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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
--------------------
FORM 10-Q
(Mark One)
X QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 1999
OR
__ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission File number 000-27817
EDISON SCHOOLS INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3915075
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
521 Fifth Avenue, 15th Floor, New York, NY 10175
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (212) 419-1600
Former name, former address and former fiscal year, if changed since last report
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
(1) Yes X No (2) Yes No X
---- ---- ---- ----
The number of shares outstanding of each of the Registrant's classes of common
stock:
38,693,519
(Number of shares of Class A Common Stock Outstanding as of December 15, 1999)
3,543,800
(Number of shares of Class B Common Stock Outstanding as of December 15, 1999)
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EDISON SCHOOLS INC.
INDEX TO QUARTERLY REPORT ON FORM 10-Q
FOR THE QUARTER ENDED SEPTEMBER 30, 1999
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION PAGE
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<S> <C> <C>
ITEM 1. FINANCIAL STATEMENTS
Condensed Balance Sheets as of September 30, 1999 (unaudited) and June 30, 1999.................................3
Condensed Statements of Operations for the Three Months Ended September 30, 1999 and 1998 (unaudited)............4
Condensed Statements of Cash Flows for the Three Months Ended September 30, 1999 and 1998 (unaudited)............5
Notes to Condensed Financial Statements (unaudited) .......................................................... 6-9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS ....................................................................... 10-29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK............................................ 30
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.................................................................................. 31
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.......................................................... 31
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.................................................................... 32
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS................................................ 32
ITEM 5. OTHER INFORMATION.................................................................................. 33
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K................................................................... 33
SIGNATURES......................................................................................... 34
</TABLE>
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PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
Edison Schools Inc.
Condensed Balance Sheets
(Dollars in thousands)
<TABLE>
<CAPTION>
September 30,
1999 June 30,
ASSETS: (Unaudited) 1999
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Current assets:
<S> <C> <C>
Cash and cash equivalents ...................................................................... $ 22,113 $ 27,922
Accounts receivable ............................................................................ 15,182 12,035
Notes and other receivables .................................................................... 13,379 9,712
Other current assets ........................................................................... 2,411 1,440
--------- ---------
Total current assets .............................................................. 53,085 51,109
Property and equipment, net ...................................................................... 70,900 42,871
Restricted cash .................................................................................. 2,628 2,432
Notes and other receivables, less current portion ................................................ 3,693 3,893
Stockholder notes receivable ..................................................................... 2,508 2,478
Other assets ..................................................................................... 7,628 4,087
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Total assets ...................................................................... $ 140,442 $ 106,870
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY:
Current liabilities:
Current portion of long term debt .............................................................. $ 6,575 $ 6,661
Accounts payable ............................................................................... 18,415 12,014
Accrued expenses ............................................................................... 11,389 9,800
--------- ---------
Total current liabilities ......................................................... 36,379 28,475
Long term debt, less current portion ............................................................. 6,702 8,264
Stockholders' notes payable ...................................................................... 6,611 6,611
Other liabilities ................................................................................ 536 478
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Total liabilities ..................................................................... 50,228 43,828
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Commitments and contingencies
Stockholders' equity:
Preferred stock:
Series A-G, par value $.01; 85,531,054 and 77,931,054 shares authorized at September 30, 1999
and June 30, 1999, respectively; 63,209,579 and 56,422,341 shares issued and outstanding
at September 30, 1999 and June 30, 1999, respectively (aggregate liquidation preference of
$189,525,796 and $146,990,753 at September 30, 1999 and June 30, 1999, respectively) ....... 2,452 1,868
Common stock:
Series A-H and non-voting common, par value $.01; 57,446,590 and 53,646,590
shares authorized at September 30, 1999 and June 30, 1999, respectively; 3,107,356 shares
issued and outstanding at September 30, 1999 and June 30, 1999 ............................. 62 62
Additional paid-in capital ..................................................................... 187,035 145,877
Unearned stock-based compensation .............................................................. (4,737) (5,836)
Accumulated deficit ............................................................................ (94,598) (78,929)
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Total stockholders' equity ........................................................ 90,214 63,042
--------- ---------
Total liabilities and stockholders' equity ........................................ $ 140,442 $ 106,870
========= =========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements
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EDISON SCHOOLS INC.
CONDENSED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND 1998
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
(UNAUDITED)
1999 1998
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<S> <C> <C>
Revenue from educational services $ 41,151 $ 24,004
Education and operating expenses:
Direct site expenses 38,995 21,635
Administration, curriculum and development 10,585 5,890
Preopening expenses 3,456 2,728
Depreciation and amortization 3,587 2,391
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Total education and operating expenses 56,623 32,644
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Loss from operations (15,472) (8,640)
Other income (expense):
Interest income 889 1,097
Interest expense (787) (610)
Other expenses (299) (78)
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Total other (197) 409
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Net loss (15,669) (8,231)
Preferred stock accretion (516) (257)
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Net loss attributable to common stockholders $(16,185) $ (8,488)
======== ========
Per common share data:
Basic and diluted net loss per share $ (5.21) $ (2.73)
======== ========
Weighted average shares of common stock outstanding used
in computing basic and diluted net loss per share 3,107 3,107
======== ========
Pro forma per share data:
Pro forma basic and diluted net loss per share $ (0.46) $ (0.32)
======== ========
Pro forma weighted average shares outstanding used in
computing basic and diluted net loss per share 34,204 25,621
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements
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Edison Schools Inc.
Condensed Statements of Cash Flows
For three months ended September 30, 1999 and 1998
(Dollars in Thousands)
<TABLE>
<CAPTION>
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES: 1999 1998
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<S> <C> <C>
Net loss $(15,669) $ (8,231)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization of property and equipment 3,277 2,132
Amortization of deferred charter costs and original
issue discount (50) (15)
Stock-based compensation 1,100 1,657
Equipment loss 119 78
Changes in working capital accounts 3,900 1,192
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Cash used in operating activities (7,323) (3,187)
-------- --------
Cash flows from investing activities:
Additions to property and equipment (31,425) (13,903)
Proceeds from disposition of property and
equipment, net -- 4,445
Proceeds from notes receivable and advances due from
charter schools 683 36
Notes receivable and advances due from charter schools (3,786) (3,562)
Other assets (3,855) (281)
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Cash used in investing activities (38,383) (13,265)
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Cash flows from financing activities:
Proceeds from issuance of stock and warrants 41,741 16,512
Proceeds from notes payable -- 2,115
Payments on notes payable and capital leases (1,648) (1,191)
Restricted cash (196) 238
-------- --------
Cash provided by financing activities 39,897 17,674
-------- --------
Increase (decrease) in cash and cash equivalents (5,809) 1,222
Cash and cash equivalents at beginning of period 27,922 7,492
-------- --------
Cash and cash equivalents at end of period $ 22,113 $ 8,714
======== ========
Supplemental disclosure of cash flow information:
Cash paid during the periods for interest $ 671 $ 489
======== ========
Supplemental disclosure of non-cash investing and
financing activities:
Accretion of Series D preferred PIK dividend $ 516 $ 257
======== ========
Additions to property and equipment included in
accounts payable $ 7,413 --
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements
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EDISON SCHOOLS INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)
1. BASIS OF PRESENTATION
The unaudited condensed financial statements have been prepared by Edison
Schools Inc (the "Company") in accordance with generally accepted accounting
principles ("GAAP") for interim financial information and with the instructions
to Form 10-Q and Article 10 of Regulation S-X. In the opinion of management, all
adjustments, consisting of normal recurring items necessary to present fairly
the financial position and results of operations have been included. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with the generally accepted accounting principles have
been condensed or omitted pursuant to such SEC rules and regulations. These
financial statements should be read in conjunction with the financial statements
and related notes included in the Company's Registration Statement on Form S-1,
as amended (Registration No. 333-84177), declared effective on November 10,
1999.
The preparation of financial statements in conformity with GAAP requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosures of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Significant estimates include, among other
things, certain school revenues and expenses, useful lives of assets,
recoverability of equipment, deferred income tax valuation allowance, certain
accrued expenses and expenses in connection with stock options and warrants;
actual results could differ from these estimates.
Because new schools are opened in the first fiscal quarter of each year,
trends in the Company's business, whether favorable or unfavorable, will tend
not to be reflected in the Company's quarterly financial results, but will be
evident primarily in year-to-year comparisons. The first quarter of our fiscal
year has historically reflected less revenue and lower expenses than the other
three quarters. Historically, the Company has a lower gross site margin in the
first fiscal quarter than in the remaining fiscal quarters. The Company also
recognizes pre-opening costs primarily in the first and fourth quarters.
2. DESCRIPTION OF BUSINESS
The Company manages elementary and secondary public schools under contracts
with school districts and charter school boards located in 16 states and
Washington, D.C. The Company opened its first four school boards in the fall of
1995, and, as of September 30, 1999, operated 79 schools with approximately
38,000 students.
The Company provides the education program, recruits and manages personnel,
and maintains and operates the facilities at each school it manages. The Company
also assists charter school boards in obtaining facilities and the related
financing. As compensation for its services, the Company receives revenues which
approximate, on a per pupil basis, the average per pupil spending of the school
district in which the school is located.
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EDISON SCHOOLS INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
3. INITIAL PUBLIC OFFERING
On November 17, 1999, the Company completed an initial public offering
("IPO") in which the Company sold 6,800,000 shares of its Class A Common Stock
for net proceeds to the Company of approximately $109.3 million. Since the IPO
was completed subsequent to the reporting period ended September 30, 1999, the
Stockholders' equity section of the accompanying condensed Balance sheet
includes preferred and common shares outstanding at that time.
On October 5, 1999, the Board of Directors approved a proposal to amend and
restate the Company's certificate of incorporation. On October 26, 1999, the
amended and restated certificate of incorporation was approved by the Company's
shareholders. The amended and restated certificate of incorporation became
effective upon the closing of the IPO and, among other things, provided that
outstanding Series A through G Preferred stock converted into Class A Common
Stock upon the closing of the IPO with the number of shares upon conversion
calculated as the original purchase price of each share plus accrued and unpaid
dividends divided by the conversion price multiplied by nine-twentieths. In
addition, each preferred share converted into a number of shares of Class B
Common Stock upon the closing of the IPO calculated as the original purchase
price for each share plus accrued and unpaid dividends divided by the conversion
price multiplied by one-twentieth. Further, all outstanding shares of existing
common stock converted into nine-twentieths of a share of Class A Common stock
and one-twentieth of a Class B Common Stock upon the closing of the IPO. All
fractional shares of Class A Common Stock and Class B Common Stock were rounded
up to the next larger number. Additional information concerning the IPO and
changes in the Company's capital structure since June 30, 1999 may be found in
the financial statements and notes thereto included in the Company's
Registration Statement on Form S-1, as amended (Registration No. 333-84177).
4. NET LOSS PER SHARE AND PRO FORMA NET LOSS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share." Pursuant
to SFAS No. 128, the basic and diluted earnings per common share information has
been shown on the Condensed Statement of Operations adjusted retroactively for
the periods presented to reflect the changes in the Company's capital structure
discussed in Note 3. SFAS No. 128 also replaced primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effect of
options, warrants and convertible securities. Diluted earnings per share is very
similar to fully diluted earnings per share. Basic earnings per share is
computed using the weighted-average number of common shares outstanding during
the period. Diluted earnings per share is computed using the weighted-average
number of common and common stock equivalent shares outstanding during the
period. Common stock equivalent shares, such as convertible preferred stock,
stock options, and warrants, have been excluded from the computation, as their
effect is antidilutive for all periods presented.
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EDISON SCHOOLS INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED) - CONTINUED
The pro forma basic and diluted net loss per share is computed by dividing
the net loss by the weighted average number of shares of common stock assuming
conversion of convertible preferred stock outstanding during the period under
the if-converted method. Each outstanding share of common and preferred stock
will automatically convert into 0.45 shares of class A common stock and 0.05
shares of class B common stock pursuant to the IPO discussed above. The
calculation of pro forma net loss per share for the three month periods ended
September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
SEPTEMBER 1999 SEPTEMBER 1998
<S> <C> <C>
Net Loss......................................... $ 15,669,000 $ 8,231,000
============ ============
Common stock outstanding at July 1,.............. 3,107,356 3,107,356
Convertible preferred stock outstanding July 1,.. 28,211,171 21,724,146
Add:
Issuance of convertible preferred stock as if
converted on a weighted average basis.......... 2,885,242 789,272
------------ ------------
Pro forma weighted average number of shares
outstanding, assuming conversion of convertible
preferred stock................................ 34,203,769 25,620,774
============ ============
Pro forma net loss per share..................... $ (0.46) $ (0.32)
============ ============
</TABLE>
5. RELATED PARTY TRANSACTION
In November 1999, the Company loaned $6,620,700 to H. Christopher Whittle,
its President and Chief Executive Officer. The loan bears interest at the
greater of the prime rate or the Company's actual borrowing rate, in effect from
time to time, with payment due in full in November 2004. The proceeds from the
loan were used by Mr. Whittle to purchase an aggregate of 652,500 shares of
Class A Common Stock and 72,500 shares of Class B Common Stock for $3.00 per
share through the exercise of existing stock options, and to pay income tax
obligations resulting from the exercise of such options.
8
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EDISON SCHOOLS INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)- CONTINUED
6. LINE OF CREDIT
In November 1999, the Company obtained a line of credit from Imperial Bank
which provides for borrowings of up to $10 million (the "LOC"). The LOC is for 3
years and may be used for seasonal working capital needs and other general
corporate purposes. The interest rate on the LOC is LIBOR plus 4% and it is
collateralized by the general assets of the Company and is subject to financial
covenants and restrictions, including minimum liquidity requirements and
prohibition on the payment of dividends. As of December 15, 1999, no amounts had
been borrowed under the LOC.
7. ISSUANCE OF WARRANT
In October 1999, in connection with an equipment financing, the Company
issued to an equipment financing firm a warrant to purchase up to 30,000 shares
of Series A Common Stock at an exercise price of $6.15 per share. Upon the
closing of the IPO, each share of Series A Common Stock converted, automatically
and without additional consideration, into 0.45 shares of Class A Common Stock
and 0.05 shares of Class B Common Stock, and the warrant automatically adjusted
to become a warrant to purchase 13,500 shares of Class A Common Stock and 1,500
shares of Class B Common Stock at an exercise price of $12.30 per share.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Certain of the matters and subject areas discussed in this Quarterly Report
on Form 10-Q contain "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. All statements other than
statements of historical information provided herein are forward-looking
statements and may contain information about financial results, economic
conditions, trends and known uncertainties based on our current expectations,
assumptions, estimates and projections about our business and our industry.
These forward-looking statements involve risks and uncertainties. Our actual
results could differ materially from those anticipated in these forward-looking
statements as a result of several factors, as more fully described under the
caption "Additional Risk Factors that May Affect Future Results" and elsewhere
in this Quarterly Report. Readers are cautioned not to place undue reliance on
these forward-looking statements, which reflect management's analysis, judgment,
belief or expectation only as of the date hereof. The forward-looking statements
made in this Quarterly Report on Form 10-Q relate only to events as of the date
on which the statements are made. We undertake no obligation to publicly update
any forward-looking statements for any reason, even if new information becomes
available or other events occur in the future.
OVERVIEW
We are the nation's largest private operator of public schools serving
students from kindergarten through 12th grade. We contract with local school
districts and public charter school boards to assume educational and operational
responsibility for individual schools in return for per-pupil funding that is
generally comparable to that spent on other public schools in the area. We
opened our first four schools in August 1995 and have grown rapidly in every
subsequent year, currently serving 38,000 students in 79 schools located in 16
states across the country and the District of Columbia.
From our formation in 1992 until opening our first schools in fiscal 1996,
we were a development stage company focused on research, development and
marketing of the Edison school design and curriculum and raising capital to
support our business plan. From 1992 until 1995, Edison's team of leading
educators and scholars developed an innovative, research-backed curriculum and
school design. We operated as a partnership prior to November 1996, when we
converted to a corporation. As of September 30, 1999, our accumulated deficit
since November 1996 was approximately $94.6 million. In addition, prior to
November 1996, we incurred losses of approximately $61.8 million, which are
reflected in our additional paid-in capital. Because of our rapid growth, and in
view of the evolving nature of our business and our limited operating history,
we believe that period-to-period comparisons of our operating results may not be
meaningful.
Edison's curriculum expenses include the ongoing costs to maintain and
support Edison's educational design. These expenses include the salaries and
wages of trained educators in our central office curriculum department, the
costs of providing professional training to our staff and teachers, including
materials, and the ongoing costs of maintaining and updating the teaching
methods and educational content of our program.
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We make a significant investment in each school we open. The investment
generally includes:
- Initial staff training and professional development;
- Technology, including laptop computers for teachers and, after
the first year of operation, a computer for the home of every
child above the second grade;
- Books and other materials to support the Edison curriculum and
school design, including enrollment fees for the Success for
All reading program; and
- Upgrades in facilities.
REVENUE FROM EDUCATIONAL SERVICES
Our revenue is principally derived from contractual relationships to manage
and operate contract and charter schools. We also receive small amounts of
revenue, which represented less than 0.5% of total revenue in fiscal 1999, from
the collection of after-school program fees and food service costs. We receive
per-pupil revenue from local, state and federal sources, including Title I and
special education funding, in return for providing comprehensive education to
our students. The per-pupil revenue is generally comparable to the funding spent
on other public schools in the area. We recognize revenue for each school pro
rata over the 11 months from August through June. Because the amount of revenue
we receive for operating each school depends on the number of students enrolled,
achieving site-specific enrollment objectives is necessary for satisfactory
financial performance at the school. Both the amount of per-pupil revenue and
the initial enrollment at each school become known at the beginning of the
school year and generally tend not to vary significantly throughout the year.
For these reasons, our revenue for each school year is largely predictable at
the beginning of the school year.
DIRECT EXPENSES
Direct site expenses include most of the expenses incurred on-site at our
schools. The largest component of this expense is salaries and wages, primarily
for principals and teachers. The remaining direct site expenses include on-site
administration, facility maintenance and, in some cases, transportation and food
services. Once staffing levels for the school year are determined, most of these
expenses are fixed and, accordingly, variations in enrollment will generally not
change the overall cost structure of a school for that year. Direct site
expenses do not include teacher training and other pre-opening expenses
associated with new schools, financing costs or depreciation and amortization
related to technology, including computers for teachers and students, curriculum
materials and capital improvements to school buildings.
GROSS SITE CONTRIBUTION AND GROSS SITE MARGIN
We define gross site contribution as revenue from educational services less
direct site expenses. Gross site margin is gross site contribution expressed as
a percentage of revenue from educational services. Gross site contribution is a
measurement of ongoing site-level operating performance of our schools. We
believe it serves as a useful operating measurement when evaluating our schools'
financial performance. Gross site contribution does not reflect all site-
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related costs, including depreciation and amortization or interest expense and
principal repayment related to site-level investments, or on-site pre-opening
expenses, and accordingly gross site contribution does not represent site-level
profitability.
ADMINISTRATION, CURRICULUM AND DEVELOPMENT EXPENSES
Support from our central office is important for the successful delivery of
our curriculum and school design. Administration, curriculum and development
expenses include those amounts related to the creation and enhancement of our
curriculum, and our general, administrative and sales and marketing functions.
These costs include costs for curriculum, assessment and training professionals,
sales and marketing personnel, financial reporting and legal and technological
support and travel expenses and other development activities.
PRE-OPENING EXPENSES
Pre-opening expenses consist principally of various administrative and
personnel costs incurred prior to the opening of a new school or the expansion
of an existing school, particularly the costs for the initial training and
orientation of professional staff, recruitment and travel expenses and expenses
for temporary offices and staff. In connection with the establishment of a new
school, we seek to hire the school's principal several months in advance of the
school's opening. This allows the principal to hire staff, most of whom receive
substantial professional training in the Edison education design prior to the
first day of school. Pre-opening expenses generally are first incurred in the
fourth quarter of the fiscal year prior to the school's opening or expansion and
continue into the first quarter of the fiscal year in which the school opens.
These costs are expensed as incurred.
DEPRECIATION AND AMORTIZATION
Depreciation and amortization relates primarily to the investments we make
in each school for books and other educational materials, including enrollment
fees for the Success for All program, computers and other technology, and
facility improvements. These investments support the Edison curriculum and
school design and relate directly to our provision of educational services.
ENROLLMENT
Our annual budgeting process establishes site-specific revenue and expense
objectives, which include assumptions about enrollment and anticipated
per-student funding. While our budgets include desired enrollment levels, we do
not attempt to maximize enrollment based upon the physical capacity of our
facilities. Our budgets are designed to achieve both financial and academic
goals, both of which we believe are critical to the ongoing success of our
business. Therefore, our budgets are designed to achieve the proper balance
between financial performance and academic standards. While managed closely at
each school, our school enrollment levels are evaluated by management in the
aggregate.
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RESULTS OF OPERATIONS
FISCAL QUARTER ENDED SEPTEMBER 30, 1999 COMPARED TO FISCAL QUARTER ENDED
SEPTEMBER 30, 1998
REVENUE FROM EDUCATIONAL SERVICES. Our revenue from educational services
increased to $41.2 million for the three months ended September 30, 1999 from
$24.0 million for the same period of the prior year, an increase of 72%. The
increase was primarily due to a 59% increase in student enrollment from 23,900
in the 1997-1998 school year to 38,000 in the 1998-1999 school year, reflecting
both the opening of new schools and the expansion of existing schools.
DIRECT SITE EXPENSES. Our direct site expenses increased to $39.0 million
for the three months ended September 30, 1999 from $21.6 million for the same
period of the prior year, an increase of 80.2%. Similar to the increase in
revenue from educational services, the increase in direct site expenses was
primarily due to the 59% increase in student enrollment. The largest element of
direct site expenses is personnel costs. Personnel costs included in direct site
expenses increased to $29.1 million for the three months ended September 30,
1999 from $15.9 million for the same period of the prior year.
GROSS SITE CONTRIBUTION AND MARGIN. Our gross site contribution was $2.2
million for the three month period ended September 30, 1999 compared to $2.4
million for the same period of the prior year. The corresponding gross site
margin decreased to 5.2% for the three months ended September 30, 1999 from 9.9%
for the same period of the prior year. Though the current quarter's gross site
margin reflects a decrease from the same quarter last year, this was expected.
The prior year's first quarter's gross site contribution was unusually high as
expenses estimated for certain sites for that quarter were subsequently revised
upward and recorded later in the school year.
ADMINISTRATION, CURRICULUM AND DEVELOPMENT EXPENSES. Our administration,
curriculum and development expenses increased to $10.6 million for the three
months ended September 30, 1999 from $5.9 million for the same period of the
prior year, an increase of 79.7%. The increase was substantially due to greater
personnel costs resulting from an increase of 101 headquarters employees, which
reflects a substantial increase in staff in our school operations and
curriculum and education divisions and an increase in our central office
administrative staff to enhance legal, contracting, and financial reporting
functions. These expenses increased in part due to the additional reporting and
administrative obligations required of us in connection with operating as a
public company. Administration, curriculum and development expenses also
includes $1.1 million of non-cash stock based compensation we incurred in the
three months ended September 30, 1999 compared to $1.7 million for the same
period of the prior year. Excluding these expenses, administration, curriculum
and development and pre-opening expenses as a percentage of revenues increased
to 31.4% for the three months ended September 30, 1999 from 29.0% for the same
period of the prior year. On an annual basis, these costs as a percentage of
revenue are anticipated to trend positively from the prior year.
PRE-OPENING EXPENSES. Our pre-opening expenses increased to $3.5 million
for the three months ended September 30, 1999 from $2.7 million for the same
period of the prior year, an increase of 29.6 %. This increase was associated
primarily with opening new schools and expanding existing schools for the
1999-2000 school year, with 14,000 new students enrolled compared to
approximately 11,300 new students enrolled one year earlier.
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DEPRECIATION AND AMORTIZATION. Our depreciation and amortization increased
to $3.6 million for the three months ended September 30, 1999 from $2.4 million
for the same period of the prior year, an increase of 50%. The increased
depreciation and amortization resulted from additional capital expenditures for
our curriculum materials, computers and related technology, and facility
improvements related to our standard enrollment growth.
EBITA, NET OF OTHER CHARGES. EBITDA, net of other charges, is defined as
net loss excluding other income or loss, depreciation and amortization and
non-cash stock based compensation. This amount for the three months ended
September 30, 1999 was a negative $10.8 million compared to a negative $4.5
million for the same period of the prior year. The decline primarily resulted
from lower gross site margin and increased administration, curriculum and
development, and pre-opening expenses. On a per-student basis, negative EBITDA
increased from $192 to $284 for the same period one year ago.
OTHER INCOME AND EXPENSE. Other income and expenses was a net expense of
$197,000 for the three months ended September 30, 1999 compared to an income of
$409,000 in the same period of the prior year. The decrease was primarily due to
lower interest income resulting from lower invested cash balances, increased
interest expense from expanded borrowings and the recording of 16.5% of the net
losses of APEX Online learning, Inc, a company which provides interactive
advance placement courses for high school students over the Internet. We
invested $5.0 million in APEX in July 1999, for a 16.5% ownership interest, and
invested an additional $5.0 million in December 1999, increasing our ownership
interest to 19.8%. Because of our significant ownership interest in APEX, we
must recognize a pro rata portion of APEX's losses based upon our ownership
interest, up to a maximum amount equal to our investment in APEX.
LIQUIDITY AND CAPITAL RESOURCES
We have historically operated in a negative cash flow position. To date we
have financed our cash needs through a combination of equity and debt financing.
In July 1999, we closed on $41.7 million of new equity capital. We completed an
initial public offering of 6,800,000 shares of our Class A Common Stock in
November 1999 (the "IPO"). These shares were sold to the public $18.00 per
share, which, net of offering expenses, resulted in net proceeds of $109.3
million.
For the three months ended September 30, 1999, we used approximately $7.3
million for operating activities. This use primarily resulted from $15.7 million
of net loss partially offset by depreciation and amortization totaling $3.3
million, a $3.9 million net decrease in working capital accounts and a $1.1
million non-cash stock based compensation expense.
During the same three month period, we advanced approximately $3.8 million
to our charter board clients to help fund new or improved facilities for our
students. Additionally, in July 1999, we invested $5.0 million in APEX Online
Learning Inc., a company that provides interactive advanced placement courses
for high school students over the Internet, and acquired a 16.5% ownership
interest. In December 1999, we invested an additional $5.0 million in the APEX,
increasing our ownership interest to 19.8%.
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In November 1999, we obtained a line of credit from Imperial Bank which
provides for borrowings of up to $10 million (the "LOC"). The LOC is for 3 years
and may be used for seasonal working capital needs and other general corporate
purposes. The interest rate on the LOC is LIBOR plus 4% and it is secured by our
general assets and is subject to financial covenants and restrictions, including
the prohibition on the payment of dividends. As of December 15, 1999, no amounts
had been borrowed under the LOC.
We expect our cash on hand, including the proceeds of the IPO, borrowings
under financing arrangements to finance technology and facilities-related
expenditures together with expected repayments of advances we have made to
charter boards, will be sufficient to meet our working capital needs over the
next twelve months. As of October 31, 1999, the Company had approximately $19.9
million of available financing for its technology purchases.
Our longer term requirements are for capital to fund operational losses,
capital expenditures related to growth and for anticipated working capital needs
and general corporate purposes. We expect to fund such expenditures and other
longer term liquidity needs with cash generated from operations, the proceeds
from the IPO and expanded financing arrangements. Depending on the terms of any
financing arrangements, such funding may be dilutive to existing shareholders,
and we cannot be certain that we will be able to obtain additional financing on
favorable terms, if at all.
In general, our ability to achieve positive cash flow will be dependent on
the volume of schools with positive gross site contribution to offset central
office and overhead expenses. Because gross site contribution is the difference
between site revenues and site expenditures, positive gross site contribution
can be achieved at a range of enrollment levels. While higher enrollment tends
to have a positive effect on gross site contribution, our growth and cash flow
do not depend on 100% enrollment.
Capital expenditures for fiscal 2000 are expected to be approximately $40.0
million, which includes approximately $20.0 million for computers and other
technology and $6.0 million for curriculum materials. Additionally, we expect to
advance or lend $8.2 million to new charter board clients to help secure and
renovate properties for schools opening in the 1999-2000 school year. We are
also implementing enterprise-wide computer and software packages. Such systems
include financial reporting, payroll, purchasing, accounts payable, human
resources and other administrative modules as well as a student data and school
management package. Through September 30, 1999, we have spent approximately $4.4
million. We expect the hardware, implementation costs and other maintenance
expenditures to account for an additional $5.6 million over the next 24 to 36
months.
YEAR 2000
Many computer programs have been written using two digits rather than four
to define the applicable year. This poses a problem at the end of the century
because these computer programs may not properly recognize a year that begins
with "20" instead of "19." This, in turn, could result in major system failures
or miscalculations that could disrupt our business. We have formulated a plan to
address our year 2000 issues and have created a year 2000 task force headed by
our Chief Information Officer to implement the plan. Our year 2000 plan applies
to our
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internal business systems and compliance by external customers and providers and
has six phases:
- ORGANIZATIONAL AWARENESS: educating our employees, senior
management and the board of directors about the year 2000
issue;
- INVENTORY: conducting a complete inventory of internal
business systems and their relative priority to continuing
business operations. In addition, this phase includes a
complete inventory of critical vendors, suppliers and service
providers and their year 2000 compliance status;
- ASSESSMENT: assessing our internal business systems and the
year 2000 compliance status of our important vendors,
suppliers and service providers;
- PLANNING:: preparing the individual project plans and project
teams and other required internal and external resources to
implement the solutions for year 2000 compliance;
- EXECUTION: implementing the solutions and fixes; and
- VALIDATION: testing the solutions for year 2000 compliance.
Our year 2000 plan will apply to our internal business systems and compliance by
external customers and providers.
Internal Business Systems
Our internal business systems and workstation business application will be
a primary area of focus. Currently, we have no existing enterprise-wide business
software. We do, however, have several key site-wide and departmental
applications. The majority of these solutions are presented by their vendors as
being fully year 2000 compliant.
We have categorized all of our internal business systems as either critical
or non-critical and have completed the organizational awareness, inventory and
assessment phases for all critical internal business systems. We believe all of
our critical systems are year 2000 compliant.
We will not address the year 2000 compliance of some non-critical systems
until after January 1, 2000. However, we believe that any failure of these
systems would not cause significant disruption in our operations.
Compliance By External Providers, Contractors and Our School District and
Charter Board Clients
During calendar 1999, we completed the organizational awareness phase of
our year 2000 plan with respect to suppliers, service providers, contractors and
our school district and charter board clients to determine the extent to which
our systems are susceptible to those third parties' failure to remedy their own
year 2000 issues. We have also satisfactorily completed our inventory and
assessment faces. We noted no instances in our assessments that would lead us to
believe that material year 2000 non-compliant issues exist.
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Costs to Address Year 2000 Issues
Because we are in the position of implementing new enterprise-wide business
applications, there are few, if any, year 2000 changes required to existing
business applications. We have been informed by the vendors that all of the new
business applications implemented, or in the process of being implemented in
1999, are year 2000 compliant.
Excluding the cost of implementing our new enterprise wide system, we
currently believe that the additional costs of implementing our year 2000 plan
will not exceed $350,000 and will not have a material effect on our financial
position.
Contingency Plan
We have a contingency plan in place and will review and update the
contingency plan as needed.
Summary
We anticipate that the year 2000 issues will not have a material adverse
effect on our financial position or results of operations. We can give no
assurance, however, that the systems of our clients, other companies or
government entities, on which we rely for supplies, cash payments and future
business, will be timely converted or that a failure to convert by our clients
or government entities would not have a material adverse effect on our business.
ADDITIONAL RISK FACTORS THAT MAY AFFECT FUTURE RESULTS
Our business, operating results or financial condition could be materially
adversely affected by any of the following factors. You should also refer to the
other information set forth in this report, including our condensed financial
statements and the related notes.
WE ARE A YOUNG COMPANY, HAVING OPENED OUR FIRST SCHOOLS IN FISCAL 1996; THIS
MAKES IT DIFFICULT TO EVALUATE OUR BUSINESS
We opened our first schools and recorded our first revenue in fiscal 1996.
As a result, we have only four years of operating history on which you can base
your evaluation of our business and prospects. Our business and prospects must
be considered in light of the risks and uncertainties frequently encountered by
companies in the early stages of development, particularly companies like us who
operate in new and rapidly evolving markets. Our failure to address these risks
and uncertainties could cause our operating results to suffer and result in the
loss of all or part of your investment.
WE HAVE A HISTORY OF LOSSES AND EXPECT LOSSES IN THE FUTURE
We have incurred substantial net losses in every fiscal period since we
began operations. For the three months ended September 30, 1999, our net loss
was $15.7 million. As of September 30, 1999, our accumulated deficit since
November 1996, when we converted from a partnership to a corporation, was
approximately $94.6 million. In addition, prior to November 1996, we incurred
losses of approximately $61.8 million, which are reflected in our additional
paid-in capital. We have not yet demonstrated that public schools can be
profitably managed by private companies
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and we are not certain when we will become profitable, if at all. Our ability to
become profitable will depend upon our ability to generate and sustain higher
levels of both gross site contribution and total revenue to allow us to reduce
central expenses as a percentage of total revenue. Even if we do achieve
profitability, we may not sustain or increase profitability on a quarterly or
annual basis. Failure to become and remain profitable may adversely affect the
market price of our class A common stock and our ability to raise capital and
continue operations.
THE PRIVATE, FOR-PROFIT MANAGEMENT OF PUBLIC SCHOOLS IS A RELATIVELY NEW AND
UNCERTAIN INDUSTRY, AND IT MAY NOT BECOME PUBLICLY ACCEPTED
Our future is highly dependent upon the development, acceptance and
expansion of the market for private, for-profit management of public schools.
This market has only recently developed and we are among the first companies to
provide these services on a for-profit basis. We believe the first meaningful
example of a school district contracting with a private company to provide core
instructional services was in 1992, and we opened our first schools in August
1995. The development of this market has been accompanied by significant press
coverage and public debate concerning for-profit management of public schools.
If this business model fails to gain acceptance among the general public,
educators, politicians and school boards, we may be unable to grow our business
and the market price of our class A common stock would be adversely affected.
THE SUCCESS OF OUR BUSINESS DEPENDS ON OUR ABILITY TO IMPROVE THE ACADEMIC
ACHIEVEMENT OF THE STUDENTS ENROLLED IN OUR SCHOOLS, AND WE MAY FACE
DIFFICULTIES IN DOING SO IN THE FUTURE
We believe that our growth will be dependent upon our ability to
demonstrate general improvements in academic performance at our schools. Our
management agreements contain performance requirements related to test scores.
As average student performance at our schools increases, whether due to
improvements in achievement over time by individual students in our schools or
changes in the average performance levels of new students entering our schools,
aggregate absolute improvements in student performance will be more difficult to
achieve. If academic performance at our schools declines, or simply fails to
improve, we could lose business and our reputation could be seriously damaged,
which would impair our ability to gain new business or renew existing school
management agreements.
WE COULD INCUR LOSSES AT OUR SCHOOLS IF WE ARE UNABLE TO ENROLL ENOUGH STUDENTS
Because the amount of revenue we receive for operating each school depends
on the number of students enrolled, and because many facility and on-site
administrative costs are fixed, achieving site-specific enrollment objectives is
an important factor in our ability to achieve satisfactory financial performance
at a school. We may be unable to recruit enough students to attend all grades in
our new schools or maintain enrollment at all grades in our existing schools. We
sometimes do not have enough students to fill some grades in some schools,
particularly the higher grades. It is sometimes more difficult to enroll
students in the higher grades because older students and their parents are
reluctant to change schools. To the extent we are unable to meet or maintain
enrollment objectives at a school, the school will be less financially
successful and our financial performance will be adversely affected.
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WE ARE EXPERIENCING RAPID GROWTH, WHICH MAY STRAIN OUR RESOURCES AND MAY NOT BE
SUSTAINABLE
We have grown rapidly since we opened our first four schools in August
1995. For the 1999-2000 school year, we have grown to 79 schools. This rapid
growth has sometimes strained our managerial, operational and other resources,
and we expect that continued growth would strain these resources in the future.
If we are to manage our rapid growth successfully, we will need to continue to
hire and retain management personnel and other employees. We must also improve
our operational systems, procedures and controls on a timely basis. If we fail
to successfully manage our growth, we could experience client dissatisfaction,
cost inefficiencies and lost growth opportunities, which could harm our
operating results. We cannot guarantee that we will continue to grow at our
historical rate.
WE MAY NOT BE ABLE TO ATTRACT AND RETAIN HIGHLY SKILLED PRINCIPALS AND TEACHERS
IN THE NUMBERS REQUIRED TO GROW OUR BUSINESS
Our success depends to a very high degree on our ability to attract and
retain highly skilled school principals and teachers. For the 1999-2000 school
year we hired approximately 750 new teachers and 20 new principals. Currently,
there is a well-publicized nationwide shortage of teachers and other educators
in the United States. In addition, we may find it difficult to attract and
retain principals and teachers for a variety of reasons, including the
following:
- We generally require our teachers to work a longer day and a longer
year than most public schools;
- We tend to have a larger proportion of our schools in challenging
locations, such as low-income urban areas, which may make attracting
principals and teachers more difficult; and
- We believe we generally impose more accountability on principals and
teachers than do public schools as a whole.
These factors may increase the challenge we face in an already difficult
market for attracting principals and teachers. We have also experienced higher
levels of turnover among teachers than is generally found in public schools
nationally, which we attribute in part to these factors. If we fail to attract
and retain principals and teachers in sufficient numbers or of a sufficient
quality, we could experience client dissatisfaction and lost growth
opportunities, which would adversely affect our business.
WE ARE CURRENTLY IMPLEMENTING NEW INFORMATION SYSTEMS, WHICH COULD CAUSE
DISRUPTIONS TO OUR BUSINESS
We are currently in the process of implementing a new student information
system, as well as a new accounting, financial reporting and management
information system. We may face difficulties in integrating these systems with
our existing information and other systems. If we fail to successfully implement
and integrate these new systems, we may not have access on a timely basis to the
information we need to effectively manage our schools, our business and our
growth.
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WE MUST OPEN A LARGE NUMBER OF NEW SCHOOLS IN A SHORT PERIOD OF TIME AT THE
BEGINNING OF EACH SCHOOL YEAR AND, IF WE ENCOUNTER DIFFICULTIES IN THIS PROCESS,
OUR BUSINESS AND REPUTATION COULD SUFFER
It is the nature of our business that virtually all of the new schools we
open in any year must be opened within a few weeks of each other at the
beginning of the school year. Each new school must be substantially functional
when students arrive on the first day of school. This is a difficult logistical
and management challenge, and the period of concentrated activity preceding the
opening of the school year places a significant strain on our management and
operational functions. We expect this strain will increase if we are successful
in securing larger numbers of school management agreements in the future. If we
fail to successfully open schools by the required date, we could lose school
management agreements, incur financial losses and our reputation would be
damaged. This could seriously compromise our ability to pursue our growth
strategy.
OUR BUSINESS COULD SUFFER IF WE LOSE THE SERVICES OF KEY EXECUTIVES
Our future success depends upon the continued services of a number of our
key executive personnel, particularly Benno C. Schmidt, Jr., our Chairman of the
Board of Directors, and H. Christopher Whittle, our President and Chief
Executive Officer. Mr. Schmidt and Mr. Whittle have been instrumental in
determining our strategic direction and focus and in publicly promoting the
concept of private management of public schools. If we lose the services of
either Mr. Schmidt or Mr. Whittle, or any of our other executive officers or key
employees, our ability to grow our business would be seriously compromised and
the market price of our class A common stock may be adversely affected. Also, we
do not maintain any key man insurance on any of our executives.
WE DEPEND UPON COOPERATIVE RELATIONSHIPS WITH TEACHERS' UNIONS, BOTH AT THE
LOCAL AND NATIONAL LEVELS
With respect to contract schools, but generally not charter schools, union
cooperation at the local level is often critical to us in obtaining new
management agreements and maintaining existing management agreements. In those
school districts where applicable, provisions of collective bargaining
agreements must typically be waived in areas such as length of school day,
length of school year, negotiated compensation policies and prescribed methods
of evaluation in order to implement the Edison design at a contract school. We
regularly encounter resistance from local teachers' unions during school board
debates over whether to enter into a management agreement with us. If we fail to
achieve and maintain cooperative relationships with local teachers' unions, we
could lose business and our ability to grow could suffer, which could adversely
affect the market price of our class A common stock. In addition, at the
national level, the American Federation of Teachers and the National Education
Association have substantial financial and other resources that could be used to
influence legislation and public opinion in a way that would hurt our business.
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WE COULD BE LIABLE FOR EVENTS THAT OCCUR AT OUR SCHOOLS
We could become liable for the actions of principals, teachers and other
personnel in our schools. In the event of on-site accidents, injuries or other
harm to students, we could face claims alleging that we were negligent, provided
inadequate supervision or were otherwise liable for the injury. We could also
face allegations that teachers or other personnel committed child abuse, sexual
abuse or other criminal acts. In addition, if our students commit acts of
violence, we could face allegations that we failed to provide adequate security
or were otherwise responsible for their actions, particularly in light of recent
highly publicized incidents of school violence. Although we maintain liability
insurance, this insurance coverage may not be adequate to fully protect us from
these kinds of claims. In addition, we may not be able to obtain liability
insurance in the future at reasonable prices or at all. A successful liability
claim could injure our reputation and hurt our financial results. Even if
unsuccessful, such a claim could cause unfavorable publicity, entail substantial
expense and divert the time and attention of key management personnel.
OUR MANAGEMENT AGREEMENTS WITH SCHOOL DISTRICTS AND CHARTER BOARDS ARE
TERMINABLE UNDER SPECIFIED CIRCUMSTANCES AND GENERALLY EXPIRE AFTER A TERM OF
FIVE YEARS
Our management agreements generally have a term of five years. When we
expand by adding an additional school under an existing management agreement,
the term with respect to that school generally expires at the end of the initial
five-year period. We have limited experience in renewing management agreements,
having renewed only one management agreement covering four schools to date. We
cannot be assured that any management agreements will be renewed at the end of
their term. Management agreements representing 16 schools, accounting for 28.3%
of our total revenue for fiscal 1999, will expire at the end of the 1999-2000
school year, and management agreements representing 10 schools, accounting for
21.1% of our total revenue for fiscal 1999, will expire at the end of the
2000-2001 school year. In addition, management agreements representing 13
schools, accounting for 25.8% of our total revenue for fiscal 1999, are
terminable by the school district or charter board at will, with or without good
reason, and all of our management agreements may be terminated for cause,
including a failure to meet specified educational standards, such as academic
performance based on standardized test scores. If we fail to renew a significant
number of management agreements at the end of their term, or if management
agreements are terminated prior to their expiration, our reputation and
financial results would be adversely affected.
OUR MANAGEMENT AGREEMENTS INVOLVE FINANCIAL RISK
Under all of our management agreements, we agree to operate a school in
return for per-pupil funding that generally does not vary with our actual costs.
To the extent our actual costs under a management agreement exceed our budgeted
costs, or our actual revenue is less than planned because we are unable to
enroll as many students as we anticipated or for any other reason, we could lose
money at that school. We are generally obligated by our management agreements to
continue operating a school for the duration of the contract even if it becomes
unprofitable to do so.
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WE HAVE LIMITED EXPERIENCE OPERATING FOUR-YEAR HIGH SCHOOLS
An element of our strategy is to increase our business with existing
customers by opening new schools in school districts with whom we have an
existing relationship. An important aspect of this strategy is to open Edison
high schools in districts in which we operate elementary and middle schools. In
the 1998-1999 school year, we operated one high school through the 11th grade.
In the current school year, we added the senior year to that school and opened
our first four-year high school. Because we have just begun to operate all four
years of a high school, our complete high school curriculum, school design and
operating plan are not fully tested. In addition, school districts typically
spend more per pupil on high school education than on elementary education. By
contrast, some of our management agreements provide that we receive for each
student, regardless of grade level, the average per-pupil funding spent by the
school district for all grade levels. For this reason, in these schools we
receive less per high school student than is spent by the school district for
each of its high school students. In these situations, our success depends upon
our ability to deliver our high school design for the same per-pupil spending as
in our elementary schools. If we are unable to successfully and profitably
operate high schools, our ability to pursue our growth strategy will be
impaired, which could adversely affect the market price of our class A common
stock.
OUR LENGTHY SALES CYCLE COULD DELAY NEW BUSINESS
The time between initial contact with a potential contract or charter client
and the ultimate opening of a school, and related recognition of revenue,
typically ranges between 10 and 20 months. Our sales cycle for contract schools
is generally very long due to the approval process at the local school board
level, the political sensitivity of converting a public school to private
management and the need, in some circumstances, for cooperation from local
unions. We also have a lengthy sales cycle for charter schools for similar
reasons, as well as the need to arrange for facilities to house the school. As a
result of this lengthy sales cycle, we have only a limited ability to forecast
the timing of new management agreements. Any delay in completing, or failure to
complete, management agreements could hurt our financial performance.
WE COULD LOSE MONEY IF WE UNDERESTIMATE THE REAL ESTATE COSTS ASSOCIATED WITH
ACQUIRING OR RENOVATING A CHARTER SCHOOL
If we incur unexpected real estate cost overruns in acquiring or renovating
a charter school, we could lose money in operating the school. Our decision to
enter into a management agreement for a charter school, and our estimate of the
financial performance of the charter school, is based, in part, on the estimated
facility financing cost associated with renovating an existing facility or
building a new facility to house the charter school. This cost varies widely
from minimal amounts for minor upgrades to between $4.0 million to more than
$8.0 million for new construction. Each charter school absorbs a portion of its
facility financing costs each year through its leasing and similar expenses. If
these expenses exceed our estimates for the charter school, the charter school
could lose money and our financial results would be adversely affected.
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WE HAVE ADVANCED AND LOANED MONEY TO CHARTER SCHOOLS THAT MAY NOT BE REPAID
As of September 30, 1999, we had receivables from charter boards of
approximately $15.0 million. The amounts advanced were used to finance the
purchase or renovation of school facilities we manage. We generally have not
charged interest on these loans and advances. Approximately $5.8 million of
these receivables, representing six schools, are unsecured or subordinated to a
senior lender. Receivables of $9.2 million, representing two schools, may be
accelerated upon termination of the corresponding management agreement with the
charter school. If these loans are not repaid when due, our financial results
could be adversely affected.
WE COULD BECOME LIABLE FOR FINANCIAL OBLIGATIONS OF CHARTER BOARDS
We could have facility financing obligations for charter schools we no
longer operate, because the terms of our facility financing obligations for some
of our charter schools exceeds the term of the management agreement for those
schools. While the charter board is generally responsible for locating and
financing its own school building, the holders of school charters, which are
often non-profit organizations, typically do not have the resources required to
obtain the financing necessary to secure and maintain the school building. For
this reason, if we want to obtain a management agreement with the charter board,
we must often help the charter board arrange for the necessary financing. For
three of our charter schools, we have entered into a long-term lease for the
school facility which exceeds the current term of the management agreement by as
much as 14 years. If our management agreements were to be terminated, or not
renewed in these charter schools, our obligations to make lease payments would
continue, which could adversely affect our financial results. As of September
30, 1999, our aggregate future lease obligations totaled $24.4 million, with
varying maturities over the next 18 years. In four of our charter schools, we
have provided some type of permanent credit support for the school building,
typically in the form of loan guarantees or cash advances. We do not charge
interest on these advances. Although the term of these arrangements is
coterminous with the term of the corresponding management agreement, our
guarantee does not expire until the loan is repaid in full. The lenders under
these facilities are not committed to release us from our obligations unless
replacement credit support is provided. The default by any charter school under
a credit facility that we have guaranteed could result in a claim against us for
the full amount of the borrowings. Furthermore, in the event any charter board
becomes insolvent or has its charter revoked, our loans and advances to the
charter board may not be recoverable, which could adversely affect our financial
results. As of September 30, 1999, the amount of loans we had guaranteed totaled
$4.9 million.
OUR FINANCIAL RESULTS ARE SUBJECT TO SEASONAL PATTERNS AND OTHER FLUCTUATIONS
FROM QUARTER TO QUARTER
We expect our results of operations to experience seasonal patterns and
other fluctuations from quarter to quarter. The factors that could contribute to
fluctuations, which could have the effect of masking or exaggerating trends in
our business and which could hurt the market price of our class A common stock,
include:
- Because new schools are opened in the first fiscal quarter of each
year, increases in student enrollment and related revenue and expenses
will first be reflected in that quarter. Subsequent to the first
quarter, student enrollment is expected to remain relatively stable
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throughout a school year, and, accordingly, trends in our business,
whether favorable or unfavorable, will tend not to be reflected in our
quarterly financial results, but will be evident primarily in
year-to-year comparisons.
- - We recognize revenue for each school pro rata over the 11 months from
August through June, and we recognize no school revenue in July. Most
of our site costs are recognized over the 11 months from August through
June. For this reason, the first quarter of our fiscal year has
historically reflected less revenue and lower expenses than the other
three quarters, and we expect this pattern to continue.
- - Our recognition of site-related expenses in the first fiscal quarter is
proportionally greater than the revenue recognition because some site
expenses are incurred in July and no revenue is recorded in July. This
results in lower gross site margin in the first fiscal quarter than in
the remaining fiscal quarters. We also recognize pre-opening costs
primarily in the first and fourth quarters.
Our financial results can vary among the quarters within any fiscal year
for other reasons, including unexpected enrollment changes, greater than
expected costs of opening schools or delays in opening new schools.
WE EXPECT OUR MARKET TO BECOME MORE COMPETITIVE
We expect the market for providing private, for-profit management of public
schools will become increasingly competitive. Currently, we compete with a
relatively small number of companies which provide these services, and they have
to date primarily focused on the operation of charter schools. These companies
could, however, begin to compete with us at any time for contract schools. In
addition, a variety of other types of companies and entities could enter the
market, including colleges and universities, other private companies that
operate higher education or professional education schools and others. Our
existing competitors and these new market entrants could have financial,
marketing and other resources significantly greater than ours. We also compete
for public school funding with existing public schools, who may elect not to
enter into management agreements with private managers or who may pursue
alternative reform initiatives, such as magnet schools and inter-district choice
programs. In addition, in jurisdictions where voucher programs have been
authorized, we will begin to compete with existing private schools for public
tuition funds. Voucher programs provide for the issuance by local or other
governmental bodies of tuition vouchers to parents worth a certain amount of
money that they can redeem at any approved school of their choice, including
private schools. If we are unable to compete successfully against any of these
existing or potential competitors, our revenues could be reduced, resulting in
increased losses.
FAILURE TO RAISE NECESSARY ADDITIONAL CAPITAL COULD RESTRICT OUR GROWTH AND
HINDER OUR ABILITY TO COMPETE
We have had negative cash flow in every fiscal period since we began
operations and are not certain when we will have positive cash flow, if at all.
We do not currently have a line of credit. We have regularly needed to raise
funds in order to operate our business and may need to raise additional funds in
the future. We cannot be certain that we will be able to obtain additional
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financing on favorable terms, if at all. If we issue additional equity
securities, stockholders may experience dilution or the new equity securities
may have rights, preferences or privileges senior to those of existing holders
of class A common stock. If we cannot raise funds on acceptable terms, if and
when needed, we may not be able to take advantage of future opportunities, grow
our business or respond to competitive pressures or unanticipated requirements,
which could seriously harm our business.
WE MUST RECOGNIZE A PORTION OF ANY LOSSES OF APEX ONLINE LEARNING INC.
In July 1999, we acquired a 16.5% ownership interest in APEX Online
Learning Inc., a company which provides interactive advance placement courses
for high school students over the Internet, for $5.0 million. In December 1999,
we invested an additional $5.0 million in APEX, increasing our ownership
interest to 19.8%. Because of our significant ownership interest in APEX, we
must recognize a pro rata portion of APEX's losses based upon our ownership
interest, up to a maximum amount equal to our investment in APEX. We expect APEX
to recognize losses into the future. If APEX does not become profitable, we will
be required to recognize losses attributable to APEX, and our reported financial
performance could suffer.
WE MAY BE HURT BY THE YEAR 2000 PROBLEM
We are currently in the process of testing the information and
non-information technology systems we use internally for year 2000 compliance.
We are also determining whether critical third parties with which we do business
are year 2000 compliant. We are particularly dependent on the year 2000
compliance of our school district and charter board clients because their
failure to be year 2000 compliant could cause our receipt of payment from them
to be delayed. Our failure, or the failure of third parties with which we do
business, to be year 2000 compliant could hurt our business in a number of other
ways, including:
- The Common, our Internet-based, internal messaging and information
system, which connects all of our schools and allows parents to
communicate by e-mail with teachers and administrators, could fail,
requiring that we use other means of communications;
- The computers we use in our schools and the computers we provide to
our families could fail, disrupting the computer-based portion of our
educational program;
- We might be unable to receive materials and supplies from our vendors
that are necessary for operating our existing schools or opening new
schools;
- Heating and cooling, security and other operational systems and
equipment at our schools could fail;
- Our voicemail system could fail; and
- Our payroll and human resources software, our financial reporting
system software and other software we use could fail and cause
disruption to our business, such as delaying payment of salaries and
wages to our employees, preventing us from producing financial
information needed to manage our business, or causing other unforeseen
problems.
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<PAGE> 26
WE RELY ON GOVERNMENT FUNDS FOR SPECIFIC EDUCATION PROGRAMS, AND OUR BUSINESS
COULD SUFFER IF WE FAIL TO COMPLY WITH RULES CONCERNING THE RECEIPT AND USE OF
THE FUNDS
We benefit from funds from federal and state programs to be used for
specific educational purposes. Funding from the federal government under Title I
of the Elementary and Secondary Education Act, which provides federal funds for
children from low-income families, accounts for approximately 6% of our total
revenue. We estimate that funding from other federal and state programs accounts
for an additional 12% of our total revenue. A number of factors relating to
these government programs could lead to adverse effects on our business:
- - These programs have strict requirements as to eligible students and
allowable activities. If we or our school district and charter board
clients fail to comply with the regulations governing the programs, we
or our clients could be required to repay the funds or be determined
ineligible to receive these funds, which would harm our business.
- - If the income demographics of a district's population were to change
over the life of our management agreement for a school in the district,
resulting in a decrease in Title I funding for the school, we would
receive less revenue for operating the school and our financial results
could suffer.
- - Funding from federal and state education programs is allocated through
formulas. If federal or state legislatures or, in some case, agencies
were to change the formulas, we could receive less funding and the
growth and financial performance of our business would suffer.
- - Federal, state and local education programs are subject to annual
appropriations of funds. Federal or state legislatures or local
officials could drastically reduce the funding amount of appropriation
for any program, which would hurt our business and our ability to grow.
- - The Elementary and Secondary Education Act, including Title I, is
scheduled for reauthorization by Congress in 1999. If Congress does not
reauthorize or provide interim appropriation for the Elementary and
Secondary Education Act, we would receive less funding and our growth
and financial results would suffer.
- - Most federal education funds are administered through state and local
education agencies, which allot funds to school boards and charter
boards. These state and local education agencies are subject to
extensive government regulation concerning their eligibility for
federal funds. If these agencies were declared ineligible to receive
federal education funds, the receipt of federal education funds by our
school board or charter board clients could be delayed, which could in
turn delay our payment from our school board and charter board clients.
- - We could become ineligible to receive these funds if any of our
high-ranking employees commit serious crimes.
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<PAGE> 27
WE COULD BE SUBJECT TO EXTENSIVE GOVERNMENT REGULATION BECAUSE WE BENEFIT FROM
FEDERAL FUNDS, AND OUR FAILURE TO COMPLY WITH GOVERNMENT REGULATIONS COULD
RESULT IN THE REDUCTION OR LOSS OF FEDERAL EDUCATION FUNDS
Because we benefit from federal funds, we must also comply with a variety
of federal laws and regulations not directly related to any federal education
program, such as federal civil rights laws and laws relating to lobbying. Our
failure to comply with these federal laws and regulations could result in the
reduction or loss of federal education funds which would cause our business to
suffer. In addition, our management agreements are potentially covered by
federal procurement rules and regulations because our school district and
charter board clients pay us, in part, with funds received from federal
programs. Federal procurement rules and regulations generally require
competitive bidding, awarding contracts based on lowest cost and similar
requirements. If a court or federal agency determined that a management
agreement was covered by federal procurement rules and regulations and was
awarded without compliance with those rules and regulations, then the management
agreement could be voided and we could be required to repay any federal funds we
received under the management agreement, which would hurt our business.
WE RECEIVE ALL OF OUR REVENUE FROM PUBLIC SOURCES AND ANY REDUCTION IN GENERAL
FUNDING LEVELS FOR EDUCATION COULD HURT OUR BUSINESS
All of our revenue is derived from public sources. If general levels of
funding for public education were to decline, the field of school districts in
which we could profitably operate schools would likewise diminish, and our
ability to grow by adding new schools would suffer. In addition, our management
agreements generally provide that we bear the risk of lower levels of per-pupil
funding, which would be directly reflected in lower revenue to us, even if our
costs do not decline accordingly.
RESTRICTIONS ON GOVERNMENT FUNDING OF FOR-PROFIT SCHOOL MANAGEMENT COMPANIES
COULD HURT OUR BUSINESS
Any restriction on the use of federal or state government educational funds
by for-profit companies could hurt our business and our ability to grow. From
time to time, a variety of proposals have been introduced in state legislatures
to restrict or prohibit the management of public schools by private, for-profit
entities like us. For example, a bill filed in Minnesota that would have
prohibited for-profit entities from managing charter schools in that state was
defeated in both 1997 and 1998. A similar bill in Massachusetts was not voted
out of committee. Additionally, Idaho's charter school law may, subject to
interpretation, restrict our ability to manage schools in that state. If states
were to adopt legislation prohibiting for-profit entities from operating public
schools, the market for our services could suffer.
THE OPERATION OF OUR CHARTER SCHOOLS DEPENDS ON THE MAINTENANCE OF THE
UNDERLYING CHARTER GRANT
Our 16 charter schools operate under a charter that is typically granted by
a state authority to a third-party charter holder, such as a community group or
established non-profit organization. Our management agreement in turn is with
the charter holder or the charter board. If the state charter authority were to
revoke the charter, which could occur based on actions of the charter board
outside of our control, we would lose the right to operate that school. In
addition, many state charter school statutes require periodic reauthorization.
Charter schools accounted for
27
<PAGE> 28
33.5% of our total revenue in fiscal 1999, or $44.5 million. If state charter
school legislation were not reauthorized or were substantially altered in a
meaningful number of states, our business and growth strategy would suffer and
we could incur losses.
OUR STOCK PRICE MAY BE VOLATILE
The market price of the class A common stock may fluctuate significantly in
response to the risks discussed above, as well as other factors, some of which
are beyond our control. These other factors include:
- - Variations in our quarterly operating results;
- - Changes in securities analysts' estimates of our financial performance;
- - Changes in market valuations of similar companies;
- - Future sales of our class A common stock or other securities; and
- - General stock market volatility.
In the past, securities class action litigation has often been brought
against a company following periods of volatility in the market price of its
securities. We may in the future be the target of similar litigation. Securities
litigation could result in substantial costs and divert management's attention
and resources.
ANTI-TAKEOVER PROVISIONS OF DELAWARE LAW AND OUR CHARTER AND BYLAWS COULD
PREVENT OR DELAY A CHANGE IN CONTROL
Provisions of Delaware law, our charter and our bylaws could make it more
difficult for a third party to acquire us, even if doing so would be beneficial
to our stockholders. These provisions could limit the price that certain
investors might be willing to pay in the future for shares of class A common
stock, and could have the effect of delaying, deferring or preventing a change
in control of Edison. These provisions include:
- - The high-vote nature of the class B common stock;
- - Restrictions on removal of directors, which may only be effected for
cause and only by a vote of the holders of 80% of the class of common
stock that elected the director;
- - Section 203 of the General Corporation Law of Delaware which could have
the effect of delaying transactions with interested stockholders;
- - A prohibition of stockholder action by written consent; and
- - Procedural and notice requirements for calling and bringing action
before stockholder meetings.
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<PAGE> 29
OUR OFFICERS AND DIRECTORS EXERCISE SIGNIFICANT CONTROL OVER OUR AFFAIRS, WHICH
COULD RESULT IN THEIR TAKING ACTIONS OF WHICH OTHER STOCKHOLDERS DO NOT APPROVE
Immediately following the closing of our initial public offering, our
officers and directors and entities affiliated with them together beneficially
owned 30,824,113 shares of class A common stock and 3,424,967 shares of class B
common stock. These shares represent approximately 75.2% of the voting power of
the class A common stock, including the ability to elect six of the seven class
A directors; approximately 90.1% of the voting power of the class B common
stock, including the ability to elect all of the four class B directors; and
approximately 82.4% of the combined voting power of the class A and class B
common stock. Of the shares beneficially owned by our officers and directors and
others affiliated with them, 2,299,951 shares of class A common stock and
255,569 shares of class B common stock are subject to options exercisable within
60 days of October 1, 1999. These stockholders, if they act together, will be
able to exercise control over all matters requiring approval by our
stockholders, including the approval of significant corporate transactions. This
concentration of ownership may also have the effect of delaying or preventing a
change in control of our company and could prevent stockholders from receiving a
premium over the market price if a change of control is proposed.
In addition, immediately following the closing of the initial public
offering, H. Christopher Whittle, our President and Chief Executive Officer and
a director, beneficially owned 10,064,329 shares of class A common stock and
1,333,051 shares of class B common stock. These shares represent approximately
25.4% of the voting power of the class A common stock, including the ability to
elect two of the seven class A directors; approximately 36.6% of the voting
power of the class B common stock, including the ability to elect one of the
four class B directors; and approximately 30.7% of the combined voting power of
the class A and class B common stock. Of the shares beneficially owned by Mr.
Whittle and his affiliates, 926,752 shares of class A common stock and 102,979
shares of class B common stock are subject to options exercisable within 60 days
of October 1, 1999. Mr. Whittle and his affiliates also own options not
exercisable within 60 days of October 1, 1999 covering 3,448,201 shares of class
A common stock and 382,848 shares of class B common stock. To the extent Mr.
Whittle exercises these options, his voting power will be increased. In
addition, if the other holders of class B common stock sell a significant
portion of their class B common stock, the voting power of Mr. Whittle's class B
common stock will further concentrate. Also, if the other holders of class B
common stock reduce their common stock holdings below a specified threshold,
then their class B common stock will automatically convert into class A common
stock, further increasing Mr. Whittle's voting power. The class B common stock
generally converts into class A common stock upon its transfer. However, shares
of class B common stock transferred to Mr. Whittle do not automatically convert
into class B common stock. Consequently, Mr. Whittle can also increase his
voting power by acquiring shares of class B common stock from other
stockholders.
PLEDGES OF SHARES OF OUR COMMON STOCK BY MR. WHITTLE COULD RESULT IN VOTING
POWER SHIFTING TO THE HANDS OF HIS LENDERS
Immediately following the closing of the initial public offering, Mr.
Whittle and WSI Inc., a corporation controlled by Mr. Whittle, directly or
indirectly owned 2,967,121 shares of class A common stock and 544,510 shares of
class B common stock, including 852,429 shares of class A common stock and
94,715 shares of class B common stock which represents WSI's partnership
interest in limited partnerships that hold Edison stock. These figures include
shares issuable upon
29
<PAGE> 30
the exercise of options within 60 days of October 1, 1999. Mr. Whittle and WSI
have pledged to Morgan Guaranty Trust Company of New York all of their direct
and indirect interests in Edison to secure personal obligations. These
obligations become due in August 2002 and interest on these obligations is
payable quarterly. Of these shares, Morgan allowed WSI to pledge 500,002 shares
to another lender. Upon satisfaction of WSI's obligation to the other lender,
these shares would revert back to being pledged to Morgan. Morgan also allowed
WSI to grant options to purchase an aggregate of 65,991 of these shares to other
investors. If these options were not exercised, these shares would revert back
to being pledged to Morgan. If Mr. Whittle and WSI were to default on their
obligations to Morgan and Morgan were to foreclose on its pledge, the class B
common stock transferred directly or indirectly to Morgan would be converted
into class A common stock. Thereafter, based on current holdings, and assuming
the shares pledged to the other lender and the shares subject to options to
other investors revert to the Morgan pledge, Morgan, together with its
affiliates who are currently stockholders of Edison, would beneficially own
6,067,992 shares of class A common stock, including shares subject to options
exercisable within 60 days of October 1, 1999. The holdings of Morgan and its
affiliates would then represent 15.4% of the voting power of the class A common
stock, 9.5% of the voting power of the class B common stock and 12.0% of the
combined voting power. This would enable Morgan to exercise greater influence
over corporate matters.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We currently have market risk sensitive instruments related to interest
rates. We had outstanding long-term notes payable of $13.3 million at September
30, 1999. Interest rates on the notes are fixed and range from 15.0% to 20.4%
per annum and have terms of 36 to 48 months.
We do not believe that we have significant exposure to changing interest
rates on long-term debt because interest rates for our debt is fixed. We have
not undertaken any additional actions to cover interest rate market risk and are
not a party to any other interest rate market risk management activities.
Additionally, we do not have significant exposure to changing interest
rates on invested cash, which was approximately $22.1 million at September 30,
1999 and we generally invest cash in money market accounts and short term
investment grade marketable securities. We do not purchase or hold derivative
financial instruments for trading purposes.
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<PAGE> 31
PART II -- OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in various legal proceedings from time to time
incidental to the conduct of its business. The Company currently believes that
any ultimate liability arising out of such proceedings will not have a material
adverse effect on its financial condition or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
In October 1999, in connection with an equipment financing, the Company
issued to an equipment financing firm a warrant to purchase up to 30,000 shares
of Series A Common Stock at an exercise price of $6.15 per share. Upon the
closing of the Company's initial public offering, each share of Series A Common
Stock converted, automatically and without additional consideration, into 0.45
shares of Class A Common Stock and 0.05 shares of Class B Common Stock, and the
warrant automatically adjusted to become a warrant to purchase 13,500 shares of
Class A Common Stock and 1,500 shares of Class B Common Stock at an exercise
price of $12.30 per share.
Between July 1, 1999 and September 30, 1999, the Company issued options to
directors and employees to purchase an aggregate of 354,000 shares of Series A
Common Stock at a weighted average exercise price of $6.15 per share. Upon the
closing of the Company's initial public offering, these options automatically
adjusted to become options to purchase an aggregate of 159,300 shares of Class A
Common Stock and 17,700 shares of Class B Common Stock at a weighted average
exercise price of $12.30 per share.
In December 1999, the Company issued options under its 1999 Stock Incentive
Plan to purchase an aggregate of 39,157 shares of Class A Common Stock at a
weighted average exercise price of $12.30 per share.
No underwriters were involved in the foregoing sales of securities. Such
sales were made in reliance upon an exemption from the registration provisions
of the Securities Act of 1933, as amended (the "Securities Act"), set forth in
Section 4(2) thereof relative to sales by an issuer not involving any public
offering or the rules and regulations thereunder, or, in the case of options to
purchase Series A Common Stock, Class A Common Stock and Class B Common Stock,
Rule 701 of the Securities Act. All of the foregoing securities are deemed
restricted securities for the purposes of the Securities Act.
In connection with the Company's initial public offering, on November 10,
1999, the Securities and Exchange Commission declared the Company's Registration
Statement on Form S-1 (Registration No. 333-84177) effective. Merrill Lynch,
Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC, Credit
Suisse First Boston Corporation, Donaldson, Lufkin & Jenrette Securities
Corporation and J.P. Morgan Securities Inc., and their respective foreign
affiliates, served as the managing underwriters of the offering. On November 17,
1999, the Company sold 6,800,000 shares of its Class A Common Stock at $18.00
per share to the underwriters. The Company's net proceeds from the offering were
$109.3 million, reflecting
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gross proceeds of $122.4 million net of underwriting discount of approximately
$8.6 million and other estimated offering costs of approximately $4.5 million.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITIES HOLDERS
Pursuant to an Action by Written Consent of Stockholders in Lieu of a
Meeting, dated July 26, 1999, the holders of 5,625,523 shares of the Company's
Common Stock (out of 6,214,712 shares outstanding) and 51,182,768 shares of the
Company's convertible preferred stock (out of 61,300,389 shares outstanding)
approved changing the name of the Company from The Edison Project, Inc. to
Edison Schools Inc.
Pursuant to an Action by Written Consent of Stockholders in Lieu of a
Meeting, dated October 26, 1999, the following matters were approved by the
holders of 5,997,929 shares of the Company's Common Stock (out of 6,214,712
shares outstanding) and 61,726,362 shares of the Company's convertible preferred
stock (out of 63,209,579 shares outstanding):
(a) The Company's Fifth Amended and Restated Certificate of
Incorporation;
(b) The Company's Sixth Amended and Restated Certificate of
Incorporation, subject to the completion of the Company's
initial public offering;
(c) The Company's Second Amended and Restated By-laws, subject to
the completion of the Company's initial public offering;
(d) Ratification of the appointment of the following persons to
the Board of Directors of the Company:
H. Christopher Whittle
Benno C. Schmidt, Jr.
Virginia G. Bonker
John W. Childs
Ramon C. Cortines
Charles J. Delaney
Laura K. Eshbaugh
Robert Finzi
John B. Fullerton
Janet A. Hickey
Klas Hillstrom
Bert Kolde
Jeffrey T. Leeds
Brian P. Mathis
William F. Weld
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(e) Adoption of the 1999 Stock Incentive Plan;
(f) Ratification of the appointment of PricewaterhouseCoopers LLP
as the Company's Independent Auditors; and
(g) Corporate Cleanup.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits
10.1 Revolving Credit Agreement, dated as of November 12,
1999, between the Company and Imperial Bank
10.2 Security Agreement, dated as of November 12, 1999,
between the Company and Imperial Bank
10.3 Promissory Note, dated as of November 12, 1999,
issued by the Company in the name of Imperial Bank
27.1 Financial Data Schedule
(b) Reports on Form 8-K
On November 23, 1999, the Company filed a report on Form 8-K announcing
that on November 22, 1999, the Company issued a press release regarding a
contract with the Dallas Independent School District.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
<TABLE>
EDISON SCHOOLS INC.
<S> <C>
Date December 23, 1999 /s/ H. Christopher Whittle
----------------- ----------------------
H. Christopher Whittle
President, Chief Executive Officer and Director
Date December 23, 1999 /s/ James L. Starr
----------------- ----------------------
James L. Starr
Executive Vice President and Chief Financial Officer
(Principal Accounting Officer)
</TABLE>
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EXHIBIT INDEX
-------------
10.1 Revolving Credit Agreement, dated as of November 12,
1999, between the Company and Imperial Bank
10.2 Security Agreement, dated as of November 12, 1999,
between the Company and Imperial Bank
10.3 Promissory Note, dated as of November 12, 1999,
issued by the Company in the name of Imperial Bank
27.1 Financial Data Schedule
<PAGE> 1
EXECUTION COPY
EXHIBIT 10.1
REVOLVING CREDIT AGREEMENT
dated as of November 12, 1999
- between -
EDISON SCHOOLS INC.,
as Borrower
- and -
IMPERIAL BANK,
as Bank
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I DEFINITIONS............................................................................... 1
SECTION 1.1. Defined Terms................................................................. 1
SECTION 1.2. Use of Defined Terms.......................................................... 22
SECTION 1.3. Cross-References.............................................................. 22
SECTION 1.4. Accounting and Financial Determinations....................................... 23
SECTION 1.5. General Provisions Relating to Definitions.................................... 23
ARTICLE II COMMITMENT............................................................................... 23
SECTION 2.1 Commitment..................................................................... 23
SECTION 2.2. Commitment Amounts............................................................ 24
SECTION 2.3. The Borrowing Base............................................................ 24
ARTICLE III LOANS AND NOTES......................................................................... 24
SECTION 3.1. Borrowing Procedures.......................................................... 24
SECTION 3.2. Note.......................................................................... 25
SECTION 3.3. Principal Payments............................................................ 25
</TABLE>
-i-
<PAGE> 3
<TABLE>
<S> <C>
SECTION 3.3.1. Repayments......................................................... 25
SECTION 3.3.2. Loan Prepayments and Repayments.................................... 25
SECTION 3.4. Interest Payments............................................................. 26
SECTION 3.4.1. Interest Rates..................................................... 26
SECTION 3.4.2. Interest During Continuation of Events of Default; etc............. 27
SECTION 3.4.3. Payment Dates...................................................... 27
SECTION 3.5. Fees.......................................................................... 27
SECTION 3.5.l. Closing Fee........................................................ 28
SECTION 3.5.2. Commitment Fees.................................................... 28
SECTION 3.6. Making of Payments; Computations; etc......................................... 28
SECTION 3.6.1. Making of Payments................................................. 28
SECTION 3.6.2. Setoff. 28
SECTION 3.6.3. Due Date Extension................................................. 28
SECTION 3.6.4. Notices of Changes in Prime Rate; Notice of Eurodollar Rates....... 28
</TABLE>
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<TABLE>
<S> <C>
SECTION 3.6.5. Computations....................................................... 29
SECTION 3.6.6. Recordkeeping...................................................... 29
SECTION 3.7. Taxes......................................................................... 29
SECTION 3.8. Use of Proceeds............................................................... 29
SECTION 3.9. No Withholding................................................................ 29
SECTION 3.10. Collateral Security........................................................... 30
ARTICLE IV FUNDING OPTIONS.......................................................................... 31
SECTION 4.1. Pricing of Each Loan.......................................................... 31
SECTION 4.2. Conversion Procedures......................................................... 31
SECTION 4.3. Continuation Procedures....................................................... 31
SECTION 4.4. Limitations on Interest Periods and Continuation and Conversion Elections..... 32
SECTION 4.4.1. Interest Periods................................................... 32
SECTION 4.4.2. Conditions Precedent............................................... 32
SECTION 4.4.3. Other Limitations.................................................. 32
</TABLE>
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<TABLE>
<S> <C>
SECTION 4.5. Increased Costs............................................................... 32
SECTION 4.6. Interest Rate Inadequate or Unfair............................................ 34
SECTION 4.7. Changes in Law Rendering Eurodollar Loans Unlawful............................ 34
SECTION 4.8. Funding Losses................................................................ 34
SECTION 4.9. Discretion of Bank as to Manner of Funding.................................... 35
SECTION 4.10. Conclusiveness of Statements; Survival of Provisions......................... 35
ARTICLE V LETTERS OF CREDIT......................................................................... 35
SECTION 5.1. Requests for Letters of Credit................................................ 35
SECTION 5.2. Issuances and Extensions...................................................... 36
SECTION 5.3. Fees and Expenses............................................................. 36
SECTION 5.4. Disbursements................................................................. 36
SECTION 5.5. Reimbursement................................................................. 37
SECTION 5.6. Deemed Disbursements.......................................................... 37
SECTION 5.7. Nature of Reimbursement Obligations........................................... 38
</TABLE>
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<TABLE>
<S> <C>
SECTION 5.8. Indemnity..................................................................... 39
ARTICLE VI CONDITIONS TO CREDIT EXTENSIONS.......................................................... 39
SECTION 6.1. Conditions to Making First Credit Extensions.................................. 39
SECTION 6.1.1. Execution and Delivery of this Agreement and Note.................. 39
SECTION 6.1.2. Security Agreement; UCC Filings; etc............................... 39
SECTION 6.1.3. Other Loan Documents and Ancillary Documents....................... 40
SECTION 6.1.4. Certificates of Insurance.......................................... 40
SECTION 6.1.5. [Intentionally Omitted.]........................................... 40
SECTION 6.1.6. Closing Date Certificate........................................... 40
SECTION 6.1.7. Resolutions; etc................................................... 40
SECTION 6.1.8. Certificates of Good Standing...................................... 41
SECTION 6.1.9. Compliance Certificate............................................. 41
SECTION 6.1.10. Approvals.......................................................... 41
SECTION 6.1.11. Environmental Compliance........................................... 41
</TABLE>
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<PAGE> 7
<TABLE>
<S> <C>
SECTION 6.1.12. Opinions of Counsel................................................ 41
SECTION 6.1.13. Financial Statements............................................... 41
SECTION 6.1.14. No Materially Adverse Effect....................................... 41
SECTION 6.1.15. Fees and Expenses.................................................. 42
SECTION 6.1.16. Satisfactory Legal Form; etc....................................... 42
SECTION 6.2. All Credit Extensions......................................................... 42
SECTION 6.2.1. Compliance with Representations; Absence of Litigation; No
Default; etc..................................................... 42
SECTION 6.2.2. Credit Request..................................................... 43
SECTION 6.2.3. Legality of Transactions........................................... 43
SECTION 6.2.4. Borrowing Report................................................... 43
SECTION 6.2.5. Banking Arrangements............................................... 43
SECTION 6.3. Conditions to Effectiveness of this Agreement................................. 43
ARTICLE VII WARRANTIES; ETC......................................................................... 44
SECTION 7.1. Organization; etc............................................................. 44
</TABLE>
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<TABLE>
<S> <C>
SECTION 7.2. Power, Authority.............................................................. 44
SECTION 7.3. Validity; etc................................................................. 44
SECTION 7.4. Financial Information......................................................... 44
SECTION 7.5. Projections................................................................... 45
SECTION 7.6. Materially Adverse Effect..................................................... 45
SECTION 7.7. Existing Indebtedness; Absence of Defaults.................................... 45
SECTION 7.8. Litigation; Ancillary Documents; etc.......................................... 45
SECTION 7.9. Regulations U and X........................................................... 46
SECTION 7.10. Government Regulation......................................................... 46
SECTION 7.11. Taxes......................................................................... 47
SECTION 7.12. Compliance with ERISA......................................................... 47
SECTION 7.13. Labor Controversies........................................................... 47
SECTION 7.14. Corporate Structure; etc...................................................... 47
SECTION 7.15. Ownership of Properties; Liens................................................ 47
SECTION 7.16. Trademarks; etc............................................................... 47
</TABLE>
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<TABLE>
<S> <C>
SECTION 7.17. Collateral Documents.......................................................... 48
SECTION 7.18. Environmental Matters......................................................... 48
SECTION 7.19. Compliance with Applicable Laws............................................... 49
SECTION 7.20. Existing Investments.......................................................... 49
SECTION 7.21. Transactions with Affiliates.................................................. 49
SECTION 7.22. Year 2000 Problem............................................................. 49
SECTION 7.23. Banking Arrangements.......................................................... 49
SECTION 7.24. Representations in Loan Documents and Ancillary Documents..................... 50
ARTICLE VIII COVENANTS.............................................................................. 50
SECTION 8.1. Certain Affirmative Covenants................................................. 50
SECTION 8.1.1. Financial Information; etc......................................... 50
SECTION 8.1.2. Maintenance of Existence; etc...................................... 52
SECTION 8.1.3. Foreign Qualification.............................................. 52
SECTION 8.1.4. Payment of Taxes; etc.............................................. 53
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SECTION 8.1.5. Maintenance of Property............................................ 53
SECTION 8.1.6. Notice of Default; etc............................................. 53
SECTION 8.1.7. Books and Records.................................................. 54
SECTION 8.1.8. Compliance with Laws; etc.......................................... 55
SECTION 8.1.9. Identification of Subsidiaries; Provision of Collateral............ 55
SECTION 8.1.10. Landlord Lien Waivers.............................................. 55
SECTION 8.1.11. Year 2000 Compliance............................................... 56
SECTION 8.1.12. Banking Arrangements............................................... 56
SECTION 8.1.13. Compliance with Terms of Management Agreements; etc................ 57
SECTION 8.2. Certain Negative Covenants.................................................... 57
SECTION 8.2.1. Limitation on Lines of Business.................................... 57
SECTION 8.2.2. Indebtedness....................................................... 57
SECTION 8.2.3. Liens.............................................................. 58
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SECTION 8.2.4. Financial Covenants................................................ 58
SECTION 8.2.5. Investments and Acquisitions....................................... 58
SECTION 8.2.6. Restricted Payments................................................ 59
SECTION 8.2.7. Mergers; Sales of Property......................................... 60
SECTION 8.2.8. Limitations on Optional Payments; etc.............................. 60
SECTION 8.2.9. Modification of other Ancillary Documents; etc..................... 61
SECTION 8.2.10. Limitation on Changes in Fiscal Periods............................ 61
SECTION 8.2.11. Limitation on Negative Pledge Clauses.............................. 61
SECTION 8.2.12. Limitation on Restrictions on Subsidiary Distributions............. 61
SECTION 8.2.13. Transactions with Affiliates....................................... 61
SECTION 8.2.14. Sale of Capital Stock; etc......................................... 62
SECTION 8.2.15. Change of Location or Name......................................... 63
SECTION 8.2.16. Financial Asset Accounts........................................... 63
ARTICLE IX EVENTS OF DEFAULT........................................................................ 63
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SECTION 9.1. Events of Default............................................................. 63
SECTION 9.1.1. Non-Payment of Obligations......................................... 63
SECTION 9.1.2. Non-Performance of Certain Obligations............................. 63
SECTION 9.1.3. Non-Performance of Other Obligations............................... 63
SECTION 9.1.4. Breach of Warranty................................................. 64
SECTION 9.1.5. Default Under Other Instruments; etc............................... 64
SECTION 9.1.6. Bankruptcy, Insolvency; etc........................................ 64
SECTION 9.1.7. Judgments.......................................................... 65
SECTION 9.1.8. Impairment of Security; etc........................................ 65
SECTION 9.2. Action if Bankruptcy.......................................................... 65
SECTION 9.3. Action if Other Event of Default.............................................. 66
ARTICLE X MISCELLANEOUS............................................................................. 66
SECTION 10.1. Waivers, Amendments; etc..................................................... 66
SECTION 10.2. Notices...................................................................... 66
SECTION 10.3. Costs and Expenses........................................................... 67
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SECTION 10.4. Indemnification.............................................................. 67
SECTION 10.5. Survival..................................................................... 68
SECTION 10.6. Severability................................................................. 68
SECTION 10.7. Headings..................................................................... 68
SECTION 10.8. Counterparts; Entire Agreement............................................... 69
SECTION 10.9. CHOICE OF LAW................................................................ 69
SECTION 10.10. Successors and Assigns....................................................... 69
SECTION 10.11. Further Assurances........................................................... 69
SECTION 10.12. CONSENT TO JURISDICTION...................................................... 69
SECTION 10.13. WAIVER OF JURY TRIAL......................................................... 71
</TABLE>
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<PAGE> 14
LIST OF SCHEDULES
FIRST SCHEDULE - FINANCIAL COVENANT SCHEDULE
SECOND SCHEDULE - DISCLOSURE SCHEDULE
LIST OF EXHIBITS
EXHIBIT A - FORM OF NOTE
EXHIBIT B - FORM OF SECURITY AGREEMENT
EXHIBIT C - FORM OF TRADEMARK SECURITY AGREEMENT
EXHIBIT D - FORM OF COPYRIGHT SECURITY AGREEMENT
EXHIBIT E - FORM OF ACCOUNT AGENCY AGREEMENT
EXHIBIT F - FORM OF LOAN REQUEST
EXHIBIT G - FORM OF ISSUANCE REQUEST
EXHIBIT H - FORM OF COMPLIANCE CERTIFICATE
EXHIBIT I - FORM OF CLOSING DATE CERTIFICATE
EXHIBIT J - LEGAL OPINION OF SPECIAL COUNSEL TO THE BORROWER
<PAGE> 15
REVOLVING CREDIT AGREEMENT
REVOLVING CREDIT AGREEMENT, dated as of November 12, 1999, between
EDISON SCHOOLS INC., a Delaware corporation (hereinafter, together with its
successors in title and assigns, the "BORROWER"), and IMPERIAL BANK, a bank
organized under the laws of the State of California (hereinafter, together with
its successors in title and assigns, the "BANK").
RECITALS
The Borrower has requested the Bank to make a revolving credit facility
available to the Borrower. The proceeds of the loans and other credit extensions
under the facilities are to be used by the Borrower for working capital and for
the other purposes described in Section 3.8. The Bank is willing to make the
facility available to the Borrower and to make loans and other credit extensions
to the Borrower hereunder, all upon the terms and subject to the conditions
contained in this Agreement.
Accordingly, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. DEFINED TERMS.
The following terms, when used in this Agreement, including the
introductory paragraph and Recitals hereto, or in any of the other Loan
Documents, shall, except where the context otherwise requires, have the
following meanings:
"ACCOUNTS RECEIVABLE" means, in relation to any Person, such Person's
now owned or hereafter acquired rights to payment (a) for the rendition of
services in the ordinary course of such Person's business, or (b) under or in
respect of Management Agreements to which such Person shall from time to time be
a party, in any case under clause (a) or clause (b), whether or not evidenced by
any Instrument. The amount of any Accounts Receivable shall be determined in
accordance with GAAP.
"ACQUISITION" means any transaction, or any series of related
transactions, in which the Borrower or any of its Subsidiaries (a) acquires any
business or all or substantially all of the Property of any Person or any
division or other business unit thereof, whether through purchase of assets,
merger or otherwise, (b) directly or indirectly acquires control of at least a
majority (in number of votes) of the Voting Interests of any Person, or (c)
directly or indirectly acquires ownership or control of a majority of the Equity
Interests of any class or series of any Person.
"ADJUSTED CONSOLIDATED CAPITAL EXPENDITURES" means, in relation to the
Borrower and its Subsidiaries for any period, the Consolidated Capital
Expenditures made by the Borrower and its Subsidiaries for such period LESS the
Charter School Capital Expenditures made by the Borrower and its Subsidiaries
for such period, all as determined on a consolidated basis in accordance with
GAAP.
<PAGE> 16
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"AFFILIATE" of any Person means (a) any other Person which, directly or
indirectly, controls or is controlled by or is under common control with such
Person, or (b) any other Person who is a director, manager or officer of such
Person or of any Person described in clause (a). For purposes of this
definition, control of a Person shall mean the power, whether direct or
indirect, to direct or cause the direction of the management and policies of
such Person, whether by contract or otherwise. For purposes of this Agreement
and the other Loan Documents, (i) the Borrower shall not be or be deemed to be
an Affiliate of any of the Borrower's Subsidiaries, (ii) none of the
Subsidiaries of the Borrower, and none of the Schools, shall be or be deemed to
be an Affiliate of the Borrower or of any of the other Subsidiaries of the
Borrower, and (iii) the Bank shall not be or be deemed to be an Affiliate of the
Borrower or of any of its Subsidiaries.
"AFFILIATE TRANSACTION" means any of the following transactions or
arrangements:
(a) the making by the Borrower or any of its Subsidiaries of
any payment or prepayment (whether of principal, premium, interest or
any other sum) of or on account of, or any payment or other
distribution by the Borrower or any of its Subsidiaries on account of
the redemption, repurchase, defeasance or other acquisition for value
of, any Indebtedness of any kind whatsoever (i) of any Affiliate of the
Borrower, or (ii) of the Borrower or any of its Subsidiaries to any
Affiliate of the Borrower;
(b) the making of any loans, advances or other Investments of
any kind whatsoever by the Borrower or any of its Subsidiaries to or in
any Affiliate of the Borrower or to or in any holder of any
Indebtedness described in clause (a) of this definition;
(c) the Sale by the Borrower or any of its Subsidiaries of all
or any part of its Property to, or for the direct or indirect benefit
of, any Affiliate of the Borrower;
(d) the incurrence by the Borrower or any of its Subsidiaries
of any Indebtedness to any Affiliate of the Borrower;
(e) the declaration or payment by the Borrower or any of its
Subsidiaries of any dividends or other distributions on account of, or
the making by the Borrower or any of its Subsidiaries of any payment or
other distribution on account of the purchase, repurchase, redemption
or other acquisition for value of, any shares of Capital Stock or any
other Equity Interests or Securities of any Affiliate of the Borrower;
(f) the payment by the Borrower or any of its Subsidiaries to
any Affiliate of the Borrower of any fees or commissions of any kind,
including, without limitation, management or consulting fees,
non-competition payments or other similar fees, investment banking or
underwriting fees or commissions, arrangement, placement or syndication
fees, or brokers', finders' or other transaction fees or commissions;
or
(g) any other transaction or Contractual Obligation between
any Affiliate of the Borrower, on the one hand, and the Borrower, on
the other hand, or between any Affiliate of the Borrower, on the one
hand, and any Subsidiary of the Borrower, on the other hand.
<PAGE> 17
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For the purposes of this Agreement and the other Loan Documents, the term
"AFFILIATE TRANSACTION" shall not include any salaries, bonuses, advances or
incentive stock options paid or issued to directors, managers, officers or
employees of the Borrower or of any of its Subsidiaries in the ordinary course
of business and in all material respects consistent with the Borrower's usual
and customary business practice.
"AGENCY ACCOUNT" means any depository, securities, investment or other
similar Financial Asset Account maintained by the Borrower or any of its
Subsidiaries with an Agency Account Institution, the funds or other Property
from which shall be subject to transfer, upon the terms contained in the Agency
Account Agreement applicable thereto, to the Borrower's Concentration Account or
otherwise to the Bank or as the Bank shall direct.
"AGENCY ACCOUNT AGREEMENT" is defined in Section 8.1.12.
"AGENCY ACCOUNT INSTITUTION" means any financial institution (other
than the Bank) which (a) receives deposits directly or indirectly (whether as
the result of an interim concentration of funds in depository accounts or
otherwise) or cash, Cash Equivalents, Securities or other Property from or for
the account of the Borrower or any of its Subsidiaries, and (b) is a party to
and bound by an Agency Account Agreement as contemplated and provided by Section
8.1.12.
"AGREEMENT" means this Credit Agreement.
"AMOUNT" means, with respect to any Acquisition, all consideration paid
in respect thereof, including consideration in the form of cash, Property (as
valued at the time of such Acquisition), or the assumption of Indebtedness or
other obligations.
"ANCILLARY DOCUMENTS" means, collectively, the Governing Documents of
each of the Borrower and its Subsidiaries, the Management Agreements, the
Subordinated Debt Documents, the Real Estate Lease Agreements, and all other
Instruments that shall from time to time be identified by the Borrower and the
Bank in writing as "ANCILLARY DOCUMENTS" for purposes of this Agreement and the
other Loan Documents.
"APPLICABLE LAW" means and includes statutes and rules and regulations
thereunder and interpretations thereof by any Governmental Authority charged
with the administration or the interpretation thereof, and orders, requests,
directives, instructions and notices of any Governmental Authority.
"APPROVAL" means, relative to the Borrower or any of its Subsidiaries,
each approval, consent, filing or registration by or with any Governmental
Authority or any creditor of or any holder of Equity Interests in the Borrower
or (as the case may be) any such Subsidiary necessary to authorize or permit the
execution, delivery or performance by the Borrower or (as the case may be) such
Subsidiary of any of the Loan Documents to which it is a party or the validity
or enforceability of any of such Loan Documents against the Borrower or (as the
case may be) such Subsidiary.
"AUTHORIZED OFFICERS" is defined in Section 6.1.7.
<PAGE> 18
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"BANK" is defined in the introductory paragraph hereto.
"BANKRUPTCY CODE" means Title 11 of the United States Code.
"BANKRUPTCY OR INSOLVENCY PROCEEDING" means, with respect to any
Person, any insolvency or bankruptcy proceeding, or any receivership,
liquidation, reorganization or other similar proceeding in connection therewith,
relative to such Person or its creditors, as such, or to its Property, or any
proceeding for voluntary liquidation, dissolution, or other winding up of such
Person, whether or not involving insolvency or bankruptcy.
"BORROWER" is defined in the introductory paragraph hereto.
"BORROWER'S CONCENTRATION ACCOUNT" is defined in Section 8.1.12.
"BORROWING BASE" means, at the relevant time of reference thereto, as
contemplated and provided by Section 2.3, an amount determined by the Bank by
reference to the most recent Borrowing Base Report delivered to the Bank by the
Borrower pursuant to and in compliance with Section 6.2.4 or (as the case may
be) Section 8.1.1(c)(iii) hereof, which is equal to the greater of (a) 85% of
Eligible Trailing Revenues, or (b) 85% of Eligible Projected Revenues.
"BORROWING BASE REPORT" means a Borrowing Base Report duly executed and
delivered to the Bank by the chief financial, accounting or other senior
executive Authorized Officer of the Borrower, which Borrowing Base Report shall
be in the form prescribed from time to time by the Bank or otherwise in form and
substance reasonably satisfactory to the Bank.
"BUSINESS DAY" means a day on which commercial banks are open for
business in Boston, Massachusetts and in San Jose, California.
"CAPITAL ASSETS" means, with respect to any Person, all equipment,
fixed assets and real Property or improvements of such Person, or replacements
or substitutions therefor or additions thereto, that, in accordance with GAAP,
have been or should be reflected as additions to Property, plant or equipment on
the balance sheet of such Person or that have a useful life of more than one (1)
year.
"CAPITAL EXPENDITURES" means, with respect to any Person for any
period, (a) all expenditures made directly or indirectly by such Person during
such period for Capital Assets (whether paid in cash or other consideration or
accrued as a liability and, including, without limitation, all expenditures for
maintenance and repairs which are required, in accordance with GAAP, to be
capitalized on the books of such Person), and (b) solely to the extent not
otherwise included in clause (a) of this definition, the aggregate principal
amount of all Indebtedness (including, without limitation, Capitalized Lease
Obligations) assumed or incurred during such period in connection with any such
expenditures for Capital Assets.
"CAPITALIZED LEASE OBLIGATIONS" means, with respect to any Person, all
obligations of such Person to pay rent or other amounts under any lease of (or
other arrangements conveying the right to use) real or personal Property, or a
combination thereof, which obligations are required to be classified and
accounted for as capital leases on a balance sheet of such Person under GAAP,
and, for the purposes of this Agreement, the amount of such obligations at any
<PAGE> 19
-5-
time shall be the capitalized amount thereof at such time determined in
accordance with GAAP.
"CAPITAL STOCK" means (a) in the case of any corporation, any corporate
capital stock of any class or series, (b) in the case of any association or
business entity, any shares, interests, participations, rights or other
equivalents (howsoever designated) of corporate capital stock, and (c) in the
case of any partnership or limited liability company, partnership or membership
interests (whether general or limited).
"CASH EQUIVALENTS" means:
(a) marketable obligations or other Securities issued or
directly, fully and unconditionally guaranteed or insured by the United
States government or any agency thereof and, in each case, maturing
within one (1) year after the date of acquisition thereof;
(b) marketable direct obligations or other Securities issued
by any State of the United States or any political subdivision of any
such State or any public instrumentality thereof maturing within one
(1) year after the date of acquisition thereof and, at the time of
acquisition, having one of the three (3) highest ratings obtainable
from either Standard & Poor's Ratings Group ("S&P") or Moody's
Investors Service, Inc. ("MOODY'S");
(c) commercial paper maturing less than one (1) year after the
date of acquisition thereof, issued by a corporation organized under
the laws of any State of the United States or of the District of
Columbia and, at the time of acquisition, having one of the three (3)
highest ratings obtainable from either S&P or Moody's;
(d) certificates of deposit, time deposits, eurodollar time
deposits or bankers' acceptances maturing within one (1) year after the
date of acquisition thereof, issued by the Bank or by any other
domestic commercial bank that is a member of the Federal Reserve System
that has capital and surplus aggregating not less than $100,000,000 and
is rated A-1 (or the equivalent) or better by S&P or P-1 (or the
equivalent) or better by Moody's;
(e) repurchase agreements entered into with the Bank or any
other domestic commercial bank meeting the qualifications specified in
clause (d), secured by a perfected first-priority Lien on any
obligations of the type described in any of clauses (a) through (d),
having a fair market value at the time such repurchase agreement is
entered into of not less than 100% of the repurchase obligation
thereunder of the Bank or other commercial bank; and
(f) money market funds in which at least 85% of such funds'
assets are invested in "CASH EQUIVALENTS" of the kind described in any
of clauses (a), (b), (c) or (d).
"CERCLA" means the Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended.
<PAGE> 20
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"CHARTER SCHOOL" means any public not-for-profit charter school
established, operated or managed by the Borrower or by any of its Subsidiaries
pursuant to one or more Management Agreements to which the Borrower or any of
its Subsidiaries is a party.
"CHARTER SCHOOL CAPITAL EXPENDITURES" means, in relation to the
Borrower and its Subsidiaries for any period, all Capital Expenditures for such
period made by the Borrower and its Subsidiaries for the acquisition or
improvement of any Property, plant or equipment or other facilities of any
Charter School, all as determined on a consolidated basis in accordance with
GAAP.
"CLOSING DATE" means the date on which the first Credit Extensions are
made or to be made by the Bank to the Borrower hereunder.
"CLOSING DATE CERTIFICATE" is defined in Section 6.1.6.
"CLOSING FEE" is defined in Section 3.5.1.
"CODE" means the Internal Revenue Code of 1986, as amended, reformed or
otherwise modified from time to time.
"COLLATERAL" means, collectively, any and all collateral provided by
the Borrower and its Subsidiaries to the Bank from time to time under the
Collateral Documents and other Loan Documents.
"COLLATERAL DOCUMENTS" means, collectively, the Security Agreements,
the Agency Account Agreements and all other Instruments executed and delivered
to the Bank pursuant to Section 6.1.2, all Instruments executed and delivered to
the Bank pursuant to Section 3.10 or Section 8.1.9 from time to time after the
date hereof, and all other Instruments that shall from time to time after the
date hereof be identified in writing by the Bank and the Borrower as "COLLATERAL
DOCUMENTS" for purposes of this Agreement and the other Loan Documents.
"COLLECTION LOCKBOX" is defined in Section 6.2.5.
"COLLECTION PERIOD" means, in relation to each fiscal month of the
Borrower and its Subsidiaries ending on or after the date hereof, the period of
three (3) consecutive fiscal months of the Borrower ending on the last day of
such fiscal month.
"COMMITMENT" means the Bank's obligations pursuant to Section 2.1 to
make Loans and other Credit Extensions.
"COMMITMENT AMOUNT" is defined in Section 2.2.
"COMMITMENT FEES" is defined in Section 3.5.2.
"COMMITMENT TERMINATION DATE" means the third Business Day prior to the
Final Maturity Date.
"COMPLIANCE CERTIFICATE" means a certificate duly executed by an
Authorized Officer of
<PAGE> 21
-7-
the Borrower, substantially in the form of Exhibit H attached hereto (with such
changes thereto as may be agreed upon from time to time by the Bank and the
Borrower), for purposes of monitoring the compliance of the Borrower and its
Subsidiaries with the Loan Documents.
"CONSOLIDATED CAPITAL EXPENDITURES" means, in relation to any Person
and its Subsidiaries for any period, all Capital Expenditures by such Person and
its Subsidiaries for such period, all as determined on a consolidated basis in
accordance with GAAP.
"CONTINGENT OBLIGATION" means, in relation to any Person, any direct or
indirect liability, contingent or otherwise, of that Person (a) with respect to
any Indebtedness, lease, dividend, letter of credit or other obligation of
another Person if the primary purpose or intent thereof by the Person incurring
the Contingent Obligation is to provide assurance to the obligee of such
obligation that such obligation will be paid, or that any agreements relating
thereto will be complied with, or that the holders of such obligation will be
protected (in whole or in part) against loss in respect thereof, (b) with
respect to any letter of credit issued for the account of that Person or as to
which that Person is otherwise liable for reimbursement of drawings, or (c)
under Hedge Agreements. Contingent Obligations shall in any event include: (i)
any direct or indirect guaranty, endorsement (otherwise than for collection or
deposit in the ordinary course of business), co-making, discounting with
recourse or Sale with recourse by such Person of the obligation of another
Person; and (ii) any liability of such Person for the obligation of another
through any agreement (contingent or otherwise) to purchase, repurchase or
otherwise acquire such obligation or any security therefor, or to provide funds
for the payment or discharge of such obligation (whether in the form of loans,
capital contributions, other Investments or otherwise).
"CONTINUATION/CONVERSION NOTICE" means a notice, signed by an
Authorized Officer of the Borrower, complying with the requirements of Section
4.2 or 4.3, as applicable, or otherwise in form and substance reasonably
satisfactory to the Bank.
"CONTRACTUAL OBLIGATION" means, in relation to any Person, any
agreement or obligation under any Securities issued by such Person or under any
Instrument or undertaking to which such Person is a party or by which it or any
of its Property is bound.
"COPYRIGHT SECURITY AGREEMENT" means a Copyright Security Agreement, in
or substantially in the form of Exhibit D attached hereto, to be executed and
delivered by the Borrower in favor of the Bank pursuant to the Security
Agreement.
"CORPORATION" means, unless the context otherwise requires, any
corporation, limited liability company, association, joint stock company,
business trust or other similar business organization or business enterprise.
"CREDIT EXTENSION" means (a) the advancing of Loans by the Bank to the
Borrower pursuant to Article II and Article III, and (b) the issuance or
extension by the Bank of Letters of Credit pursuant to Article V.
"CREDIT REQUEST" means any Loan Request or Issuance Request.
"DEFAULT" means any Event of Default or any condition or event which,
after notice or
<PAGE> 22
-8-
the lapse of time, or both, would become an Event of Default.
"DISBURSEMENT" is defined in Section 5.4.
"DISBURSEMENT DATE" is defined in Section 5.4.
"DISCLOSURE SCHEDULE" means the Disclosure Schedule attached hereto as
the Second Schedule.
"DOLLARS" and the sign "$" mean lawful money of the United States.
"DOMESTIC OFFICE" means, in relation to the Bank, 226 Airport Parkway,
San Jose, California, or such other office of the Bank within the United States
as may be designated from time to time by prior written notice from the Bank to
the Borrower, by and through which each of the Loans and other Credit Extensions
will be made by the Bank hereunder.
"DRAWDOWN DATE" means any date (which must be a Business Day) on which
any Loan is made or to be made to the Borrower pursuant to Section 3.1.
"EFFECTIVE DATE" means the date of this Agreement.
"ELIGIBLE PROJECTED REVENUES" means, with respect to the Borrower and
its Subsidiaries as at the last day of any fiscal month, the aggregate amount of
all cash which the Borrower, on the basis of reasonable assumptions made in good
faith by the Borrower, projects will be received in the Borrower's Concentration
Account as payment on account of Net Revenues Receivables during the Projected
Collection Period ending on the last day of the third fiscal month following
such fiscal month.
"ELIGIBLE TRAILING REVENUES" means, with respect to the Borrower and
its Subsidiaries as at the last day of any fiscal month, the aggregate amount of
all cash actually received in the Borrower's Concentration Account as payment on
account of Net Revenues Receivables during the Collection Period ending on the
last day of such fiscal month. Notwithstanding the foregoing, as at the last day
of each fiscal month ending during the period commencing on the Closing Date and
continuing through December 31, 1999, Eligible Trailing Revenues shall mean the
aggregate amount of all cash actually received by the Borrower and its
Subsidiaries (either directly or through one or more depository banks) as
payment on account of Net Revenues Receivables during the Collection Period
ending on the last day of such fiscal month, all as more fully described in the
Borrowing Base Report as at the close of such fiscal month and in the other
reports and supporting information delivered by the Borrower to the Bank to
confirm the Borrowing Base calculations as of the last day of such fiscal month
"ENVIRONMENTAL LAWS" means all Applicable Laws relating to health and
safety matters or protection of the environment or relating to or imposing
liability or standards of conduct concerning any hazardous, toxic or dangerous
waste, substance, material or pollutant, in each case, as in effect from time to
time.
"EQUITY INTERESTS" means Capital Stock and all warrants, options or
other rights to purchase or otherwise acquire Capital Stock (but excluding any
debt Securities that are
<PAGE> 23
-9-
convertible into, or exchangeable for, Capital Stock).
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and any successor statute of similar import, together with the
regulations thereunder, in each case, as in effect from time to time.
"EURODOLLAR LOAN" means any Loan which bears interest at a rate
determined by reference to the Eurodollar Rate (Reserve Adjusted).
"EURODOLLAR OFFICE" means, in relation to the Bank, 226 Airport
Parkway, San Jose, California, or such other office, whether or not outside the
United States, of the Bank as may be designated from time to time, by written
notice from the Bank to the Borrower, as the office from which the Bank shall be
making or maintaining Eurodollar Loans hereunder.
"EURODOLLAR RATE" means, in relation to each Interest Period applicable
to any Eurodollar Loan, the rate of interest per annum determined by the Bank to
be the offered rate per annum at which deposits in Dollars appears on Telerate
Page 3750 (or any successor page) as of 11:00 a.m., London time two (2) Business
Days prior to the beginning of such Interest Period, or in the event such
offered rate is not available from the Telerate Page, the rate per annum
(rounded upwards, if necessary, to the nearest 1/16 of 1%) determined by the
Bank as the annual rate at which the Bank is offered Dollar deposits in
immediately available funds two (2) Business Days prior to the beginning of such
Interest Period by prime banks in the interbank eurodollar market as at or about
1:00 p.m., San Jose, California time, in each case, for delivery on the first
day of such Interest Period, for the number of days comprised therein and in an
amount substantially equal to the amount of the Eurodollar Loan for such
Interest Period.
"EURODOLLAR RATE MARGIN" means, with respect to the principal amount of
any Loans maintained as Eurodollar Loans, four percent (4.0%) per annum.
"EURODOLLAR RATE (RESERVE ADJUSTED)" means, with respect to any
Eurodollar Loan for any Interest Period, a rate per annum (rounded upwards, if
necessary, to the nearest 1/16 of 1%) determined pursuant to the following
formula:
Eurodollar Rate = Eurodollar Rate
-----------------------------
(Reserve Adjusted) 1 - Eurodollar Reserve Percentage
"EURODOLLAR RESERVE PERCENTAGE" means, with respect to any Eurodollar
Loan for any Interest Period, a percentage (expressed as a decimal) equal to the
daily average during such Interest Period of the maximum percentages in effect
on each day of such Interest Period, as prescribed by the F.R.S. Board, for
determining the maximum reserve requirements applicable to "EUROCURRENCY
LIABILITIES" pursuant to Regulation D or any other applicable regulation of the
F.R.S. Board that prescribes reserve requirements applicable to "EUROCURRENCY
LIABILITIES" as currently defined in Regulation D.
"EVENT OF DEFAULT" is defined in Section 9.1.
"EXCLUDED ACCOUNT" is defined in Section 8.1.12(b).
<PAGE> 24
-10-
"EXCLUDED EQUIPMENT" means (a) in relation to the Borrower, "Excluded
Equipment" of the Borrower as defined in the Security Agreement, and (b) in
relation to any Subsidiary of the Borrower, equipment of such Subsidiary from
time to time located or used, or otherwise intended to be located or used, in or
at the location of any of the Schools from time to time operated, managed or
administered by such Subsidiary.
"FAIR MARKET VALUE" means, with respect to any Property, the price
which could be negotiated in an arm's length free market transaction, for cash,
between a willing seller and a willing and able buyer, neither of whom is under
undue pressure or compulsion to complete the transaction.
"FEDERAL FUNDS RATE" means, for any day, the rate set forth in the
daily statistical release designated as the Composite 3:30 p.m. Quotations for
U.S. Government Securities, or any successor publication, published by the
Federal Reserve Bank of New York (including any such successor publication, the
"COMPOSITE 3:30 P.M. QUOTATIONS") for such day under the caption "Federal Funds
Effective Rate". If such rate is not published in the Composite 3:30 p.m.
Quotations for any Business Day, the rate for such day will be the arithmetic
mean of the rates for the last transaction in overnight federal funds arranged
prior to 9:00 a.m., New York City time, on such day by each of three brokers of
recognized national standing dealing in federal funds transactions in New York
City, selected by the Bank. The Federal Funds Rate for any day which is not a
Business Day shall be the rate for the immediately preceding Business Day.
"FEES" means, collectively, the Closing Fee, the Commitment Fees and
the Letter of Credit Fees payable pursuant to Section 5.3.
"FINANCIAL ASSET ACCOUNT" means any depository, securities, investment
or other similar account maintained by the Borrower or any of its Subsidiaries
with any bank or other financial institution with respect to the funds, Cash
Equivalents, securities or other Property from time to time owed by the
Borrower.
"FINANCIAL COVENANT SCHEDULE" means the Financial Covenant Schedule
attached hereto as the First Schedule.
"FINAL MATURITY DATE" means November 30, 2002.
"F.R.S. BOARD" means the Board of Governors of the Federal Reserve
System.
"GAAP" is defined in Section 1.4.
"GOVERNING DOCUMENTS" means, with respect to any Person, the
certificate of incorporation or registration (including, if applicable,
certificate of change of name), articles of incorporation or association,
memorandum of association, charter, bylaws, partnership agreement, trust
agreement, joint venture agreement, limited liability company operating or
members agreement, joint venture agreement, or any one or more similar
agreements, Instruments or documents constituting the organization or formation
of such Person.
"GOVERNMENTAL AUTHORITY" means any nation or government, any state,
province, city, municipal entity or other political subdivision thereof, and any
governmental, executive,
<PAGE> 25
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legislative, judicial, administrative or regulatory agency, department,
authority, instrumentality, commission, board or similar body, whether federal,
state, provincial, territorial, local or foreign, including, without limitation,
any school district or board of education thereof.
"GROUP" as defined in Section 4.1.
"HAZARDOUS MATERIAL" means and includes the following: any "hazardous
substance", as defined in CERCLA; any "hazardous waste", as defined in the
Resource Conservation and Recovery Act, as amended; any petroleum product; or
any pollutant or contaminant or hazardous, dangerous or toxic chemical, material
or substance within the meaning of any other applicable Environmental Laws.
"HEDGE AGREEMENTS" means interest rate swap, cap or collar
arrangements, interest rate future or option contracts, currency swap
agreements, currency future or option contracts and other similar arrangements.
"HISTORICAL FINANCIALS" is defined in Section 7.4.
"IMPERMISSIBLE QUALIFICATION" means, relative to the opinion or
certification of the Independent Public Accountant as to any financial statement
of the Borrower or any of its Subsidiaries, any qualification or exception to
such opinion or certification:
(a) which is of a "going concern" or similar nature;
(b) which relates to the limited scope of examination of
matters relevant to such financial statement; or
(c) which relates to the treatment or classification of any
item in such financial statement and which, as a condition to its
removal, would require an adjustment to such item the effect of which
would be to cause the Borrower to be in default of any of its
Obligations under Section 8.2.4.
"INCUR" means, with respect to any Indebtedness of any Person, to
create, issue, incur (by conversion, exchange or otherwise), assume, guarantee
or otherwise become liable in respect of such Indebtedness or the recording, as
required pursuant to GAAP or otherwise, of any such Indebtedness on the balance
sheet of such Person (and "INCURRENCE", "INCURRED", and "INCURRING" shall have
meanings correlative to the foregoing).
"INDEBTEDNESS" means, in relation to any Person as at any date, without
duplication, (a) all indebtedness of such Person for borrowed money, (b) all
indebtedness of such Person for the deferred purchase price of Property or
services (other than accounts or trade payables and accrued expenses incurred in
the ordinary course of such Person's business and not overdue more than 90
days), (c) all indebtedness of such Person evidenced by notes, bonds, debentures
or other similar Instruments, (d) all indebtedness created or arising under any
conditional sale or other title retention agreement with respect to Property
acquired by such Person (even though the rights and remedies of the seller or
lender under such agreement in the event of default are limited to repossession
or sale of such Property), (e) all Capitalized Lease Obligations of such Person,
(f) the face amount of all indebtedness of such Person, contingent of otherwise,
as an
<PAGE> 26
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account party under acceptance, letter of credit or similar facilities, (g) all
indebtedness then due and owing of such Person to purchase, redeem, retire or
otherwise acquire for value any Equity Interests of such Person, (h) all
Contingent Obligations of such Person in respect of indebtedness of the kind
referred to in clauses (a) through (g); (i) all indebtedness of the kind
referred to in clauses (a) through (h) secured by (or for which the holder of
such indebtedness has an existing right, contingent or otherwise, to be secured
by) any Lien on Property (including, without limitation, accounts and contract
rights) owned by such Person, whether or not such Person has assumed or become
liable for the payment of such indebtedness, and (j) all obligations of such
Person in respect of Hedge Agreements. The amount of any indebtedness under
clause (j) shall be the net amount, including any net termination payments that
would be required to be paid to a counterparty on such date if a termination of
the applicable Hedge Agreement were to occur on such date rather than the
notional amount of the applicable Hedge Agreement. Anything in the foregoing
sentence of this definition to the contrary notwithstanding, for purposes of
this Agreement and the other Loan Documents, the term "INDEBTEDNESS", when used
in relation to any Person, shall in no event include any indebtedness or
contingent obligations of such Person in respect of any accounts or trade
payables, accrued expenses or other indebtedness to trade creditors or employees
incurred in the ordinary course of business and not overdue more than 90 days.
"INDEMNIFIED LIABILITIES" is defined in Section 10.4.
"INDEMNIFIED PARTY" is defined in Section 10.4.
"INDEPENDENT PUBLIC ACCOUNTANT" means any one of the so-called
"big-four" firms of certified public accountants or any other firm of certified
public accountants of recognized standing selected by the Borrower and
reasonably acceptable to the Bank.
"INSTRUMENT" means any contract, agreement, indenture, mortgage or
other document or writing (whether a formal agreement, letter or otherwise)
under which any obligation is evidenced, assumed or undertaken, or any right to
any Lien is granted or perfected.
"INTEREST PERIOD" means, relative to any Eurodollar Loan, the period,
selected in accordance with Section 4.4.1, for which such Eurodollar Loan bears
interest at the Eurodollar Rate (Reserve Adjusted).
"INVESTMENT" means, in relation to any Person:
(a) any loan, advance or other extension of credit made by
such Person to any other Person;
(b) the creation of any Contingent Obligation of such Person
to support any of the Indebtedness of any other Person; or
(c) any capital contribution by such Person to, or purchase of
any Equity Interests or other Securities by such Person in, any other
Person, or any other investment evidencing an ownership or similar
interest of such Person in any other Person.
"ISSUANCE REQUEST" means a request and certificate duly executed by the
chief financial,
<PAGE> 27
-13-
accounting or executive Authorized Officer of the Borrower, in or substantially
in the form of Exhibit G (with such changes thereto as may be agreed upon from
time to time by the Bank and the Borrower).
"L/C COMMITMENT AMOUNT" means $3,000,000.
"LANDLORD LIEN WAIVER" means, with respect to any Real Estate Lease or
(as the case may be) any warehouse contract to which the Borrower is a party, a
Lien waiver from the lessor, landlord or (as the case may be) warehouse
thereunder in form and substance reasonably satisfactory to the Bank.
"LETTER OF CREDIT" is defined in Section 5.1.
"LETTER OF CREDIT OUTSTANDINGS" means, at any time, an amount equal to
the sum of (a) the then aggregate amount which is undrawn and available under
all outstanding Letters of Credit; PLUS (b) the then aggregate amount of all
unpaid and outstanding Reimbursement Obligations.
"LIEN" means any mortgage, security interest, pledge, encumbrance, lien
(statutory, judgment or otherwise), or other security agreement of any kind or
nature whatsoever (including any conditional sale or other title retention
agreement, and any financing lease involving substantially the same economic
effect as any of the foregoing).
"LINE OF BUSINESS" means the businesses presently conducted by the
Borrower and shall in any event include (a) the businesses of establishing,
operating and managing not-for-profit charter and public schools, and (b)
businesses reasonably related, ancillary or complimentary thereto.
"LOAN DOCUMENTS" means, collectively, this Agreement, the Note, the
Collateral Documents, the Closing Date Certificate, and each other Instrument
executed and delivered pursuant to or in connection with any thereof.
"LOAN REQUEST" means a loan request and certificate duly executed and
delivered to the Bank by the chief financial, accounting or executive Authorized
Officer of the Borrower, in or substantially in the form of Exhibit F hereto,
with such changes thereto as may be agreed upon from time to time by the
Borrower and the Bank.
"LOANS" is defined in Section 2.1.
"MANAGEMENT AGREEMENTS" means, collectively, all management agreements,
educational management service contracts and other similar Instruments to which
the Borrower or any of its Subsidiaries shall from time to time be a party and
pursuant to which the Borrower or any of its Subsidiaries shall establish,
operate or manage one or more Schools.
"MATERIALLY ADVERSE EFFECT" means, in relation to any event, occurrence
or development of whatsoever nature (including any adverse determination in any
litigation, arbitration or governmental investigation or proceeding):
<PAGE> 28
-14-
(a) any Materially adverse effect on the business, Property,
results of operations, condition, financial or otherwise, or prospects
of the Borrower and its Subsidiaries, taken as a whole;
(b) any Materially adverse effect on the ability of the
Borrower or any of its Subsidiaries to perform any of its payment or
other material Obligations under any Loan Document to which it is a
party; or
(c) a material impairment of the validity or enforceability of
any Loan Document or any material impairment of the rights or remedies
available to the Bank under any Loan Document.
"NET PROCEEDS" means, with respect to any Sale of any Investment or
other Property or any issue of Equity Interests or other Securities by any
Person, all cash and other Property (including, without limitation, Instruments
evidencing or securing Indebtedness and Equity Interests or other Securities)
payable to or receivable by such Person from such Sale or issuance, net of (a)
all income, sales, use, transfer or other taxes (state, federal or local) solely
attributable to such Sale or issuance and reasonably estimated to be payable in
cash by such Person for the taxable year in which such Sale or issuance
occurred, and (b) all commissions and fees, costs and other expenses incurred in
connection with such Sale or issuance.
"NET REVENUES RECEIVABLE" means, in relation to the Borrower and its
Subsidiaries as at any date, the aggregate amount of all of the cash revenues
payable to or otherwise receivable by the Borrower or any of its Subsidiaries
from any Governmental Authorities or any other Persons pursuant to Management
Agreements by which the Borrower and any of its Subsidiaries is then bound, net
(in each case) of all (if any) credits, rebates, offsets, holdbacks and other
adjustments which will or could reasonably be expected to reduce the liabilities
and obligations represented by such revenues receivable, all as determined as at
such date on a consolidated basis and in accordance with GAAP.
"NOTE" is defined in Section 3.2, and shall also mean and refer to all
other promissory notes accepted from time to time in substitution therefor,
replacement or renewal thereof or refunding thereof.
"OBLIGATIONS" means, collectively, all of the Indebtedness and other
obligations and liabilities existing on the date of this Agreement or arising
from time to time thereafter, whether direct or indirect, joint or several,
actual, absolute or contingent, matured or unmatured, liquidated or
unliquidated, secured or unsecured, arising by contract, operation of law or
otherwise, of the Borrower or any of its Subsidiaries to the Bank (a) in respect
of any of the Loans or other Credit Extensions made or to be made to the
Borrower by the Bank pursuant to this Agreement, or (b) under or in respect of
this Agreement, the Note or any of the other Loan Documents.
"PAID (OR PAYMENT) IN FULL" means paid (or payment) in full and in
cash.
"PARTNERSHIP SCHOOL" means any not-for-profit public school (other than
any Charter School) managed, operated and administered by the Borrower or by any
of its Subsidiaries
<PAGE> 29
-15-
pursuant to one or more Management Agreements to which the Borrower or any of
its Subsidiaries is a party.
"PERMITTED DISPOSITION" means:
(a) any Sale by the Borrower or any of its Subsidiaries of any
of its inventory in the ordinary course of its business;
(b) any Sale by the Borrower or any of its Subsidiaries in the
ordinary course of its business of its equipment or other tangible
personal Property that is obsolete or no longer useful or necessary to
its business;
(c) any Sale by the Borrower or any of its Subsidiaries in the
ordinary course of its business, and in a manner consistent with its
customary and usual cash management practices, of its Permitted
Investments; and
(d) the creation or incurrence by the Borrower or any of its
Subsidiaries of any Liens expressly permitted by Section 8.2.3.
"PERMITTED EQUITY INTERESTS" means any Equity Interests of any Person
on account of or with respect to which such Person has no obligation to (a)
declare or pay any dividends or other distributions at any time on or prior to
December 31, 2002, except dividends or other distributions to be paid in
Permitted Equity Interests of such Person, (b) make any redemption, repurchase,
retirement or acquisition, whether through a Subsidiary of such Person or
otherwise, at any time on or prior to December 31, 2002, except (in any such
case) with Permitted Equity Interests of such Person, (c) make any return of
capital to the holder thereof at any time on or prior to December 31, 2002,
except with Permitted Equity Interests of such Person, or (d) make any other
distributions of any kind at any time on or prior to December 31, 2002, except
distributions to be made in Permitted Equity Interests of such Person.
"PERMITTED INDEBTEDNESS" means any of the following Indebtedness:
(a) Indebtedness of the Borrower or any of its Subsidiaries in
respect of taxes, assessments, levies or other governmental charges,
and Indebtedness of any such Person in respect of accounts payable or
other Indebtedness to trade creditors incurred in the ordinary course
of business or in respect of claims against it for labor, materials or
supplies, to the extent (in each case) that the payment thereof shall
not at the time be required to be made in accordance with the
provisions of Section 8.1.4;
(b) Indebtedness of the Borrower or any of its Subsidiaries
secured by Liens of carriers, warehousemen, mechanics, landlords,
materialmen, laborers, suppliers and the like that constitute Permitted
Liens under clause (a) or (d) of the definition thereof;
(c) Indebtedness of the Borrower or any of its Subsidiaries in
respect of judgments or awards which have been in force for less than
the applicable appeal period so long as (i) (in each case) such Person
shall at the time in good faith be prosecuting an appeal or proceedings
for review and execution thereof shall have been effectively stayed
pending such appeal or review, and (ii) the aggregate principal amount
of all such
<PAGE> 30
-16-
Indebtedness of the Borrower or any of its Subsidiaries outstanding at
any time (determined on a consolidated basis in accordance with GAAP)
does not exceed $1,000,000;
(d) Contractual Obligations of the Borrower or any of its
Subsidiaries (other than Contractual Obligations constituting
Indebtedness for borrowed money) under Instruments (including operating
leases or subleases of real or personal Property, but in any event
excluding any Instruments creating, governing or securing Indebtedness
for borrowed money) entered into in the ordinary course of business of
such Person, and Contingent Obligations of the Borrower or any of its
Subsidiaries incurred in the ordinary course of business of such Person
in respect of any of such Contractual Obligations;
(e) Indebtedness under or in respect of Contingent Obligations
of the Borrower or any of its Subsidiaries in respect of letters of
credit or bankers' acceptances or surety or other bonds issued in the
ordinary course of business of such Person in connection with Liens
that constitute Permitted Liens under clause (b) of the definition
thereof;
(f) Indebtedness created or incurred by the Borrower or any of
its Subsidiaries from time to time after the date hereof in connection
with the acquisition, lease, construction or improvement by such Person
from time to time after the date hereof and in the ordinary course of
business of Property used or to be used in the ordinary course of
business of the Borrower or any of its Subsidiaries; provided, however,
that (i) any Liens on such Property securing any such Indebtedness of
any such Person shall constitute Permitted Liens under clause (g) of
the definition thereof, and (ii) the aggregate amount of all of the
Indebtedness of the Borrower and its Subsidiaries (determined on a
consolidated basis) described in this clause (f) and in clause (g) of
the definition of the term "PERMITTED LIENS" shall not at any time
exceed $53,500,000; and
(g) Indebtedness of the Borrower that (i) is existing on the
date of this Agreement, and (ii) is specifically identified in Section
7.7 of the Disclosure Schedule.
"PERMITTED INVESTMENTS" means any of the following Investments by the
Borrower or any of its Subsidiaries:
(a) Investments that (i) are owned or held by the Borrower or
are outstanding or are in effect on the date of this Agreement, and
(ii) are identified, unless immaterial and insubstantial, in Section
7.20 of the Disclosure Schedule;
(b) Investments in cash or in Cash Equivalents;
(c) Investments in the form of accounts receivable;
(d) Investments in the form of advances or prepayments to
suppliers or other vendors made in the ordinary course of business and
in all material respects consistent with the Borrower's usual and
customary business practices;
(e) Investments in the form of advances to directors,
managers, officers or
<PAGE> 31
-17-
employees in the ordinary course of business and in all material
respects consistent with the Borrower's usual and customary business
practices for travel expenses, entertainment expenses, relocation
expenses, drawing accounts or other similar business-related expenses;
(f) Investments by the Borrower or any of its Subsidiaries if
and to the extent made in exchange for Permitted Equity Interests of
the Borrower;
(g) Investments by the Borrower or any of its Subsidiaries
made in the ordinary course of its business in Capital Assets;
provided, however, that, prior to and after giving effect to each of
such Investments, no Default or Event of Default shall be continuing;
and
(h) other Investments by the Borrower or by any of its
Subsidiaries made from time to time after the date hereof and not
otherwise described in any of clauses (a) through (g) of this
definition; provided, however, that the aggregate amount of all of such
Investments so made from time to time after the date hereof by the
Borrower or by any of its Subsidiaries shall not exceed $500,000, such
aggregate amount to be determined on the basis of the cost of each of
such Investments and determined before giving any effect to any
write-offs or write-downs of any of such Investments or to any
decreases or losses (whether partial or complete) in the Fair Market
Value thereof.
"PERMITTED LIENS" means any of the following Liens:
(a) Liens to secure taxes, assessments, levies or other
governmental charges imposed upon the Borrower or any of its
Subsidiaries, and Liens to secure claims against the Borrower or any of
its Subsidiaries for labor, materials or supplies, to the extent (in
each case) that the payment thereof shall not at the time be required
to be made in accordance with the provisions of Section 8.l.4;
(b) deposits or pledges made by the Borrower or any of its
Subsidiaries in the ordinary course of its business (i) in connection
with, or to secure payment of, (A) workers' compensation, unemployment
insurance or other forms of governmental insurance or benefits, or (B)
liability to insurance carriers under insurance or self-insurance
arrangements, (ii) to secure the performance of bids, tenders,
statutory obligations, leases, contracts (other than contracts relating
to borrowed money) or other obligations of like nature, or (iii) to
secure surety, appeal, indemnity or performance bonds, in each case, in
the ordinary course of the business of such Person, and, in each case,
only to the extent that payment thereof shall not at the time be
required to be made in accordance with the provisions of Section 8.1.4;
(c) Liens in respect of judgments or awards against the
Borrower or any of its Subsidiaries to the extent that such judgments
or awards constitute Permitted Indebtedness under clause (c) of the
definition thereof;
(d) Liens of carriers, warehousemen, mechanics, landlords,
materialmen, laborers, suppliers and the like incurred in the ordinary
course of the business of the
<PAGE> 32
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Borrower or any of its Subsidiaries, in each case, for sums not overdue
or being contested in good faith by appropriate proceedings, and for
which appropriate reserves with respect thereto have been established
and maintained on the consolidated books of the Borrower and its
Subsidiaries in accordance with GAAP to the extent required by GAAP;
(e) easements, rights-of-way, zoning and other similar
restrictions and covenants and other similar encumbrances or title
defects which, in the aggregate, are not substantial in amount, and
which do not in any case materially detract from the value of the
Property subject thereto or interfere with the ordinary conduct of the
business of the Borrower or any of its Subsidiaries;
(f) Liens that (i) are in existence on the date of this
Agreement, and (ii) secure Indebtedness of the Borrower that
constitutes Permitted Indebtedness hereunder;
(g) Liens created or incurred by the Borrower or any of its
Subsidiaries from time to time after the date hereof to secure the
payment of the cost of Property acquired, leased, constructed or
improved by such Person from time to time after the date hereof and in
the ordinary course of business, and which Liens are created or
incurred substantially contemporaneously with or within 360 days after
the acquisition, lease, construction or improvement of the Property
subject thereto (all Liens of the type described in this clause (g)
being hereinafter called "PURCHASE MONEY LIENS"); provided, however,
that:
(i) any Property subject to any such Purchase Money
Lien created or incurred by any such Person shall be used in
the ordinary course of business of the Borrower or any of its
Subsidiaries;
(ii) no such Purchase Money Lien on any such Property
shall extend to or cover any other Property of the Person
creating such Lien or any Property of any other Person; and
(iii) the aggregate amount of all of the Indebtedness
of the Borrower and its Subsidiaries (determined on a
consolidated basis) secured by all of such Purchase Money
Liens described in this clause (g) and in clause (f) of the
definition of the term "PERMITTED INDEBTEDNESS" shall not at
any time exceed $53,500,000; and
(h) extensions, renewals and replacements of Liens described
in clause (g) of this definition, provided that (A) each such
extension, renewal or replacement Lien is limited to the Property
covered by the Lien so extended, renewed or replaced, and (B) does not
secure any Indebtedness other than Indebtedness that constitutes
Permitted Indebtedness under clause (f) of the definition thereof.
"PERMITTED SUBORDINATED DEBT" means any Indebtedness of the Borrower,
all of the proceeds of which are used by the Borrower for working capital and
other corporate purposes; provided, however, that, without the express prior
written consent of the Bank in each case: (a) no portion of such Indebtedness
shall mature or shall be mandatorily redeemable, pursuant to a
<PAGE> 33
-19-
sinking fund obligation or otherwise, or be redeemable at the option of the
holder thereof, in whole or in part, on or prior to the Final Maturity Date; (b)
the interest on such Indebtedness shall not be paid in cash prior to maturity
and no sinking fund shall be required to be established for the payment of
interest; (c) no part of such Indebtedness shall be secured by Liens on any
Property of the Borrower or of any of its Subsidiaries; (d) no part of such
Indebtedness shall be guaranteed by any of the Borrower's Subsidiaries; (e) all
of such Indebtedness shall be subordinated, and made junior in right of payment,
to all of the Obligations of the Borrower to the Bank under this Agreement, the
Note and the other Loan Documents on terms and conditions reasonably
satisfactory to the Bank, as evidenced by its prior written approval thereof;
and (f) all of the other terms and conditions of such Indebtedness shall be
reasonably satisfactory to the Bank, as evidenced by its prior written approval
thereof.
"PERSON" means any natural person, corporation, limited liability
company, partnership, joint venture, association, Governmental Authority or any
other entity, whether acting in an individual, fiduciary or other capacity.
"PRIME RATE" means the greater of (a) the annual rate of interest
announced from time to time by the Bank at its offices in San Jose, California,
as its "prime rate", or (b) one-half of one percent (1/2%) above the Federal
Funds Rate.
"PRIME RATE LOAN" means any Loan which bears interest at a rate
determined by reference to the Prime Rate.
"PRIME RATE MARGIN" means, with respect to the principal amount of any
Loans maintained as Prime Rate Loans, one and three-quarters percent (1-3/4%)
per annum.
"PROJECTED COLLECTION PERIOD" means, in relation to each fiscal month
of the Borrower and its Subsidiaries ending on or after the date hereof, the
period of three (3) consecutive fiscal months of the Borrower ending on the last
day of the third fiscal month following such fiscal month.
"PROJECTIONS" is defined in Section 7.5.
"PROPERTY" means any interest in any kind of property or asset, whether
real, personal or mixed, and whether tangible or intangible.
"REAL ESTATE" means all real Property at any time owned or leased (as
lessee or sublessee) by the Borrower or any of its Subsidiaries.
"REAL ESTATE LEASE" means any lease, including any ground lease or
space lease or any rental or occupancy agreement (in each case, whether written
or oral, and whether express or implied), that relates to and governs or
otherwise evidences the terms and conditions for the leasing or use of, or any
leasehold or other similar interest in, any Real Estate, and pursuant to which
the Borrower or any of its Subsidiaries shall lease any Real Estate, in each
case, as lessee or sublessee thereof .
"REAL ESTATE LEASE AGREEMENTS" means, in relation to any Real Estate
Lease, all Instruments governing or evidencing such Real Estate Lease or
otherwise executed and delivered
<PAGE> 34
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in connection with such Real Estate Lease.
"REFERENCE PERIOD" means each period of four (4) consecutive fiscal
quarters of the Borrower and its Subsidiaries.
"REIMBURSEMENT OBLIGATIONS" is defined in Section 5.5.
"RELEASE" means a "release", as such term is defined in CERCLA.
"RESTRICTED PAYMENTS" means, in relation to the Borrower and its
Subsidiaries:
(a) any payment, prepayment, distribution, loan, advance,
Investment or Sale by the Borrower or any of its Subsidiaries which
constitutes an Affiliate Transaction described in clause (a), (b), (c),
(d), (e), (f) or (g) of the definition "AFFILIATE TRANSACTION"; and
(b) any declaration or payment by the Borrower or any of its
Subsidiaries of any dividends or other distributions on account of, or
any payment or other distribution by the Borrower or any of its
Subsidiaries on account of the purchase, repurchase, redemption,
retirement or other acquisition for value of, any Equity Interests or
other Securities of the Borrower.
"SALE" means any sale, conveyance, exchange, swap, trade, transfer or
other disposition of any Property.
"SCHEDULES" means, collectively, the Financial Covenant Schedule and
the Disclosure Schedule.
"SCHOOLS" means, collectively, the Charter Schools and the Partnership
Schools.
"SCHOOL FACILITIES" is defined in Section 8.2.5(b)(i).
"SECURITIES" means any Capital Stock, Equity Interests, bonds,
debentures, notes or other evidences of Indebtedness, secured or unsecured,
convertible, subordinated or otherwise, or, in general, any Instruments commonly
known as "securities".
"SECURITY AGREEMENT" means the Security Agreement, in or substantially
in the form of Exhibit B attached hereto, to be executed and delivered by the
Borrower on or prior to the Closing Date in favor of the Bank.
"SECURITY AGREEMENTS" means, collectively, the Security Agreement and
each of the Trademark Security Agreements, Copyright Security Agreements and
Agency Account Agreements entered into from time to time.
"SECURITY INSTRUMENT" means any security agreement, chattel mortgage,
assignment, financing or similar statement or notice, continuation statement, or
other agreement or Instrument, or any amendment or supplement to any thereof,
providing for, evidencing or perfecting any Lien.
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"STATED AMOUNT" of each Letter of Credit means the "Stated Amount" as
defined therein or, if not defined therein, the face amount thereof.
"STATED EXPIRY DATE" is defined in clause (B) of Section 5.1.
"STUDENT ENROLLMENT" means, at any date, the aggregate number of
students enrolled in any School for whom the Borrower or any of its Subsidiaries
receives funding or derives revenue from any Governmental Authority or other
Person pursuant to any Management Agreement; provided, however, that, for all
purposes of this Agreement, the Student Enrollment of any School as at any date
on which such School is not in session shall be equal to the Student Enrollment
of such School on and as of the last preceding date on which such School was in
session.
"SUBORDINATED DEBT DOCUMENTS" means, collectively, all agreements or
other Instruments governing or evidencing Permitted Subordinated Debt.
"SUBSIDIARY" means, in relation to any Person (in this paragraph called
the "PARENT") at any time, any corporation, limited liability company,
partnership or other Person (a) of which shares of Capital Stock or other Equity
Interests having ordinary voting power to elect a majority of the board of
directors or other managers of such corporation, limited liability company,
partnership or other Person, or representing a majority of the Equity Interests
in such corporation, limited liability company, partnership or other Person, are
at the time owned, controlled or held, directly or indirectly, by the parent, or
(b) the management of which is otherwise controlled, directly or indirectly, by
the parent.
"TARGET SCHOOL" is defined in Section 8.2.5(b)(i).
"TAXES" is defined in Section 3.7.
"TRADEMARK SECURITY AGREEMENT" means a Trademark Security Agreement, in
or substantially in the form of Exhibit C attached hereto, to be executed and
delivered by the Borrower in favor of the Bank pursuant to the Security
Agreement.
"TYPE" is defined in Section 4.1.
"UNUSED COMMITMENT AMOUNT" means, for any period (of one or more days),
the average daily amount for such period by which the Commitment Amount (as
reduced by any permanent reduction pursuant to Section 2.2) on each day during
such period exceeds the sum of (a) the aggregate principal amount of all Loans
outstanding on each such day, PLUS (b) the aggregate amount of Letter of Credit
Outstandings on each such day.
"VOTING INTERESTS" means, in relation to any Person at any particular
date, any Capital Stock or other Equity Interests of the class or classes having
general voting power under ordinary circumstances to elect the board of
directors, managers or trustees (or any other Persons performing similar
functions) of such Person (irrespective of whether or not at the time Capital
Stock or other Equity Interests of any other classes shall have or might have
voting power by reason of the happening of any contingency).
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"YEAR 2000 COMPLIANT" is defined in Section 8.1.11.
"YEAR 2000 PROBLEM" is defined in Section 7.22.
SECTION 1.2. USE OF DEFINED TERMS.
Terms for which meanings are provided in this Agreement shall, unless
otherwise defined or the context otherwise requires, have such meanings when
used in the Note, the Schedules and Exhibits, each of the other Loan Documents,
and each notice or other communication delivered from time to time in connection
with this Agreement or any Instrument executed pursuant hereto.
SECTION 1.3. CROSS-REFERENCES.
Unless otherwise specified, references in this Agreement or in any of
the other Loan Documents to any Schedule, Exhibit, Article or Section are
references to such Schedule, Exhibit, Article or Section of this Agreement or
such other Loan Document, as the case may be, and unless otherwise specified,
references in any Schedule, Exhibit, Article, Section or definition to any
paragraph or clause are references to such paragraph or clause of such Schedule,
Exhibit, Article, Section or definition.
SECTION 1.4. ACCOUNTING AND FINANCIAL DETERMINATIONS.
(a) Where the character or amount of any asset or liability or item of
income or expense is required to be determined, or any accounting computation is
required to be made, for the purposes of this Agreement and the other Loan
Documents, such determination or calculation shall, to the extent applicable, be
made in accordance with generally accepted accounting principles ("GAAP").
(b) Anything in this Agreement or in any of the other Loan Documents
express or implied to the contrary notwithstanding, until the Borrower acquires,
creates or forms any Subsidiary, any reference (whether in any defined term, in
Article VII, in Article VIII, in connection with any Compliance Certificate or
otherwise) to the term "CONSOLIDATED" or "CONSOLIDATING" in relation to the
Borrower and its Subsidiaries or in relation to any financial statements or
other financial information of any kind (whether pro forma or otherwise)
pertaining to the Borrower and its Subsidiaries shall instead be construed and
treated for all purposes as a reference to the Borrower alone, and any covenant
or other requirement in this Agreement, any Compliance Certificate or any other
Loan Document that consolidated or consolidating financial statements or other
financial information of any kind be furnished to the Bank in relation to the
Borrower and its Subsidiaries shall instead be construed and treated for all
purposes as a covenant and requirement that such financial statements or other
financial information be furnished to the Bank in relation to the Borrower
alone.
SECTION 1.5. GENERAL PROVISIONS RELATING TO DEFINITIONS.
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Terms for which meanings are defined in this Agreement shall apply
equally to the singular and plural forms of the terms defined. Whenever the
context may require, any pronoun shall include the corresponding masculine,
feminine and neuter forms. The term "INCLUDING" means including, without
limiting the generality of any description preceding such term. Each reference
herein to any Person shall include a reference to such Person's successors and
assigns. References to any Instrument defined in this Agreement refer to such
Instrument as originally executed, or, if subsequently amended or supplemented
from time to time, as so amended or supplemented and in effect at the relevant
time of reference thereto.
ARTICLE II
COMMITMENT
SECTION 2.1 COMMITMENT.
Subject to the terms and conditions of this Agreement (including
Article VI) the Bank agrees that it will, from time to time on any Business Day
occurring during the period commencing on the Closing Date and continuing to
(but not including) the Commitment Termination Date, make loans ("LOANS") to the
Borrower in the principal amount requested by the Borrower pursuant to Section
3.1; provided, however, that the Bank shall not be required to make any Loan if,
after giving effect to the making of such Loan, the sum of (a) the aggregate
principal amount of all Loans then outstanding, PLUS (b) the aggregate amount of
Letter of Credit Outstandings, would exceed the lesser of the Commitment Amount
and the Borrowing Base then in effect. Subject to the terms and conditions of
this Agreement (including Article VI), the Bank agrees that it will, from time
to time on any Business Day occurring during the period commencing on the date
hereof and continuing up to (but not including) the Commitment Termination Date,
issue or extend Letters of Credit for the account of the Borrower, all in
accordance with the provisions of Article V. Subject always to the terms and
conditions hereof, the Borrower may from time to time borrow, prepay and
reborrow Loans pursuant to the Commitment.
SECTION 2.2. COMMITMENT AMOUNTS.
The aggregate principal amount ("Commitment Amount") of the Commitment
of the Bank on any date on or prior to the Commitment Termination Date shall be
$10,000,000. The Commitment shall in any event terminate in full and the
Commitment Amount shall be reduced to zero on the Commitment Termination Date.
The Commitment Amount from time to time in effect shall, at the option of the
Borrower, be subject to permanent reduction in full or in part, automatically
and without further action, by the aggregate principal amount of each voluntary
permanent reduction of the Commitment Amount made by the Borrower from time to
time after the date hereof; provided, however, that
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(a) each such permanent reduction of the Commitment Amount
shall require at least three (3) Business Days' prior notice to the
Bank and shall be permanent, and any partial reduction of such amount
shall be in a minimum amount of $200,000 or in an integral multiple of
$50,000 in excess thereof; and
(b) no such permanent reduction of the Commitment Amount may
be made by the Borrower if, after giving effect to such reduction, the
Commitment Amount would be reduced to an amount which is less than the
sum of (i) the aggregate principal amount of all Loans then outstanding
at such time, PLUS (ii) the aggregate amount of Letter of Credit
Outstandings at such time.
SECTION 2.3. THE BORROWING BASE.
The Borrowing Base shall be determined monthly by the Bank by reference
to the Borrowing Base Report delivered to the Bank pursuant to Section 6.2.4 or
Section 8.1.1(c)(iii) (as the case may be), and by reference to such other
information (written or otherwise) as shall from time to time be available to
the Bank.
ARTICLE III
LOANS AND NOTES
SECTION 3.1. BORROWING PROCEDURES.
By delivering to the Bank a Loan Request on or before 11:00 a.m., San
Jose, California time, the Borrower may from time to time request, on not less
than one (1) nor more than five (5) Business Days' notice for Prime Rate Loans
(or not less than four (4) nor more than seven (7) Business Days' notice for
Eurodollar Loans), that a Loan be made by the Bank in a minimum aggregate
principal amount of $200,000, or any integral multiple of $50,000 in excess
thereof, on the Drawdown Date (which must be a Business Day) specified in such
Loan Request. The proceeds of each Loan shall be made available by the Bank to
the Borrower on the Drawdown Date specified in the Loan Request by wire
transferring such funds in such amount or causing such funds in such amount to
be wire transferred to such account of the Borrower, or to such designees of the
Borrower, as shall be designated by the Borrower to the Bank in the Loan Request
therefor. Each request for Loans made pursuant to this Section 3.1 shall
constitute the representation and warranty of the Borrower made to the Bank that
all of the applicable conditions contained in Article VI shall, after giving
effect to such Loans, have been satisfied by the Borrower, and the making
available of such Loans to the Borrower shall be subject to the satisfaction by
the Borrower of the applicable conditions of Article VI.
SECTION 3.2. NOTE.
All Loans made by the Bank shall be evidenced by a single promissory
note of the
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Borrower, dated on or prior to the Closing Date, and in or substantially in the
form of Exhibit A attached hereto (as amended, endorsed, replaced or otherwise
modified from time to time, the "NOTE"), payable to the order of the Bank in a
face amount equal to the Commitment Amount in effect on the Effective Date.
SECTION 3.3. PRINCIPAL PAYMENTS.
Repayments and prepayments of principal of the Loans shall be made as
follows in accordance with this Section 3.3:
SECTION 3.3.1. REPAYMENTS.
The Borrower absolutely and unconditionally promises to pay in full, on
the Final Maturity Date, all of the principal of the Loans remaining unpaid on
the Final Maturity Date. All of the other Obligations evidenced by the Note
shall, if not sooner paid, be in any event due and payable in full on the Final
Maturity Date.
SECTION 3.3.2. LOAN PREPAYMENTS AND REPAYMENTS.
(a) The Borrower:
(i) VOLUNTARY PREPAYMENTS. May, from time to time on
any Business Day (without premium or penalty, except as may be
required by Section 4.8), make a voluntary prepayment, in
whole or in part, of the then aggregate outstanding principal
amount of the Loans; provided, however, that
(A) all such voluntary prepayments shall
require at least one (1) and no more than five (5)
Business Days' prior notice as to prepayments of
Prime Rate Loans, and at least three (3) and no more
than five (5) Business Days' prior notice as to
prepayments of Eurodollar Loans, in each case, to the
Bank; and
(B) all such voluntary prepayments in part
shall be in a minimum aggregate principal amount of
$200,000 or in any integral multiple of $50,000 in
excess thereof;
(ii) CERTAIN MANDATORY REPAYMENTS. Shall, on each
Business Day when the sum of (A) the then outstanding
principal amount of the Loans, PLUS (B) the aggregate amount
of the Letter of Credit Outstandings, exceeds the LESSER of
(Y) the Commitment Amount, or (Z) the Borrowing Base then in
effect, pay to the Bank principal of the Loans equal to such
excess for application to principal of such Loans then
outstanding; and
(iii) ANNUAL CLEAN-UP. Shall, during each calendar
year (beginning with calendar year 2000) ensure that, for a
period of not less than thirty (30) consecutive calendar days
during such calendar year, no principal of the Loans shall
remain outstanding, and the Borrower shall pay to the Bank
principal of the Loans in such amounts and at such times as
shall be necessary to ensure
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compliance with the Borrower's Obligations under this clause
(iii).
(b) Each repayment or prepayment of the Loans made pursuant to
clause (a) of this Section 3.3.2 shall be without premium or penalty,
except as may be required by Section 4.8. Subject always to the terms
and conditions hereof, on or prior to (but not after) the Commitment
Termination Date the Borrower shall be entitled to reborrow all or any
part of the principal of the Loans which shall be repaid or prepaid.
Voluntary prepayments of any Eurodollar Loans pursuant to subclause (i)
of Section 3.3.2(a) shall only be made at the end of the Interest
Periods applicable thereto, unless all losses and expenses referred to
in Section 4.8 (if any) shall be paid by the Borrower to the Bank
concurrently with such prepayments.
(c) Any partial payment of the Obligations of the Borrower
under or in respect of the Note shall be applied: (i) first, to the
payment of all of the interest due and payable on principal of the Note
at the time of such partial payment; (ii) then, to the payment of all
(if any) other amounts (except principal) due and payable under the
Note at such time; and (iii) finally, to the payment of the principal
of the Note due and payable at such time in accordance with paragraph
(a) or paragraph (b) of this Section 3.3.2.
SECTION 3.4. INTEREST PAYMENTS.
The Borrower shall make payments of interest in accordance with this
Section 3.4 as follows:
SECTION 3.4.1. INTEREST RATES.
The Borrower hereby absolutely and unconditionally promises to pay
interest on the unpaid principal amount of each Loan for the period commencing
on the date of such Loan until such Loan is paid in full (excluding the date of
payment), as follows:
(a) on any portion of each Loan that constitutes a Prime Rate
Loan, at a rate per annum equal to the sum of the Prime Rate from time
to time in effect, PLUS the Prime Rate Margin; and
(b) on any portion of each Loan that constitutes a Eurodollar
Loan, at a rate per annum equal to the Eurodollar Rate (Reserve
Adjusted) applicable to each Interest Period for such Eurodollar Loan,
PLUS the Eurodollar Rate Margin;
provided, however, that in no event shall the rate of interest on any Loan
exceed the maximum rate permitted by Applicable Law.
SECTION 3.4.2. INTEREST DURING CONTINUATION OF EVENTS OF DEFAULT; ETC.
The Borrower shall pay interest,
(a) during the continuation of any Event of Default, on the
unpaid principal amount of each Loan, from the date on which such Event
of Default shall have first occurred to the date on which such
principal shall be paid to the Bank (whether before or
<PAGE> 41
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after judgment), at a rate per annum that is at all times equal to the
sum of the Prime Rate from time to time in effect, PLUS the Prime Rate
Margin, PLUS four percent (4%); and
(b) to the maximum extent permitted by Applicable Law, on any
overdue interest, fees or other sums (other than principal) owing to
the Bank under this Agreement or the other Loan Documents, from and
including the third day after such overdue amount shall have first
become due and payable to the date on which such amount shall be paid
to the Bank (whether before or after judgment), at a rate per annum
that is at all times equal to the sum of the Prime Rate from time to
time in effect, PLUS the Prime Rate Margin, PLUS four percent (4%).
SECTION 3.4.3. PAYMENT DATES.
Interest accrued on each Loan shall be payable, without duplication:
(a) on the Final Maturity Date;
(b) with respect to the outstanding principal amount of each
Prime Rate Loan, on the first day of each month;
(c) with respect to the outstanding principal amount of all
Eurodollar Loans, on the last day of each applicable Interest Period
(and, if such Interest Period shall exceed three (3) months, on the
last day of each consecutive three-month period occurring during such
Interest Period);
(d) with respect to that portion of the outstanding principal
amount of Loans converted into Prime Rate Loans or Eurodollar Loans on
a day when interest would not otherwise have been payable pursuant to
clause (b) or (c), the date of such conversion;
(e) with respect to any portion of any Loans prepaid pursuant
to Section 3.3.2, on the date of such prepayment; and
(f) with respect to any interest accrued pursuant to Section
3.4.2 on principal of the Loans, and, to the maximum extent permitted
by Applicable Law, on any overdue interest, fees or other sums, upon
demand and, in any event, on the last Business Day of each month.
SECTION 3.5. FEES.
SECTION 3.5.1. CLOSING FEE.
The Bank has previously received from the Borrower the sum of $30,000,
representing one-fifth (1/5th) of the non-refundable closing fee of $150,000
("Closing Fee") payable by the Borrower hereunder. The Borrower shall pay to the
Bank on the Effective Date the $120,000 balance of the non-refundable Closing
Fee.
SECTION 3.5.2. COMMITMENT FEES.
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The Borrower shall pay to the Bank commitment fees ("Commitment Fees")
on the unused Commitment Amount from time to time in effect during the period
commencing on the date hereof and ending on the Final Maturity Date. The
Commitment Fees shall be payable by the Borrower to the Bank for each calendar
month ending after the date hereof, and (a) shall be computed on the Unused
Commitment Amount in effect on each day during each calendar month at the annual
rate equal to 0.50%, and (b) shall be payable in arrears on the first day of
each calendar month, beginning December 1, 1999, and on the Commitment
Termination Date.
SECTION 3.6. MAKING OF PAYMENTS; COMPUTATIONS; ETC.
SECTION 3.6.1. MAKING OF PAYMENTS.
All payments of principal of and interest on the Note, and all payments
of Fees and other sums payable under the Loan Documents, shall be made by the
Borrower to the Bank in immediately available funds at its Domestic Office not
later than 1:00 p.m., San Jose, California time, on the date due, and funds
received after that hour shall be deemed to have been received by the Bank on
the next following Business Day.
SECTION 3.6.2. SETOFF.
The Borrower agrees with the Bank that, regardless of the adequacy of
any Collateral, the Bank shall continue to have all rights of set-off and
bankers' liens provided by Applicable Law, and, in addition thereto, the
Borrower further agrees that, so long as any Event of Default shall be
continuing, the Bank may, regardless of the adequacy of any Collateral, apply to
the payment of the Obligations any and all balances, credits, deposits, accounts
or moneys of the Borrower then or thereafter deposited with or held by the Bank.
SECTION 3.6.3. DUE DATE EXTENSION.
If any payment of principal of or interest on the Note, or any payment
of any Fees or other sums payable under any of the Loan Documents, falls due on
a day which is not a Business Day, then such due date shall be extended to the
next following Business Day (unless, in the case of interest due on the
principal amount of any Eurodollar Loan, such next following Business Day is the
first day of a calendar month, in which case such due date shall be the
immediately preceding Business Day), and additional interest and Fees shall
accrue and be payable for the period of such extension.
SECTION 3.6.4. NOTICES OF CHANGES IN PRIME RATE; NOTICE OF EURODOLLAR
RATES.
Changes in the rate of interest on any Prime Rate Loans shall take
effect simultaneously with each change in the Prime Rate. The Bank shall, upon
request of the Borrower from time to time, give notice of changes in the Prime
Rate. The applicable Eurodollar Rate for each Interest Period shall be
determined by the Bank, and notice thereof shall, upon request of the Borrower
from time to time, be given by the Bank to the Borrower. Each determination of
the Prime Rate and the applicable Eurodollar Rate by the Bank shall be
conclusive and binding upon the parties hereto, in the absence of manifest
error. The Bank shall, upon written request of the Borrower from time to time,
deliver to the Borrower a statement showing in reasonable detail the
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computations used by the Bank in determining any applicable Eurodollar Rate
hereunder.
SECTION 3.6.5. COMPUTATIONS.
Interest and Commitment Fees shall be computed based on the actual
number of days elapsed and a year of 360 days.
SECTION 3.6.6. RECORDKEEPING.
The Bank shall record in its records, or at its option on the grid
attached to the Note, the date and amount of each of the Loans made by the Bank
and each repayment and prepayment thereof, and in the case of each Eurodollar
Loan, the principal amount thereof and the dates on which each Interest Period
for such Loan shall begin and end. The aggregate unpaid principal amount so
recorded shall be rebuttable presumptive evidence of the principal amount owing
and unpaid on the Note. The failure to so record any such amount or any error in
so recording any such amount shall not, however, limit or otherwise affect the
Obligations of the Borrower hereunder or under the Note to repay the principal
amount of the Loans evidenced by the Note together with all interest accruing
thereon in accordance with the terms hereof.
SECTION 3.7. TAXES.
All payments of principal of and interest on the Note and of all Fees
and other sums payable hereunder or under any of the other Loan Documents shall
be made free and clear of and without deduction for any present or future
income, excise, stamp or franchise taxes or other taxes, fees, duties,
withholdings or charges of any nature whatsoever imposed by any Governmental
Authority, but excluding franchise taxes imposed on the Bank and taxes imposed
on the Bank measured by its net income or receipts (all non-excluded items being
called "TAXES"). If any withholding or deduction from any such payment to be
made hereunder or under any of the other Loan Documents is required in respect
of any Taxes pursuant to any Applicable Law, then the Borrower will pay to the
Bank such additional amounts as are necessary to ensure that the net amount
actually received by the Bank will equal the full amount the Bank would have
received had no such withholding or deduction been required. If the Borrower
fails to pay any Taxes when due to the appropriate Governmental Authority or
fails to remit to the Bank when due any payments required by this Section 3.7 or
any required receipts or other required documentary evidence, the Borrower shall
indemnify the Bank for any incremental Taxes, interest or penalties that may
become payable by the Bank as a result of any such failure and shall promptly
pay to the Bank any amounts not paid when due to the Bank as required by this
Section 3.7.
SECTION 3.8. USE OF PROCEEDS.
The Borrower covenants and agrees with the Bank that the entire
proceeds of all Loans made pursuant hereto will be used and applied by the
Borrower for working capital and other general corporate purposes not otherwise
prohibited by this Agreement.
SECTION 3.9. NO WITHHOLDING.
The Borrower absolutely, unconditionally and irrevocably agrees with
the Bank that
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each payment of principal, interest, Fees or other sums which shall become due
and payable to the Bank under this Agreement, the Note or any of the other Loan
Documents shall be made by the Borrower to the Bank without any set-off or
counterclaim whatsoever and free and clear of and without any deductions or
withholdings of any kind.
SECTION 3.10. COLLATERAL SECURITY.
(a) As security for the payment of all of the Obligations, the Borrower
shall grant or cause to be granted to the Bank, for the benefit of the Bank, a
Lien on and security interest in and to all of the following, whether now or
hereafter owned, existing, created, arising or acquired: (i) all of the Equity
Interests in its Subsidiaries or in any other Person now or hereafter owned or
otherwise acquired by the Borrower or any of its Subsidiaries, and all income
and proceeds thereof; and (ii) all of the tangible or intangible personal
Properties of the Borrower and of each of its Subsidiaries (other than Excluded
Equipment), and all income, proceeds and products thereof. If, in order to
secure financing provided to the Borrower after the date hereof, the Borrower
shall not have granted a first-priority Lien on the Real Estate located at 706
W. 42nd Street, Kansas City, Missouri, by February 28, 2000, then the Borrower
shall, by March 31, 2000, grant to the Bank a first-priority Lien on such Real
Estate pursuant to mortgage or other Instruments reasonably satisfactory in form
and substance to the Bank
(b) Concurrently with the consummation of any acquisition,
organization, creation or formation of any new Subsidiary of the Borrower, the
Borrower will:
(i) execute and deliver to the Bank a pledge agreement, in
form and substance satisfactory to the Bank, pledging all of the
Borrower's Equity Interests in such new subsidiary; and;
(ii) (A) deliver or cause to be delivered to the Bank in
pledge all of the certificates representing such Equity Interests, and
(B) cause such new Subsidiary to execute and deliver to the Bank (1) a
guarantee agreement and a security agreement in form and substance
satisfactory to the Bank upon the terms of which such Subsidiary shall
guarantee the payment and performance in full of all of the
Obligations and grant to the Bank a Lien on and security interest in
and to all of its tangible or intangible personal Properties (other
than Excluded Equipment), and (2) such Uniform Commercial Code
financing statements and other Security Instruments as shall be
required to perfect the security interests and Liens of the Bank in
the collateral being pledged and assigned by such new Subsidiary
pursuant to such security agreement; and
(iii) in each such case, comply with all of the applicable
provisions of Section 8.1.9 and provide all such other documentation,
including, without limitation, one or more opinions of counsel
reasonably satisfactory to the Bank, Governing Documents, and
resolutions, as in the reasonable opinion of the Bank shall be
necessary or advisable in connection with such acquisition or
formation of such new Subsidiary.
(c) From time to time after the date hereof, upon and in accordance
with the reasonable request of the Bank, and at the cost and expense of the
Borrower, promptly create or cause to be created in favor of the Bank, as
security for the payment and performance of all of the
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Obligations, perfected Liens (subject only to such other Liens as shall be
expressly permitted by this Agreement or by any of the other Loan Documents)
with respect to all (if any) of the personal Property of the Borrower or any of
its Subsidiaries (whether tangible or intangible) which is not then subject to
perfected Liens in favor of the Bank (subject only to such other Liens as shall
be expressly permitted by this Agreement or by any of the other Loan Documents),
all such Liens to be created under Security Instruments in form and substance
reasonably satisfactory to the Bank; deliver or cause to be delivered to the
Bank all such Instruments (including legal opinions, Lien search results and
releases and termination statements) as the Bank shall reasonably request to
evidence satisfaction of the Obligations created by this Section 3.10(c); and
promptly provide such evidence as the Bank shall from time to time reasonably
request as to the perfection and priority of such Liens and any other Liens
created pursuant to any of the Collateral Documents; provided, however, that
nothing in this paragraph (c) shall be construed so as to require the Borrower
or any of its Subsidiaries to create perfected Liens in and to any Excluded
Equipment or any copyrights which have not been registered with the United
States Copyright Office.
ARTICLE IV
FUNDING OPTIONS
SECTION 4.1. PRICING OF EACH LOAN.
The outstanding principal amount of each Loan made by the Bank may be
allocated among different types (as hereinafter defined) of Loans selected by
the Borrower from time to time in accordance with Sections 3.1, 4.2 and 4.3.
Each Loan shall be either a Prime Rate Loan or a Eurodollar Loan (each a "TYPE"
of Loan), as the Borrower shall specify in the initial notice of borrowing
delivered by the Borrower pursuant to Section 3.1, or in any
Continuation/Conversion Notice delivered by the Borrower pursuant to Section 4.2
or 4.3. All Prime Rate Loans, and all Eurodollar Loans having the same Interest
Period, may sometimes be referred to as a "GROUP" of Loans.
SECTION 4.2. CONVERSION PROCEDURES.
Subject to the provisions of Section 4.4, the Borrower may convert all
or any part of any outstanding Group of Loans into a Group of Loans of a
different type by delivering a Continuation/Conversion Notice to the Bank not
later than (a) in the case of conversion into a Prime Rate Loan, 1:00 p.m., San
Jose, California time, on the proposed date of such conversion, and (b) in the
case of a conversion into a Eurodollar Loan, 1:00 p.m., San Jose, California
time, at least four (4) Business Days prior to the proposed date of such
conversion. Each such notice shall be irrevocable upon receipt by the Bank and
shall specify the date and amount of such conversion, the Group of Loans (or
portion thereof) to be so converted, the type of Loan to be converted into and,
in the case of a conversion into a Eurodollar Loan, the initial Interest Period
therefor; provided, however, that no Eurodollar Loan shall be converted on any
day other than the last day of its Interest Period. Subject to the provisions of
this Section 4.2 and Section 4.4, each Loan shall be so converted on the
requested date of conversion.
SECTION 4.3. CONTINUATION PROCEDURES.
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Subject to the provisions of Section 4.4, the Borrower may continue all
or any part of any outstanding Group of Eurodollar Loans for an additional
Interest Period commencing upon the conclusion of the Interest Period then in
effect for such Group of Eurodollar Loans, by delivering a
Continuation/Conversion Notice to the Bank not later than 1:00 p.m., San Jose,
California time, at least four (4) Business Days prior to the end of such
then-current Interest Period. Each such notice shall be irrevocable upon receipt
by the Bank and shall specify the amount to be so continued, the date of such
continuation and the Interest Period therefor that is to commence upon the
termination of the then-current Interest Period.
SECTION 4.4. LIMITATIONS ON INTEREST PERIODS AND CONTINUATION AND
CONVERSION ELECTIONS.
The Borrower's rights under Sections 3.1, 4.2 and 4.3 shall be subject
to the following limitations:
SECTION 4.4.1. INTEREST PERIODS.
Each Interest Period for a Eurodollar Loan shall commence on the date
the Loan is made, if applicable, or on the date such Loan is converted from a
Prime Rate Loan, or, in the case of a continuation, on the expiration of the
immediately preceding Interest Period for such Eurodollar Loan, and shall end on
the date which is one, two, three or six months thereafter, as the Borrower may
specify in the related notice of borrowing pursuant to Section 3.1, or in any
Continuation/Conversion Notice pursuant to Section 4.2 or 4.3; provided,
however, that: (a) each Interest Period for a Eurodollar Loan that would
otherwise end on a day which is not a Business Day shall end on the immediately
succeeding Business Day (unless such immediately succeeding Business Day is the
first Business Day of a calendar month, in which case such Interest Period shall
end on the immediately preceding Business Day); (b) the Borrower may not select
any Interest Period for any principal of any Loan which would end after the
Final Maturity Date; and (c) absent the timely selection of a new Interest
Period for a then outstanding Eurodollar Loan, or any part thereof, such
Eurodollar Loan or such part, as the case may be, shall, immediately upon the
expiration of such Interest Period, automatically and without further action, be
converted into a Prime Rate Loan.
SECTION 4.4.2. CONDITIONS PRECEDENT.
No portion of the outstanding principal amount of any Loan may be
continued as, or converted into, one or more Eurodollar Loans if, on or as of
the requested date of continuation or conversion, as the case may be, any
Default shall have occurred and shall be continuing.
SECTION 4.4.3. OTHER LIMITATIONS.
At all times:
(a) the aggregate principal amount of each Group of Eurodollar
Loans shall be in a minimum amount of $500,000 or in an integral
multiple of $50,000 in excess thereof; and
(b) the total number of Eurodollar Loans in effect at any time
shall not exceed
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six (6).
SECTION 4.5. INCREASED COSTS.
(a) If, after the date hereof, the adoption of any Applicable
Law, or any change therein or in any existing Applicable Law, or any
change in the interpretation or administration thereof by any
Governmental Authority charged with the interpretation or
administration thereof, or compliance by the Bank (or the Eurodollar
Office of the Bank) with any request or directive (whether or not
having the force of law) of such Governmental Authority:
(i) shall subject the Bank (or the Eurodollar Office
of the Bank) to any tax, duty or other charge with respect to
the Eurodollar Loans, the Note or the Bank's obligation to
make Eurodollar Loans available, or shall change the basis of
taxation of payments to the Bank of the principal of or
interest on its Eurodollar Loans or any other amounts due
under this Agreement in respect of its Eurodollar Loans or its
obligation to make Eurodollar Loans available (except for
taxes covered by Section 3.7 and except for changes in the
rate of tax on the overall net income of the Bank or its
Eurodollar Office imposed by the jurisdiction in which the
Bank's Eurodollar Office is located); or
(ii) shall impose, modify or deem applicable any
reserve (including, without limitation, any reserve imposed by
the F.R.S. Board), special deposit or similar requirement
against assets of, deposits with or for the account of, or
credit extended by, the Bank (or the Eurodollar Office of the
Bank) (which is not otherwise reflected in the definition of
the term "EURODOLLAR RATE (RESERVE ADJUSTED)"; or
(iii) shall impose on the Bank (or its Eurodollar
Office) any other condition affecting its Eurodollar Loans,
its Note or the Bank's obligation to make Eurodollar Loans
available;
and the result of any of the foregoing is to increase the cost to the
Bank (or the Eurodollar Office of the Bank) of making or maintaining
any Eurodollar Loan, or to reduce the amount of any sum received or
receivable by the Bank (or its Eurodollar Office) under this Agreement
or under its Note with respect thereto, then upon demand by the Bank,
the Borrower shall pay directly to the Bank such additional amount as
will compensate the Bank for such increased cost or such reduction.
(b) If the Bank shall reasonably determine that the adoption
of any Applicable Law regarding capital adequacy, or any change therein
or in any existing Applicable Law, or any change in the interpretation
or administration thereof by any Governmental Authority charged with
the interpretation or administration thereof, or compliance by the Bank
(or its Eurodollar Office) or any Person controlling the Bank with any
request or directive regarding capital adequacy (whether or not having
the force of law) of any such Governmental Authority, in each case,
after the date hereof, has or would have the effect of reducing the
rate of return on the Bank's or such controlling Person's capital as a
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consequence of the Bank's obligations hereunder (including, without
limitation, the Commitment) to a level below that which the Bank or
such controlling Person could have achieved but for such adoption,
change or compliance (taking into consideration the Bank's or such
controlling Person's policies with respect to capital adequacy) by an
amount deemed by the Bank or such controlling Person to be material,
then the Bank shall promptly after its determination of such occurrence
give written notice thereof to the Borrower. The Borrower shall within
thirty (30) days after the day on which the Borrower shall receive such
notice pay such additional amounts which will, in the Bank's reasonable
determination, compensate the Bank or such controlling person for such
reduction. In determining such amount, the Bank may use any reasonable
methods of averaging, allocating or attributing such reductions among
its customers.
SECTION 4.6. INTEREST RATE INADEQUATE OR UNFAIR.
If with respect to any Interest Period:
(a) the Bank reasonably determines (which determination shall
be binding and conclusive on the Borrower) that, by reason of
circumstances affecting the interbank eurodollar market, adequate and
reasonable means do not exist for ascertaining the applicable
Eurodollar Rate; or
(b) the Bank reasonably determines that the Eurodollar Rate
(Reserve Adjusted) will not adequately and fairly reflect the cost to
the Bank of maintaining or funding Eurodollar Loans for such Interest
Period, or that the maintaining or funding of Eurodollar Loans has
become impracticable as a result of an event occurring after the date
of this Agreement which in the reasonable opinion of the Bank
materially adversely affects Eurodollar Loans;
then the Bank shall promptly notify the Borrower in writing, and so long as such
circumstances shall continue, (i) the Bank shall thereafter have no obligation
to fund or make available Eurodollar Loans, and (ii) on the last day of the
current Interest Period for any Eurodollar Loan, such Eurodollar Loan shall,
unless then repaid in full, automatically convert to a Prime Rate Loan.
SECTION 4.7. CHANGES IN LAW RENDERING EURODOLLAR LOANS UNLAWFUL.
In the event that the adoption of any Applicable Law, or any change
therein or in any existing Applicable Law or any change in the interpretation
thereof by any Governmental Authority charged with the interpretation or
administration thereof, in each case after the date hereof, shall make it
unlawful for the Bank to maintain or fund Eurodollar Loans, then the Bank shall
promptly notify the Borrower in writing, and, so long as such circumstances
shall continue, (a) the Bank shall thereafter have no obligation to fund or make
available Eurodollar Loans, and (b) on the last day of the current Interest
Period for any Eurodollar Loan (or, in any event, on such earlier date as may be
required by the relevant Applicable Law), such Eurodollar Loan shall, unless
then repaid in full, automatically convert to a Prime Rate Loan.
SECTION 4.8. FUNDING LOSSES.
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The Borrower hereby agrees that, upon demand by the Bank, the Borrower
will indemnify the Bank against any net loss or expense which the Bank shall
sustain or incur (including, without limitation, any net loss or expense
reasonably incurred by reason of the liquidation or employment of deposits or
other funds acquired by the Bank to maintain or fund any Eurodollar Loan), as
reasonably determined by the Bank, as a result of (a) any payment, repayment,
prepayment or conversion of any Eurodollar Loan of the Bank on a date other than
the last day of an Interest Period for such Eurodollar Loan (including any
conversion pursuant to Section 4.7) or (b) any failure of the Borrower to
borrow, continue or convert any Loan on a date specified therefor in a notice of
borrowing pursuant to Section 3.1 or in any Continuation/Conversion Notice
pursuant to Section 4.2 or 4.3.
SECTION 4.9. DISCRETION OF BANK AS TO MANNER OF FUNDING.
Notwithstanding any provision of this Agreement to the contrary, the
Bank shall be entitled to maintain and fund all or any part of any of the Loans
in any manner it sees fit, it being understood, however, that for purposes of
this Agreement all determinations hereunder (including determinations of any net
loss or expense under Section 4.8) shall be made as if the Bank had actually
funded and maintained each Eurodollar Loan during each Interest Period for such
Eurodollar Loan through the purchase of a deposit on the first day of such
Interest Period having a principal amount equal to the principal amount of such
Eurodollar Loan, having a maturity corresponding to such Interest Period, and
bearing an interest rate equal to the Eurodollar Rate for such Interest Period.
SECTION 4.10. CONCLUSIVENESS OF STATEMENTS; SURVIVAL OF PROVISIONS.
Demands made by the Bank to the Borrower under Section 4.5, 4.6, 4.7 or
4.8 shall be accompanied by a statement setting forth in reasonable detail the
basis for the calculations of the amounts being claimed. Such statements, and
all other determinations and statements of the Bank pursuant to Section 4.5,
4.6, 4.7 or 4.8, shall be conclusive absent manifest error. It is understood and
agreed that, for purposes of calculating any net losses or expenses of the kind
described in Section 4.8, and for purposes of calculating other amounts claimed
under Section 4.5, 4.6, 4.7 or 4.8, the Bank may use reasonable averaging and
attribution methods in determining compensation, reimbursement or
indemnification under Section 4.5, 4.6, 4.7 or 4.8, and the provisions of such
Sections shall survive repayment or prepayment of any of the Loans, cancellation
of the Note and any termination of this Agreement.
ARTICLE V
LETTERS OF CREDIT
SECTION 5.1. REQUESTS FOR LETTERS OF CREDIT.
The Borrower may request, by delivering to the Bank an Issuance Request
on or before 11:00 a.m., San Jose, California time, at any time and from time to
time prior to the Commitment Termination Date and on not less than four (4) nor
more than seven (7) Business Days' notice, that the Bank issue, for the account
of the Borrower, an irrevocable documentary or standby letter of credit in such
form as may be requested by the Borrower and approved by the Bank
<PAGE> 50
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(each a "LETTER OF CREDIT"), in support of financial obligations of the Borrower
incurred in the ordinary course of its business and which are described in such
Issuance Request; provided, however, that immediately after giving effect to
such request (a) the sum of (i) the Letter of Credit Outstandings, PLUS (ii) the
aggregate principal amount of all Loans outstanding, shall not exceed the LESSER
of (A) the Commitment Amount then in effect, and (B) the Borrowing Base then in
effect, and (b) the Letter of Credit Outstandings shall not exceed the L/C
Commitment Amount then in effect. Each Letter of Credit shall by its terms:
(1) be issued in a Stated Amount which is at least $20,000 and
an integral multiple of $1,000 in excess thereof;
(2) be stated to expire on a date (its "STATED EXPIRY DATE")
that is no later than the earlier of one (1) year from its date of
issuance or the Commitment Termination Date; and
(3) on or prior to its Stated Expiry Date
(a) terminate immediately upon notice to the Bank
from the beneficiary thereunder that all obligations covered
thereby have been terminated, paid or otherwise satisfied in
full,
(b) reduce in part immediately and to the extent the
beneficiary thereunder has notified the Bank that the
obligations covered thereby have been paid or otherwise
satisfied in part, or
(c) terminate not more than thirty (30) days after
notice to the beneficiary thereunder from the Bank that any
Default has occurred and is continuing.
By delivery to the Bank of an Issuance Request at least four (4) but
not more than seven (7) Business Days prior to the Stated Expiry Date of any
Letter of Credit, the Borrower may request the Bank to extend the Stated Expiry
Date of such Letter of Credit for an additional period not to exceed the earlier
of one (1) year from its date of extension or the Commitment Termination Date.
SECTION 5.2. ISSUANCES AND EXTENSIONS.
Subject to the terms and conditions of this Agreement (including
Article VI), the Bank shall issue Letters of Credit and extend the Stated Expiry
Dates of outstanding Letters of Credit for additional periods of the shorter of
(a) one (1) year, or (b) the Commitment Termination Date, in accordance with the
Issuance Requests made therefor. The Bank will make available the original of
each Letter of Credit which it issues in accordance with the Issuance Request
therefor to the beneficiary thereof and will notify the beneficiary under any
Letter of Credit issued by it of any extension of the Stated Expiry Date
thereof.
SECTION 5.3. FEES AND EXPENSES.
The Borrower agrees to pay to the Bank: (a) for the account of the
Bank, with respect to
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each Letter of Credit, a letter of credit fee of equal to two percent (2.0%) of
the Stated Amount of such Letter of Credit, which fee shall be payable by the
Borrower on the date of issuance and on each date of renewal or extension (if
any) thereof; and (b) for the account of the Bank, all such other reasonable
fees and other administrative expenses customarily charged by the Bank in
connection with the issuance, maintenance, modification (if any) and
administration of each applicable Letter of Credit upon demand by the Bank from
time to time.
SECTION 5.4. DISBURSEMENTS.
The Bank will notify the Borrower promptly of the presentment for
payment of any Letter of Credit issued by it, together with notice of the date
(the "DISBURSEMENT DATE") such payment shall be made. Subject to the terms and
provisions of such Letter of Credit, the Bank shall make such payment to the
beneficiary (or its designee) of such Letter of Credit (a "DISBURSEMENT"). Prior
to 1:00 p.m., San Jose, California time, on the Disbursement Date, the Borrower
will reimburse the Bank for all amounts which the Bank has disbursed under such
Letter of Credit issued by it. To the extent the Bank is not reimbursed in full
in accordance with the third sentence of this Section 5.4, the Reimbursement
Obligations in respect of a Letter of Credit shall accrue interest at a
fluctuating rate determined by reference to the Prime Rate, PLUS the Prime Rate
Margin applicable to the Loans, PLUS four percent (4%), payable on demand. In
the event the Bank is not reimbursed by the Borrower on the Disbursement Date,
or if the Bank must for any reason return or disgorge such reimbursement, the
Bank shall, subject to the satisfaction of all conditions contained in Article
VI, fund the Reimbursement Obligations therefor by making Loans which are Prime
Rate Loans as provided in Section 3.1 (the Borrower being deemed to have given a
timely Loan Request therefor for such amount); provided, however, that, for the
purposes of funding the Reimbursement Obligations by making Prime Rate Loans
pursuant to this sentence of Section 5.4, in order to determine the Letter of
Credit Outstandings immediately prior to giving effect to the application of the
proceeds of such Loans, such Reimbursement Obligations shall be deemed not to be
outstanding at such time.
SECTION 5.5. REIMBURSEMENT.
The Borrower's Obligations under Section 5.4 to reimburse the Bank with
respect to each Disbursement (including interest thereon) in respect of Letters
of Credit (the "REIMBURSEMENT OBLIGATIONS") shall be absolute and unconditional
under any and all circumstances and irrespective of any setoff, counterclaim or
defense to payment which the Borrower may have or have had against the Bank or
any beneficiary of any Letter of Credit, including any defense based upon the
occurrence of any Default or Event of Default, any draft, demand or certificate
or other document presented under a Letter of Credit proving to be forged,
fraudulent, invalid or insufficient, the failure of any Disbursement to conform
to the terms of the applicable Letter of Credit (if, in the Bank's good faith
opinion in respect of Letters of Credit, such Disbursement is determined to be
appropriate), or any nonapplication or misapplication by the beneficiary of the
proceeds of such Disbursement, or the legality, validity, form, regularity or
enforceability of such Letter of Credit.
SECTION 5.6. DEEMED DISBURSEMENTS.
Upon the occurrence and during the continuation of any Default, an
amount equal to that
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portion of Letter of Credit Outstandings attributable to outstanding and undrawn
Letters of Credit shall, at the option of the Bank, and without demand upon or
notice to the Borrower, be deemed to have been paid or disbursed by the Bank
under such Letters of Credit (notwithstanding that such amount may not in fact
have been so paid or disbursed), and, upon notification by the Bank to the
Borrower of the Borrower's Obligations under this Section 5.6, the Borrower
shall be immediately obligated to reimburse the Bank the amount deemed to have
been so paid or disbursed by the Bank. Any amounts so received by the Bank from
the Borrower pursuant to this Section 5.6 shall be held as Collateral security
for the repayment of the Borrower's Obligations in connection with the Letters
of Credit issued by the Bank. At any time when such Letters of Credit shall
terminate and all obligations of the Bank thereunder are either terminated or
paid or reimbursed to the Bank in full, the Obligations of the Borrower under
this Section 5.6 shall be reduced accordingly (subject, however, to
reinstatement in the event any payment in respect of such Letters of Credit is
recovered in any manner from the Bank), and the Bank will, if no other
Obligations are then owed to the Bank hereunder, return to the Borrower the
EXCESS, if any, of
(a) the aggregate amount deposited by the Borrower with the
Bank pursuant to this Section 5.6 and not theretofore applied by the
Bank to any Reimbursement Obligations owed to the Bank, OVER
(b) the aggregate amount of all Reimbursement Obligations owed
to the Bank pursuant to this Section 5.6, as so adjusted.
If any other Obligations shall be owed by the Borrower or any of its
Subsidiaries to the Bank hereunder, then the Bank shall apply such excess to
such Obligations until the same shall be paid in full. At such time when all
Defaults shall have been cured or waived and all of the Borrower's Obligations
hereunder shall have been paid in full, the Bank shall return to the Borrower
all amounts then on deposit with the Bank pursuant to this Section 5.6.
SECTION 5.7. NATURE OF REIMBURSEMENT OBLIGATIONS.
The Borrower shall assume all risks of the acts, omissions or misuse of
any Letter of Credit by the beneficiary thereof. The Bank (except to the extent
of its own gross negligence or willful misconduct) shall not be responsible for:
(a) the form, validity, sufficiency, accuracy, genuineness or
legal effect of any Letter of Credit or any document submitted by any
party in connection with the application for and issuance of a Letter
of Credit, even if it should in fact prove to be in any or all respects
invalid, insufficient, inaccurate, fraudulent or forged;
(b) the form, validity, sufficiency, accuracy, genuineness or
legal effect of any Instrument transferring or assigning or purporting
to transfer or assign a Letter of Credit or the rights or benefits
thereunder or proceeds thereof, in whole or in part, which may prove to
be invalid or ineffective for any reason;
(c) the failure of the beneficiary to comply fully with
conditions required in order to demand payment under a Letter of
Credit;
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(d) errors, omissions, interruptions or delays in transmission
or delivery of any messages, by mail, cable, telegraph, telex or
otherwise; or
(e) any loss or delay in the transmission or otherwise of any
document or draft required in order to make a Disbursement under a
Letter of Credit or of the proceeds thereof.
None of the foregoing shall affect, impair or prevent the vesting of any of the
rights or powers granted to the Bank hereunder. In furtherance and extension,
and not in limitation or derogation of any of the foregoing, any action taken or
omitted to be taken by the Bank in good faith shall be binding upon the Borrower
and shall not put the Bank under any resulting liability to the Borrower.
SECTION 5.8. INDEMNITY.
In addition to amounts payable as elsewhere provided in this Article V,
the Borrower hereby agrees to protect, indemnify, pay and save the Bank harmless
from and against any and all claims, demands, liabilities, damages, losses,
costs, charges and expenses (including reasonable attorneys' fees) which the
Bank may incur or be subject to as a consequence, direct or indirect, of (a) the
issuance of any Letter of Credit, other than as a result of the negligence or
willful misconduct of the Bank as determined by a court of competent
jurisdiction, or (b) the failure of the Bank to honor a drawing under any Letter
of Credit issued by it as a result of any act or omission, whether rightful or
wrongful, of any present or future de jure or de facto Governmental Authority.
ARTICLE VI
CONDITIONS TO CREDIT EXTENSIONS
SECTION 6.1. CONDITIONS TO MAKING FIRST CREDIT EXTENSIONS.
The obligations of the Bank to make its first Credit Extensions
hereunder on the Closing Date shall be subject to the fulfillment by the
Borrower of the following conditions precedent prior to or simultaneously with
the making of the first Credit Extensions on the Closing Date:
SECTION 6.1.1. EXECUTION AND DELIVERY OF THIS AGREEMENT AND NOTE.
The Bank shall have received (a) counterparts of this Agreement duly
executed and delivered by the Borrower and the Bank, and (b) for the account of
the Bank, the Note, dated not later than the Closing Date, duly executed and
delivered to the Bank by the Borrower and containing appropriate insertions and
conforming to the requirements of Section 3.2.
SECTION 6.1.2. SECURITY AGREEMENT; UCC FILINGS; ETC.
The Bank shall have received counterparts of the Security Agreement,
dated not later than the Closing Date and duly executed and delivered by the
Borrower, together (in each case) with:
(a) executed copies of proper financing statements (Form
UCC-1), each in
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appropriate form for filing, naming the Borrower as the debtor, and the
Bank as the secured party, and other similar Instruments or documents,
to be filed under the Uniform Commercial Code in the jurisdictions
identified in the Security Agreement;
(b) executed copies of proper financing statements (Form
UCC-3) necessary to release all material Liens and other rights of any
other Persons in the Collateral described in the Security Agreement
previously granted by the Borrower (or an undertaking reasonably
satisfactory to the Bank by the secured party under any such security
agreement to execute and deliver all financing statements (Form UCC-3)
reasonably required by the Bank to release all such Liens), except for
any Liens that constitute Permitted Liens or that are otherwise
expressly permitted by this Agreement or any of the other Loan
Documents; and
(c) copies of such search reports, dated a date reasonably
near (but prior to) the Closing Date, as shall have been previously
requested by special counsel for the Bank, listing effective financing
statements which name the Borrower (under its present name or any
previous name) as debtor and which are filed in jurisdictions
(specified by special counsel for the Bank) in which certain of the
filings are to be made pursuant to clause (a), together with copies of
such financing statements.
Any other action, including the taking of possession of specific Collateral by
the Bank, reasonably required by the Bank to create in favor of the Bank
perfected first-priority Liens (subject to Permitted Liens and other Liens
otherwise expressly permitted by this Agreement or any of the other Loan
Documents) in the Collateral described in the Security Instruments referred to
in this Section 6.1.2 shall have been properly taken by or on behalf of the
Borrower.
SECTION 6.1.3. OTHER LOAN DOCUMENTS AND ANCILLARY DOCUMENTS.
(a) Each of the other Loan Documents required by the terms hereof to be
executed and delivered on or prior to the Closing Date shall have been duly and
properly authorized, executed and delivered by the respective party or parties
thereto and shall be in full force and effect.
(b) The Bank shall have received counterparts of each of such other
Loan Documents and true and complete copies of each of the Ancillary Documents.
Each Loan Document shall, where applicable, be substantially in the form of an
Exhibit attached hereto, and all other Loan Documents and all of such Ancillary
Documents shall be in form and substance reasonably satisfactory to the Bank.
All exhibits, schedules or other attachments to any of the Collateral Documents
shall be in form and substance reasonably satisfactory to the Bank.
SECTION 6.1.4. CERTIFICATES OF INSURANCE.
The Bank shall have received a certificate of insurance from an
independent insurance broker, dated as of a date reasonably near (but not after)
the Closing Date, identifying insurers, types of insurance, insurance limits and
policy terms, and otherwise describing the insurance obtained in accordance with
the provisions of the Security Agreement, including noting that the Bank has
been named as additional insured and loss payee on such insurance.
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SECTION 6.1.5. [INTENTIONALLY OMITTED.]
SECTION 6.1.6. CLOSING DATE CERTIFICATE.
The Bank shall have received a duly executed and completed certificate,
dated as of the Closing Date, in or substantially in the form of Exhibit I (a
"CLOSING DATE CERTIFICATE"), duly executed and delivered by an Authorized
Officer of the Borrower.
SECTION 6.1.7. RESOLUTIONS; ETC.
The Bank shall have received from the Borrower, a certificate, dated
not later than the Effective Date, of its Secretary or any Assistant Secretary
as to:
(a) resolutions of its Board of Directors then in full force
and effect authorizing the execution, delivery and performance of, in
each case, to the extent the Borrower is a party thereto, this
Agreement and each of the other Loan Documents;
(b) the incumbency and signatures of the officers of the
Borrower (the "AUTHORIZED OFFICERS") authorized to act with respect to
(in each case, to the extent the Borrower is a party thereto) this
Agreement and each of the other Loan Documents (upon which certificate
the Bank may conclusively rely until the Bank shall have received a
further certificate of the Borrower canceling or amending such prior
certificate, which further certificate shall be reasonably satisfactory
to the Bank); and
(c) the Fifth Amended and Restated Certificate of
Incorporation of the Borrower and the By-laws of the Borrower, each as
amended and as in effect on and as of the date of such certificate.
SECTION 6.1.8. CERTIFICATES OF GOOD STANDING.
The Bank shall have received a certificate signed by the Secretary of
State of the State of Delaware, dated a date reasonably near (but not after) the
Closing Date, stating that the Borrower is a corporation duly organized, validly
existing and in good standing under the laws of such State. The Bank shall have
also received, from the Secretary of State of each State (other than the State
of Ohio and the District of Columbia) in which the nature of the Borrower's
business makes qualification to do business as a foreign corporation necessary
or appropriate, a certificate signed by such Secretary of State, dated a date
reasonably near (but not after) the Closing Date, stating that the Borrower is
duly qualified to do business and is in good standing as a foreign corporation
in such State.
SECTION 6.1.9. COMPLIANCE CERTIFICATE.
The Bank shall have received a duly executed and completed Compliance
Certificate, dated as of the Closing Date, in or substantially in the form of
Exhibit H, duly executed by an Authorized Officer of the Borrower.
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SECTION 6.1.10. APPROVALS.
The Bank shall have received evidence that all Approvals necessary in
connection with the credit facilities contemplated hereby shall have been
obtained and shall be in full force and effect.
SECTION 6.1.11. ENVIRONMENTAL COMPLIANCE.
The Borrower shall have demonstrated to the Bank's reasonable
satisfaction that on the Closing Date all representations and warranties set
forth in Section 7.18 hereof are accurate, true and complete in all material
respects.
SECTION 6.1.12. OPINIONS OF COUNSEL.
The Bank shall have received an opinion, dated not later than Closing
Date, addressed to the Bank from counsel to the Borrower, in or substantially in
the form of Exhibit J.
SECTION 6.1.13. FINANCIAL STATEMENTS.
The Borrower shall have furnished to the Bank the Historical Financials
and the Projections.
SECTION 6.1.14. NO MATERIALLY ADVERSE EFFECT.
No events or developments shall have occurred since June 30, 1999
which, individually or in the aggregate, have had or could reasonably be
expected to have any Materially Adverse Effect.
SECTION 6.1.15. FEES AND EXPENSES.
The Bank shall have received from the Borrower payment in full of all
of the Fees required to be paid to the Bank on or prior to the Closing Date in
accordance with Section 3.5, and the Bank, or (as the case may be) its special
counsel, shall have received from the Borrower payment in full of the Bank's
reasonable out-of-pocket costs and expenses (including reasonable counsel fees
and disbursements payable in accordance with Section 10.3 for which invoices
shall have been submitted to the Borrower on or prior to the Closing Date).
SECTION 6.1.16. SATISFACTORY LEGAL FORM; ETC.
All documents executed and delivered or submitted pursuant hereto by or
on behalf of the Borrower shall be reasonably satisfactory in form and substance
to the Bank and its special counsel; the Bank and its special counsel shall have
received all such information, and such counterpart originals or such certified
or other copies of such materials, as the Bank or its special counsel may
reasonably request; and all legal matters incident to the transactions
contemplated by this Agreement and the other Loan Documents shall be reasonably
satisfactory to special counsel to the Bank.
SECTION 6.2. ALL CREDIT EXTENSIONS.
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The obligations of the Bank to make Credit Extensions hereunder
(including its first Credit Extensions to be made on the Closing Date) shall
also be subject to the satisfaction by the Borrower of each of the following
conditions precedent set forth in this Section 6.2:
SECTION 6.2.1. COMPLIANCE WITH REPRESENTATIONS; ABSENCE OF LITIGATION;
NO DEFAULT; ETC.
The representations and warranties of the Borrower set forth in Article
VII, in the Collateral Documents and in the other Loan Documents shall have been
true and correct in all material respects as of the date made; and, both
immediately before and immediately after giving effect to each of such Credit
Extensions:
(a) such representations and warranties shall be true and
correct in all material respects with the same full force and effect as
if then made (except for any such representation or warranty that
relates solely to a prior date);
(b) (i) no litigation, arbitration or governmental
investigation or proceeding shall be pending or, to the best
knowledge of the Borrower (after due inquiry), threatened
against the Borrower or any of its Subsidiaries or affecting
the business, Property, results of operations, condition
(financial or otherwise) or prospects of any thereof which was
not disclosed by the Borrower to the Bank in Section 7.8 of
the Disclosure Schedule, except to the extent such litigation,
arbitration or governmental investigation or proceeding does
not have and could not reasonably be expected to have any
Materially Adverse Effect; and
(ii) no development shall have occurred in any
litigation, arbitration or governmental investigation or
proceeding so disclosed, which, in any event, has had and
continues to have, or (as the case may be) could reasonably be
expected to have, any Materially Adverse Effect or relates to
the validity or enforceability of this Agreement, the Note or
any of the other Loan Documents or of any Obligations existing
under or, if such Credit Extension is made, would be existing
under any thereof; and
(c) no Default shall have occurred and then be continuing and
no Change of Control shall have occurred.
SECTION 6.2.2. CREDIT REQUEST.
The Bank shall have received a Credit Request for each Credit
Extension. The delivery of such Credit Request shall constitute a representation
and warranty by the Borrower that on and as of the requested date of such Credit
Extension, and before and after giving effect to such Credit Extension, all
representations and warranties required by Section 6.2.1 are true and correct in
all material respects.
SECTION 6.2.3. LEGALITY OF TRANSACTIONS.
It shall not be unlawful (a) for the Bank to perform any of its
obligations under any of the Loan Documents, or (b) for the Borrower to perform
any of its Obligations under any of the Loan
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Documents.
SECTION 6.2.4. BORROWING REPORT.
In the case of each request by the Borrower for any Credit Extension,
the Bank shall have received from the Borrower, if the Bank shall have so
requested, such written and other information and reports relating to the
Borrowing Base then in effect, and such certificates of Authorized Officers of
the Borrower relating to the Borrowing Base then in effect, as the Bank shall
have requested in order to calculate and confirm the Borrowing Base as of the
date of such Credit Extension.
SECTION 6.2.5. BANKING ARRANGEMENTS.
For purposes of each Credit Extension to be made after December 14,
1999, the Borrower shall have established by December 15, 1999 lockbox
arrangements in form and substance satisfactory to the Bank (the "COLLECTION
LOCKBOX") and shall have established with the Bank by December 15, 1999 all
primary banking and transaction accounts (including the Borrower's Concentration
Account), all upon terms and conditions reasonably satisfactory to the Bank and
the Borrower.
SECTION 6.3. CONDITIONS TO EFFECTIVENESS OF THIS AGREEMENT.
This Agreement shall become and be effective on and as of and from and
after the Effective Date; provided, however, that each of the following
conditions precedent shall first be satisfied:
(a) the Bank shall have received counterparts of this Agreement duly
executed and delivered by the Borrower and the Bank;
(b) the Bank shall have received from the Borrower the certificate
referred to and described in Section 6.1.7; and
(c) the Bank shall have received from the Borrower payment in full of
all of the Fees required to be paid to the Bank on the Effective Date in
accordance with Section 3.5.1, and the Bank, or (as the case may be) its special
counsel, shall have received from the Borrower payment in full of the Bank's
reasonable out-of-pocket costs and expenses (including reasonable counsel fees
and disbursements payable in accordance with Section 10.3 for which invoices
shall have been submitted to the Borrower on or prior to the Effective Date).
ARTICLE VII
WARRANTIES; ETC.
In order to induce the Bank to enter into this Agreement, and in order
to induce the Bank to make Credit Extensions hereunder, the Borrower represents
and warrants to the Bank as set forth in this Article VII as follows:
SECTION 7.1. ORGANIZATION; ETC.
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The Borrower is an organization duly organized, validly existing and in
good standing under the laws of the jurisdiction of its organization, is duly
qualified to do business and is in good standing as a foreign organization in
each jurisdiction where the nature of its business makes such qualification
necessary or appropriate and where the failure to so qualify has had or could
reasonably be expected to have a Materially Adverse Effect, and has full power
and authority and holds all requisite governmental licenses, permits and other
Approvals to own or hold under lease its material Properties and to conduct its
business substantially as currently conducted by it, and to execute, deliver and
perform the Loan Documents executed or to be executed by it.
SECTION 7.2. POWER, AUTHORITY.
The Borrower has taken all necessary organizational action to authorize
the execution, delivery and performance by it of the Loan Documents executed or
to be executed by it. The execution, delivery and performance by the Borrower of
each of the Loan Documents to which the Borrower is or is to become a party do
not and will not (except for Approvals which have been already given or
obtained) require any Approvals, will not result in any violation of, or
constitute any default under, (a) any provisions of any Governing Documents of
the Borrower or any other Ancillary Documents, (b) any other Contractual
Obligations of the Borrower, or (c) any Applicable Laws, and do not and will not
result in or require the creation or imposition of any Liens on any of the
Property of the Borrower pursuant to the provisions of any Instruments binding
upon or applicable to the Borrower or any of its Property.
SECTION 7.3. VALIDITY; ETC.
This Agreement has been duly executed and delivered by the Borrower and
constitutes the legal, valid, and binding Obligation of the Borrower,
enforceable in accordance with its terms. Each of the other Loan Documents,
including, without limitation, the Note, to which the Borrower is or is to
become a party has been, or, upon execution and delivery thereof will be, duly
executed and delivered by the Borrower, and does or will constitute the legal,
valid and binding obligation of the Borrower, enforceable in accordance with its
terms. The enforceability of this Agreement and the other Loan Documents against
the Borrower shall be subject to bankruptcy, insolvency, reorganization,
moratorium or other similar laws at the time in effect affecting the
enforceability of the rights of creditors generally and to general equitable
principles.
SECTION 7.4. FINANCIAL INFORMATION.
All balance sheets, all statements of operations and of cash flows, and
all other financial statements which have been furnished by the Borrower to the
Bank for the purposes of or in connection with this Agreement, including the
audited consolidated balance sheet at June 30, 1999, and the related audited
consolidated statements of operations, of stockholders' equity and of cash
flows, for the fiscal year then ended, of the Borrower accompanied by the notes
thereto and the reports thereon of the Independent Public Accountant, and the
related letters to management for the fiscal year then ended (such financial
statements being herein referred to, collectively, as the "HISTORICAL
FINANCIALS"), have been prepared in accordance with GAAP consistently (except as
otherwise described therein and in Section 7.4 of the Disclosure Schedule)
applied throughout the periods involved and present fairly the financial
condition of
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the Borrower as at the dates thereof and the results of the Borrower's
operations for the periods then ended.
SECTION 7.5. PROJECTIONS.
The projected balance sheets and projected statements of income and of
cash flows of the Borrower for each of the fiscal years of the Borrower from
fiscal year 1999 through fiscal year 2005, all of which have been delivered to
the Bank prior to the date of this Agreement (collectively, the "PROJECTIONS"),
have been prepared on the basis of the assumptions accompanying them and
reflect, as of the date of this Agreement, the good faith estimates made on a
reasonable basis by the Borrower of the financial condition and the performance
of the Borrower for the periods covered thereby based on such assumptions.
SECTION 7.6. MATERIALLY ADVERSE EFFECT.
(a) For purposes of the Credit Extensions to be made on the Closing
Date, no events or developments have occurred since June 30, 1999 which,
individually or in the aggregate, have had or could reasonably be expected to
have any Materially Adverse Effect.
(b) For purposes of each Credit Extension requested to be made after
the Closing Date, no events or developments have occurred since the Closing Date
which, individually or in the aggregate, have had or could reasonably be
expected to have any Materially Adverse Effect.
SECTION 7.7. EXISTING INDEBTEDNESS; ABSENCE OF DEFAULTS.
The Indebtedness of the Borrower in existence on the Closing Date is
identified in Section 7.7 of the Disclosure Schedule. With respect to each item
of Indebtedness identified in Section 7.7 of the Disclosure Schedule, the
Borrower has delivered or otherwise made available to the Bank a true and
complete copy of each Instrument evidencing such Indebtedness or pursuant to
which such Indebtedness was issued or secured (including each amendment,
consent, waiver or other Instrument executed and/or delivered in respect
thereof), as the same is in effect on or as of the Closing Date. Except as
otherwise disclosed in Section 7.7 of the Disclosure Schedule, the Borrower is
not in default in the payment of any Indebtedness, which payments, in the
aggregate, exceed $100,000, or in default or breach, in any material respect, in
the performance of any other material obligation under any Instrument evidencing
any Indebtedness (in an aggregate amount exceeding $1,000,000) or pursuant to
which such Indebtedness (in an aggregate amount exceeding $1,000,000) was issued
or secured.
SECTION 7.8. LITIGATION; ANCILLARY DOCUMENTS; ETC.
(a) Except as to matters identified in Section 7.8 of the Disclosure
Schedule, there is no pending or, to the best knowledge of the Borrower,
threatened litigation, arbitration or governmental investigation or proceeding
against the Borrower or any of its Subsidiaries or to which any of the
Properties of any thereof is subject which:
(i) has had and continues to have, or (as the case may be)
could reasonably be expected to have, any Materially Adverse Effect;
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(ii) relates to this Agreement, any of the other Loan
Documents or any of the Ancillary Documents; or
(iii) seeks to enjoin or otherwise prevent the consummation
of, or to recover any damages or obtain relief as a result of, any of
the transactions contemplated by or in connection with this Agreement,
any of the other Loan Documents or any of the Ancillary Documents.
None of such pending or threatened proceedings has had and continues to have, or
could reasonably be expected to have, any Materially Adverse Effect.
(b) Each of the Ancillary Documents to which the Borrower is a party or
by which the Borrower is bound on or as of the date hereof is identified in
Section 7.8 of the Disclosure Schedule.
(c) Each of the Ancillary Documents is in full force and effect. No
material default on the part of any Person bound by any Ancillary Document, and
no material breach by any such Person in the payment, performance or observance
of any of its material obligations thereunder, is continuing. No Person bound by
any of the Ancillary Documents has exercised or attempted to exercise any right
of termination, cancellation or rescission thereunder; and no event or condition
is continuing which permits any Person bound by any of the Ancillary Documents
to exercise any right of termination, cancellation or rescission thereunder.
SECTION 7.9. REGULATIONS U AND X.
The Borrower is not engaged principally, or as one of its important
activities, in the business of extending credit for the purpose of purchasing or
carrying margin stock. None of the proceeds of any of the Credit Extensions will
be used for the purpose of, or be made available by the Borrower in any manner
to any other Person to enable or assist such Person in, directly or indirectly,
purchasing or carrying margin stock in violation of F.R.S. Board Regulation U or
X. Terms for which meanings are provided in F.R.S. Board Regulation U or X or
any regulations substituted therefor, as from time to time in effect, are used
in this Section 7.9 with such meanings.
SECTION 7.10. GOVERNMENT REGULATION.
The Borrower is not an "investment company" or a "company controlled by
an investment company" within the meaning of the Investment Company Act of 1940,
as amended, or a "holding company", or a "subsidiary company" of a "holding
company", or an "affiliate" of a "holding company" or of a "subsidiary company"
of a "holding company", within the meaning of the Public Utility Holding Company
Act of 1935, as amended.
SECTION 7.11. TAXES.
Except as otherwise disclosed in Section 7.11 of the Disclosure
Schedule, each of the Borrower and its Subsidiaries has filed all material tax
returns and material reports required by Applicable Law to have been filed by it
and has paid all taxes and governmental charges thereby shown to be owing,
except any such taxes or charges which are being contested in good faith by
<PAGE> 62
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appropriate proceedings and for which adequate reserves in accordance with GAAP
shall have been set aside on its books. Except as otherwise disclosed in Section
7.11 of the Disclosure Schedule, no tax Liens (other than tax Liens that
constitute Permitted Liens) have been filed with respect to the Borrower or any
of its Subsidiaries and, to the best knowledge of the Borrower (after due
inquiry), no claims are being asserted with respect to any such taxes or charges
(and, to the best knowledge of the Borrower, no basis exists for any such
claims).
SECTION 7.12. COMPLIANCE WITH ERISA.
Each of the Borrower and its Subsidiaries is in substantial compliance
with all material provisions of ERISA, except to the extent that any failure so
to be in compliance with any provisions of ERISA does not continue to have and
could not be reasonably expected to have any Materially Adverse Effect.
SECTION 7.13. LABOR CONTROVERSIES.
Except as disclosed in Section 7.13 of the Disclosure Schedule, there
are no labor controversies pending or, to the best knowledge of the Borrower
(after due inquiry), threatened against the Borrower or any of its Subsidiaries
which have had and continue to have, or (as the case may be) could reasonably be
expected to have, any Materially Adverse Effect.
SECTION 7.14. CORPORATE STRUCTURE; ETC.
As of the Closing Date the Borrower has no Subsidiaries. Section 7.14
of the Disclosure Schedule identifies, with respect to the Borrower as of the
Closing Date, (a) the State of organization of the Borrower, (b) the number of
authorized and outstanding shares of each class of Capital Stock and all other
Equity Interests of the Borrower, (c) each of the owners of more than five
percent (5%) of the outstanding shares of each class of Capital Stock of the
Borrower, and (d) each Partnership School, each Charter School and each
Management Agreement.
SECTION 7.15. OWNERSHIP OF PROPERTIES; LIENS.
Section 7.15 of the Disclosure Schedule identifies all of the real
Property owned or leased by the Borrower as of the Closing Date. Each of the
Borrower and its Subsidiaries has valid fee or leasehold interests in all of its
real Property and good and marketable title to all of its material personal
Property, and none of such Property is or will be subject to any Liens, except
such Liens as are permitted by Section 8.2.3 or by the other Loan Documents.
Section 7.15 of the Disclosure Schedule identifies all of the Liens upon
Property of the Borrower that secure Indebtedness of the Borrower and that are
in existence on the Closing Date and either (a) are known to the Borrower on or
as of the Closing Date, or (b) are of record on and as of the Closing Date.
SECTION 7.16. TRADEMARKS; ETC.
Each of the Borrower and its Subsidiaries owns and possesses all such
patent rights, trademark rights, trade name rights, service mark rights and
copyrights material to the conduct of the businesses of such Person without (to
the knowledge of the Borrower) any infringement upon any proprietary or other
rights of any other Person, except to the extent that any such
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infringement does not continue to have, and could not reasonably be expected to
have, any Materially Adverse Effect.
SECTION 7.17. COLLATERAL DOCUMENTS.
The provisions of the Collateral Documents will be, from and after the
Closing Date, effective to create, in favor of the Bank and as security for all
of the Obligations, legal, valid and enforceable Liens in all right, title and
interest of the Borrower in the Collateral described in the Collateral
Documents. Upon filing of all required financing statements and other filings
necessary in order to perfect the Bank's Liens in the Collateral and the Bank's
taking possession of items of Collateral as to which possession is required to
perfect a Lien therein, each of the Collateral Documents will create a fully
perfected Lien in all right, title and interest of the Borrower in the
Collateral described therein superior in right to any Liens, existing or future,
which any creditor of or purchaser from the Borrower or any other Person may
have against such Collateral, except to the extent otherwise expressly permitted
hereby or by any of the other Loan Documents.
SECTION 7.18. ENVIRONMENTAL MATTERS.
Except as identified in Section 7.18 of the Disclosure Schedule:
(a) to the best knowledge of the Borrower, all Property
(including underlying groundwater) owned or leased by the Borrower or
any of its Subsidiaries has been, and continues to be, owned or leased
by such Person in substantial compliance with all Environmental Laws,
except to the extent that any failure so to be in compliance with
Environmental Laws does not continue to have, and could not reasonably
be expected to have, any Materially Adverse Effect;
(b) there have been no past, and there are no pending or, to
the knowledge of the Borrower, threatened:
(i) material claims, complaints, notices or requests
for information received by the Borrower or any of its
Subsidiaries from any Governmental Authority with respect to
any alleged violation of any Environmental Laws; or
(ii) material complaints, notices or inquiries to the
Borrower or any of its Subsidiaries from any Governmental
Authority alleging material liability under any Environmental
Laws;
(c) to the best knowledge of the Borrower, there have been no
Releases of Hazardous Materials at, on or under Property now or (to the
best knowledge of the Borrower) previously owned or leased by the
Borrower or any of its Subsidiaries, the costs to address which,
individually or in the aggregate, continue to have or (as the case may
be) could reasonably be expected to have any Materially Adverse Effect;
(d) each of the Borrower and its Subsidiaries has been issued
and is in material compliance with all permits, certificates,
approvals, licenses and other authorizations relating to environmental
matters and required under Environmental Laws
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for its businesses, except to the extent that any failure so to be in
compliance does not continue to have, and could not reasonably be
expected to have, any Materially Adverse Effect; and
(e) to the best knowledge of the Borrower, no conditions exist
at, on or under any Property now or previously owned or leased by the
Borrower or any of its Subsidiaries which has given rise to, or (as the
case may be) which could reasonably be expected to give rise to,
liability under any Environmental Laws, which liability has, or (as the
case may be) could reasonably be expected to have, individually or in
the aggregate, any Materially Adverse Effect.
SECTION 7.19. COMPLIANCE WITH APPLICABLE LAWS.
Each of the Borrower and its Subsidiaries is in substantial compliance
in all material respects with all Applicable Laws, except to the extent that any
failure so to be in compliance does not continue to have, and could not
reasonably be expected to have, any Materially Adverse Effect.
SECTION 7.20. EXISTING INVESTMENTS.
Section 7.20 of the Disclosure Schedule identifies each Investment of
the Borrower that is owned or held or is outstanding or in effect on the Closing
Date other than insubstantial and immaterial Investments and other than
Investments of the kind described in any of clauses (b) through (e) or in clause
(g) of the definition of the term "PERMITTED INVESTMENTS".
SECTION 7.21. TRANSACTIONS WITH AFFILIATES.
Section 7.21 of the Disclosure Schedule identifies (a) all (if any)
Indebtedness of the Borrower to any Affiliate of the Borrower on or as of the
Closing Date and all (if any) Contractual Obligations of the Borrower to any
Affiliate of the Borrower on or as of the Closing Date, and (b) all (if any)
Indebtedness of any Affiliate of the Borrower to the Borrower on or as of the
Closing Date and all (if any) Contractual Obligations of any Affiliate of the
Borrower to the Borrower on or as of the Closing Date.
SECTION 7.22. YEAR 2000 PROBLEM.
The Borrower has reviewed the areas within its operations and business
which could be materially adversely affected by, and has developed or is making
commercially reasonable efforts to develop a program to address on a timely
basis, the Year 2000 Problem and has made related inquiry of material suppliers,
vendors and customers (if appropriate). Based on such review and program, the
Borrower represents and warrants that the Year 2000 Problem will not have any
Materially Adverse Effect. As used herein, the term "YEAR 2000 PROBLEM" means
the possibility that any computer applications or equipment (a) used by the
Borrower, or (b) used by material suppliers, vendors or customers in connection
with the conduct of material business with the Borrower, may be unable to
recognize and properly perform date-sensitive functions involving certain dates
prior to and any dates on or after January 1, 2000.
SECTION 7.23. BANKING ARRANGEMENTS.
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The Borrower is and will be taking all action necessary or appropriate
to complete each of the following in a manner reasonably satisfactory to the
Bank by December 15, 1999: (a) direct and instruct in writing all account
debtors and other obligors of the Borrower or of any of its Subsidiaries to make
all payments and remit all cash proceeds of Net Revenues Receivable solely to
the Collection Lockbox, (b) establish the Borrower's Concentration Account, (c)
except as and to the extent otherwise expressly provided by Section 8.1.12(b) or
otherwise permitted by the Bank, make subject to an Agency Account Agreement
each bank account and other Financial Asset Account held or maintained by the
Borrower or any of its Subsidiaries with any bank or other financial institution
other than the Bank, (d) except as and to the extent otherwise expressly
permitted by the Bank, direct each Agency Account Institution, pursuant to the
Agency Account Agreement to which such Agency Account Institution is a party
(whereby such Agency Account Institution shall, among other things, waive all
rights of set-off, other than for service charges and returns incurred in
connection therewith), to cause all funds held by such Agency Account
Institution in its Agency Accounts to be transferred (with such frequency as the
Bank shall reasonably request) to, and only to, the Bank for deposit in the
Borrower's Concentration Account. Each of the bank accounts and other Financial
Asset Accounts (other than Excluded Accounts) opened, held or maintained by the
Borrower or any of its Subsidiaries with any bank or other financial institution
of any kind other than the Bank is identified in Section 7.23 of the Disclosure
Schedule.
SECTION 7.24. REPRESENTATIONS IN LOAN DOCUMENTS AND ANCILLARY
DOCUMENTS.
Except as otherwise described in Section 7.24 of the Disclosure
Schedule, each of the representations and warranties made by the Borrower in the
Loan Documents and Ancillary Documents is true and correct in all material
respects, and the Borrower makes to the Bank each such representation and
warranty made therein to the same extent and with the same full force and effect
as if such representation or warranty were set forth herein in full.
ARTICLE VIII
COVENANTS
SECTION 8.1. CERTAIN AFFIRMATIVE COVENANTS.
The Borrower agrees with the Bank and warrants that, from and after the
date of this Agreement and until the Commitment shall have terminated in full
and all of the Obligations shall have been paid in full, the Borrower will, and
will cause each of its Subsidiaries to:
SECTION 8.1.1. FINANCIAL INFORMATION; ETC.
Furnish to the Bank copies of the following financial statements,
reports and other information:
(a) promptly when available and in any event within ninety
(90) days after the close of each fiscal year of the Borrower:
(i) a consolidated balance sheet as at the close of
such fiscal year, and
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related consolidated statements of operations, stockholders'
equity and cash flows for such fiscal year, of the Borrower
and its Subsidiaries (with comparable information as at the
close of and for the prior fiscal year), such statements for
such fiscal year to be audited and accompanied by an audit
report issued without Impermissible Qualification by the
Independent Public Accountant;
(ii) consolidating balance sheets as at the close of
such fiscal year, and related consolidating statements of
operations for such fiscal year, of the Borrower and its
Subsidiaries (with comparable information as at the close of
and for the prior fiscal year), certified as to fairness of
presentation by the principal accounting or financial
Authorized Officer of the Borrower;
(iii) a Compliance Certificate calculated as at the
close of such fiscal year; and
(iv) commencing with the fiscal year of the Borrower
ending June 30, 1999, a written statement of the Independent
Public Accountant stating that, in making the examination
necessary to make the audit report on the financial statements
delivered pursuant to clause (i), it obtained no knowledge of
any Default by the Borrower or any of its Subsidiaries in the
performance or observance of any of the covenants contained in
Section 8.2.4, or, if the Independent Public Accountant shall
have obtained knowledge of any such Default, specifying all
such Defaults and the nature and status thereof;
(b) promptly when available and in any event within forty-five
(45) days after the close of each fiscal quarter of each fiscal year of
the Borrower:
(i) a consolidated balance sheet as at the close of
each such fiscal quarter, and related consolidated statements
of operations and cash flows for such fiscal quarter and for
the portion of the fiscal year then ended, of the Borrower and
its Subsidiaries (with comparable information as at the close
of and for the corresponding fiscal quarter of the prior
fiscal year and for the corresponding portion of such prior
fiscal year), certified as to fairness of presentation by the
principal accounting or financial Authorized Officer of the
Borrower;
(ii) consolidating balance sheets as at the close of
such fiscal quarter, and related consolidating statements of
operations and cash flows for such fiscal quarter and for the
portion of the fiscal year then ended, of the Borrower and its
Subsidiaries (with comparable information as at the close of
and for the corresponding fiscal quarter of the prior fiscal
year and for the corresponding portion of such prior fiscal
year), certified as to fairness of presentation by the
principal accounting or financial Authorized Officer of the
Borrower; and
(iii) a Compliance Certificate calculated as at the
close of such fiscal quarter;
(c) promptly when available and in any event within forty-five
(45) days (or,
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with respect to subclause (iii) below, fifteen (15) days) after the
close of each fiscal month of the Borrower:
(i) a consolidated balance sheet as at the close of
each such fiscal month, and related consolidated statements of
operations and cash flows for such fiscal month, of the
Borrower and its Subsidiaries;
(ii) a statement as at the close of each such fiscal
month showing aging and reconciliation of the Net Revenues
Receivable of the Borrower and its Subsidiaries as at the
close of such fiscal month; and
(iii) a schedule identifying each Financial Asset
Account (other than Excluded Accounts) opened by or for the
Borrower or any of its Subsidiaries during such fiscal month,
and a Borrowing Base Report as at the close of each such
fiscal month setting forth the amount of each of Eligible
Trailing Revenues and the Eligible Projected Revenues of the
Borrower and its Subsidiaries for the Collection Period ending
as at the last day of such fiscal month and for the Projected
Collection Period ending as at the last day of the third
fiscal month following such fiscal month, attached to which
shall be all reports and supporting information required by
the Bank to confirm the Borrowing Base calculations as of the
last day of such fiscal month;
(d) promptly upon receipt thereof, copies of all detailed
financial and management reports, if any, submitted to the Borrower or
any of its Subsidiaries by any independent public accountant in
connection with any annual or interim audit made by any such
independent public accountant of the books of the Borrower or of any of
its Subsidiaries;
(e) promptly upon completion thereof, and in any event not
later than June 15 of each fiscal year of the Borrower, a copy of the
budget for the following fiscal year for the Borrower and its
Subsidiaries, including, in each case, budgeted results for each fiscal
quarter and for the fiscal year as a whole, together with an
explanation of any differences between the sum of the individual
budgets and the consolidated totals, and upon the delivery of any
financial statements relating to any period included in such budget, a
summary comparing the actual financial performance of the Borrower and
its Subsidiaries during such period to that provided for in such
budget; and
(f) promptly, such additional financial and other information
with respect to the Borrower or any of its Subsidiaries as the Bank may
from time to time reasonably request.
SECTION 8.1.2. MAINTENANCE OF EXISTENCE; ETC.
Maintain and preserve its separate existence as a limited liability
company, limited partnership or (as the case may be) corporation and maintain
and preserve its material rights and franchises and continue to own and hold,
legally and beneficially, free and clear of all Liens (except Liens permitted by
Section 8.2.3 or by any of the other Loan Documents), all of the
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Equity Interests of each of its Subsidiaries; provided, however, that the
foregoing shall not prohibit the Borrower or any of its Subsidiaries from
entering into or implementing any Permitted Disposition or any other arrangement
or transaction permitted by Section 8.2.7.
SECTION 8.1.3. FOREIGN QUALIFICATION.
Cause to be done at all times all things necessary to be duly qualified
to do business and to be in good standing as a foreign organization in each
jurisdiction where the nature of its business makes such qualification necessary
or appropriate and where the failure to so qualify has or could reasonably be
expected to have any Materially Adverse Effect.
SECTION 8.1.4. PAYMENT OF TAXES; ETC.
Pay and discharge, as the same become due and payable, all material
federal, state and local taxes, assessments and other governmental charges or
levies against or on any of its income, profits or Property, as well as all
claims of any kind, including all claims for labor, materials and supplies,
which, if unpaid, will become a Lien upon any of its Property (other than Liens
expressly permitted by this Agreement or any of the other Loan Documents), and
pay before they become delinquent all other material obligations and
liabilities; provided, however, that the foregoing shall not require the
Borrower or any of its Subsidiaries to pay or discharge any such tax,
assessment, charge, levy, claim, obligation or liability (a) which is not yet
due and payable, or (b) so long as it shall contest the validity thereof in good
faith by appropriate proceedings and shall have set aside on its books, to the
extent required by GAAP, adequate reserves in accordance with GAAP with respect
thereto. Nothing in this Section 8.1.4 shall be construed so as to diminish or
impair the absolute and unconditional Obligations of the Borrower to pay to the
Bank all of the Obligations as and when the same shall become due and payable.
SECTION 8.1.5. MAINTENANCE OF PROPERTY.
Keep all Property owned by it that is useful and necessary in its
businesses in good working order and condition (ordinary wear and tear
excepted), and maintain or cause to be maintained insurance with respect to
Property owned by it and with respect to its businesses against such casualties
and contingencies and of such types and in such amounts and with such
deductibles as are customary in the case of similar businesses, including,
without limitation, property and casualty insurance complying with the foregoing
provisions and naming the Bank as loss payee and additional insured; and, upon
the reasonable request of the Bank at any time and from time to time (which
request, however, shall not be made by the Bank more than once in any fiscal
year of the Borrower unless any Defaults shall be continuing), furnish to the
Bank a certificate of an Authorized Officer of the Borrower setting forth the
nature and extent of all insurance maintained by the Borrower or by any of its
Subsidiaries in accordance with this Section 8.1.5.
SECTION 8.1.6. NOTICE OF DEFAULT; ETC.
Give written notice (accompanied by a reasonably detailed written
explanation with respect thereto) promptly, and in any event within five (5)
Business Days after the Borrower or any of its Subsidiaries shall have first
obtained knowledge thereof, to the Bank of:
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(a) the occurrence of
(i) any Default,
(ii) the receipt by the Borrower from or on behalf of
any holder of any Capital Stock or other Equity Interests of
the Borrower of any notice, demand or request for redemption,
purchase, repurchase or other acquisition by the Borrower of
any of the Capital Stock or other Equity Interests of the
Borrower, and
(iii) any material default or event of default under
any Ancillary Document on the part of any Person bound
thereby, or any other material breach by any Person bound by
any Ancillary Document of any of its or his material
obligations thereunder;
(b) any litigation, arbitration or governmental investigation
or proceeding not previously disclosed by the Borrower to the Bank
which has been instituted or, to the best knowledge of the Borrower
(after due inquiry), is threatened against the Borrower or any of its
Subsidiaries, or to which any of their respective Properties is
subject, which
(i) has had and continues to have, or (as the case
may be) could reasonably be expected to have, any Materially
Adverse Effect, or
(ii) relates to this Agreement, any other Loan
Document, any Collateral or any Ancillary Document;
(c) any material adverse development which shall occur in any
litigation, arbitration or governmental investigation or proceeding
previously disclosed by the Borrower to the Bank and which has had and
continues to have, or (as the case may be) could reasonably be expected
to have, any Materially Adverse Effect;
(d) any development in the business, operations, Property,
financial condition or prospects of the Borrower or any of its
Subsidiaries which has had and continues to have, or (as the case may
be) could reasonably be expected to have, any Materially Adverse
Effect;
(e) the receipt by the Borrower or any of its Subsidiaries of
written notice of the intention of any Governmental Authority or any
other Person to terminate or renegotiate a Management Agreement, or the
delivery by the Borrower or any of its Subsidiaries to any Governmental
Authority or any other Person of written notice of the intention of the
Borrower or of any of its Subsidiaries to terminate or renegotiate any
Management Agreement, if (in any such case) the termination or
renegotiation thereof has had or could reasonably be expected to have a
Materially Adverse Effect; and
(f) any termination, cancellation or rescission or any
material amendment or modification of any Management Agreement or other
Ancillary Document, which written notice shall include a copy (if in
writing) or a description (if not in writing) of any such termination,
cancellation, rescission, amendment or modification of any such
Management Agreement or Ancillary Document; provided, however, that the
Borrower
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shall have no obligation to give notices or other information or
documents under this clause (f) unless the subject event or arrangement
has had or could reasonably be expected to have a Materially Adverse
Effect.
SECTION 8.1.7. BOOKS AND RECORDS.
Keep proper books and records reflecting all of its material business affairs
and transactions in accordance with GAAP, and permit the Bank or any of its
representatives, upon reasonable notice at reasonable times and intervals during
ordinary business hours, to visit and inspect any of its offices and Properties,
discuss financial matters relating to the Borrower or any of its Subsidiaries
with any of their officers and the Independent Public Accountant (and the
Borrower hereby irrevocably authorizes the Independent Public Accountant to
discuss its financial matters with the Bank or any of the Bank's
representatives), and examine and make abstracts or photocopies from any of its
books or other corporate records, all at the cost and expense of the Borrower
for any charges imposed by such accountant or for making such abstracts or
photocopies. The Borrower acknowledges and agrees that the Bank shall have the
right to perform a collateral audit at the offices and at the business and
Property locations of the Borrower and each of its Subsidiaries twice during
each fiscal year of the Borrower so long as no Defaults shall be continuing,
and, if any Defaults shall be continuing, at such additional time or times
during each fiscal year of the Borrower as the Bank shall in its sole discretion
determine to be necessary or appropriate. All of the reasonable out-of-pocket
costs and expenses incurred or sustained by the Bank in connection with the
conduct of such collateral audits shall be for the account of the Borrower;
provided, however, that the Borrower shall not be responsible for the costs and
expenses of more than one (1) such collateral audit per fiscal year conducted by
the Bank while no Defaults are continuing.
SECTION 8.1.8. COMPLIANCE WITH LAWS; ETC.
(a) Obtain all such Approvals and take all such other action with
respect to any Governmental Authority as shall from time to time be required for
the execution, delivery or performance of this Agreement and the other Loan
Documents and duly perform and comply in all material respects with all of the
material terms and conditions of all Approvals so obtained.
(b) Comply in all material respects with all Applicable Laws, including
all Environmental Laws and all material provisions of ERISA, except to the
extent that any failure so to comply does not have and could not reasonably be
expected to have any Materially Adverse Effect.
SECTION 8.1.9. IDENTIFICATION OF SUBSIDIARIES; PROVISION OF COLLATERAL.
If and whenever any direct or indirect Subsidiary of the Borrower shall
be created or acquired by the Borrower or by any of its Subsidiaries at any time
after the date hereof:
(a) furnish promptly to the Bank a written notice identifying such
Subsidiary and setting forth with respect to such Subsidiary the information
required by Section 7.14 with respect to the Borrower; and
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(b) promptly comply with, and cause such Subsidiary to comply with, the
applicable terms of Section 3.10.
SECTION 8.1.10. LANDLORD LIEN WAIVERS.
If and when requested by the Bank with respect to any particular Real
Estate Lease or warehouse contract, continue to use commercially reasonable
efforts, including making written requests and follow-up telephone calls, to
obtain a Landlord Lien Waiver reasonably satisfactory to the Bank in form and
substance with respect to each Real Estate Lease or (as the case may be)
warehouse contract which is negotiated, completed, renewed or extended by the
Borrower or any of its Subsidiaries at any time or from time to time after the
Closing Date; and, in any event, use all commercially reasonable efforts to
obtain by December 15, 1999 a Landlord Lien Waiver reasonably satisfactory to
the Bank in form and substance with respect to each warehouse contract to which
the Borrower is a party on the date hereof. Anything in the foregoing provisions
of this Section 8.1.10 to the contrary, the Borrower shall have no obligation to
obtain any Landlord Lien Waivers with respect to any Real Estate Leases of
School facilities.
SECTION 8.1.11. YEAR 2000 COMPLIANCE.
Perform all commercially reasonable acts necessary to ensure that the
Borrower and its Subsidiaries (a) shall become Year 2000 Compliant in a timely
manner, and (b) shall not be materially adversely affected as a consequence of
the failure by any supplier, vendor or customer of the Borrower or its
Subsidiaries to become Year 2000 Compliant in a timely manner, except (in each
case) to the extent that any failure to do so will not have and could not
reasonably be expected to have any Materially Adverse Effect. Such acts will
include, as and to the extent determined by the Borrower on a reasonable basis
to be reasonably necessary and appropriate considering the nature of the
business and operations conducted by the Borrower and its Subsidiaries,
performing a comprehensive review and assessment of all material systems of the
Borrower and its Subsidiaries and, if and as reasonably necessary or
appropriate, adopting a plan, with itemized budget, if appropriate, for the
remediation, monitoring and testing of such systems. As used in this Section
8.1.11, the term "YEAR 2000 COMPLIANT" means, with respect to any Person, that
all software, hardware, firmware, equipment, goods or systems utilized by or
material to the business, operations or financial condition of such Person will
properly perform date sensitive functions before, during and after the year
2000. The Borrower will, promptly upon request by the Bank, provide to the Bank
such evidence of compliance by the Borrower and its Subsidiaries with the terms
of this Section 8.1.11 as the Bank may from time to time reasonably require.
SECTION 8.1.12. BANKING ARRANGEMENTS.
(a) The Borrower will, from and after December 15, 1999, continue to
maintain with the Bank all primary banking and transaction accounts established
by the Borrower with the Bank by December 15, 1999, all upon terms and
conditions reasonably satisfactory to the Bank and the Borrower. By December 15,
1999 and continuing thereafter, the Borrower will (i) direct and instruct in
writing all account debtors and other obligors of the Borrower or any of its
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Subsidiaries, to make all payments and remit all cash proceeds of Net Revenues
Receivable solely to the Collection Lockbox, (ii) establish a depository account
(the "BORROWER'S CONCENTRATION ACCOUNT") under the control of the Bank, in the
name of the Borrower, (iii) except as and to the extent otherwise provided by
paragraph (b) or otherwise expressly permitted by the Bank from time to time,
make subject to an agency account agreement in form and substance reasonably
satisfactory to the Bank (each, an "AGENCY ACCOUNT AGREEMENT") each bank account
and other Financial Asset Account held or maintained by the Borrower or any of
its Subsidiaries with any bank or other financial institution other than the
Bank, (iv) except as and to the extent otherwise expressly permitted by the Bank
from time to time, direct each Agency Account Institution, pursuant to the
Agency Account Agreement to which it is a party (whereby such Agency Account
Institution shall, among other things, waive all rights of set-off, other than
for service charges and returns incurred in connection therewith), to cause all
funds held by such Agency Account Institution in its Agency Accounts to be
transferred (with such frequency as shall be required by such Agency Account
Agreement) to, and only to, the Bank for deposit in the Borrower's Concentration
Account, and (v) at all times ensure that immediately upon the Borrower's or any
of its Subsidiaries' receipt of any funds constituting cash proceeds of Net
Revenues Receivable, cause such amounts to be immediately transferred to and
deposited in the Borrower's Concentration Account. All cash proceeds of Net
Revenues Receivable received in the Collection Lockbox will be transferred daily
to, and only to, the Borrower's Concentration Account. The Bank hereby agrees
with the Borrower that, unless any Event of Default is continuing, the Bank will
not give to any Agency Account Institution any written "Notice" of the kind
described in paragraph 4 of the form of Agency Account Agreement.
(b) The Borrower shall not be required to make subject to an Agency
Account Agreement any of the following Financial Asset Accounts (each, an
"EXCLUDED ACCOUNT"): (i) any Financial Asset Account (A) the cash balances or
the Cash Equivalents or other Property of which at no time exceed $50,000, and
(B) the aggregate amount of all sums or Cash Equivalents or other Property
credited to which in any calendar month do not exceed $200,000; or (ii) any
Financial Asset Account identified in Section 7.7 of the Disclosure Schedule as
being subject to Liens or other restrictions on the date hereof; provided,
however, that the Borrower shall not at any time after December 14, 1999 cause
or permit (1) the aggregate amount of all cash balances, Cash Equivalents and
other Property of all Excluded Accounts of the kind described in clause (i)
above to exceed $1,500,000 in the aggregate, or (2) the aggregate amount of all
sums, Cash Equivalents and other Property credited to Excluded Accounts of the
kind described in clause (i) above in any calendar month to exceed $4,000,000.
SECTION 8.1.13. COMPLIANCE WITH TERMS OF MANAGEMENT AGREEMENTS; ETC.
Make all payments and otherwise perform in all material respects all
material obligations in respect of all Management Agreements, Subordinated Debt
Documents and Real Estate Leases, keep such Instruments in full force and effect
and not allow such Instruments to lapse or be terminated or any rights to renew
such Instruments to be forfeited or canceled, notify the Bank of any material
default by any party with respect to such Instruments, and cooperate with the
Bank in all respects to cure any such default, except, in any case, where the
failure to do so, either individually or in the aggregate, does not have and
could not reasonably be expected to have a Materially Adverse Effect.
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SECTION 8.2. CERTAIN NEGATIVE COVENANTS.
The Borrower agrees with the Bank and warrants that, from and after the
date of this Agreement and until the Commitment shall have terminated in full
and all of the Obligations shall have been paid in full, the Borrower will not,
and the Borrower will not cause or permit any of its Subsidiaries to:
SECTION 8.2.1. LIMITATION ON LINES OF BUSINESS.
At any time undertake, conduct or transact, directly or indirectly, any
businesses except businesses that are in the Line of Business.
SECTION 8.2.2. INDEBTEDNESS.
Incur or permit or suffer to exist, or otherwise become or be liable in
respect of or be responsible for, any Indebtedness; except:
(a) Indebtedness of the Borrower or of any of its Subsidiaries
under any of the Loan Documents or in respect of any of the Credit
Extensions or any of the Obligations;
(b) Permitted Indebtedness of the Borrower or of any of its
Subsidiaries; and
(c) Permitted Subordinated Debt of the Borrower.
SECTION 8.2.3. LIENS.
Create, incur or assume, or permit or suffer to exist, any Liens upon
any of its Property (including any Equity Interests in any of its Subsidiaries),
whether now owned or hereafter created, arising or acquired; except:
(a) Liens in favor of the Bank securing the payment or
performance of any of the Credit Extensions or any of the Obligations
under or in respect of any of the Loan Documents; and
(b) Permitted Liens.
SECTION 8.2.4. FINANCIAL COVENANTS.
(a) MAXIMUM ADJUSTED CONSOLIDATED CAPITAL EXPENDITURES. Permit the
Adjusted Consolidated Capital Expenditures for any period identified in the
table set forth in Section 8.2.4(a) of the First Schedule to be greater than the
maximum Adjusted Consolidated Capital Expenditures set forth opposite such
period.
(b) MAXIMUM CHARTER SCHOOL CAPITAL EXPENDITURES. Permit the Charter
School Capital Expenditures for any period identified in the table set forth in
Section 8.2.4(b) of the First Schedule to be greater than the maximum Charter
School Capital Expenditures set forth opposite such period.
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(c) MINIMUM STUDENT ENROLLMENT. Permit the Student Enrollment on any
date identified in the table set forth in Section 8.2.4(c) of the First Schedule
to be less than the minimum Student Enrollment set forth opposite such date.
SECTION 8.2.5. INVESTMENTS AND ACQUISITIONS.
(a) Make, incur or assume, or permit or suffer to exist, or
make any offer or commitment to make, or enter into any agreement to
make, any Investments in any other Person or any Acquisitions; EXCEPT:
(i) Permitted Investments;
(ii) Investments by the Borrower made by way of
short-term loans to Schools; provided, however, that (A) the
aggregate outstanding principal amount of all of such loans
shall not at any time exceed $30,000,000, and (B) no such
loans shall be made by the Borrower while any Events of
Default shall be continuing;
(iii) Acquisitions by the Borrower or by any of its
Subsidiaries, in a single transaction or in a series of
related transactions, for total consideration paid in an
Amount not exceeding $200,000 in the aggregate for any such
single transaction or series of related transactions;
provided, however, that: (A) each such Acquisition shall be
made in the ordinary course of business and on terms and
conditions that are in all material respects consistent with
the Borrower's usual and customary business practices; (B) the
aggregate Amount of all of the consideration paid in any
fiscal year of the Borrower for all of such Acquisitions
pursuant to this clause (iii) shall not exceed $500,000 in any
such fiscal year; and (C) no Default shall be continuing at
the time of any such Acquisition or shall result therefrom;
and
(iv) Acquisitions by the Borrower or by any of its
Subsidiaries, if and to the extent that the consideration
payable therefor is Permitted Equity Interests of the
Borrower.
(b) During the continuation of any Event of Default:
(i) make, incur or assume any Investments that are
related to the acquisition or improvement by the Borrower, any
of its Subsidiaries or any other Person or Persons of any
Property, plant or equipment or other facilities
(collectively, "SCHOOL FACILITIES") for any charter school,
managed school or other similar school that is not at the time
of the occurrence of such Event of Default a School (any
charter school, managed school or other similar school that is
not a School at the time of the occurrence of such Event of
Default being herein called a "TARGET SCHOOL");
(ii) make, incur or assume any Capital Expenditures
for or in
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connection with any Target School or any School Facilities
relating to such Target School;
(iii) incur any Permitted Indebtedness of the kind
described in clause (f) of the definition of the term
"PERMITTED INDEBTEDNESS" for the purpose of acquiring,
leasing, constructing or improving any Property used or to be
used for or in connection with any Target School or any School
Facilities relating thereto; or
(iv) make any offer or commitment to make or incur,
or enter into any agreement or undertaking to make or incur,
any Investments, Capital Expenditures or Indebtedness of the
kind described in clause (i), (ii) or (iii) of this paragraph
(b).
SECTION 8.2.6. RESTRICTED PAYMENTS.
Make, extend or enter into any offer or commitment to make, or enter
into any agreement to make, any Restricted Payments; EXCEPT:
(a) the declaration and payment by the Borrower of dividends
or other distributions on its Equity Interests in the form of Permitted
Equity Interests of the Borrower; and
(b) payments, not otherwise expressly permitted by any of the
other clauses of this Section 8.2.6 and not otherwise prohibited by any
of the other covenants in this Section 8.2 or by any of the other
provisions contained in this Agreement, by the Borrower or any of its
Subsidiaries to any Affiliates of the Borrower, but, in each case, only
to the extent permitted by Section 8.2.13.
SECTION 8.2.7. MERGERS; SALES OF PROPERTY.
Consolidate or merge with or into any Person, engage in any Sale of all
or any substantial part of its Property (either in a single transaction or in a
series of related transactions), make any offer or commitment to do so, or enter
into any agreement to do so; EXCEPT:
(a) any Permitted Dispositions; and
(b) the consolidation or merger of any Subsidiary of the
Borrower with or into, or the Sale or other transfer by any such
Subsidiary of all or substantially all of its Property to, the
Borrower; provided, however, that, in the event of any merger or other
similar transaction involving the Borrower, the Borrower shall be the
Person surviving such merger or other transaction; and, provided,
further, that, prior to or in connection with the consolidation or
merger of any Subsidiary of the Borrower with or into, or the transfer
of all of the Property of any Subsidiary of the Borrower to, the
Borrower, (i) true and complete copies of all of the Instruments
evidencing such transactions shall have been furnished to the Bank and
shall be reasonably satisfactory to the Bank in form and substance, and
(ii) the Borrower shall execute and deliver to the Bank all such
Instruments (including Instruments of assumption) as shall be requested
by the Bank in
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order to protect and preserve all of its rights and remedies under the
Loan Documents and in relation to the Collateral.
SECTION 8.2.8. LIMITATIONS ON OPTIONAL PAYMENTS; ETC.
(a) Make or offer to make any optional or voluntary payment,
prepayment, repurchase or redemption of, or otherwise voluntarily or optionally
defease any Permitted Subordinated Debt or any other Indebtedness governed or
otherwise evidenced by any Ancillary Documents, or segregate funds for any such
payment, prepayment, repurchase, redemption or defeasance, provided that the
Borrower may in any fiscal year make such payments or other prepayments in a
maximum aggregate amount not exceeding $1,000,000, (b) amend, modify or
otherwise change, or consent or agree to any amendment, modification, waiver or
other change to, any of the terms governing the payment, prepayment, repurchase
or redemption of any Permitted Subordinated Debt or any other Indebtedness
governed or otherwise evidenced by any Ancillary Documents (other than any such
amendment, modification, waiver or other change (i) which affects or relates to
the Guarantee, dated November 25, 1997, in favor of BankBoston, N.A., or (ii)
which (A) would extend the maturity or reduce the amount of any payment of
principal thereof, reduce the rate or extend the date for payment of interest
thereon or relax any covenant or other restriction applicable to the Borrower or
any of its Subsidiaries, and (B) does not involve the payment of a consent fee),
or (c) designate any Indebtedness (other than the Obligations) as "senior
indebtedness" or "senior debt" for the purposes of any Instrument or Instruments
governing or otherwise evidencing any Permitted Subordinated Debt.
SECTION 8.2.9. MODIFICATION OF OTHER ANCILLARY DOCUMENTS; ETC.
Consent to or enter into or permit any material amendment, supplement
or other modification of any of the Governing Documents of the Borrower or any
of its Subsidiaries or any of the other Ancillary Documents, if such amendment,
supplement or modification (a) shall have, or (as the case may be) could
reasonably be expected to have, any Materially Adverse Effect, or (b) shall
include any term, covenant or other provision, or shall otherwise effect any
change, that conflicts with or otherwise contravenes any of the terms, covenants
or other provisions of this Agreement or any of the other Loan Documents. The
covenant of the Borrower in Section 8.2.8 is separate from and in addition to
the covenant in this Section 8.2.9.
SECTION 8.2.10. LIMITATION ON CHANGES IN FISCAL PERIODS.
Permit the fiscal year of the Borrower to end on a day other than June
30 or change the Borrower's method of determining fiscal quarters.
SECTION 8.2.11. LIMITATION ON NEGATIVE PLEDGE CLAUSES.
Enter into or suffer to exist or become effective any Instrument which
prohibits or limits the ability of the Borrower or any of its Subsidiaries to
create, incur, assume or suffer to exist any Lien upon any of its Property or
revenues, whether now owned or hereafter acquired, other than (a) this Agreement
and the other Loan Documents, and (b) any agreements governing any Purchase
Money Liens or Capitalized Lease Obligations otherwise permitted hereby (in
which case, any prohibition or limitation shall only be effective against the
assets financed thereby).
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SECTION 8.2.12. LIMITATION ON RESTRICTIONS ON SUBSIDIARY DISTRIBUTIONS.
Enter into or suffer to exist or become effective any consensual
encumbrance or restriction on the ability of any Subsidiary of the Borrower to
(a) make any dividends or other distributions in respect of any Capital Stock of
such Subsidiary held by, or pay any Indebtedness owed to, the Borrower or any of
its Subsidiaries, (b) make Investments in the Borrower or any of its
Subsidiaries, or (c) transfer any of its Property to the Borrower or any of its
Subsidiaries, EXCEPT for such encumbrances or restrictions existing under or by
reason of (i) any restrictions existing under the Loan Documents, and (ii) any
restrictions on the ability of the Borrower or any of its Subsidiaries to
transfer any asset imposed by the provisions of the documentation pursuant to
which there shall have been created a Lien on such asset expressly permitted by
Section 8.2.3.
SECTION 8.2.13. TRANSACTIONS WITH AFFILIATES.
Enter into, engage in or perform any Affiliate Transaction, make any
offer or commitment to do so, or enter into any agreement to do so, EXCEPT:
(a) Restricted Payments by the Borrower, if and only to the
extent expressly permitted by Section 8.2.6;
(b) loans or advances to any director, manager, officer or
employee of the Borrower or any of its Subsidiaries made in the
ordinary course of business and on terms and conditions that are in all
material respects consistent with the Borrower's usual and customary
business practices; provided, however, that the aggregate principal
amount of all of such loans or advances from time to time outstanding
shall not exceed $250,000 at any time;
(c) the payment by the Borrower of management or transaction
fees to any of its Affiliates; provided, however, that: (i) the
aggregate amount of all of such fees so paid in any fiscal year of the
Borrower shall not exceed $100,000 in any such fiscal year; and (ii) no
such fees shall be paid so long as any Default shall be continuing;
(d) Permitted Investments of the kind described in paragraph
(f) of the definition of the term "PERMITTED INVESTMENTS";
(e) each of the Affiliate Transactions described in Section
7.21 of the Disclosure Schedule; and
(f) any other Affiliate Transaction not otherwise permitted by
any of the other provisions of this Section 8.2.13; provided, however,
that (i) such Affiliate Transaction is not otherwise prohibited by the
terms of this Agreement or any of the other Loan Documents; (ii) such
Affiliate Transaction is made or undertaken in the ordinary course of
business by the Borrower or by any of its Subsidiaries and on terms and
conditions that are in all material respects consistent with the
Borrower's usual and customary business practices; (iii) the terms of
such Affiliate Transaction, taken as a whole, are no less favorable to
the Borrower or its Subsidiaries than would be the case if such
Affiliate Transaction had been entered into on an arm's length basis
with a Person that is not an
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Affiliate of the Borrower; and (iv) at the time of the completion of
such Affiliate Transaction, and after giving effect thereto, no Default
shall occur or be continuing.
SECTION 8.2.14. SALE OF CAPITAL STOCK; ETC.
Issue, sell, transfer or otherwise dispose of any shares of any Capital
Stock or other Equity Interests of the Borrower or any of its Subsidiaries;
EXCEPT:
(a) the pledge to the Bank from time to time of Capital Stock
and other Equity Interests now owned or from time to time hereafter
acquired by the Borrower or by any of its Subsidiaries, all in
accordance with the terms of this Agreement and the Collateral
Documents;
(b) the issuance and Sale by the Borrower or by any of its
Subsidiaries of Permitted Equity Interests of the Borrower as
consideration in, or in connection with the formation of any
acquisition vehicle to be used in, any Acquisition permitted by
paragraph (iii) of Section 8.2.5(a); and
(c) the issuance and Sale by the Borrower of shares of its
Permitted Equity Interests; provided, however, that no breach of
Section 8.2.16 shall occur as a result of such Sale.
SECTION 8.2.15. CHANGE OF LOCATION OR NAME.
Change (a) the location of its principal place of business, chief
executive office, major executive office, chief place of business or records
concerning its business and financial affairs, or (b) its name or the name under
or by which it conducts its business, in each case, without first giving the
Bank written notice thereof and having taken any and all action reasonably
required by the Bank to maintain and preserve the perfected first-priority Liens
in favor of the Bank created by the Collateral Documents.
SECTION 8.2.16. FINANCIAL ASSET ACCOUNTS.
Except as and to the extent otherwise expressly permitted by the Bank,
establish, at any time after December 14, 1999, any bank accounts or other
Financial Asset Accounts other than those with the Bank or with any Agency
Account Institution that is party to an Agency Account Agreement and other than
as otherwise expressly permitted by Section 8.1.12(b).
ARTICLE IX
EVENTS OF DEFAULT
SECTION 9.1. EVENTS OF DEFAULT.
The term "EVENT OF DEFAULT" shall mean any of the following events set
forth in this Section 9.1 occurring or existing at any time on or after the date
of this Agreement:
SECTION 9.1.1. NON-PAYMENT OF OBLIGATIONS.
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The Borrower shall default:
(a) in the payment or prepayment when due under this Agreement
or the Note of any principal of any of the Loans, and such default
shall continue unremedied for a period of more than one (1) Business
Day;
(b) in the payment or prepayment when due under this
Agreement, the Note or any other Loan Documents of any interest on any
of the Loans or on any other Obligations or any Fees payable under
Section 3.5, and such default shall continue unremedied for a period of
more than three (3) Business Days; or
(c) in the payment when due under this Agreement or any of the
other Loan Documents of any other sum (other than any sum referred to
in clause (a) or (b)), and such default shall continue unremedied for a
period of more than five (5) Business Days.
SECTION 9.1.2. NON-PERFORMANCE OF CERTAIN OBLIGATIONS.
The Borrower shall default in the due performance or observance of any
of its Obligations under Section 3.10, Section 8.1.6, Section 8.1.9, Section
8.1.12, Section 8.1.13, or Section 8.2 (including Sections 8.2.1 through 8.2.16,
inclusive).
SECTION 9.1.3. NON-PERFORMANCE OF OTHER OBLIGATIONS.
The Borrower shall default in the due performance or observance of any
of its Obligations under any of the Loan Documents (other than the Obligations
specified in Section 9.1.1 or 9.1.2), and such default shall continue unremedied
for more than thirty (30) days after written notice thereof shall have been
given to the Borrower by the Bank.
SECTION 9.1.4. BREACH OF WARRANTY.
Any representation or warranty of the Borrower under any of the Loan
Documents is or shall be untrue or incorrect in any material respect when made
or deemed made.
SECTION 9.1.5. DEFAULT UNDER OTHER INSTRUMENTS; ETC.
At any time after the date hereof,
(a) the Borrower or any of its Subsidiaries shall fail to make
any payments, when due, of any Indebtedness of the Borrower or of any
of its Subsidiaries (other than the Obligations), such payments shall
exceed $2,000,000 in the aggregate, and such failure shall continue
beyond the periods of grace, if any, provided in the Instruments under
or by which such Indebtedness is governed or evidenced;
(b) the Borrower or any of its Subsidiaries shall fail to
perform or observe the terms of any Instruments governing or evidencing
any Indebtedness of the Borrower or of any of its Subsidiaries, and
such failure of the kind described in this clause (b) shall permit any
one or more holders of such Indebtedness to declare immediately due and
payable or otherwise to immediately accelerate Indebtedness of the
Borrower or of any of
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its Subsidiaries in an aggregate amount exceeding $4,000,000;
(c) any Lien on any Property of the Borrower or of any of its
Subsidiaries securing any Indebtedness of the Borrower or of any of its
Subsidiaries in an aggregate amount exceeding $2,000,000, or any Lien
created under or in connection with the Real Estate Lease in effect on
the date hereof, shall be foreclosed or otherwise enforced;
(d) during any fiscal year of the Borrower, the aggregate
Student Enrollment of all Schools, determined after deducting the
aggregate Student Enrollment of all Schools covered by Management
Agreements in respect of which the Borrower or any of its Subsidiaries
shall have received written notices of termination or of intention to
terminate, shall be less than ninety percent (90%) of the minimum
Student Enrollment required to be maintained during such fiscal year
pursuant to Section 8.2.4(c).
SECTION 9.1.6. BANKRUPTCY, INSOLVENCY; ETC.
The Borrower or any Subsidiary of the Borrower shall:
(a) generally fail to pay its debts as they become due, or
admit in writing its inability to pay its debts as they become due;
(b) apply for, consent to, or acquiesce in, the appointment of
a trustee, receiver, sequestrator, or other custodian for the Borrower
or any such Subsidiary or any Property of any thereof, or make a
general assignment for the benefit of creditors;
(c) in the absence of such application, consent or
acquiescence, permit or suffer to exist the involuntary appointment of
a trustee, receiver, sequestrator or other custodian for the Borrower
or any such Subsidiary or for a substantial part of the Property of any
thereof, and such trustee, receiver, sequestrator or other custodian
shall not be discharged within sixty (60) days;
(d) permit or suffer to exist the involuntary commencement of,
or voluntarily commence, any bankruptcy, reorganization, debt
arrangement, or other case or proceeding under any bankruptcy or
insolvency laws, or permit or suffer to exist the involuntary
commencement of, or voluntarily commence, any dissolution, winding up
or liquidation proceeding, in each case, by or against the Borrower or
any such Subsidiary; provided that if not commenced by the Borrower or
any such Subsidiary, such proceeding shall be consented to or
acquiesced in by the Borrower or any such Subsidiary, or shall result
in the entry of an order for relief or shall remain undismissed or
shall not be stayed, bonded or vacated for more than sixty (60) days;
(e) permit or suffer to exist the commencement of any case,
proceeding or other action seeking the issuance of a warrant of
attachment, execution, distraint or similar process against all or any
material part of its Property (except for any such attachment or
similar process that would constitute a Permitted Lien); or
(f) take any corporate action authorizing, or in furtherance
of, any of the foregoing.
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SECTION 9.1.7. JUDGMENTS.
A final judgment which, with all other such outstanding final judgments
against the Borrower or any of its Subsidiaries, exceeds an aggregate of
$1,000,000 shall be rendered against the Borrower or any of its Subsidiaries,
and, within thirty (30) days after entry thereof, such judgment shall not have
been discharged or execution thereof stayed pending appeal, or within thirty
(30) days after the expiration of any such stay, such judgment shall not have
been discharged.
SECTION 9.1.8. IMPAIRMENT OF SECURITY; ETC.
Any Loan Document, or any Lien on any material portion of the
Collateral granted thereunder, shall (except in accordance with its terms), in
whole or in part, terminate, cease to be effective, or cease to be the legally
valid, binding and enforceable obligation of the Borrower or (as the case may
be) any of its Subsidiaries; or the Borrower or any of its Subsidiaries shall,
directly or indirectly, contest in any manner such effectiveness, validity,
binding nature or enforceability; or any Lien on any material portion of the
Collateral securing any of the Obligations shall, in whole or in part, cease to
be a perfected first-priority Lien, subject only to the exceptions permitted by
the Loan Documents.
SECTION 9.2. ACTION IF BANKRUPTCY.
If any Default or Event of Default described in Section 9.1.6 shall
occur, the Commitment shall automatically be terminated in full and the
outstanding principal amount of all Loans and the outstanding amount of all
other Obligations shall automatically be and become immediately due and payable,
and the Borrower shall automatically become obligated to provide cash Collateral
to the Bank in an amount equal to the undrawn amount under all Letters of
Credit, all without notice, demand, presentment or other action of any kind.
SECTION 9.3. ACTION IF OTHER EVENT OF DEFAULT.
If any Event of Default (other than an Event of Default described in
Section 9.1.6) shall occur for any reason, whether voluntary or involuntary, and
be continuing, the Bank may, by giving written notice to the Borrower, declare
(a) the Commitment to be terminated in full, whereupon the Commitment shall be
immediately terminated in full, and/or (b) all or any portion of the outstanding
principal amount of the Loans or the outstanding amount of any other Obligations
to be immediately due and payable, whereupon the Commitment shall terminate
forthwith in full and such Loans and other Obligations, or, as the case may be,
such portion thereof, shall be and become immediately due and payable, and the
Borrower shall automatically become obligated to provide cash Collateral to the
Bank in an amount equal to the undrawn amount under all Letters of Credit, in
each case under clause (a) or clause (b), without further notice, demand,
presentment or other action of any kind.
ARTICLE X
MISCELLANEOUS
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SECTION 10.1. WAIVERS, AMENDMENTS; ETC.
The provisions of this Agreement and the other Loan Documents may from
time to time be amended, modified or waived, and all or any Collateral may be
released, if such amendment, modification, waiver or release is consented to in
writing by the Bank and, in the case of any amendment or modification, the
Borrower. No waiver or approval by the Bank under this Agreement, the Note or
any other Loan Documents shall, except as may be otherwise stated in such waiver
or approval, be applicable to subsequent transactions. No waiver or approval
hereunder shall require any similar or dissimilar waiver or approval thereafter
to be granted hereunder.
SECTION 10.2. NOTICES.
(a) All notices and other communications pursuant to this
Agreement or any of the other Loan Documents shall be in writing,
either delivered in hand or sent by first-class mail, postage prepaid,
or sent by facsimile transmission, addressed as follows:
(i) if to the Borrower, at 521 Fifth Avenue, 15th
Floor, New York, NY 10175, marked Attention: James L. Starr,
Chief Financial Officer; telecopy: (212) 419-1706, with a copy
of each such notice or other communication given
simultaneously to Hale and Dorr, 1455 Pennsylvania Avenue,
N.W., Washington, D.C. 20004, marked Attention: William
Winslow, Esq., telecopy: (202)942-8484; or
(ii) if to the Bank, at 9920 South La Cienega
Boulevard, 8th Floor, Inglewood, California 90301, marked
"Attention: Richard M. Baker, Esq., Senior Vice President,
General Counsel and Secretary", with a copy of each such
notice or other communication given simultaneously to Diane H.
Russell, Senior Vice President, Imperial Bank Merchant Banking
Division, 225 Franklin Street, 29th Floor, Boston,
Massachusetts 02110, and also to Bingham Dana LLP, 150 Federal
Street, Boston, Massachusetts 02110, marked "Attention: Louis
J. Duval, Esq.", telecopy: (617) 951-8736; or
(iii) to such other addresses as any party hereto
shall have designated in a written notice to the other parties
hereto.
(b) Any notice or other communication pursuant to this
Agreement or any of the other Loan Documents shall be deemed to have
been duly given or made and to have become effective when delivered in
hand to the party to which it is directed, or, if sent by first-class
mail, postage prepaid, or by facsimile transmission, and properly
addressed in accordance with paragraph (a) of this Section 10.2, when
received by the addressee.
SECTION 10.3. COSTS AND EXPENSES.
The Borrower agrees to pay to the Bank upon demand all reasonable
out-of-pocket costs and expenses incurred by the Bank in connection with the
structuring, preparation, negotiation, review, execution or delivery of this
Agreement or any of the other Loan Documents, including
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all Schedules and Exhibits, or in connection with any amendments, consents or
waivers to this Agreement, any of the other Loan Documents or any related
documents (whether or not any of the same become effective), including (in each
case) all reasonable fees and expenses of counsel (including all local and
special counsel) for the Bank from time to time incurred in connection
therewith, whether or not any of the transactions contemplated hereby or thereby
are consummated, and to pay all reasonable costs and expenses of the Bank
(including reasonable fees and expenses of counsel to the Bank) incurred in
connection with the preparation, negotiation, review, execution or delivery of
the form of any Instrument relevant to this Agreement or any of the other Loan
Documents, the consideration of legal questions relevant hereto and thereto, and
the consideration and/or conduct of any proposed or actual restructuring or
"workout" of any of the Obligations. The Borrower also agrees to reimburse the
Bank upon demand for all Uniform Commercial Code and U.S. Patent and Trademark
Office and U.S. Copyright Office filing fees and all stamp or other taxes
payable in connection with the execution, delivery or enforcement of this
Agreement, any of the other Loan Documents or any Instrument related hereto or
thereto and for all reasonable out-of-pocket expenses (including reasonable
attorneys' fees and legal expenses) incurred by the Bank in enforcing any of the
Obligations of the Borrower under this Agreement or any other Loan Documents and
the consideration and/or conduct of any proposed or actual restructuring or
"workout" of any Obligations.
SECTION 10.4. INDEMNIFICATION.
In consideration of the execution and delivery of this Agreement by the
Bank and the extension of the Commitment by the Bank, the Borrower hereby
indemnifies and holds free and harmless the Bank and its shareholders, officers,
directors, employees, agents and Affiliates (collectively, the "INDEMNIFIED
PARTIES" and, individually, an "INDEMNIFIED PARTY") from and against any and all
actions, causes of action, suits, losses, costs, liabilities, damages and
expenses actually incurred in connection with any of the Loan Documents or any
of the transactions contemplated thereby (irrespective of whether such
Indemnified Party is a party to the action for which indemnification hereunder
is sought), including all reasonable fees and disbursements of counsel, all
amounts paid in settlement and all court costs (the "INDEMNIFIED LIABILITIES"),
incurred from time to time by the Indemnified Parties or any of them as a result
of, or arising out of, or relating to, or as a direct or indirect result of:
(a) any transactions financed or to be financed in whole or in
part or directly or indirectly with the proceeds of any of the Credit
Extensions; or
(b) the entering into or performance of this Agreement or any
of the other Loan Documents by any of the Indemnified Parties or the
Borrower or any of its Subsidiaries; or
(c) the enforcement by any of the Indemnified Parties of any
of its rights or remedies under any of the Loan Documents or in respect
of any of the Collateral; or
(d) the presence on or under, or the escape, seepage, leakage,
spillage, discharge, emission, discharging or release from, any real
Property owned or operated by the Borrower or any of its Subsidiaries
of any Hazardous Material (including, without
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limitation, any losses, liabilities, damages, injuries, costs, expenses
or claims asserted or arising under any Environmental Laws), regardless
of whether or not caused by, or within the control of, the Borrower or
any of its Subsidiaries.
except for any portion of such Indemnified Liabilities which a court of
competent jurisdiction has found resulted by reason of such Indemnified Party's
fraud, gross negligence or willful misconduct or the breach by such Indemnified
Party of its obligations under the Loan Documents. If and to the extent that the
foregoing undertaking may be unenforceable for any reason, the Borrower hereby
agrees to make the maximum contribution to the payment and satisfaction of each
of the Indemnified Liabilities which is permissible under Applicable Law, except
as aforesaid to the extent not payable by reason of the Indemnified Party's
fraud, negligence or willful misconduct or breach of such obligations.
SECTION 10.5. SURVIVAL.
The Obligations of the Borrower under each of Sections 10.3, 10.4 and
10.5 shall in each case survive any termination of this Agreement and the
payment of any of the other Obligations. The representations and warranties made
by the Borrower in this Agreement or in any of the other Loan Documents, or in
any document, certificate or statement delivered pursuant hereto or thereto or
in connection herewith or therewith, shall survive the execution and delivery of
this Agreement and each of the other Loan Documents and the making of the Loans.
SECTION 10.6. SEVERABILITY.
Any provision of this Agreement, the Note or any of the other Loan
Documents which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent only of such prohibition or
unenforceability without invalidating any of the remaining provisions of this
Agreement, the Note or any of the other Loan Documents or the enforceability of
any such provision in any other jurisdiction.
SECTION 10.7. HEADINGS.
The various headings of this Agreement and of each of the other Loan
Documents are inserted for convenience only and shall not affect the meaning or
interpretation of this Agreement or any of such other Loan Documents or any
provisions hereof or thereof.
SECTION 10.8. COUNTERPARTS; ENTIRE AGREEMENT.
This Agreement may be executed by the parties hereto in several
counterparts, each of which shall be deemed to be an original and all of which
shall constitute together but one and the same agreement. This Agreement, the
Note and the other Loan Documents constitute the entire understanding among the
parties hereto with respect to the subject matter hereof and supersede any prior
agreements, written or oral, with respect thereto, including, without
limitation, all engagement letters, commitment letters and term sheets.
SECTION 10.9. CHOICE OF LAW.
THIS AGREEMENT, THE NOTES AND THE OTHER LOAN DOCUMENTS
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SHALL IN ALL RESPECTS BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE
INTERNAL SUBSTANTIVE LAWS OF THE STATE OF CALIFORNIA, AND, IN THE CASE OF
PROVISIONS RELATING TO INTEREST RATES, ANY APPLICABLE LAWS OF THE UNITED STATES
OF AMERICA.
SECTION 10.10. SUCCESSORS AND ASSIGNS.
This Agreement shall be binding upon and shall inure to the benefit of
the parties hereto and their respective successors and assigns; provided,
however, that the Borrower may not assign or transfer any of its rights or
obligations hereunder or under any other Loan Documents without the prior
written consent of the Bank.
SECTION 10.11. FURTHER ASSURANCES.
The Borrower hereby agrees that it will, from time to time at its own
expense, promptly execute and deliver all such further Instruments and take all
such further action that may be necessary or appropriate, or that the Bank may
reasonably request, in order to perfect, preserve or protect any Liens granted
or purported to be granted under the Collateral Documents, to enable the Bank to
exercise and enforce any of its rights or remedies under this Agreement or any
of the other Loan Documents or otherwise to carry out the intent of this
Agreement or any of the other Loan Documents.
SECTION 10.12. CONSENT TO JURISDICTION.
THE BORROWER BY ITS EXECUTION HEREOF (A) HEREBY IRREVOCABLY SUBMITS TO
THE NONEXCLUSIVE JURISDICTION OF THE STATE COURTS OF THE STATE OF CALIFORNIA AND
TO THE NONEXCLUSIVE JURISDICTION OF THE UNITED STATES DISTRICT COURT FOR THE
DISTRICT OF CALIFORNIA FOR THE PURPOSE OF ANY SUIT, ACTION OR OTHER PROCEEDING
ARISING OUT OF OR BASED UPON THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE
SUBJECT MATTER HEREOF OR THEREOF, AND (B) HEREBY WAIVES TO THE EXTENT NOT
PROHIBITED BY APPLICABLE LAW, AND AGREES NOT TO ASSERT, BY WAY OF MOTION, AS A
DEFENSE OR OTHERWISE, IN ANY SUCH PROCEEDING, ANY CLAIM THAT IT IS NOT SUBJECT
PERSONALLY TO THE JURISDICTION OF THE ABOVE-NAMED COURTS, THAT ITS PROPERTY IS
EXEMPT OR IMMUNE FROM ATTACHMENT OR EXECUTION, THAT ANY SUCH PROCEEDING BROUGHT
IN ONE OF THE ABOVE-NAMED COURTS IS IMPROPER, OR THAT THIS AGREEMENT OR ANY
OTHER LOAN DOCUMENT, OR THE SUBJECT MATTER HEREOF OR THEREOF MAY NOT BE ENFORCED
IN OR BY SUCH COURT. THE BORROWER HEREBY CONSENTS TO SERVICE OF PROCESS IN ANY
SUCH PROCEEDING IN ANY MANNER PERMITTED BY THE LAWS OF THE STATE OF CALIFORNIA,
AND AGREES THAT SERVICE OF PROCESS BY REGISTERED OR CERTIFIED MAIL, RETURN
RECEIPT REQUESTED, TO THE BORROWER IS REASONABLY CALCULATED TO GIVE ACTUAL
NOTICE.
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SECTION 10.13. WAIVER OF JURY TRIAL.
TO THE EXTENT NOT PROHIBITED BY APPLICABLE LAW WHICH CANNOT BE WAIVED,
EACH OF THE BANK AND THE BORROWER HEREBY WAIVES, AND COVENANTS THAT IT WILL NOT
ASSERT (WHETHER AS PLAINTIFF, DEFENDANT OR OTHERWISE), ANY RIGHT TO TRIAL BY
JURY IN ANY FORUM IN RESPECT OF ANY ISSUE, CLAIM, DEMAND, ACTION OR CAUSE OF
ACTION ARISING OUT OF OR BASED UPON THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT TO
WHICH SUCH PERSON IS PARTY OR THE SUBJECT MATTER HEREOF OR THEREOF OR ANY
OBLIGATION OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE DEALINGS
OF THE BANK OR THE BORROWER IN CONNECTION WITH ANY OF THE ABOVE, IN EACH CASE
WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER IN CONTRACT OR TORT OR
OTHERWISE. THE BORROWER ACKNOWLEDGES THAT THE PROVISIONS OF THIS SECTION 10.13
CONSTITUTE A MATERIAL INDUCEMENT UPON WHICH THE BANK IS RELYING AND WILL RELY IN
ENTERING INTO THIS AGREEMENT AND ANY OTHER LOAN DOCUMENT. THE BANK OR THE
BORROWER MAY FILE AN ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 10.13 WITH
ANY COURT AS WRITTEN EVIDENCE OF THE CONSENT OF EACH OF THE BANK AND THE
BORROWER TO THE WAIVER OF ITS RIGHT TO TRIAL BY JURY.
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SECTION 10.14. TERMINATION OF LOAN DOCUMENTS. Upon the latest
to occur of the reduction or termination in full of the Commitment (whether at
the option of the Borrower pursuant to Section 2.2 or otherwise in accordance
with the terms hereof), the payment in full of the unpaid principal of all of
the Loans, the payment in full or (as the case may be) the termination of all
Letter of Credit Outstandings, or the payment in full of all other Obligations
under this Agreement and the other Loan Documents, this Agreement and all of the
other Loan Documents shall (except as and to the extent otherwise expressly
provided by Section 10.5 hereof) be for all purposes terminated and of no
further force or effect whatsoever, and, in accordance with the terms of Section
2.10 of the Security Agreement, all Liens granted to the Bank to secure payment
of all of the Obligations shall terminate and shall be of no further force or
effect.
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IN WITNESS WHEREOF, the parties hereto have caused this REVOLVING
CREDIT AGREEMENT to be executed by their respective officers hereunto duly
authorized on and as of the day and in the year first above written.
THE BORROWER:
EDISON SCHOOLS INC.
By:_________________________________
Name:
Title:
THE BANK:
IMPERIAL BANK
By:_________________________________
Name:
Title:
<PAGE> 1
Exhibit 10.2
SECURITY AGREEMENT
This SECURITY AGREEMENT is entered into as of November 12, 1999 between
EDISON SCHOOLS INC., a Delaware corporation (hereinafter, together with its
successors in title and assigns, called the "BORROWER"), and IMPERIAL BANK, a
bank organized under the laws of the State of California (hereinafter, together
with its successors in title and assigns, called the "BANK").
RECITALS
Pursuant to the Revolving Credit Agreement, dated as of November 12,
1999 (as amended, supplemented, amended and restated or otherwise modified from
time to time, the "CREDIT AGREEMENT"), between the Borrower and the Bank, the
Bank has extended commitments to make Credit Extensions to the Borrower.
It is a condition precedent to the making of Credit Extensions to the
Borrower that the Borrower shall execute and deliver to the Bank a security
agreement in or substantially in the form hereof.
Accordingly, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS
SECTION 1.1. CERTAIN TERMS. The following terms when used in this
Agreement, including the introductory paragraph and Recitals hereto, shall,
except where the context otherwise requires, have the following meanings:
"ACCOUNTS RECEIVABLE" is defined in the Credit Agreement.
"AGREEMENT" means this Security Agreement, as amended, supplemented or
otherwise modified from time to time.
"BANK" is defined in the introductory paragraph hereto.
"BORROWER" is defined in the introductory paragraph hereto.
"CAPITAL STOCK" is defined in the Credit Agreement.
"COLLATERAL" is defined in the Credit Agreement.
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"COMPUTER HARDWARE AND SOFTWARE COLLATERAL" means, in relation to the
Borrower, all of the following Property of the Borrower, whether currently
existing or hereafter created, arising or acquired:
(a) all computer and other electronic data processing
hardware, integrated computer systems, central processing units, memory
units, display terminals, printers, features, computer elements, card
readers, tape drives, hard and soft disk drives, cables, electrical
supply hardware, generators, power equalizers, accessories and all
peripheral devices and other related computer hardware;
(b) all software programs (including both source code, object
code and all related applications and data files), whether now owned,
licensed or leased or hereafter acquired or created by the Borrower,
whether or not intended or designed for use on the computers and
electronic data processing hardware described in clause (a);
(c) all firmware associated therewith;
(d) all documentation (including flow charts, logic diagrams,
manuals, guides and specifications) with respect to such hardware,
software and firmware described in clauses (a) through (c);
(e) all rights of the Borrower with respect to any of the
foregoing, including, without limitation, any and all Copyrights,
licenses, options, warranties, service contracts, program services,
test rights, maintenance rights, support rights, improvement rights,
renewal rights and indemnifications and any substitutions,
replacements, additions or model conversions of any of the foregoing;
and
(f) all products, royalties and proceeds of or from any of the
foregoing.
"COPYRIGHT COLLATERAL" means, collectively, all copyrights of the
Borrower, whether statutory or common law, registered or unregistered, now or
hereafter in force throughout the world, including, without limitation, all of
the Borrower's right, title and interest in and to all copyrights registered in
the United States Copyright Office or anywhere else in the world and also
including, without limitation, all (if any) registered United States copyrights
referred to in Item D of Exhibit A (all of the foregoing being collectively
called "COPYRIGHTS"), and all applications for registration thereof, whether
pending or in preparation, all copyright licenses (to the extent such licenses
do not prohibit the Borrower from granting a security interest in its rights
thereunder), including each (if any) copyright license referred to in Item E of
Exhibit A, all rights corresponding thereto throughout the world, all extensions
and renewals of any thereof, the right to sue for past, present and future
infringements of any thereof, and all proceeds of the foregoing, including,
without limitation, licenses, royalties, income, payments, claims, damages and
proceeds of suit.
"CONTRACT RIGHTS" is defined in clause (b) of Section 2.1.
<PAGE> 3
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"CREDIT AGREEMENT" is defined in the first paragraph of the Recitals
hereto.
"DEBT SECURITIES" means, collectively, promissory notes, bonds,
debentures and other Instruments evidencing, governing or securing any
Indebtedness of any kind, whether secured or unsecured, convertible,
subordinated or otherwise, and, in general, any Instruments commonly known as
"debt securities".
"DISTRIBUTIONS" means, collectively, dividends in the form of Capital
Stock or in the form of other Equity Interests, shares of Capital Stock and
other Equity Interests resulting from stock splits, combinations,
reclassifications, mergers or consolidations, non-cash dividends, and other
non-cash dividends or distributions (whether similar or dissimilar to the
foregoing), (in each case) on or with respect to Equity Interests, but shall not
mean Dividends.
"DIVIDENDS" means, collectively, cash dividends and other cash
distributions on or with respect to Capital Stock or other Equity Interests.
"EQUIPMENT" is defined in clause (e) of Section 2.1
"EQUITY INTERESTS" means Capital Stock and all warrants, options or
other rights to purchase, subscribe for or otherwise acquire Capital Stock (but
excluding any Debt Securities that are convertible into, or exchangeable for,
Capital Stock or other Equity Interests).
"EXCLUDED PROPERTY" is defined in clause (b) of Section 2.2.
"INTELLECTUAL PROPERTY COLLATERAL" means, collectively, in relation to
the Borrower, all of the Borrower's Computer Hardware and Software Collateral,
Copyright Collateral, Patent Collateral, Trade Secrets Collateral and Trademark
Collateral.
"INVENTORY" is defined in clause (a) of Section 2.1.
"OBLIGATIONS" is defined in the Credit Agreement.
"PATENT COLLATERAL" means, in relation to the Borrower, all of the
following Property of the Borrower, whether currently existing or hereafter
created, arising or acquired:
(i) all patents and applications for patents
throughout the world;
(ii) all patent licenses and other agreements
providing the Borrower with the right to use patented
technology;
(iii) all reissues, divisions, continuations,
extensions, renewals, continuations-in-part and reexaminations
of any of the items described in the foregoing clauses (i) and
(ii); and
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(iv) all proceeds and royalties of, and rights
associated with, the foregoing (including license royalties
and proceeds of infringement suits), the right to sue third
parties for past, present or future infringements of any
patent or patent application or for breach or enforcement of
any patent or patent license agreement or other similar
agreement providing the Borrower with a right to use patented
technology.
"PLEDGED COLLATERAL" is defined in clause (d) of Section 2.1.
"PLEDGED INTERESTS" is defined in clause (d) of Section 2.1.
"PLEDGED NOTES" is defined in clause (d) of Section 2.1.
"PLEDGED RIGHTS" is defined in clause (d) of Section 2.1.
"PLEDGED SECURITIES" means, collectively, Pledged Interests, Pledged
Rights and Pledged Notes.
"RELATED CONTRACTS" is defined in clause (b) of Section 2.1.
"SECURITY AGREEMENT COLLATERAL" is defined in Section 2.1.
"TRADEMARK COLLATERAL" means, in relation to the Borrower, all of the
following Property of the Borrower, whether currently existing or hereafter
created, arising or acquired:
(i) all trademarks, service marks, trade names,
corporate names, company names, business names, fictitious
business names, trade styles, logos, other source of business
identifiers, prints and labels on which any of the foregoing
have appeared or appear, designs and general intangibles of a
like nature (all of the foregoing items in this clause (i)
being collectively called "TRADEMARKS"), all registrations and
recordings thereof, and, in connection therewith, all
applications in the United States Patent and Trademark Office
or in any similar office or agency of the United States or any
state thereof, including all (if any) registrations and
applications for registration referred to in Item A and Item B
of Exhibit A, and in any event including all common law
trademarks and common law service marks, including the common
law marks referred to in Item C of Exhibit A;
(ii) all Trademark licenses and other agreements
providing the Borrower with rights to use Trademarks;
(iii) all reissues, extensions or renewals of any of
the items described in the foregoing clauses (i) and (ii);
(iv) all of the goodwill of the business connected
with the use of, and symbolized by the items described in,
clauses (i), (ii) and (iii); and
<PAGE> 5
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(v) all royalties from and all proceeds of, and
rights associated with, the foregoing, including any claims by
the Borrower (and the right to sue thereunder) against third
parties for past, present or future infringement or dilution
of any Trademark, Trademark registration or Trademark license,
including any Trademark, Trademark registration, Trademark
license or trade name referred to in Item A, Item B or Item C
of Exhibit A, or for any injury to the goodwill associated
with any Trademark, Trademark registration, Trademark license
or trade name.
"TRADE SECRETS COLLATERAL" means, in relation to the Borrower, all
common law and statutory trade secrets and all other confidential or proprietary
or useful information and all know-how obtained by or used in or contemplated at
any time for use in the business of the Borrower (all of the foregoing being
collectively called "TRADE SECRETS"), whether or not such Trade Secrets have
been reduced to a writing or other tangible form, and whether currently existing
or hereafter arising or acquired, including all documents and things embodying,
incorporating or referring in any way to such Trade Secrets, all Trade Secret
licenses, and including the right to sue for and to enjoin and to collect
damages for the actual or threatened misappropriation of any Trade Secret or for
the breach or enforcement of any such Trade Secret license.
"U.C.C." means the Uniform Commercial Code as in effect in the relevant
jurisdiction.
SECTION 1.2. CREDIT AGREEMENT DEFINITIONS. Unless otherwise defined
herein or the context otherwise requires, terms used in this Agreement,
including the introductory paragraph and Recitals hereto, that are defined in
the Credit Agreement have the meanings given to such terms in the Credit
Agreement.
SECTION 1.3. U.C.C. DEFINITIONS. Unless otherwise defined herein or the
context otherwise requires, terms for which meanings are provided in the U.C.C.
are used in this Agreement, including the introductory paragraph and Recitals
hereto, with such meanings.
SECTION 1.4. GENERAL PROVISIONS RELATING TO DEFINITIONS. Terms for
which meanings are defined in this Agreement shall apply equally to the singular
and plural forms of the terms defined. Whenever the context may require, any
pronoun shall include the corresponding masculine, feminine and neuter forms.
The term "INCLUDING" means including, without limiting the generality of any
description preceding such term. Each reference herein to any Person shall
include a reference to such Person's permitted successors and assigns.
References to any Instrument in this Agreement refer to such Instrument as
originally executed or, if subsequently amended or supplemented from time to
time, as so amended or supplemented and in effect at the relevant time of
reference thereto.
<PAGE> 6
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ARTICLE II
SECURITY INTEREST
SECTION 2.1. GRANT OF SECURITY INTEREST. The Borrower hereby pledges
and assigns as collateral to the Bank, for the benefit of the Bank, and hereby
grants to the Bank, for the benefit of the Bank, a continuing security interest
in and to, all of its right, title and interest in and to all of the following
Property, wheresoever located, whether now owned or hereafter acquired, created,
arising or existing (all of such Property being collectively called the
"SECURITY AGREEMENT COLLATERAL"):
(a) all of the Borrower's inventory in all of its forms,
including:
(i) all inventory, merchandise, goods and other
personal Property which are held for sale or lease by the
Borrower, all raw materials, work in process, unfinished and
finished goods with respect thereto, and all materials used or
consumed in the manufacture or production thereof;
(ii) all goods in which the Borrower has an interest
in mass or a joint or other interest or right of any kind
(including goods in which the Borrower has an interest or
right as consignee); and
(iii) all goods which are returned to or repossessed
by the Borrower;
together with, in each case, all accessions thereto and products and
proceeds thereof and documents therefor (any and all such inventory,
accessions, products, proceeds and documents described in this clause
(a) being collectively called the "INVENTORY");
(b) all Accounts Receivable, accounts, contracts, contract
rights, chattel paper, documents, copyrights, instruments, general
intangibles, and other obligations and rights of the Borrower of any
kind, whether or not arising out of or in connection with the sale or
lease of goods or the rendering of services by the Borrower, including
all of the following:
(i) all rights and interests of the Borrower under
each management contract, including, without limitation, each
educational management service contract, franchise agreement,
equipment lease or other lease, Real Estate Lease Agreement,
or any other similar agreement to which the Borrower is from
time to time a party;
(ii) all rights and interests of the Borrower under
each limited liability company operating agreement, limited
partnership agreement, partnership agreement, joint venture
agreement or other similar agreement to which the Borrower is
from time to time a party;
<PAGE> 7
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(iii) all of the Borrower's Intellectual Property
Collateral, BUT NOT IN ANY EVENT ANY OF THE EXCLUDED PROPERTY;
(iv) all rights and remedies in and to all Security
Instruments, equipment leases or other leases, Real Estate
Lease Agreements and other Instruments securing or otherwise
relating to any such accounts, Accounts Receivable, contracts,
contract rights, chattel paper, documents, copyrights,
instruments, general intangibles, management contracts,
franchise agreements, lease and other agreements, or other
obligations; and
(v) all Instruments evidencing any of the foregoing
Accounts Receivable, accounts, contracts, contract rights,
chattel paper, documents, copyrights, instruments, general
intangibles, management contracts, franchise agreements, lease
and other agreements, or other obligations (all such
Instruments being collectively called the "RELATED
CONTRACTS");
(any and all such accounts, Accounts Receivable, contracts, contract
rights, chattel paper, documents, copyrights, instruments, general
intangibles, management contracts, franchise agreements, lease and
other agreements, Related Contracts, other obligations, and other
Property described in this clause (b) being collectively called the
"CONTRACT RIGHTS");
(c) all claims, demands, judgments, rights, choses in action,
equities, credits, bank accounts, cash on hand and in banks, lock boxes
and other post office boxes, insurance policies, including the cash
surrender value thereof and all proceeds thereof, and all federal,
state and local tax refunds and/or abatements to which the Borrower is
or may from time to time become entitled, no matter how or when
arising, including, but not limited to, any loss carryback tax refunds;
(d) all of the following Property of the Borrower, whether now
owned or hereafter issued, created, acquired or existing (all of such
Property being herein collectively called the "PLEDGED COLLATERAL"):
(i) all Capital Stock and other Equity Interests
(collectively, "PLEDGED Interests");
(ii) all Dividends and all Distributions;
(iii) all rights to receive profits and surplus of,
and other Dividends and Distributions (including income,
return of capital and liquidating distributions) from, any
partnership, joint venture, limited liability company or other
Person, including Distributions by any such Person to
partners, joint venturers or members, and including rights,
whether contractual or otherwise, under limited or general
partnership agreements, joint venture agreements, limited
liability company operating agreements, or as a limited
partner in a limited partnership, as a general partner in a
general partnership, as a joint
<PAGE> 8
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venturer in a joint venture or as a member of a limited
liability company (all such rights being herein collectively
called "PLEDGED RIGHTS");
(iv) all Debt Securities of every description
(collectively, "PLEDGED NOTES");
(v) all investment property and investment securities
of every description; and
(vi) all other Property (including Dividends and
Distributions) that may from time to time be delivered or be
required to be delivered by the Borrower to the Bank for the
purpose of pledge hereunder;
(e) all of the Borrower's equipment in all of its forms
(including all fixtures), and all substitutions therefor, replacements
thereof and additions thereto, and all attachments, components, parts
and accessories installed thereon or affixed thereto, including all
computers and computer peripherals, all telephone and all other
telecommunications equipment, all photoduplicating and photocopying
equipment, and all office equipment of every description (any and all
of the foregoing being collectively called the "EQUIPMENT"), BUT NOT IN
ANY EVENT INCLUDING ANY OF THE EXCLUDED PROPERTY;
(f) all other Property of the Borrower of every kind and
description (including all rights, permits and licenses of every kind
and description), BUT NOT INCLUDING ANY EXCLUDED PROPERTY;
(g) all books, records, writings, data bases, information and
other Property (OTHER THAN EXCLUDED PROPERTY) relating to, used or
useful in connection with, evidencing, embodying, incorporating or
referring to, any of the foregoing Security Agreement Collateral; and
(h) all products, royalties, rents, issues, profits, returns,
dividends, distributions, income and proceeds of or rights with respect
to any and all of the foregoing Security Agreement Collateral,
including proceeds which constitute Property of the types described in
clauses (a) through (g) and, to the extent not otherwise included, all
payments under any indemnity, warranty or guaranty payable by reason of
loss or damage to or otherwise with respect to any of the foregoing
Security Agreement Collateral.
SECTION 2.2. EXCLUDED PROPERTY. Notwithstanding the foregoing, the
terms "SECURITY AGREEMENT COLLATERAL" and "COMPUTER HARDWARE AND SOFTWARE
COLLATERAL" shall not include the following Property, and the Bank shall not
have any security interests in or Liens upon any of the following Property:
<PAGE> 9
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(a) any Property which the Borrower and the Bank shall have
agreed, in a writing signed by both parties identifying such Property,
is not subject to the security interests and Liens created by the
Borrower in favor of the Bank; and
(b) all of the Borrower's Equipment and other tangible
personal Property (including other tangible personal Property that
would otherwise constitute Computer Hardware or Software Collateral) in
all of its forms from time to time (i) located or used, or otherwise
intended to be located or used, in or at the location of any of the
Schools from time to time operated, managed or administered by the
Borrower, or (ii) in the possession or under the control of Persons who
are students in any of such Schools, including, without limitation, in
all of such cases, all fixtures, and also including all computers and
computer peripherals, all telephone and other telecommunications
Equipment, all photoduplicating and photocopying Equipment, and all
office Equipment, in each case, if (and only if) such Property is
located or used, or otherwise intended to be located or used, in or at
the location of any Schools or is in the possession or under the
control of Persons who are students in any of such Schools, and also
including any and all present and future additions, parts, accessories,
attachments, substitutions, repairs, improvements and replacements to
or for any such Property, and any and all proceeds thereof, including,
without limitation, proceeds of insurance, and all manuals, blueprints,
know-how, warranties, and records in connection therewith, all rights
against suppliers, warrantors, manufacturers, sellers or others in
connection therewith, and together with all substitutes for any of the
foregoing (any and all of the foregoing being herein collectively
called the "EXCLUDED PROPERTY").
Anything in the foregoing paragraph (b) of this Section 2.2 express or
implied to the contrary notwithstanding, any and all of the Borrower's Equipment
and other tangible personal Property located in or otherwise held in or by
warehouses and the like shall, at all times while so located or held, constitute
"SECURITY AGREEMENT COLLATERAL" for all purposes of this Agreement and the other
Loan Documents.
SECTION 2.3. SECURITY FOR OBLIGATIONS. This Agreement (and the Security
Agreement Collateral) secures the prompt payment in full and performance when
due of all and each of the Obligations of the Borrower and its Subsidiaries
under the Credit Agreement and the other Loan Documents. In addition, all
advances, charges, costs and expenses, including reasonable attorneys' fees,
incurred or paid by the Bank in exercising any right, power or remedy conferred
by this Agreement, or in the enforcement hereof, shall, to the extent lawful,
become a part of the Obligations secured hereby.
SECTION 2.4. PLEDGE AND DELIVERY OF PLEDGED COLLATERAL. All
certificates or Instruments (other, in any case, than Dividends or any checks or
drafts received in the ordinary course of business) representing or evidencing
any Pledged Collateral to be delivered from time to time hereafter shall be:
(a) delivered to and held by or on behalf of the Bank pursuant
hereto;
<PAGE> 10
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(b) in suitable form for transfer by delivery; and
(c) accompanied by all necessary Instruments of transfer or
assignment (including, with respect to the Pledged Interests, undated
stock powers), duly executed in blank, all in form and substance
reasonably satisfactory to the Bank.
From and after the date hereof, the Borrower shall, promptly after its receipt
thereof, deliver or cause to be delivered to the Bank in pledge hereunder any
and all additional shares of Capital Stock of any issuer, and all other Pledged
Collateral (other than Dividends), issued, distributed or sold to, or purchased
or otherwise acquired by, the Borrower. Upon the formation by the Borrower of
any Subsidiary, the acquisition by the Borrower of or Investment by the Borrower
in any Person which as a result of such acquisition or investment becomes a
Subsidiary of the Borrower, or the receipt by the Borrower of any shares of
Capital Stock or other Equity Interests of any Subsidiary of the Borrower, the
Borrower shall, promptly after such formation, acquisition, Investment or
receipt, deliver or cause to be delivered to the Bank in pledge hereunder any
and all shares of Capital Stock of such Subsidiary and all other Pledged
Collateral (other, in any case, than Dividends or any checks or drafts received
in the ordinary course of business) issued, distributed or otherwise delivered
to, or acquired by, the Borrower in respect of or relating to such Capital Stock
or other Pledged Collateral. The Borrower shall take all other actions from time
to time requested by the Bank to grant to the Bank a perfected security interest
in all of the Pledged Collateral (subject only to such other Liens as shall from
time to time be permitted by the Credit Agreement and the other Loan Documents).
Anything in this Agreement or any other Loan Documents express or implied to the
contrary notwithstanding, the Borrower shall not be required by this Agreement
or any other Loan Documents to deliver to the Bank hereunder any stock
certificates evidencing Equity Interests in Apex Online Learning Inc. or any
stock powers or other similar Instruments relating to such certificates.
SECTION 2.5. BORROWER REMAINS LIABLE, ETC. Anything herein to the
contrary notwithstanding:
(a) the Borrower shall remain liable under all Instruments
included in the Security Agreement Collateral to the extent set forth
therein to perform all of its duties and obligations thereunder to the
same extent as if this Agreement had not been executed;
(b) the exercise by the Bank of any rights hereunder shall not
release the Borrower from any of its duties or obligations under any
Instruments included in the Security Agreement Collateral;
(c) the Bank shall not have any obligation or liability under
any Instruments included in the Security Agreement Collateral by reason
of this Agreement, nor shall the Bank be obligated to perform any of
the obligations or duties of the Borrower thereunder or to take any
action to collect or enforce any claim for payment assigned hereunder;
(d) the Borrower has not delegated to or otherwise assigned to
the Bank the performance of or the responsibility for the duties and
obligations of the Borrower under
<PAGE> 11
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any of the educational management service contracts or other similar
contracts to which the Borrower shall be from time to time a party; and
(e) the Bank shall not have any rights to delegate or
otherwise assign to any Person or Persons the performance of or the
responsibility for the duties and obligations of the Borrower under any
of the educational management service contracts or other similar
contracts to which the Borrower shall be from time to time a party.
SECTION 2.6. SECURITY INTERESTS ABSOLUTE. All rights and security
interests of the Bank granted hereunder, and all obligations of the Borrower
hereunder, shall be absolute and unconditional irrespective of, and shall not be
impaired or affected by:
(a) any lack of validity or enforceability of the Credit
Agreement, any other Loan Document or any other Instrument relating to
any thereof or to any of the Obligations;
(b) any change in the existence, organization, structure or
ownership of the Borrower or of any of its Subsidiaries or any
Bankruptcy or Insolvency Proceeding affecting any such Person or any
Property of any such Person or any resulting release or discharge of
any of the Obligations contained in the Credit Agreement or any other
Loan Documents;
(c) the failure of the Bank
(i) to assert any claim or demand or to enforce any
right or remedy against the Borrower or any other Persons
under any provisions of the Credit Agreement or any other Loan
Documents or any other agreement or Instrument relating to any
thereof or under any Applicable Law, or
(ii) to exercise any right or remedy against any
Collateral;
(d) any change in the time, manner or place of payment of, or
in any other term of all or any Obligations, or any other compromise,
renewal, extension, acceleration or release with respect thereto or
with respect to the Collateral, or any other amendment to, rescission,
waiver or other modification of, or any consent to any departure from
any of the terms, of the Credit Agreement, any other Loan Document or
any other Instrument relating to any thereof;
(e) any increase, reduction, limitation, impairment or
termination of the Obligations for any reason, including any claim of
waiver, release, surrender, alteration or compromise, and any defense
or set-off, counterclaim, recoupment or termination whatsoever by
reason of the invalidity, illegality, nongenuineness, irregularity,
compromise or unenforceability of, or any other event or occurrence
affecting, any of the Obligations (and the Borrower hereby waives any
right to or claim of any such defense or set-off, counterclaim,
recoupment or termination);
<PAGE> 12
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(f) any sale, exchange, release, surrender or non-perfection
of any of the Security Agreement Collateral or any other Collateral, or
any release or amendment or waiver of, or any consent to any departure
from, any guaranty or collateral held by the Bank securing or
guaranteeing all or any of the Obligations;
(g) any defense, set-off or counterclaim which may at any time
be available to or be asserted by the Borrower against the Bank; or
(h) any other circumstances which might otherwise constitute a
suretyship or other defense available to, or a legal or equitable
discharge of, the Borrower.
SECTION 2.7. ATTORNEY-IN-FACT. The Borrower hereby irrevocably appoints
the Bank, and any officer or agent thereof, the Borrower's attorney-in-fact,
with full authority in the place and stead of the Borrower and in the name of
the Borrower or otherwise, from time to time in the Bank's discretion, at any
time and from time to time, to take any and all action and to execute any
Instrument or other assurance which the Bank may deem reasonably necessary or
advisable to accomplish the purposes of this Agreement (subject to the rights of
the Borrower under Section 4.4), including, without limitation:
(a) to obtain and adjust insurance required to be maintained
by the Borrower pursuant to Section 4.3;
(b) to ask, demand, collect, sue, recover, compromise,
receive, and give acquittances and receipts, for moneys due or to
become due under or in respect of any of the Security Agreement
Collateral;
(c) to receive, endorse and collect any drafts or other
Instruments and chattel paper in connection with clause (a) or (b);
(d) to execute and do all such assurances, acts and things
which the Borrower ought to do under the covenants and provisions of
this Agreement;
(e) to take any and all such actions as the Bank may, in its
reasonable discretion, determine to be necessary or advisable for the
purpose of maintaining, preserving or protecting the security
constituted by this Agreement or any of the rights, remedies, powers or
privileges of the Bank under this Agreement;
(f) generally, in the name of the Borrower or in the name of
the Bank, to exercise all or any of the powers, authorities and
discretions conferred on or reserved to the Bank pursuant to this
Agreement;
(g) to maintain and preserve all of the Intellectual Property
Collateral; and
(h) to file such financing statements with respect hereto, or
a photocopy of this Agreement in substitution for a financing
statement, as the Bank may deem appropriate.
<PAGE> 13
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The Borrower hereby ratifies all that the Bank shall do or cause to be done by
virtue hereof. The Borrower hereby acknowledges, consents, and agrees that the
power of attorney granted to the Bank pursuant to this Section 2.7 is
irrevocable and coupled with an interest and shall terminate only upon
termination in full of all of the Commitment and payment in full and in cash of
all of the Obligations. Unless any Event of Default shall be continuing, the
Bank shall notify the Borrower promptly of any action taken by the Bank pursuant
to the power-of-attorney granted to the Bank pursuant to this Section 2.7.
SECTION 2.8. PROTECTION OF COLLATERAL. The Bank may from time to time,
at its option, perform any act which the Borrower shall have agreed hereunder to
perform and which the Borrower shall fail to perform after being requested in
writing to so perform (it being understood that no such request need be given
during the continuance of any Default or Event of Default), and the Bank may
from time to time take any other action which the Bank reasonably deems
necessary for the maintenance, preservation or protection of any of the Security
Agreement Collateral or of the security interests therein. The Bank will
exercise reasonable care in the custody and preservation of the Security
Agreement Collateral in its possession.
SECTION 2.9. BANK HAS NO DUTY. The powers conferred on the Bank
hereunder are solely to protect its interest in the Security Agreement
Collateral and shall not impose any duty upon it to exercise any such powers.
Except as provided in Section 2.8, the accounting for moneys actually received
by it hereunder and other duties imposed by the U.C.C. upon secured creditors
(unless otherwise modified hereby), the Bank shall have no duty as to any
Security Agreement Collateral or responsibility for taking any necessary steps
to preserve rights against prior parties or any other rights pertaining to any
Security Agreement Collateral.
SECTION 2.10. CONTINUING SECURITY INTERESTS; TERMINATION OF SECURITY
INTERESTS. This Agreement has created and shall create continuing security
interests in all of the Security Agreement Collateral and shall:
(a) remain in full force and effect until the latest to occur
of the termination of all of the Commitment of the Bank under the
Credit Agreement and all other Loan Documents, the payment in full of
the unpaid principal of all of the Loans, the payment in full or (as
the case may be) the termination of all Letter of Credit Outstandings,
or the payment in full in cash of all the other Obligations;
(b) be binding upon the Borrower and its successors and
assigns (provided that the Borrower may not assign any of its
obligations hereunder without the prior written consent of the Bank);
and
(c) inure to the benefit of the Bank and its successors,
transferees and assigns.
Upon the latest to occur of the termination of all of the Commitment of the Bank
under the Credit Agreement and all other Loan Documents, the payment in full of
the unpaid principal of all of the Loans, the payment in full or (as the case
may be) the termination of all Letter of Credit Outstandings, or the payment in
full in cash of all of the Obligations, the security interests
<PAGE> 14
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granted hereby by the Borrower shall automatically terminate and all rights to
the Security Agreement Collateral of the Borrower shall revert to the Borrower.
Upon any such termination of the security interests granted hereby, the Bank
will, at the sole expense of the Borrower, promptly execute and deliver to the
Borrower such Instruments and other assurances as the Borrower shall reasonably
request to evidence such termination, including properly completed UCC-3
Financing Statements.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
The Borrower represents and warrants to the Bank as set forth in this
Article III, but subject always to the terms and provisions of the Credit
Agreement and the Disclosure Schedule attached thereto.
SECTION 3.1. LOCATIONS. The chief place of business and chief executive
office of the Borrower and the offices where the Borrower keeps its records
concerning its Security Agreement Collateral and its Equipment are specified in
Item A of Exhibit B. The Borrower has exclusive possession and control of
substantially all of its Equipment and Inventory, all of which is located at the
places specified in Item B and Item C, respectively, of Exhibit B. As of the
date hereof, no Security Agreement Collateral or Equipment is located at any
other location, except those locations specified in Items A, B and C of Exhibit
B.
SECTION 3.2. OWNERSHIP, POSSESSION, ETC. The Borrower owns its Security
Agreement Collateral and its Equipment free and clear of all Liens, EXCEPT (a)
for Liens from time to time permitted by the Loan Documents, and (b) as
otherwise provided or contemplated by the Credit Agreement or the Disclosure
Schedule attached thereto. No effective financing statements or other Security
Instruments similar in effect covering all or any part of the Security Agreement
Collateral or Equipment of the Borrower are on file in any recording office,
except such as may have been filed in favor of the Bank relating to this
Agreement and except such as are identified in Item D of Exhibit B or are from
time to time permitted under the Loan Documents. The Borrower does no business
in the United States under any trade names other than those listed in Item E of
Exhibit B. No material item of Security Agreement Collateral consists of chattel
paper which evidences Contract Rights, and no item of Security Agreement
Collateral is evidenced by a promissory note or other Instrument (other, in any
case, than checks or drafts received in the ordinary course of business).
SECTION 3.3. CONTRACTS, ETC. Each of the material Related Contracts and
other contracts (and all agreements and contract rights embodied therein) which
constitutes Security Agreement Collateral has been, to the knowledge of the
Borrower, duly authorized, executed and delivered by the parties thereto, has
not been amended or modified in any manner which would have a Materially Adverse
Effect, is in full force and effect, and is binding upon and enforceable against
the parties thereto in accordance with its terms, subject, as to enforcement,
only to bankruptcy, insolvency, reorganization, moratorium or other similar
Applicable Laws affecting the enforceability of the rights of creditors
generally. There exists no material default or other condition which, after
notice or lapse of time, would become a material default under any such
<PAGE> 15
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Related Contract or other contract which default could reasonably be expected to
have a Materially Adverse Effect.
SECTION 3.4. PERFECTION, ETC. This Agreement, together with the filing
of the UCC-1 Financing Statements signed by the Borrower and delivered to the
Bank on or prior to the date hereof, will create, upon the filing of the UCC-l
Financing Statements in the appropriate filing offices, a valid security
interest in substantially all the Security Agreement Collateral as to which a
security interest may be perfected by filing UCC-1 Financing Statements, which
security interest (except as to any Security Agreement Collateral in which
another Person has a prior security interest pursuant to a Lien permitted under
the Loan Documents) is a first-priority security interest. No authorization,
approval or other action by and no notice to or filing with any Governmental
Authority is required either for the grant by the Borrower of the security
interest created hereby or for the execution, delivery or performance of this
Agreement by the Borrower or for the perfection of such security interests
created hereby in any Security Agreement Collateral as to which a security
interest may be perfected by the filing of UCC-1 Financing Statements, EXCEPT
for:
(i) the filing of the UCC-1 Financing Statements signed by the
Borrower and delivered to the Bank on or prior to the date hereof;
(ii) with respect to the exercise by the Bank of its rights
and remedies with respect to contracts pursuant to which the United
States government (or any of its agencies, departments, or
instrumentalities) is the obligor, compliance with the notice
provisions of the Assignment of Claims Act of 1940 or comparable
provisions of State law;
(iii) in respect of goods covered by a certificate of title,
receipt by the Bank of such certificate of title indicating the
security interest of the Bank on such certificate;
(iv) with respect to the exercise by the Bank of its rights
and remedies with respect to any securities, compliance with the
federal and state laws affecting the offering and sale of securities;
and
(v) the timely filing of UCC continuation statements.
SECTION 3.5. INTELLECTUAL PROPERTY COLLATERAL. The Borrower represents
and warrants to the Bank that:
(a) it is the true and lawful owner of the Intellectual
Property Collateral identified as its Property in Items A, B, C, and D
of Exhibit A, and such Intellectual Property Collateral constitutes all
of the material United States Intellectual Property Collateral owned by
the Borrower;
(b) it is a licensee under the Intellectual Property
Collateral identified as owned by it in Item E of Exhibit A, and such
Intellectual Property Collateral constitutes
<PAGE> 16
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all of the material Intellectual Property Collateral under which the
Borrower is the licensee;
(c) the Intellectual Property Collateral of the Borrower is
subsisting in all material respects and has not been adjudged invalid
or unenforceable, in whole or in any material part;
(d) the rights of the Bank in the Intellectual Property
Collateral of the Borrower are valid and enforceable against the
Borrower in all material respects;
(e) except as otherwise described in Exhibit A, the Borrower
has not made any recordations of any of its interests (i) in Patents
and Trademarks, in the United States Patent and Trademark Office, or
(ii) in Copyrights, in the United States Copyright Office;
(f) the Borrower is the owner of the entire right, title and
interest in and to the Intellectual Property Collateral owned by the
Borrower, free and clear of all Liens, except for Liens from time to
time permitted under the Loan Documents, and, to the Borrower's
knowledge, no claim is being asserted that the use of its Intellectual
Property Collateral does or may violate in any material respect the
asserted rights of any third party;
(g) the Borrower has performed and will continue to perform in
all material respects all acts and has paid and will continue to pay
all required fees and taxes to maintain in full force and effect in the
United States each item of Intellectual Property Collateral that is
owned by the Borrower and that has been registered with the United
States Patent and Trademark Office or the United States Copyright
Office; and
(h) the Borrower owns, or is entitled to use by license or
otherwise, all patents, trademarks, trade secrets, copyrights,
licenses, technology, know-how, processes and other rights with respect
to any of the foregoing used in or necessary for the conduct of the
Borrower's business.
SECTION 3.6. PLEDGED COLLATERAL. The delivery by the Borrower to the
Bank of the Pledged Collateral purported to be pledged by the Borrower from time
to time hereunder will be effective to create, in favor of the Bank, valid,
perfected security interests in such Pledged Collateral subject only to such
other Liens as shall from time to time be permitted by the Credit Agreement and
the other Loan Documents.
ARTICLE IV
COVENANTS
SECTION 4.1. FURTHER ASSURANCES GENERALLY. The Borrower hereby
covenants and agrees that it will, from time to time at its own expense,
promptly execute and deliver all further Instruments and other assurances and
take all further action that may be necessary or reasonably desirable, or that
the Bank may reasonably request, in order to perfect and protect any security
interests purported to be granted by the Borrower under this Agreement or to
enable the Bank to
<PAGE> 17
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exercise and enforce its rights and remedies hereunder with respect to any of
the Security Agreement Collateral. Without limitation of the foregoing, the
Borrower will, with respect to all of its following Property constituting
Security Agreement Collateral:
(a) at the request of the Bank at any time when any Event of
Default is continuing, immediately mark conspicuously each document
included in the Inventory, each chattel paper included in the Contract
Rights, each Related Contract, each Account Receivable and each of its
records pertaining to Security Agreement Collateral with a legend, in
form and substance reasonably satisfactory to the Bank, indicating that
such Account Receivable, document, chattel paper, Related Contract or
Security Agreement Collateral is subject to the security interests
granted hereby;
(b) at the written request of the Bank, if any Account
Receivable shall be evidenced by any Instruments, Securities or chattel
paper, promptly deliver and pledge to the Bank hereunder such
Instruments, Securities or chattel paper duly endorsed and accompanied
by duly executed Instruments of transfer or assignment (other, in any
case, than any checks or drafts received in the ordinary course of
business), all in form and substance reasonably satisfactory to the
Bank; and
(c) execute and file such financing or continuation
statements, or amendments thereto, and such other Instruments and
notices, as may be necessary or reasonably desirable, or as the Bank
may reasonably request, in order to perfect and preserve the security
interests granted or purported to be granted hereby.
The Borrower hereby further authorizes the Bank to file one or more financing or
continuation statements, and amendments thereto, relative to all or any part of
the Security Agreement Collateral without the signature of the Borrower where
permitted by Applicable Law. A copy of this Agreement shall be sufficient as a
financing statement where permitted by Applicable Law. The Borrower will furnish
to the Bank from time to time statements and schedules further identifying and
describing the Security Agreement Collateral and such other reports in
connection with the Security Agreement Collateral as the Bank may reasonably
request, all in reasonable detail.
SECTION 4.2. AS TO EQUIPMENT AND INVENTORY. The Borrower hereby
covenants and agrees that it will, with respect to all of its following Property
constituting Equipment or Security Agreement Collateral:
(a) keep the Equipment and Inventory (other than (i) worn-out
and no longer used or useful Equipment, and (ii) Inventory sold in the
ordinary course of business) at the places therefor specified in
Section 3.1, or, upon 30 days' prior written notice to the Bank, at
such other places in jurisdictions where all action required by the
Bank pursuant to Section 4.1 shall have been taken with respect to the
Equipment and Inventory;
(b) cause the Equipment to be maintained and preserved in good
condition, repair and working order, ordinary wear and tear and
worn-out and no longer used or useful Equipment excepted, and shall, in
the case of any material loss or damage to any
<PAGE> 18
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of the material Equipment (of which written notice shall be given to
the Bank promptly, if such loss or damage is material) as quickly as
reasonably practicable after the occurrence thereof, make or cause to
be made all repairs, replacements and other improvements in connection
therewith which are necessary or desirable to such end;
(c) pay promptly prior to the date they become delinquent all
property and other taxes, assessments and governmental charges or
levies in the aggregate imposed upon, and all claims against, the
Equipment and Inventory, except to the extent the validity thereof is
being contested in good faith; and
(d) permit representatives of the Bank at any time upon
reasonable notice during normal business hours to enter on premises
where any of its Security Agreement Collateral or Equipment is located
for the purpose of inspecting the Borrower's books and records and its
Security Agreement Collateral and Equipment, observing its use or
otherwise protecting the Bank's interests therein.
Notwithstanding the foregoing, this Section 4.2 shall not be deemed, in and of
itself, to restrict any disposition of Property by the Borrower otherwise
permitted under the Credit Agreement.
SECTION 4.3. INSURANCE. The Borrower will, at its own expense, maintain
insurance with respect to its Equipment and Inventory in such amounts, against
such risks, in such form, and with such insurers, as shall be customary in the
case of similar businesses and reasonably satisfactory to the Bank, including,
without limitation, property and casualty insurance complying with the foregoing
provisions and naming the Bank as loss payee and additional insured. The
Borrower will, if requested by the Bank, deliver to the Bank original or
duplicate policies of such insurance and, as often as the Bank may reasonably
request, a report of a reputable insurance broker with respect to the adequacy
of such insurance. Further, the Borrower will, at the request of the Bank, duly
execute and deliver Instruments of assignment of such insurance policies, and
cause the respective insurers to acknowledge notice of such assignment. All
insurance payments otherwise payable to the Borrower under policies of Property
damage insurance shall instead be paid to and applied by the Bank as specified
in Section 5.2.
SECTION 4.4. AS TO CONTRACT RIGHTS. The Borrower will, with respect to
all of its following Property constituting Security Agreement Collateral:
(a) keep its chief place of business and chief executive
office and the offices where it keeps its records concerning the
Contract Rights, and all originals of all chattel paper which evidence
Contract Rights, at the location therefor specified in Section 3.1 or,
upon thirty (30) days' prior written notice to the Bank, at such other
locations; provided, however, that all statements set forth in Section
3.4 shall be true and correct and all action reasonably required by the
Bank pursuant to Section 4.1 shall have been taken;
(b) hold and preserve such records and chattel paper and
permit representatives of the Bank upon reasonable advance written
notice at any time during normal business hours to inspect and make
abstracts from such records and chattel paper.
<PAGE> 19
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Unless any Default is continuing and the Bank has instructed the Borrower
otherwise, the Borrower shall, except as otherwise provided by the Credit
Agreement, continue to collect, at its own expense, all amounts due or to become
due to the Borrower under the Contract Rights, provided, that the Borrower may
adjust, settle or compromise the amount or payment thereof in the ordinary
course of business. In connection with such collections, the Borrower may take
such action as the Borrower may deem necessary or advisable to enforce
collection of the Contract Rights; provided, however, that the Bank shall have
the right, at any time during the continuance of any Default, to communicate
with account debtors in order to verify with them, to the Bank's reasonable
satisfaction, the existence, amount and terms of any Accounts Receivable or
other Contract Rights, to notify the account debtors or obligors under any
Accounts Receivable or other Contract Rights of the assignment of such Accounts
Receivable or other Contract Rights to the Bank, and to direct such account
debtors or obligors to make payment of all amounts due or to become due to the
Borrower thereunder directly to the Bank (to such account of the Bank as the
Bank shall reasonably designate) and, upon such notification and at the expense
of the Borrower, to enforce collection of any such Accounts Receivable or other
Contract Rights, and to adjust, settle or compromise the amount or payment
thereof, in the same manner and to the same extent as the Borrower might have
done. During the continuance of a Default and receipt (at any time thereafter)
by the Borrower of notice from the Bank instructing the Borrower to comply with
the following provisions of this Section 4.4: (i) all amounts and proceeds
(including any Instruments) received by the Borrower in respect of any Accounts
Receivable or other Contract Rights shall be received in trust for the benefit
of the Bank hereunder, shall be segregated from other funds of the Borrower, and
shall be forthwith paid over to the Bank (to such account of the Bank as the
Bank shall designate) in the same form as so received (with any necessary
endorsements) to be held as cash collateral and applied in accordance with
Section 5.2; and (ii) the Borrower will not, without the consent of the Bank,
adjust, settle, or compromise the amount or payment of any Accounts Receivable
or other Contract Rights, or release wholly or partly any account debtor or
obligor thereof, or allow any credit or discount thereon.
SECTION 4.5. AS TO INTELLECTUAL PROPERTY COLLATERAL. The Borrower
hereby covenants and agrees that, with respect to all of its following Property
constituting Security Agreement Collateral:
(a) the Borrower will not, unless the Borrower shall either
(i) reasonably and in good faith determine that any of the Patent
Collateral is of negligible economic value to the Borrower, or (ii)
have a valid business purpose to do otherwise, do any act, or omit to
do any act, whereby any of the Patent Collateral may become abandoned
or dedicated;
(b) neither the Borrower nor any of its licensees will, unless
the Borrower shall reasonably and in good faith determine that any of
the Trademark Collateral is of negligible economic value to the
Borrower, (i) fail to continue to use any of the Trademark Collateral
in order to maintain all of the Trademark Collateral in full force free
from any claim of abandonment for non-use, (ii) fail to maintain
consistent with past practices the quality of products and services
offered under any of the Trademark Collateral, (iii) fail to employ any
of the Trademark Collateral with an appropriate
<PAGE> 20
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trademark notice, (iv) adopt or use any trademark or trade name which
is confusingly similar or a colorable imitation of any of the Trademark
Collateral, (v) use any of the Trademark Collateral in any manner other
than the manner for which registration or application for registration
of such Trademark Collateral (if any) has been made, or (vi) permit any
of the Trademark Collateral to become invalidated;
(c) the Borrower will, if the Borrower registers any of its
copyrights with the United States Copyright Office: (i) notify the Bank
promptly upon any such registration; and (ii) provide the Bank with all
such information as the Bank shall from time to time reasonably
request;
(d) the Borrower will not, unless the Borrower shall either
(i) reasonably and in good faith determine that any of the Copyright
Collateral or any of the Trade Secrets Collateral owned by the Borrower
is of negligible economic value to the Borrower, or (ii) have a valid
business purpose to do otherwise, do or permit any act or knowingly
omit to do any act whereby any of the Copyright Collateral or Trade
Secrets Collateral owned by the Borrower may lapse or become invalid or
unenforceable or placed in the public domain except upon expiration of
an unrenewable term of a registration thereof;
(e) the Borrower will notify the Bank promptly if it knows
that any application or registration relating to any material item of
Intellectual Property Collateral may become abandoned or dedicated to
the public domain or invalid or unenforceable, or of any adverse
determination or development regarding the Borrower's ownership of any
of the material Intellectual Property Collateral, its right to register
the same, or to keep and maintain the same;
(f) neither the Borrower nor any of its agents, employees,
licensees or designees will file an application for the registration of
any Intellectual Property Collateral with the United States Patent and
Trademark Office, the United States Copyright Office or any other
Governmental Authority unless it, within thirty (30) days thereof,
informs the Bank, and upon request of the Bank, executes and delivers
any and all Instruments as the Bank may reasonably request to evidence
the Bank's security interest in such Intellectual Property Collateral
and the goodwill and general intangibles of the Borrower relating
thereto or represented thereby;
(g) the Borrower will take all necessary steps, including in
any proceeding before the United States Patent and Trademark Office or
any political subdivision thereof or the United States Copyright Office
or any political subdivision thereof, to maintain and pursue each
application (and to obtain the relevant registration) filed with
respect to, and to maintain any registration of, the material
Intellectual Property Collateral, including the filing of applications
for renewal, affidavits of use, affidavits of incontestability and
opposition, interference and cancellation proceedings (except to the
extent that dedication, abandonment, or invalidation is permitted under
clause (a), (b), (c) or (d) above); and
<PAGE> 21
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(h) the Borrower will execute and deliver to the Bank, from
time to time upon the request of the Bank, such Copyright Security
Agreements, Trademark Security Agreements and such other Instruments as
may be required to acknowledge or register or perfect the Bank's
security interests in any part of the Intellectual Property Collateral
owned by the Borrower which shall from time to time hereafter be
recorded or registered by the Borrower with the United States Copyright
Office or United States Patent and Trademark Office.
SECTION 4.6. AS TO PLEDGED COLLATERAL. The Borrower hereby covenants
and agrees with the Bank that, with respect to all of its following Property
constituting Pledged Collateral, the Borrower will:
SECTION 4.6.1. STOCK POWERS, INSTRUMENTS, ETC. From time to time upon
the request of the Bank, except as otherwise provided herein, (a) promptly
deliver to the Bank such stock powers, Instruments (other, in any case, than
Dividends or any checks or drafts received in the ordinary course of business)
and similar documents, satisfactory in form and substance to the Bank, with
respect to the Pledged Collateral purported to be pledged by the Borrower
hereunder as the Bank may request, and (b) during the continuance of any Event
of Default, promptly, upon request of the Bank, transfer any Pledged Interests
or other Pledged Collateral into the name of any nominee designated by the Bank.
SECTION 4.6.2. VOTING RIGHTS; DIVIDENDS, ETC. Deliver (properly
endorsed where required hereby or reasonably requested by the Bank) to the Bank
if requested by the Bank while any Event of Default shall be continuing:
(a) promptly upon receipt thereof by the Borrower, while any
Event of Default shall be continuing, all Dividends and other cash
payments and other interest, income and proceeds received by the
Borrower in respect of the Pledged Collateral purported to be pledged
by the Borrower hereunder, all of which shall be held by the Bank as
additional Pledged Collateral for use in accordance with Section 5.2;
and
(b) while any Event of Default shall be continuing, promptly
upon request of the Bank, such proxies and other documents as may be
necessary to allow the Bank to exercise voting power with respect to
any Pledged Interests constituting Pledged Collateral purported to be
pledged by such Pledgor hereunder.
All (i) Dividends, Distributions, cash payments, interest, income and proceeds
which may at any time and from time to time be held by the Borrower, but which
is then required to be delivered to the Bank in accordance with the terms of
this Agreement, and (ii) additional Pledged Interests and other Pledged
Collateral received by the Borrower, shall, until delivery to the Bank, be held
by the Borrower separate and apart from its other Property in trust for the
Bank.
SECTION 4.6.3. DIVIDENDS AND VOTING RIGHTS OTHER THAN FOLLOWING AN
EVENT OF DEFAULT. The Bank agrees with the Borrower as follows:
<PAGE> 22
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(a) unless an Event of Default is continuing and the Bank has
delivered to the Borrower a written notice referring to this Section
4.6.3 and the exercise of rights hereunder (a "SECTION 4.6.3 NOTICE"),
the Borrower shall be entitled to exercise, in its reasonable judgment,
but in a manner that would not impair in any material respect the
Pledged Collateral and that would not violate or contravene the terms
of this Agreement, the Credit Agreement or any other Loan Document, the
voting power and all other incidental rights of ownership with respect
to the Pledged Interests and other Pledged Collateral pledged by the
Borrower hereunder; and
(b) the Borrower shall be entitled to receive all Dividends on
the Pledged Collateral pledged by the Borrower hereunder and to use the
proceeds of all such Dividends as and to the extent from time to time
permitted or otherwise not prohibited by the Credit Agreement.
The Bank agrees that, unless an Event of Default is continuing and the Bank
shall have delivered a Section 4.6.3 Notice, the Bank shall, upon the written
request of the Borrower, promptly deliver such proxies and other documents, if
any, as shall be reasonably requested by the Borrower to allow the Borrower to
exercise the rights described in clause (a) or clause (b) of this Section 4.6.3.
SECTION 4.7. DEFENSE OF BANK'S RIGHTS. The Borrower hereby covenants
and agrees that it will defend the right, title and interest of the Bank in and
to the Security Agreement Collateral and in and to all of the proceeds and
products thereof against the claims and demands of all other Persons.
SECTION 4.8. CONTINUOUS PERFECTION. The Borrower hereby covenants and
agrees that it will not change its name, identity or corporate structure in any
manner which might make any financing or continuation statement filed hereunder
seriously misleading within the meaning of Section 9-402(7) of the U.C.C. (or
any other then applicable provision of the U.C.C.) unless the Borrower shall
have given the Bank at least thirty (30) days' prior written notice thereof and
shall have taken all action (or made arrangements to take such action
substantially simultaneously with such change if it is impossible to take such
action in advance) necessary or reasonably requested by the Bank to amend such
financing statement or continuation statement so that it is not seriously
misleading.
SECTION 4.9. TRANSFERS AND OTHER LIENS.
(a) The Borrower hereby covenants and agrees that it will not:
(i) sell, assign (by operation of law or otherwise)
or otherwise dispose of any of its Security Agreement
Collateral or Equipment, except (in any case) for Sales and
other dispositions of Property from time to time permitted by
the Loan Documents; or
<PAGE> 23
-23-
(ii) create or suffer to exist any Liens upon or with
respect to any of its Security Agreement Collateral or
Equipment, except for (A) the security interests created by
this Agreement, and (B) any other Liens from time to time
permitted by the Loan Documents.
(b) The Borrower hereby covenants and agrees that it will
defend the right, title and interest of the Bank in and to its Security
Agreement Collateral and in and to all of the proceeds and products
thereof against the claims and demands of all other Persons.
SECTION 4.10. NOTICES. The Borrower hereby covenants and agrees that it
will, upon obtaining knowledge thereof, advise the Bank promptly, in reasonable
detail, (a) of any Lien made or asserted against any of its Security Agreement
Collateral (except for Liens from time to time permitted by the Loan Documents
to attach to such Security Agreement Collateral), (b) of any material change
outside of the ordinary course of business in the composition of its Security
Agreement Collateral, (c) of the occurrence of any other event which would have
a materially adverse effect on the aggregate value of its Security Agreement
Collateral or on the security interests created by it hereunder, and (d) any
other matters relating to its Security Agreement Collateral that the Bank may
from time to time reasonably request in writing.
ARTICLE V
REMEDIES
SECTION 5.1. EXERCISE. If any Event of Default is continuing, the Bank
may exercise in respect of all or any of the Security Agreement Collateral, in
addition to all other rights and remedies provided for herein or otherwise
available to it, all the rights and remedies of the Bank upon default under the
U.C.C. (whether or not the U.C.C. applies to the affected Security Agreement
Collateral) and other Applicable Law. Without limitation of the above, the Bank
may, whenever an Event of Default is continuing, without (to the extent
permitted by Applicable Law) notice to the Borrower, take all or any of the
following actions:
(a) transfer all or any part of the Security Agreement
Collateral into the name of the Bank or its nominee, with or without
disclosing that such Security Agreement Collateral is subject to any
Liens hereunder;
(b) notify the parties obligated in respect of any of the
Security Agreement Collateral to make payments directly to the Bank of
any amount due or to become due thereunder;
(c) enforce collection of any of the Security Agreement
Collateral by suit or otherwise, and surrender, release or exchange all
or any part thereof, or compromise or extend or renew for any period
(whether or not longer than the original period) any obligations of any
nature of any party with respect thereto;
(d) endorse any checks, drafts or other writings in the name
of the Borrower to allow collection of the Security Agreement
Collateral;
<PAGE> 24
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(e) take control of any proceeds of the Security Agreement
Collateral;
(f) execute (in the name, place, and stead of the Borrower)
endorsements, assignments, stock powers and other Instruments of
conveyance or transfer with respect to all or any of the Security
Agreement Collateral; and
(g) generally, do all such other acts and things as may be
considered incidental or conducive to any of the matters or powers
mentioned in the foregoing provisions of this Section 5.1 and which the
Bank may or can do lawfully and to use the name of the Borrower for
such purposes and in any proceedings arising therefrom.
In furtherance of, and not in limitation of, the foregoing, the Bank, without
demand of performance or other demand, advertisement or notice of any kind
(except the notice specified below of time and place of public or private sale)
to or upon the Borrower or any other Person (all and each of which demands,
advertisements and/or notices are hereby expressly irrevocably waived by the
Borrower), may, whenever any Event of Default is continuing, in a commercially
reasonable manner, collect, receive, appropriate and realize upon the Security
Agreement Collateral, or any part thereof, and sell, assign, give an option or
options to purchase, contract to sell or otherwise dispose of and deliver the
Security Agreement Collateral, or any part thereof, in one or more parcels at
public or private sale or sales, at any exchange, at any broker's board or at
any of the Bank's offices or elsewhere upon such terms and conditions as it may
reasonably deem advisable and at such prices as it may deem best, for cash or on
credit or for future delivery without assumption of any credit risk, with the
right to the Bank upon any such sale or sales, public or private, to purchase
the whole or any part of the Security Agreement Collateral so sold, free of any
right or equity of redemption in the Borrower, which right or equity is hereby
expressly irrevocably waived and released by the Borrower. Unless Security
Agreement Collateral is perishable or threatens to decline speedily in value or
is of a type customarily sold on a recognized market, in which event no
notification is required, the Borrower agrees that the Bank need not give it
more than ten (10) days' notice of the time and place of any public sale or of
the time after which a private sale or other intended disposition is to take
place and that such notice is reasonable notification of such matters.
SECTION 5.2. APPLICATION OF PROCEEDS. All cash proceeds received or
otherwise held by the Bank in respect of any sale of, collection from, or other
realization upon, all or any part of the Security Agreement Collateral shall be
applied by the Bank in the following order:
(a) FIRST, to any Person, on account of the payment of any
Indebtedness, the payment of which shall be secured by any Lien having
priority over the rights of the Bank in and to such cash proceeds;
(b) SECOND, to the Bank, on account of the payment of, or the
reimbursement of the Bank for, all costs and expenses incurred or
sustained by the Bank that are required by the terms of this Agreement,
the Credit Agreement or any other Loan Document to be paid or
reimbursed by the Borrower or any of its Subsidiaries; and
<PAGE> 25
-25-
(c) THIRD, to the Bank, on account of all of the other
Obligations of the Borrower or any of its Subsidiaries to the Bank
(whether or not such Obligations are then due and payable, matured or
unmatured, absolute or contingent, or otherwise).
Any surplus of such cash proceeds held by the Bank and remaining after payment
in full of all of the Obligations shall be paid over to the Borrower or to
whomsoever else may be lawfully entitled to receive such surplus.
THE BORROWER SHALL REMAIN LIABLE FOR ANY DEFICIENCY.
SECTION 5.3. INDEMNITY AND EXPENSES. The Borrower hereby indemnifies
and holds harmless the Bank and the shareholders, officers, directors,
employees, agents, Subsidiaries and affiliates of the Bank, from and against any
and all claims, losses, and liabilities arising out of or resulting from this
Agreement (including the enforcement thereof), except to the extent that such
claims, losses or liabilities have been found by a court of competent
jurisdiction, in a final, nonappealable order, to have resulted as a consequence
of the Bank's fraud, gross negligence or willful misconduct. The Borrower will,
upon written demand, pay to the Bank the amount of any and all reasonable
expenses, including the reasonable fees and disbursements of its counsel and of
any experts, which the Bank may incur in connection with:
(a) the administration of this Agreement or any agreement or
other Instrument relating hereto;
(b) the removal, custody, preservation, use or operation of,
or the sale of, collection from, or other realization upon, any of the
Borrower's Security Agreement Collateral;
(c) the exercise or enforcement against the Borrower of any of
the rights or remedies of the Bank hereunder;
(d) the failure by the Borrower to perform or observe any of
the provisions hereof; or
(e) the advancement of any funds in connection with actions
taken pursuant to Section 2.7.
SECTION 5.4. GRANT OF LICENSE TO USE INTELLECTUAL PROPERTY COLLATERAL.
For the purpose of enabling the Bank to exercise rights and remedies under
Section 5.1, and as a supplement to any other rights and remedies available to
the Bank, the Borrower grants to the Bank an irrevocable, non-exclusive license
(without payment of any royalty or other compensation to the Borrower) to use,
license or sublicense and to change, alter or otherwise modify, any Intellectual
Property Collateral now owned or hereafter created, arising or acquired by the
Borrower, and including in such license reasonable access to all media in which
any of the licensed items may be recorded or stored and to all computer and
automatic machinery software and programs used for the compilation or printout
thereof.
<PAGE> 26
-26-
SECTION 5.5. NO WAIVER; REMEDIES CUMULATIVE. No delay, act or omission
on the part of the Bank of any of its rights hereunder shall be deemed a waiver
of any rights hereunder unless also contained in a writing signed by the Bank,
nor shall any single or partial exercise of, or any failure to exercise, any
right, power or privilege preclude any other or further or initial exercise
thereof of any other right, power or privilege. The rights and remedies provided
herein are cumulative, and not exclusive of rights and remedies which may be
granted or provided by Applicable Law.
SECTION 5.6. MARSHALLING. The Bank shall not be required to marshal any
present or future collateral security (including, but not limited to, this
Agreement and the Security Agreement Collateral) for, or other assurances of
payment of, the Obligations or any of them or to resort to such collateral
security or other assurances of payment in any particular order, and all of the
rights of the Bank hereunder or in respect of such collateral security and other
assurances of payment shall be cumulative and in addition to all other rights,
however existing or arising. To the extent that it lawfully may, the Borrower
hereby agrees that it will not invoke any Applicable Law relating to the
marshalling of collateral which might cause delay in or impede the enforcement
of the Bank's rights under this Agreement or under any other Instrument creating
or evidencing any of the Obligations or under which any of the Obligations is
outstanding or by which any of the Obligations is secured or payment thereof is
otherwise assured, and, to the extent that it lawfully may, the Borrower hereby
irrevocably waives the benefits of all such laws.
ARTICLE VI
MISCELLANEOUS
SECTION 6.1. COLLATERAL DOCUMENT, ETC. For all purposes of the Credit
Agreement, this Agreement is a "COLLATERAL DOCUMENT" and a "LOAN DOCUMENT"
executed and delivered pursuant to the Credit Agreement, and shall (unless
otherwise expressly indicated herein) be construed, administered and applied in
accordance with and subject to the terms and provisions of the Credit Agreement.
SECTION 6.2. AMENDMENTS, ETC. No amendment or waiver of any provision
of this Agreement nor consent to any departure by the Borrower herefrom shall in
any event be effective unless the same shall be in writing and signed by the
Bank, and then such waiver or consent shall be effective only in the specific
instance and for the specific purpose for which it is given.
SECTION 6.3. ADDRESSES FOR NOTICES. All notices and other
communications provided for hereunder shall be in writing or by facsimile
transmission and, if to the Borrower, addressed or delivered to it at the
address specified in the Credit Agreement, and if to the Bank, addressed or
delivered to it at the address specified in the Credit Agreement, or as to any
party at such other address as shall be designated by such party in a written
notice to the other parties complying as to delivery with the terms of this
Section 6.3. Any such notices and other communications, if mailed and properly
addressed with postage prepaid or if transmitted by facsimile transmission,
shall be deemed given when received.
<PAGE> 27
-27-
SECTION 6.4. CHOICE OF LAW. THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS
SHALL IN ALL RESPECTS BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE
INTERNAL LAWS OF THE STATE OF CALIFORNIA.
SECTION 6.5. COUNTERPARTS; ENTIRE AGREEMENT. This Agreement may be
executed by the parties hereto in several counterparts, each of which shall be
deemed to be an original and all of which shall constitute together but one and
the same agreement. This Agreement, the Credit Agreement and the other Loan
Documents constitute the entire understanding between the parties hereto with
respect to the subject matter hereof and supersede any prior agreements, written
or oral, with respect thereto.
SECTION 6.6. HEADINGS. The various headings of this Agreement are
inserted for convenience only and shall not affect the meaning or interpretation
of this Agreement or any provision hereof.
SECTION 6.7. WAIVER OF JURY TRIAL. TO THE EXTENT NOT PROHIBITED BY
APPLICABLE LAW WHICH CANNOT BE WAIVED, EACH OF THE BANK AND THE BORROWER HEREBY
WAIVES, AND COVENANTS THAT IT WILL NOT ASSERT (WHETHER AS PLAINTIFF, DEFENDANT
OR OTHERWISE), ANY RIGHT TO TRIAL BY JURY IN ANY FORUM IN RESPECT OF ANY ISSUE,
CLAIM, DEMAND, ACTION OR CAUSE OF ACTION ARISING OUT OF OR BASED UPON THIS
AGREEMENT OR ANY OTHER LOAN DOCUMENT OR THE SUBJECT MATTER HEREOF OR THEREOF OR
ANY OBLIGATION OR IN ANY WAY CONNECTED WITH OR RELATED OR INCIDENTAL TO THE
DEALINGS OF THE BANK OR OF THE BORROWER IN CONNECTION WITH ANY OF THE ABOVE, IN
EACH CASE WHETHER NOW EXISTING OR HEREAFTER ARISING AND WHETHER IN CONTRACT OR
TORT OR OTHERWISE. THE BORROWER ACKNOWLEDGES THAT THE PROVISIONS OF THIS SECTION
6.7 CONSTITUTE A MATERIAL INDUCEMENT UPON WHICH THE BANK IS RELYING AND WILL
RELY IN ENTERING INTO THIS AGREEMENT. THE BANK OR THE BORROWER MAY FILE AN
ORIGINAL COUNTERPART OR A COPY OF THIS SECTION 6.7 WITH ANY COURT AS WRITTEN
EVIDENCE OF THE CONSENT OF THE BANK AND THE BORROWER TO THE WAIVER OF ITS RIGHT
TO TRIAL BY JURY.
[THE REMAINDER OF THIS PAGE IS INTENTIONALLY LEFT BLANK.]
<PAGE> 28
-28-
IN WITNESS WHEREOF, the parties hereto have caused this SECURITY
AGREEMENT to be duly executed and delivered by their respective officers
thereunto duly authorized on and as of the date first above written.
THE BORROWER:
[SEAL] EDISON SCHOOLS INC.
Attest: By:
Name:
Title:
THE BANK:
IMPERIAL BANK
By:
Name:
Title:
STATE OF __________ )
) SS.
COUNTY OF ________ )
Personally appeared before me, the undersigned, a Notary Public in and
for said county, ___________________, personally known to me, who, being by me
first duly sworn, declared that he is the ___________________ of EDISON SCHOOLS
INC., a Delaware corporation, that being duly authorized he did sign and seal
the said SECURITY AGREEMENT as such officer of and on behalf of such
corporation, and that the same is such corporation's free act and deed.
IN WITNESS WHEREOF, I have hereunto set my hand and official seal on
this _____ day of November, 1999.
NOTARY PUBLIC
MY COMMISSION EXPIRES:
<PAGE> 1
Exhibit 10.3
PROMISSORY NOTE
$10,000,000 DATED AS OF: NOVEMBER 12, 1999
FOR VALUE RECEIVED, the undersigned, EDISON SCHOOLS INC., a Delaware
corporation (the "BORROWER"), hereby absolutely and unconditionally promises to
pay to IMPERIAL BANK (the "HOLDER"), or order, on or before the FINAL MATURITY
DATE, the principal sum of TEN MILLION DOLLARS ($10,000,000), or, if less, the
aggregate unpaid principal amount of all of the Loans made by the original
Holder hereof to the Borrower from time to time pursuant to the Credit Agreement
referred to below. The Borrower also promises to pay interest from the date
hereof, computed as provided in the Credit Agreement, on the principal amount of
the Loans from time to time unpaid at the per annum rates applicable to such
unpaid principal as provided in the Credit Agreement and to pay interest, to the
extent not prohibited by Applicable Law, on overdue interest and other overdue
sums payable hereunder at the rates specified in the Credit Agreement, all such
interest being payable at the times specified in the Credit Agreement, except
that all accrued unpaid interest shall in any event become and be absolutely and
unconditionally due and payable at the stated or accelerated maturity hereof or
upon the prepayment in full hereof.
This Note evidences Loans made under, is entitled to the benefits of,
and is subject to the provisions of, the Revolving Credit Agreement, dated as of
November 12, 1999 (as amended, supplemented, amended and restated or otherwise
modified and from time to time in effect, the "CREDIT AGREEMENT"), between the
Borrower and the original Holder hereof. The principal of this Note is repayable
and prepayable in the amounts and under the circumstances set forth in the
Credit Agreement, and may be prepaid in whole or from time to time in part, all
as set forth in the Credit Agreement. Terms defined in the Credit Agreement are
used herein with the meanings given thereto in the Credit Agreement.
In case any Event of Default shall at any time occur, the entire unpaid
principal of and all unpaid interest accrued on this Note may become or be
declared due and payable in the manner and with the effect provided in the
Credit Agreement.
THIS NOTE SHALL IN ALL RESPECTS BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE INTERNAL SUBSTANTIVE LAWS OF THE STATE OF CALIFORNIA AND, IN
THE CASE OF PROVISIONS RELATING TO INTEREST RATES, ANY APPLICABLE LAWS OF THE
UNITED STATES OF AMERICA.
Should all or any part of the Indebtedness represented by this Note be
collected by action at law, or in Bankruptcy or Insolvency Proceedings or other
court proceedings, or should this Note be placed in the hands of attorneys for
collection after default, the Borrower hereby
<PAGE> 2
-2-
promises to pay to the Holder of this Note, upon demand by the Holder hereof at
any time and from time to time, in addition to principal, interest and all (if
any) other sums payable on or in respect of this Note or the Indebtedness
evidenced hereby, all court costs and reasonable attorneys' fees and all other
reasonable collection charges and expenses incurred or sustained by the Holder
hereof.
The parties hereto, including the Borrower and all guarantors and
endorsers, hereby waive presentment, demand, notice, protest and all other
demands and notices in connection with the delivery, acceptance, performance and
enforcement of this Note, except as specifically otherwise provided in the
Credit Agreement, and assent to all extensions of time of payment, forbearance
and all other indulgences, all without notice.
IN WITNESS WHEREOF, this PROMISSORY NOTE has been duly executed as an
Instrument under seal by and on behalf of EDISON SCHOOLS INC. on and as of the
date first above written.
THE BORROWER:
[SEAL] EDISON SCHOOLS INC.
ATTEST: BY:_______________________________
NAME:
TITLE:
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<ARTICLE> 5
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 22,113,000
<SECURITIES> 0
<RECEIVABLES> 15,182,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 53,085,000
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 140,442,000
<CURRENT-LIABILITIES> 36,379,000
<BONDS> 0
0
2,452,000
<COMMON> 62,000
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 140,442,000
<SALES> 0
<TOTAL-REVENUES> 41,151,000
<CGS> 0
<TOTAL-COSTS> 56,623,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 787,000
<INCOME-PRETAX> (15,669,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (15,669,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> (15,669,000)
<EPS-BASIC> (.46)
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