorize and reserve the Company Shares issuable upon exercise of the Company Option and the Company Shares, when issued and delivered by the Company upon exercise of the Company Option in accordance with the terms hereof, will be duly authorized, validly issued, fully paid and non-assessable and free of preemptive rights and other encumbrances, liens and restrictions, except those imposed by federal securities laws. (d) Except as otherwise required by the Hart-Scott-Rodino Act and other than any filings required under the blue sky laws of any states or by NASDAQ, the execution and delivery of this Agreement by the Company and the issuance of Company Shares upon exercise of the Company Option do not require the consent, waiver, approval or authorization of or any filing with any Person or public authority. (e) (A) Other than in connection with or in compliance with the provisions of the Hart-Scott-Rodino Act, the Securities Act, the Exchange Act, the blue sky laws of any State or the rules and regulations of NASDAQ, no filing with, and no permit, authorization, consent or approval of, any state or federal public body or authority by the Company is necessary for the execution of this Agreement by the Company and the consummation by the Company of the transactions contemplated hereby and (B) neither the execution and delivery of this Agreement by the Company nor the consummation by the Company of the transactions contemplated hereby Page 5 nor compliance by the Company with any of the provisions hereof shall (x) conflict with or result in any breach of the certificate of incorporation or bylaws of the Company, (y) result in a violation or breach of, or constitute (with or without notice or lapse of time or both) a default (or give rise to any third party right of termination, cancellation, material modification or acceleration) under any of the terms, conditions or provisions of any note, bond, mortgage, indenture, license, contract, commitment, arrangement, understanding, agreement or other instrument or obligation of any kind to which the Company is a party or by which the Company or any of the Company's properties or assets may be bound or (z) violate any order, writ, injunction, decree, judgment, statute, rule or regulation applicable to the Company. (f) No "fair price", "moratorium", "control share acquisition" or other form of antitakeover statute or regulation (including, without limitation, the restrictions on "business combinations" set forth in Section 203 of the Delaware Law) is or shall be applicable to execution of this Agreement or the consummation of the transactions contemplated hereby, including without limitation, the acquisition of any Stockholder's Shares or the Company Shares pursuant to this Agreement (and the Board of Directors of the Company has taken all action to approve the acquisition of the Company Shares and all Stockholders' Shares to the extent necessary to avoid such application). 5. OPTION GRANTED TO PARENT BY THE STOCKHOLDERS. (a) Each Stockholder, severally and not jointly, hereby grants to Parent an irrevocable option to purchase, in whole and not in part, all of such Stockholder's respective Shares, on the terms and subject to the conditions set forth herein (with respect to each Stockholder's Shares, the "STOCKHOLDER OPTION"). (b) Each Stockholder Option may be exercised by Parent, in whole or in part, at any time, or from time to time, during the period commencing immediately after the occurrence of a Trigger Event and ending on, and including, the date which is nine months after the termination of the Merger Agreement. As used herein, "Trigger Event" shall mean (i) the termination of the Merger Agreement pursuant to Section 8.1(c)(ii) or 8.1(b)(iii) or (ii) the termination of the Merger Agreement for any other reason (other than pursuant to Section 8.1(b)(ii)) and during the period commencing on the date hereof and ending on, and including, the date which is nine months after the termination of the Merger Agreement an Alternative Transaction (as defined inn the Merger Agreement) is consummated. (c) If Parent wishes to exercise a Stockholder Option, Parent shall send a written notice to such Stockholder (to the address set forth herein) of Parent's irrevocable election to exercise such Stockholder Option, specifying the place, and, if then known, the time and the date (the "OPTION CLOSING DATE") of the closing of the purchase of such Stockholder's Page 6 Shares (the "OPTION CLOSING"). The Option Closing Date shall occur on the fifth business day (or such longer period as may be required by applicable law or regulation) after the later of (i) the date on which such notice is delivered and (ii) the satisfaction of the conditions set forth in Section 5(f) hereof. (d) At the Option Closing, the subject Stockholder shall deliver to Parent (or its designee) all of such Stockholder's Shares by delivery of a certificate or certificates evidencing such Shares, duly endorsed to Parent or accompanied by stock powers duly executed in favor of Parent, with all necessary stock transfer stamps affixed, free and clear of all liens, encumbrances and restrictions, except for restrictions imposed by federal securities laws. (e) At the Option Closing, Parent shall pay to the subject Stockholder, by wire transfer in immediately available funds to the account of such Stockholder specified in writing no less than two days prior to the Option Closing, an amount equal to the product of $12.25 (as adjusted as provided in Section 5(g)) (the "PURCHASE PRICE") and the number of shares of Common Stock purchased pursuant to the exercise of the subject Stockholder Option. (f) The purchase of Shares pursuant to each Stockholder Option shall be subject to the satisfaction of each of the following conditions: (i) no domestic court, arbitrator or governmental body, agency or official shall have issued any order, decree or ruling (which has not been stayed or suspended pending appeal) and there shall not be any effective domestic statute, rule or regulation prohibiting the consummation of the purchase and sale of Shares pursuant to the exercise of the such Stockholder Option; and (ii) any waiting period applicable to the consummation of the purchase and sale of the Shares pursuant to the exercise of such Stockholder Option under the Hart-Scott-Rodino Act shall have expired or been terminated. (g) In the event of a stock dividend or distribution, or any change in the Common Stock by reason of any stock dividend, stock split, spin-off, reorganization, recapitalization, reclassification, consolidation, combination, exchange of shares or the like, the term "SHARES" as used in this Agreement shall be deemed to refer to and include the Shares as well as all such stock dividends and distributions and any securities or other property into which or for which any or all of the Shares may be changed or exchanged, and the Purchase Price shall be proportionately adjusted. In the event of any merger or consolidation of the Company into another corporation, the exchange of all or substantially all of the assets of the Company for the securities of another corporation, or the recapitalization, reclassification, liquidation or dissolution of the Company, or other adjustment or event which results in shares of Common Page 7 Stock being exchanged for or converted into cash, securities or other property, "Shares" shall refer to the kind and amount of cash, securities and/or other property receivable by each Stockholder as a result of such event and each Stockholder Option shall be exercisable for such cash, securities and/or other property and the Purchase Price shall be proportionately adjusted. 6. OPTION GRANT TO PARENT BY THE COMPANY. (a) Subject to the other terms and conditions set forth herein, the Company hereby grants to Parent an irrevocable option (the "COMPANY OPTION") to purchase up to 1,342,155 (as adjusted as provided herein) shares of Common Stock (the "COMPANY SHARES") at a per share cash purchase price equal to $10.125 (as adjusted as provided in Section 6(c)) (the "COMPANY PURCHASE PRICE"). (b) The Company Option may be exercised by Parent, in whole or in part, at any time, or from time to time, during the period commencing immediately after the occurrence of a Trigger Event and ending on, and including, the date which is nine months after the termination of the Merger Agreement (c) In the event of any change in the number of issued and outstanding shares of Common Stock by reason of any stock dividend, stock split, split-up, reclassification, recapitalization, merger or other change in the corporate or capital structure of the Company, the number of Company Shares subject to the Company Option and the purchase price per Company Share shall be appropriately adjusted to restore Parent to its rights hereunder, including its right to purchase Company Shares representing 19.9% of the capital stock of the Company entitled to vote generally for the election of the directors of the Company which is issued and outstanding immediately prior to the exercise of the Company Option at an aggregate purchase price equal to the Company Purchase Price multiplied by 1,342,155. In the event that any additional shares of Common Stock are issued after the date of this Agreement (other than pursuant to an event described in the preceding sentence), the number of Company Shares subject to the Company Option shall be increased by 19.9% of the number of the additional shares of Common Stock so issued (and such additional Company Shares shall have a purchase price per share equal to the Company Purchase Price). (d) In the event Parent wishes to exercise all or a portion of the Company Option, Parent shall send a written notice to the Company (the "STOCK EXERCISE NOTICE") specifying a date not later than 10 business days and not earlier than the three business days following the date such notice is given for the closing of such purchase. (e) If at any time the Company Option is then exercisable pursuant to the terms of Section 6(b) hereof, Parent may elect, in lieu of exercising the Company Option to Page 8 purchase Company Shares provided in Section 6(a) hereof, to send a written notice to the Company (the "CASH EXERCISE NOTICE") specifying a date not later than 20 business days and not earlier than 10 business days following the date such notice is given on which date the Company shall pay to Parent an amount in cash equal to the Spread (as hereinafter defined) multiplied by all or such portion of the Company Shares subject to the Company Option as Parent shall specify. As used herein "SPREAD" shall mean the excess, if any, over the Company Purchase Price of the HIGHER of (x) if applicable, the highest price per share of Common Stock (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by any Person in an Acquisition Transaction (as defined in Section 6.5 of the Merger Agreement) (the "ALTERNATIVE PURCHASE PRICE") or (y) the closing sales price of the shares of Common Stock on NASDAQ on the last trading day immediately prior to the date of the Cash Exercise Notice (the "CLOSING PRICE"). If the Alternative Purchase Price includes any property other than cash, the Alternative Purchase Price shall be the sum of (i) the fixed cash amount, if any, included in the Alternative Purchase Price plus (ii) the fair market value of such other property. If such other property consists of securities with an existing public trading market, the average of the closing sales prices (or the average of the closing bid and asked prices if closing sales prices are unavailable) for such securities in their principal public trading market on the five trading days ending five days prior to the date of the Cash Exercise Notice shall be deemed to equal the fair market value of such property. If such other property consists of something other than cash or securities with an existing public trading market and, as of the payment date for the Spread, agreement on the value of such other property has not been reached, the Alternative Purchase Price shall be deemed to equal the Closing Price. Upon exercise of Parent's right to receive cash pursuant to this Section 6(e) and the payment of such cash to Parent, the obligations of the Company to deliver the Company Shares pursuant to Section 6(g) shall be terminated with respect to such number of Company Shares for which the Parent shall have elected to be paid the Spread. (f) The closing of the Company Option shall be subject to the satisfaction of each of the following conditions: (i) no court, arbitrator or governmental body, agency or official shall have issued any order, decree or ruling (which has not been stayed or suspended pending appeal) and there shall not be any effective statute, rule or regulation, restraining, enjoining or prohibiting the consummation of the purchase and sale of the Company Shares pursuant to the exercise of the Company Option; and (ii) any waiting period applicable to the consummation of the purchase and sale of the Company Shares pursuant to the exercise of the Company Option under the Hart-Scott-Rodino Act shall have expired or been terminated. Page 9 (g) Any closing hereunder shall take place on the date specified by Parent in its Stock Exercise Notice or Cash Exercise Notice, as the case may be, at 8:00 A.M., local time, at the offices of Latham & Watkins, 75 Willow Road, Menlo Park, CA 94025, or, if the conditions set forth in Section 6(f) have not then been satisfied, on the second business day following the satisfaction of such conditions, or at such other time and place as the parties hereto may agree (the "CLOSING DATE"). On the Closing Date, (i) in the event of a closing pursuant to Section 6(d) hereof, the Company will deliver to Parent a certificate or certificates representing the Company Shares in the denominations designated by Parent in its Stock Exercise Notice and Parent will purchase such Company Shares from the Company at the price per Share equal to the Company Purchase Price or (ii) in the event of a closing pursuant to Section 6(e) hereof, the Company will deliver to Parent the cash in an amount determined pursuant to Section 6(e) hereof. Any payment made by Parent to the Company, or by the Company to the Parent, pursuant to this Agreement shall be made by certified or official bank check or by wire transfer of federal funds to a bank designated by the party receiving such funds. (h) The certificates representing the Company Shares may bear an appropriate legend relating to the fact that such Company Shares have not been registered under the Securities Act. 7. LISTING OF COMPANY SHARES; REGULATORY FILINGS AND APPROVALS. Subject to applicable law and the rules and regulations of NASDAQ, the Company will promptly file an application to list the Company Shares on NASDAQ and will use its best efforts to obtain approval of such listing and to file any necessary filings by the Company under the Hart-Scott-Rodino Act; provided, however, that if the Company is unable to effect such listing on NASDAQ by the Closing Date, the Company will nevertheless be obligated to deliver the Company Shares upon the Closing Date. The Company and Parent will use their best efforts to obtain consents of all third parties and all regulatory approvals, if any, necessary to the consummation of the closing of the sale of the Company Shares (or payment of the Spread) upon exercise of the Company Option. 8. PROFIT LIMITATION. Notwithstanding any other provision of this Agreement, in no event shall Parent's Total Profit (as defined below) exceed $5 million and, if it does exceed such amount, Parent, at its sole election, shall, within five business days, either (a) deliver to the Company for cancellation Company Shares (valued, for the purposes of this Section 8, at the closing sales price of the Common Stock on NASDAQ on the day of delivery) previously purchased by Parent, (b) pay cash or other consideration to the Company or (c) undertake any combination thereof, so that Parent's Total Profit shall not exceed $5 million after taking into account the foregoing actions. Page 10 As used herein, the term "TOTAL PROFIT" shall mean the aggregate amount (before taxes) of the following: (i) the amount of cash received by Parent pursuant to Section 8.2(b) of the Merger Agreement and Section 6(e) hereof, PLUS (ii)(x) the amount received by Parent pursuant to the sale of Company Shares acquired upon exercise of the Company Option (or any other securities into which such Company Shares are converted or exchanged), LESS (y) Parent's purchase price for such Company Shares, LESS (iii) any amounts paid or Company Shares (valued, for the purposes of this Section 8, at the closing sales price of the Common Stock on NASDAQ on the day of delivery) delivered to the Company pursuant to this Section 8 or other reimbursement obligation, including, without limitation, pursuant to Section 16 of the Exchange Act. 9. REGISTRATION RIGHTS FOR COMPANY SHARES. (a) If Parent shall desire to sell any of the Company Shares within two years after the purchase of such Company Shares pursuant hereto, at Parent's request, the Company will cooperate with Parent and any underwriters in registering such Company Shares for resale, including, without limitation, promptly filing a registration statement which complies with the requirements of applicable federal and state securities laws, entering into an underwriting agreement with such underwriters upon such terms and conditions as are customarily contained in underwriting agreements with respect to secondary distributions; provided that the Company shall not be required to have declared effective more than two registration statements hereunder and shall be entitled to delay the filing or effectiveness of any registration statement for up to 60 days if the offering would, in the judgment of the Board of Directors of the Company, require premature disclosure of any material corporate development or otherwise interfere with or adversely affect any pending or proposed offering of securities of the Company or any other material transaction involving the Company. (b) If any Company Shares are registered pursuant to the provisions of this Section 9, the Company agrees (i) to furnish copies of the registration statement and the prospectus relating to the Company Shares covered thereby in such numbers as Parent may from time to time reasonably request and (ii) if any event shall occur as a result of which it becomes necessary to amend or supplement any registration statement or prospectus, to prepare and file under the applicable securities laws such amendments and supplements as may be necessary to keep effective for at least 90 days a prospectus covering the Common Stock meeting the requirements of such securities laws, and to furnish Parent such numbers of copies of the registration statement and prospectus as amended or supplemented as may reasonably be requested. The Company shall bear the cost of the registration, including, but not limited to, all registration and filing fees, printing expenses, and fees and disbursements of counsel and accountants for the Company, except that Parent shall pay the fees and disbursements of its counsel, the underwriting fees and selling commissions applicable to the shares of Common Page 11 Stock sold by Parent. The Company shall indemnify and hold harmless Parent, its affiliates and its officers, directors and controlling persons from and against any and all losses, claims, damages, liabilities and expenses arising out of or based upon any statements contained or incorporated by reference in, and omissions or alleged omissions from, each registration statement filed pursuant to this paragraph; provided, however, that this provision does not apply to any loss, liability, claim, damage or expense to the extent it arises out of any untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by Parent, its affiliates and its officers expressly for use in any registration statement (or any amendment thereto) or any preliminary prospectus filed pursuant to this paragraph. The Company shall also indemnify and hold harmless each underwriter and each person who controls any underwriter within the meaning of either the Securities Act or the Securities Exchange Act of 1934, as amended, against any and all losses, claims, damages, liabilities and expenses arising out of or based upon any statements contained or incorporated by reference in, and omissions or alleged omissions from, each registration statement filed pursuant to this paragraph; provided, however, that this provision does not apply to any loss, liability, claim, damage or expense to the extent it arises out of any untrue statement or omission made in reliance upon and in conformity with written information furnished to the Company by the underwriters expressly for use in any registration statement (or any amendment thereto) or any preliminary prospectus filed pursuant to this paragraph. 10. TENDER OF SHARES; STOCKHOLDERS' AGREEMENT TO VOTE. (a) TENDER OF SHARES. Each Stockholder, severally and not jointly, hereby agrees to validly tender (and not to withdraw) pursuant to and in accordance with the terms of the Offer (provided that the Offer is not amended in a manner prohibited by the Merger Agreement), in a timely manner for acceptance by Purchaser of the Offer, its respective Shares. Such Stockholder hereby acknowledges and agrees that Parent's obligation to accept for payment and pay for Common Stock in the Offer, including such Stockholder's Shares, is subject to the terms and conditions of the Offer. Each Stockholder hereby agrees to permit Parent and Purchaser to disclose in any press release or public announcement related to the Offer, Merger or Merger Agreement, publish and disclose in the Offer Documents and, if approval of the stockholders of the Company is required under applicable law, the Proxy Statement (including all documents and schedules filed with the Commission) its identity and ownership of Common Stock and the nature of its commitments, arrangements and understandings under this Agreement. (b) VOTING. Each Stockholder, severally and not jointly, hereby agrees that, until the Termination Date (as defined in Section 13), at any meeting of the stockholders of the Company, however called, or in connection with any written consent of the stockholders of the Company, such Stockholder shall vote (or cause to be voted), including by way of written consent, the shares of Common Stock held of record or beneficially owned, from time to time by Page 12 such Stockholder (i) in favor of the Merger, the adoption of the Merger Agreement and the approval of the terms thereof and each of the other actions contemplated by the Merger Agreement and this Agreement and any actions required in furtherance hereof and thereof; (ii) against any action or agreement that would result in a breach of any covenant, representation or warranty or any other obligation or agreement of the Company under the Merger Agreement or this Agreement; and (iii) except as specifically requested in writing by Parent in advance, against the following actions (other than the Merger and the transactions contemplated by the Merger Agreement): (A) any Acquisition Transaction, including without limitation, any extraordinary corporate transaction, such as a merger, consolidation or other business combination involving the Company or any of its subsidiaries, a sale, lease or transfer of a material amount of assets of the Company or any of its subsidiaries or a reorganization, recapitalization, dissolution or liquidation of the Company or any of its subsidiaries; or (B) (1) the election of any Person to, or other change in the size or composition of, the board of directors of the Company; (2) any material change in the present capitalization of the Company or any amendment of the Company's Certificate of Incorporation or By-Laws; (3) any other material change in the Company's corporate structure or business; or (4) any other action which is intended, or could reasonably be expected, to impede, interfere with, delay, postpone, discourage or materially adversely affect the Offer, the Merger or the transactions contemplated by the Merger Agreement or this Agreement or the contemplated economic benefits of any of the foregoing. Such Stockholder shall not enter into any agreement or understanding which is inconsistent with clauses (i), (ii) or (iii) of the preceding sentence. 11. CERTAIN COVENANTS OF STOCKHOLDERS. Except in accordance with the terms of this Agreement, each Stockholder severally and not jointly, hereby covenants and agrees as follows: (a) NO SOLICITATION. Prior to the Termination Date, no Stockholder shall, in its capacity as such, directly or indirectly solicit, initiate, facilitate or encourage any inquiries or the making of any proposal with respect to any tender offer, exchange offer, merger, consolidation, sale of assets, sales or capital stock or other business combination involving the Company or its subsidiaries or the acquisition of 20% or more of the assets or capital stock of the Company and its subsidiaries taken as a whole (an "ACQUISITION TRANSACTION"), or negotiate, explore or otherwise communicate in any way with, or provide or furnish any information to, any Person (other than Parent or the Purchaser) with respect to any Acquisition Transaction or enter into any agreement, arrangement or understanding requiring it to abandon, terminate or fail to consummate the Offer or the Merger or any other transaction contemplated by the Merger Agreement or this Agreement; provided, however, that the foregoing shall not restrict a Stockholder who is also a director of the Company from taking actions in such Stockholder's capacity as a director to the extent and in the circumstances permitted by Section 6.5 of the Merger Agreement. Such Stockholder shall immediately advise Parent in writing of the receipt by such Stockholder or any of its agents or representatives of any request for information, Page 13 inquiries, indications of interest, offers or proposals relating to an Acquisition Transaction and any actions taken pursuant to Section 6.5 of the Merger Agreement, which notice shall include the identity of the Person making such request, inquiry, indication of interest, offer or proposal and the terms, if any, of such Acquisition Transaction. Such Stockholder and its agents and representatives will upon the execution of this Agreement, cease any discussion or negotiations with, and shall cease to provide any information to or otherwise cooperate or encourage, any Person with respect to an Acquisition Transaction. (b) RESTRICTION ON TRANSFER, PROXIES AND NONINTERFERENCE. Prior to the expiration of the Stockholder Option, no Stockholder shall, directly or indirectly: (i) except pursuant to the terms of the Merger Agreement and this Agreement, offer for sale, sell, transfer, tender, pledge, encumber, assign or otherwise dispose of (including by merger or otherwise by operation of law) or enter into any contract, option or other arrangement or understanding with respect to, or consent to the offer for sale, transfer, tender, pledge, encumbrance, assignment or other disposition of, or exercise any discretionary powers to distribute, any or all of such Stockholder's Shares or any interest therein; (ii) grant any proxies or powers of attorney with respect to any shares of Common Stock beneficially owned by it, deposit any shares of Common Stock beneficially owned by it into a voting trust or enter into a voting agreement with respect to any shares of Common Stock beneficially owned by it; or (iii) take any action that would make any representation or warranty of such Stockholder contained herein untrue or incorrect or have the effect of preventing or disabling such Stockholder from performing such Stockholder's obligations under this Agreement. (c) WAIVER OF APPRAISAL AND DISSENTER'S RIGHTS. Each Stockholder hereby waives any rights of appraisal or rights to dissent from the Merger that such Stockholder may have. (d) ATTACHMENT. Each Stockholder agrees that this Agreement and the obligations of such Stockholder hereunder shall attach to such Stockholder's Shares and shall be binding upon any Person to which legal or beneficial ownership of such Shares shall pass, whether by operation of law or otherwise. Each Stockholder agrees, if so requested by Parent, to promptly submit to the Company or its agent the certificates representing such Stockholder's Shares so that legends referencing the restrictions imposed by this Agreement may be placed on the certificates. (e) STOP TRANSFER. Each Stockholder agrees with, and covenants to, Parent that such Stockholder shall not request that the Company register the transfer (book-entry or otherwise) of any certificate or uncertificated interest representing any of such Stockholder's Shares, unless such transfer is made in compliance with this Agreement. The Company acknowledges the foregoing and agrees in furtherance thereof to issue stop transfer instructions Page 14 to the transfer agent for the Common Stock, at the request of Parent, to enforce the foregoing agreement. 12. FURTHER ASSURANCES. From time to time, at the another party's request and without further consideration, each party hereto shall execute and deliver such additional documents and take all such further action as may be necessary or desirable to consummate and make effective, in the most expeditious manner practicable, the transactions contemplated by this Agreement. 13. TERMINATION. The obligations of the Stockholders under Section 10, Section 11(a) and 11(b) shall terminate upon the first to occur of (a) the effective time of the Merger and (b) the date the Merger Agreement is terminated in accordance with its terms (the "TERMINATION DATE"). The representations and warranties of the parties hereto shall survive the consummation of the transactions contemplated hereby and by the Merger Agreement and the Termination Date. The agreements and obligations of the parties hereto shall survive in accordance with their respective terms. 14. MISCELLANEOUS. (a) ENTIRE AGREEMENT; ASSIGNMENT. This Agreement (i) constitutes the entire agreement between the parties with respect to the subject matter hereof and supersedes all other prior agreements and understandings, both written and oral, between the parties with respect to the subject matter hereof and (ii) shall not be assigned by operation of law or otherwise without the prior written consent of the other parties, provided that Parent may assign, in its sole discretion, its rights and obligations hereunder to any subsidiary or affiliate of Parent, but no such assignment shall relieve Parent of its obligations hereunder if such assignee does not perform such obligations. Subject to the foregoing limitations, this Agreement shall be binding upon and inure to the benefit of the permitted successors and permitted assigns of the parties hereto. (b) AMENDMENTS. This Agreement may not be modified, amended, altered or supplemented, except upon the execution and delivery of a written agreement executed by Parent and the parties hereto that are affected directly by such amendment. Schedule I may be supplemented by Parent by adding the name and other relevant information concerning any stockholder of the Company who is or agrees to be bound by the terms of this Agreement without the agreement of any other party hereto, and thereafter such added stockholder shall be treated as a "Stockholder" for all purposes of this Agreement. (c) NOTICES. All notices and other communications hereunder shall be in writing and shall be delivered personally, by next-day courier or mailed by registered or certified mail (return receipt requested), first class postage prepaid, or telecopied with confirmation of Page 15 receipt to the parties at the addresses specified below (or at such other addresses as shall be specified by the parties by like notice; provided, however, that notices of a change of address shall be effective only upon receipt thereof). Any such notice shall be effective upon receipt, if personally delivered or telecopied, one day after delivery to a courier for next-day delivery, or three days after mailing, if deposited in the U.S. mail, first class postage prepaid. If to the Company: Children's Discovery Centers of America, Inc. 851 Irwin Street, Suite 200 San Rafael, California 94901 Telecopy: 415-459-1374 Attn: President copy to: Farella Braun & Martel, L.L.P. 235 Montgomery Street, 30th Floor San Francisco, California 94104 Telecopy: 415-954-4480 Attn: Bruce Maximov If to a Stockholder: at the address set forth on Schedule I If to Parent: Knowledge Beginnings, Inc. 844 Moraga Drive Los Angeles, California 90049 Telecopy: 310-440-3669 Attn: President copy to: Latham & Watkins 75 Willow Road Menlo Park, California 94025 Telecopy: 650-463-2600 Attn: Peter F. Kerman, Esq. (d) GOVERNING LAW. This Agreement shall be governed by and construed in accordance with the laws of the State of Delaware, regardless of the laws that might otherwise govern under applicable principles of conflicts of laws thereof. (e) ENFORCEMENT. The parties agree that irreparable damage would occur in the event that any of the provisions of this Agreement were not performed in accordance with their specific terms or were otherwise breached. It is accordingly agreed that the parties shall be entitled to an injunction or injunctions to prevent breaches of this Agreement and to enforce Page 16 specifically the terms and provisions of this Agreement in addition to any other remedy at law or in equity. The parties further agree to waive any requirements for proving actual damages and for securing or posting of any bond in connection with obtaining any such equitable relief. If the Company or any Stockholder shall fail to perform any of its obligations under this Agreement, it hereby agrees that all reasonable fees and expenses, including reasonable attorneys' fees, which may be incurred by Parent in enforcing this Agreement shall be paid by the Company or such Stockholder, as the case may be. (f) COUNTERPARTS; EFFECTIVENESS. This Agreement may be executed in two or more counterparts, each of which shall be deemed to be an original, but both of which shall constitute one and the same Agreement. This Agreement, and all of the provisions contained herein, shall not become effective until executed by all of the parties hereto. (g) DESCRIPTIVE HEADINGS. The descriptive headings used herein are inserted for convenience of reference only and are not intended to be part of or to affect the meaning or interpretation of this Agreement. (h) SEVERABILITY. Whenever possible, each provision or portion of any provision of this Agreement will be interpreted in such manner as to be effective and valid under applicable law but if any provision or portion of any provision of this Agreement is held to be invalid, illegal or unenforceable in any respect under any applicable law or rule in any jurisdiction, such invalidity, illegality or unenforceability will not affect any provision or portion of any provision in any other jurisdiction or any other provision or portion of any provision in such same jurisdiction, and this Agreement will be reformed, construed and enforced in such jurisdiction as if such invalid, illegal or unenforceable provision or portion of any provision had never been contained herein. (i) EXPENSES. Each party shall pay its own expenses incurred in connection with this Agreement, except as otherwise specifically provided herein. (j) DEFINITIONS. For purposes of this Agreement: "BENEFICIALLY OWN" or "BENEFICIAL OWNERSHIP" and similar terms with respect to any securities shall mean having "beneficial ownership" of such securities (as determined pursuant to Rule 13d-3 under the Exchange Act), including pursuant to any agreement, arrangement or understanding, whether or not in writing. Without duplicative counting of the same securities by the same holder, securities beneficially owned by a Person shall include securities beneficially owned by all other Persons with whom such Person would constitute a "group" as described in Section 13(d)(3) of the Exchange Act. Page 17 IN WITNESS WHEREOF, Parent, the Company and each Stockholder have caused this Agreement to be duly executed as of the day and year first above written. Knowledge Beginnings, Inc. By: /s/ Ronald J. Packard ------------------------------- Title: Treasurer Name: Ronald J. Packard Children's Discovery Centers of America, Inc. By: /s/ Randall J. Truelove ------------------------------- Title: Vice President Name: Randall J. Truelove STOCKHOLDERS Proactive Partners, L.P. By: /s/ Charles C. McGettigan ------------------------------- Title: General Partner Name: Charles C. McGettigan Fremont Proactive Partners, L.P. By: /s/ Charles C. McGettigan ------------------------------- Title: General Partner Name: Charles C. McGettigan Lagunitas Partners, L.P. By: /s/ J. Patterson McBaine ------------------------------- Title: General Partner Name: J. Patterson McBaine Page 18 SCHEDULE I
Record Holder or Beneficial Owner Number of Shares Address for Notices - -------------------------- ---------------- ----------------------- Lagunitas Partners, L.P. 691,100 Charles McGettigan McGettigan, Wick & Co., Inc. 50 Osgood Place, Penthouse San Francisco, CA 94133 Proactive Partnes, L.P. 649,600 Charles McGettigan McGettigan, Wick & Co., Inc. 50 Osgood Place, Penthouse San Francisco, CA 94133 Fremont Proactive 23,000 Charles McGettigan Partners, l.P. McGettigan, Wick & Co., Inc. 50 Osgood Place, Penthouse San Francisco, CA 94133
EX-99.C3 13 EXHIBIT 99-C3 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT ("Agreement"), dated as of March 27, 1998 and effective as of the Effective Date (as defined in Section 9), is made between KNOWLEDGE BEGINNINGS, INC., a Delaware corporation ("Company"), and ELANNA YALOW ("Executive"). RECITALS: WHEREAS, pursuant to an Agreement and Plan of Merger (the "Merger Agreement"), dated as of March 27, 1998, by and among Company, KBI Acquisition Corp. ("Merger Sub") and Children's Discovery Centers of America, Inc. ("CDCR"), Company proposes to acquire not less than a majority of the outstanding shares of capital stock of CDCR; WHEREAS, Executive has been a key employee of CDCR and Company and Merger Sub deem Executive's services with Company during the term of this Agreement and Executive's covenants contained herein to be material and significant to Company's success and desire to ensure that the skills and experience of Executive will remain available to Company; WHEREAS, without Executive's agreement to become employed with Company and to provide the covenants contained herein, Company and Merger Sub would not have entered into the Merger Agreement or agreed to consummate the transactions contemplated thereby; and WHEREAS, the parties hereto desire to enter into this Agreement providing for the employment of Executive with Company and Executive's other covenants contained herein on the terms and conditions hereinafter set forth. NOW, THEREFORE, in consideration of the mutual promises and subject to the terms and conditions set forth herein, the parties hereto agree as follows: SECTION 1. EMPLOYMENT. 1.1 RESPONSIBILITIES. Effective as of the Effective Date without further action of Company or Executive, Company employs Executive, and Executive accepts employment with Company, on the terms and conditions contained in this Agreement, which such terms and conditions shall supersede the terms and conditions of Executive's employment with CDCR. Executive shall serve in such executive capacity and agrees to hold such office(s) with Company and/or its subsidiaries or affiliates as Company's Board of Directors shall from time to time designate. Executive shall carry out such responsibilities and duties as are commensurate with such position and as otherwise required hereunder in an efficient trustworthy, effective and businesslike manner. Executive's primary place of employment shall be located in the State of 1 California unless strong business reasons require that the place of employment be located outside of the State of California. 1.2 EXCLUSIVE EMPLOYMENT. During the Employment Term, Executive shall devote Executive's full business time to Executive's responsibilities under this Agreement. Without limiting the generality of the foregoing, during the Employment Term Executive shall not, without the prior written approval of Company's Board of Directors, render services of a business, professional or commercial nature to any other person, firm or corporation, whether for compensation or otherwise, except that Executive may engage in civic, philanthropic and community service activities so long as such activities do not interfere with Executive's ability to comply with this Agreement and are not otherwise in conflict with the policies or interests of Company. SECTION 2. COMPENSATION AND OTHER BENEFITS. 2.1 COMPENSATION/DEDUCTIONS. In consideration of Executive's employment, and except as otherwise provided herein, Executive shall receive from Company the compensation and benefits described in this Section 2 as full and complete satisfaction of all of Company's obligations to Executive arising from Executive's employment. The compensation and employee benefits payable to Executive pursuant to this Agreement may be changed only by the written agreement of the parties. Executive authorizes Company to deduct and withhold from all compensation to be paid to Executive any and all sums required to be deducted or withheld by Company pursuant to the provisions of any federal, state, or local law, regulation, ruling, or ordinance, including, but not limited to, income tax withholding and payroll taxes. 2.2 BASE COMPENSATION. So long as Executive remains employed with Company and fully and timely performs her responsibilities to Company, Company shall pay to Executive, and Executive shall be entitled to receive from Company, as a fixed base salary for the full time employment referred to in Section 1 hereof and all other obligations of Executive hereunder, compensation ("Base Compensation") at the rate of Two Hundred Thousand Dollars ($200,000) per annum. 2.3 BONUS. Executive shall be eligible to receive a bonus ("Bonus") of up to 50% of Executive's Base Compensation, in Company's sole and absolute discretion, for each fiscal year of Company during the Employment Term in accordance with Company bonus policy in effect from time to time. 2.4 VACATION. Executive shall be entitled to paid vacation in each fiscal year of Company during the Employment Term in accordance with Company vacation policy. Said vacation time shall be planned consistent with Executive's duties and obligations hereunder. 2.5 AUTO ALLOWANCE. Executive shall receive an automobile allowance of up to five hundred dollars ($500) per month during the Employment Term. 2 2.6 EQUITY PARTICIPATION. At such time as Company or CDCR adopts an employee equity participation program, Executive shall be eligible to be granted rights under said program during the Employment Term in an amount, at a stated price, on a vesting schedule and on such other terms and conditions as shall be determined by Company's Board of Directors, or Compensation Committee, as applicable. Upon mutual agreement of Company and Executive, Executive shall invest and/or rollover $300,000 to $500,000 in equity in Company or CDCR on mutually agreeable terms. Executive currently holds options to purchase 10,000 shares of common stock of CDCR at $4.88 per share (subject to a vesting schedule). These options will be canceled effective as of the Closing of the Merger (as defined in the Merger Agreement) and will be replaced with options, stock appreciation or other rights (with the same vesting schedule) that will result in Executive realizing an economic benefit substantially similar to the canceled options (provided that such economic benefit does not constitute an "excess parachute payment" under Section 280G of the Internal Revenue Code of 1986, as amended). 2.7 OTHER BENEFITS. Executive shall be entitled to specific and applicable employee benefits as granted to Company's employees in general all in accordance with Company's policies and guidelines as in effect from time to time. 2.8 BUSINESS EXPENSES. The Company shall pay for or reimburse Executive for all reasonable business expenses incurred by Executive in the performance of Executives's duties hereunder, upon submission to Company in accordance with Company policy of a written accounting of such expenses, which accounting shall include an itemized list of all expenses incurred, the business purposes for which such expenses were incurred, and appropriate receipts and supporting documentation. SECTION 3. EMPLOYMENT TERM AND TERMINATION. 3.1 TERM. Executive's term of employment shall commence as of the Effective Date and shall terminate on the date that is three (3) years after the Effective Date, unless terminated earlier as provided in Section 3.2, 3.3, 3.4 or 3.5 below (the "Employment Term"). Upon termination of employment, Executive shall not be entitled to receive any compensation or benefits other than as specifically provided in Section 3.2, 3.3, 3.4 or 3.5 below. 3.2 TERMINATION UPON DEATH. Executive's term of employment shall terminate upon the death of Executive; provided that Company shall pay to the estate of Executive any unpaid Base Compensation (to the extent earned as of the date of termination). 3.3 TERMINATION UPON DISABILITY. Executive's term of employment shall terminate upon the "disability" of Executive. As used herein, the term "disability" shall mean a physical or mental disability that renders Executive unable to perform Executive's normal duties for Company for a period of 90 or more days as determined in the good faith judgment of the Board of Directors of Company. Upon termination for disability, Company shall pay to Executive any unpaid Base Compensation (to the extent earned as of the date of termination). 3 3.4 TERMINATION FOR CAUSE. Company shall have the right to terminate Executive's term of employment for "Cause" by written notice to Executive. For purposes of this Agreement, a termination shall be for Cause if Executive shall (i) commit an act of fraud, embezzlement or misappropriation involving Company, (ii) be convicted of, or enter a plea of guilty or no contest to, any crime involving moral turpitude or dishonesty, (iii) commit an act, or fail to commit an act, involving Company which amounts to, or with the passage of time would amount to, willful misconduct, wanton misconduct, gross negligence or a breach of this Agreement, or (iv) willfully fail or habitually neglect to perform Executive's responsibilities and duties under this Agreement. Upon termination for Cause, Company shall pay to Executive any unpaid Base Compensation (to the extent earned as of the date of termination). 3.5 TERMINATION WITHOUT CAUSE. In the event Company terminates Executive's employment prior to the expiration of the Employment Term for other than death, disability or Cause, which Company shall have the absolute right to do, Company shall continue to pay to Executive, as severance pay, Executive's Base Compensation in accordance with Section 2.2 for a period of one (1) year after the date of termination of employment. SECTION 4. COVENANTS OF EMPLOYEE. 4.1 ACKNOWLEDGMENTS. Executive acknowledges the following: 4.1.1 ACCESS TO CONFIDENTIAL INFORMATION. Executive's services previously rendered to CDCR and to be rendered hereunder have placed Executive and shall continue to place Executive in a position of confidence and trust which shall allow Executive access to Confidential Information. As used herein, "Confidential Information" shall mean information and compilations of information relating to the business of CDCR, Company, Merger Sub and/or the affiliates of CDCR, Company and/or Merger Sub (collectively, the "Affiliates") including, but not limited to, information regarding any trade secrets, proprietary knowledge, operating procedures, finances, financial condition, projections, organization, employees, suppliers, customers, clients, agents, and other personnel, business activities, budgets, strategic or financial plans, objectives, marketing plans, prices and price lists, customer and supplier lists, operating and training materials, data bases and analyses, designs, formulaes, test data, and all strategies, documents and computer databases relating to any of the foregoing. 4.1.2 FAIR AND REASONABLE COVENANT. The type and period of restrictions imposed by the covenants in this Section 4 are fair and reasonable and such restrictions will not prevent Executive from earning a livelihood. 4.2 COVENANT AS TO NONDISCLOSURE OR USE OF CONFIDENTIAL INFORMATION. Executive agrees that at all times during and after the term of Executive's employment hereunder, Executive will maintain the Confidential Information in strictest confidence and will not, unless required to do so in the conduct of Company's operations, disclose to any individual or business enterprise of any nature, or use for Executive's own personal use or financial gain, 4 whether individually or on behalf of another person, firm, corporation or entity, any Confidential Information. Without limiting the generality of the foregoing, Executive agrees that Company's agreements with other persons may include agreements that impose obligations or restrictions regarding inventions that occur in connection with work relating to such an agreement, or regarding the confidential nature of work pursuant to such an agreement. Executive agrees to be bound by all such obligations and restrictions, and to do whatever is reasonably necessary to satisfy the obligations of Company. 4.3 ASSIGNMENT OF INVENTIONS. To the maximum extent permitted by law, Executive shall assign and transfer to Company and does hereby assign and transfer to Company Executive's entire right, title and interest in and to all inventions including, but not limited to, designs, discoveries, inventions, improvements, formulas, ideas, devices, techniques, processes, writings, trade secrets, trademarks, trademark applications, patents, copyrights and all other intellectual property rights including but not limited to notes, records, reports, software, plans, memoranda and other tangible information relating to such intellectual property, whether or not subject to protection under applicable laws, which Executive solely or jointly with others conceives, makes, acquires or suggests at any time during Executive's past employment with CDCR or present or future employment with Company and which relate in any manner to the actual or demonstrably anticipated business, products, processes, work, operations, research and development or other activities of Company, or result from or are suggested by any task assigned to Executive or any work performed by Executive for or on behalf of Company ("Inventions"). All Inventions are and shall be the sole property of Company. 4.4 DISCLOSURE OF INVENTIONS, PATENTS, COPYRIGHTS AND MASK WORK RIGHTS. Executive agrees: 4.4.1 To keep and maintain adequate and current written records of all Inventions made by Executive (in the form of notes, sketches, drawings and other forms specified by Company) while employed by Company. These records shall be available to Company and shall be and remain the sole property of Company at all times. Executive will disclose such Inventions promptly in writing to the Chief Executive Officer of Company. 4.4.2 Upon request, to promptly execute a written assignment of title to Company for any Invention required to be assigned by Section 4.3 ("assignable invention") and Executive will preserve any such assignable invention as Confidential Information. 4.4.3 Upon request, to assist Company or its nominee during and at any time subsequent to Executive's employment in every reasonable way to obtain for Company's or its nominee's benefit, patents, copyrights, mask work rights and other statutory rights ("Statutory Rights") for such assignable inventions in any and all countries, which inventions shall be and remain the sole and exclusive property of Company or its nominee whether or not patented, copyrighted or the subject of a mask work right. Executive shall execute such papers and 5 perform such lawful acts as Company deems necessary to exercise all rights, title and interest in such Statutory Rights. 4.4.4 To execute and deliver to Company or its nominee upon request all documents, including applications for and assignments of Statutory Rights to be issued therefor, as Company determines are necessary or desirable to apply for and obtain Statutory Rights on such assignable inventions in any and all countries and/or to protect the interest of Company or its nominee in Statutory Rights and to vest title thereto in Company or its nominee. 4.5 RETURN OF RECORDS, EQUIPMENT AND CONFIDENTIAL INFORMATION. Upon the earlier of termination of Executive's employment hereunder or request by Company, Executive shall promptly return to Company: (i) all Confidential Information and all documents, records, procedures, books, notebooks, and any other documentation in any form whatsoever (including, but not limited to, written, audio, video or electronic) containing any information pertaining to Company which includes Confidential Information, including any and all copies of such documentation then in Executive's possession or control regardless of whether such documentation was prepared or compiled by Executive, Company, other employees of Company, representatives, agents, or independent contractors, and (ii) all equipment or tangible personal property entrusted to Executive by Company. Executive will not retain any original, copy, description, document, data base or other form of media that contains or relates to any Confidential Information whether produced by Executive or otherwise. Without limiting the generality of the foregoing, Executive shall permanently delete all Confidential Information from all computers, disks, CD-ROMS, tapes, and other media owned or used by or accessible to Executive, other than from any of the foregoing owned, used or controlled by Company. Executive acknowledges that all Confidential Information and all such documentation, copies of such documentation, equipment, and tangible personal property are and shall at all times remain the sole and exclusive property of Company. 4.6 ADDITIONAL COVENANTS PROTECTING THE INTERESTS OF COMPANY. Executive agrees as follows: 4.6.1 That at all times during Executive's employment hereunder, Executive shall comply with Company's employee manual and other policies and procedures reasonably established by Company from time to time concerning matters such as management, supervision, recruiting, diversity, and sexual harassment. 4.6.2 That during Executive's employment hereunder, Executive shall not directly or indirectly, individually or together or through any affiliate or other person, firm, corporation, or entity engage in any other business activity which would interfere with the performance of Executive's duties hereunder including, but not limited to, engaging in any business competitive with that conducted by Company. 6 4.6.3 That for the period commencing on the Effective Date and ending two (2) years after the date of termination of Executive's employment with Company and irrespective of the duration of the Employment Term, Executive shall not directly or indirectly, individually, or together with, or through any other person, firm, corporation, or entity: (i) in any manner discourage any person or entity which is or has been a customer or supplier of Company from continuing its business relationship with Company, (ii) approach, counsel, or attempt to induce any person who is then in the employ of or an independent contractor of Company, to leave their employ or engagement, or employ, engage or attempt to employ or engage any such person, or (iii) aid or counsel any other person, firm, corporation, or entity to do any of the above. 4.6.4 That during the Covenant Term and irrespective of the duration of the Employment Term, Executive will not directly or indirectly on Executive's own behalf or on behalf of any other person, firm or entity (a) engage in; (b) own or control any interest in (except as a passive investor of less than 5% of the publicly traded stock of a publicly held company); (c) act as a director, officer, manager, employee, trustee, agent, partner, joint venturer, participant, consultant of or be obligated to, or be connected in any advisory, business or ownership capacity with; (d) lend credit or money for the purpose of the establishing or operating; or (e) allow Executive's name or reputation to be used by any firm, corporation, partnership, trust or other business enterprise directly or indirectly engaged in, any Competitive Business. As used herein, the "Covenant Term" shall mean (i) the period commencing on the Effective Date and ending one (1) year after the date of termination of Executive's employment with Company in the event of termination pursuant to Section 3.5 above, or (ii) the period commencing on the Effective Date and ending one (1) year after the date of termination of Executive's employment with Company upon expiration of the term of this Agreement, if Company offers to continue to employ Executive for an additional year at Executive's then current level of Base Compensation and Executive fails to accept such offer, or (iii) the period commencing on the Effective Date and ending on the date of termination of Executive's employment with Company upon expiration of the term of this Agreement, if Company does not offer to continue to employ Executive for an additional year at Executive's then current level of Base Compensation, or (iv) the period commencing on the Effective Date and ending two (2) years after the date of termination of Executive's employment with Company under any circumstances other than as set forth in clauses (i), (ii), or (iii) above. As used herein, "Competitive Business" shall mean (x) under the circumstances governed by clause (ii) above only, any business (including any non-profit business) that operates preschools or elementary schools anywhere in the world, or (y) under all other circumstances, any competitive business (including any non-profit business) that involves any form of early childhood or elementary education or that otherwise competes with Company anywhere in the world. Executive has carefully considered the nature and extent of the restrictions upon competition set forth herein and agrees that the same are reasonable with respect to duration and territory. 4.7 POST-EMPLOYMENT COOPERATION. Executive agrees that following Executive's termination of employment under this Agreement, Executive shall, upon Company's 7 reasonable request, in good faith and with Executive's best efforts, subject to Executive's reasonable availability, cooperate and assist Company in any dispute, controversy, or litigation in which Company may be involved and with respect to which Executive obtained knowledge while employed by Company or any of its predecessors, affiliates, successors, or assigns, including, but not limited to, Executive's participation in any court or arbitration proceedings, giving of testimony, signing of affidavits, or such other personal cooperation as counsel for Company shall request. Any such activities shall be scheduled, to the extent reasonably possible, to accommodate Executive's business and personal obligations at the time. Company shall pay Executive's reasonable travel and incidental out-of-pocket expenses incurred in connection with any such cooperation. 4.8 REMEDIES. In view of the position of confidence which Executive has and will enjoy with Company and the relationship with the clients, customers, members, and employees of Company and its affiliates pursuant to Executive's employment with Company, and recognizing both the access to confidential financial and other information which Executive has had and will have pursuant to Executive's employment and the fact that Company and Merger Sub would not have entered into the Merger Agreement or purchased the capital stock of CDCR without Executive's covenants in this Agreement, Executive expressly acknowledges that the restrictive covenants set forth in this Section 4 are reasonable and necessary in order to protect and maintain the proprietary interests and other legitimate business interests of Company and its affiliates. Executive further acknowledges that (i) it would be difficult to calculate damages to Company and its affiliates from any breach of Executive's obligations under this Section 4, (ii) that injury to Company and its affiliates from any such breach would be irreparable and impossible to measure, and (iii) that the remedy at law for any breach or threatened breach of this Section 4 would therefore be an inadequate remedy and, accordingly, Company shall, in addition to all other available remedies (including without limitation seeking such damages as it can show it and its affiliates has sustained by reason of such breach and/or the exercise of all other rights it has under this Agreement), be entitled to injunctive and other similar equitable remedies without the necessity of showing actual damages or posting bond. 4.9 THIRD PARTY BENEFICIARIES. The parties hereto acknowledge that any breach of any of the provisions of this Agreement would be damaging to the Affiliates as well as Company and the Affiliates shall therefore have the right, as third party beneficiaries, to pursue any and all remedies for any breach of the provisions of this Agreement by Executive, including but not limited to the remedies provided for in Section 4.8 hereof, as though the Affiliates are a party to this Agreement. SECTION 5. REPRESENTATIONS BY EMPLOYEE. Executive represents and warrants that Executive is free to enter into and perform each of the terms and conditions of this Agreement; that Executive is not a party to any confidentiality, non-compete or other agreement that restricts the services that may be rendered by Executive for Company; and that Executive's execution and/or performance of all Executive's 8 obligations under this Agreement does not and will not violate or breach any other agreement between Executive and any other person or entity. Executive acknowledges that but for this representation and warranty, Company would not agree to enter into this Agreement. SECTION 6. ASSIGNABILITY. This Agreement is binding upon and inures to the benefit of the parties and their respective heirs, executors, administrators, personal representatives, successors, and permitted assigns. Company may assign its rights or delegate its duties under this Agreement at any time and from time to time and upon any such assignment all references herein to Company shall include any assignee of Company. The parties acknowledge that this Agreement is personal to Executive and that the availability of Executive to perform services and the covenants provided by Executive hereunder have been a material consideration for Company to enter into this Agreement. Accordingly, Executive may not assign any of Executive's rights or delegate any of Executive's duties under this Agreement, either voluntarily or by operation of law, without the prior written consent of Company, which may be given or withheld by Company in its sole and absolute discretion. SECTION 7. NOTICES. All notices, requests, demands or other communications hereunder shall be deemed to have been duly given when delivered, addressed as follows (or at such other address as the addressed party may have substituted by notice pursuant to this Section 7): If to Executive: Elanna Yalow 427 Holcomb Ave. Larkspur, CA 94939 If to Company: Knowledge Beginnings, Inc. 844 Moraga Drive Los Angeles, CA 90049 Attention: Chief Executive Officer With a copy to: Stanley E. Maron, Esq. Maron & Sandler 844 Moraga Drive Los Angeles, CA 90049 SECTION 8. MISCELLANEOUS. 8.1 ENTIRE AGREEMENT. This Agreement and the exhibits hereto embodies the entire representations, warranties, covenants and agreements in relation to the subject matter hereof. No other representations, warranties, covenants, understandings or agreements in relation 9 hereto exist between the parties except as otherwise expressly provided herein. This Agreement supersedes any previous employment, consulting or similar agreement between CDCR and Executive. 8.2 AMENDMENT. This Agreement may not be amended except by an instrument in writing duly executed by the parties hereto. 8.3 APPLICABLE LAW; ARBITRATION. This Agreement has been made and executed under, and will be construed and interpreted in accordance with, the laws of the State of California. Any dispute, controversy or claim arising out of this Agreement or the performance, breach or termination thereof shall be settled by binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association. The place of arbitration shall be Los Angeles, California. The arbitration shall be conducted by a neutral arbitrator selected by mutual agreement of the parties within ten (10) days after notice by either party to the other requesting such arbitration. If the parties fail to agree within ten (10) days on the selection of the arbitrator, an arbitrator shall be promptly appointed by the American Arbitration Association from its Large, Complex Case Panel. Judgment upon the award rendered may be entered in any court having jurisdiction. The prevailing party shall be entitled to be awarded all costs of arbitration including, but not limited to, attorneys' fees. All information resulting from or otherwise pertaining to any dispute shall be nonpublic and handled by Company, Executive and their respective agents in such a way as to prevent the public disclosure of such information. 8.5 PROVISIONS SEVERABLE. Every provision of this Agreement is intended to be severable from every other provision of this Agreement. If any provision of this Agreement is held to be void or unenforceable, in whole or in part, the remaining provisions will remain in full force and effect, unless the remaining provisions are so eviscerated by such holding that they do not reflect the intent of the parties in entering into this Agreement. If any provision of this Agreement is held to be unreasonable or excessive in scope or duration, that provision will be deemed to be reformed and enforced to the maximum extent permitted by law. 8.6 NON-WAIVER OF RIGHTS AND BREACHES. Any waiver by a party of any breach of any provision of this Agreement will not be deemed to be a waiver of any subsequent breach of that provision, or of any breach of any other provision of this Agreement. No failure or delay in exercising any right, power, or privilege granted to a party under any provision of this Agreement will be deemed a waiver of that or any other right, power, or privilege. No single or partial exercise of any right, power, or privilege granted to a party under any provision of this Agreement will preclude any other or further exercise of that or any other right, power, or privilege. 8.7 INTERPRETATION OF AGREEMENT. Each of the parties has had the opportunity to be represented by counsel in the negotiation and preparation of this Agreement. The parties agree that this Agreement is to be construed as jointly drafted. Accordingly, this Agreement will be construed according to the fair meaning of its language, and the rule of construction that 10 ambiguities are to be resolved against the drafting party will not be employed in the interpretation of this Agreement. 8.8 GENDER AND NUMBER. Concerning the words used in this Agreement, the singular form shall include the plural form, the masculine gender shall include the feminine or neuter gender, and vice versa, as the context requires, and the word "person" shall include any natural person, partnership, corporation, limited liability company, association, trust, estate or other legal entity. 8.9 HEADINGS. The headings of the Sections and Paragraphs of this Agreement are inserted for ease of reference only, and will have no effect in the construction or interpretation of this Agreement. 8.10 COUNTERPARTS. This Agreement and any amendment or supplement to this Agreement may be executed in two or more counterparts, each of which will constitute an original but all of which will together constitute a single instrument. Transmission by facsimile of an executed counterpart signature page hereof by a party hereto shall constitute due execution and delivery of this Agreement by such party. SECTION 9. EFFECTIVE DATE. Anything contained in this Agreement to the contrary notwithstanding, the effectiveness of this Agreement is contingent upon the consummation of the Offer (as defined in the Merger Agreement) in accordance with the Merger Agreement. As used herein, the "Effective Date" shall mean a date designated by Company which such date shall be on or after the date of consummation of the Offer and on or before the date of the Closing of the Merger (as defined in the Merger Agreement) in accordance with the Merger Agreement. 11 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered as of the date first above written. "Executive" /s/ Elanna S. Yalow ------------------------------- ELANNA S. YALOW "Company" KNOWLEDGE BEGINNINGS, INC., a Delaware corporation By: /s/ Ronald J. Packard -------------------------- 12 -----END PRIVACY-ENHANCED MESSAGE-----