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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] Annual Report pursuant to Section 13 or 15(d) of the Securities and
Exchange Act of 1934 for the fiscal year ended December 31, 1998
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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 __ 0-22844
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SYLVAN LEARNING SYSTEMS, INC.
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(Exact name of registrant as specified in its charter)
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Maryland 52-1492296
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
1000 Lancaster Street, Baltimore, Maryland 21202
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(Address of principal executive offices) (Zip Code)
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Registrant's telephone number, including area code: (410) 843-8000
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Securities registered pursuant to Section 12(b) of the Act:
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Name of each exchange on
Title of each class which registered
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Common Stock, Par Value $.01 NASDAQ
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Securities registered pursuant to the Section 12(g) of the Act: None
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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. Yes [X]. No [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of voting Common Stock held by non-affiliates of
the registrant was approximately $1.4 billion as of March 15, 1999.
The registrant had 50,874,171 shares of Common Stock outstanding as of March 15,
1999.
DOCUMENTS INCORPORATED BY REFERENCE
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Certain information in Sylvan Learning Systems, Inc.'s definitive Proxy
Statement for its 1999 Annual Meeting of Shareholders, which will be filed with
the Securities and Exchange Commission pursuant to Regulation 14A no later than
April 30, 1999 is incorporated by reference in Part III of this Form 10-K.
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INDEX
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PART I. Page No.
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Item 1. Business.............................................. 3
Item 2. Properties............................................ 11
Item 3. Legal Proceedings..................................... 11
Item 4. Submission of Matters to a Vote of Security Holders... 12
PART II.
Item 5. Market for Registrant's Common
Equity and Related Stockholder Matters............... 12
Item 6. Selected Financial Data............................... 13
Item 7. Management's Discussion and Analysis of
Financial Condition and Results of Operations........ 15
Item 7A. Quantitative and Qualitative Disclosures About
Market Risk.......................................... 25
Item 8. Financial Statements and Supplementary Data........... 25
Item 9. Changes in and Disagreements With Accountants
on Accounting and Financial Disclosure............... 25
PART III.
Items 10., 11., 12. and 13. are incorporated by reference from
Sylvan Learning Systems, Inc.'s definitive Proxy
Statement which will be filed with the Securities and
Exchange Commission, pursuant to Regulation 14A,
not later than April 30, 1999.......................... 26
PART IV.
Item 14. Exhibits, Financial Statement Schedules,
and Reports on Form 8-K............................... 26
SIGNATURES............................................................. 30
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PART I.
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Item 1. Business
Sylvan Learning Systems, Inc. ("the Company" or "Sylvan") is the leading
international provider of educational services to families, schools and
industry. The Company provides lifelong educational services through three
separate business segments: the Sylvan Prometric division principally delivers
computer-based testing for academic admissions, information technology and
professional certification programs; the Sylvan Learning Centers division
provides personalized instructional services to students of all ages and skill
levels; and the Sylvan Contract Educational Services division principally
provides supplemental educational services and professional development through
contracts with school systems and other organizations. Sylvan subsidiaries
include PACE, which provides corporate consulting, training and professional
development services, the Canter Group, which provides professional development
and graduate degree programs for teachers, Wall Street Institute and Aspect,
which deliver English language instruction to professionals and college
students, respectively. Through its affiliate, Caliber Learning Network, Inc.,
formed as a joint initiative between Sylvan and MCI Communications Corp., Sylvan
has the ability to distribute world-class adult professional education and
training programs. Sylvan's services are delivered through its network of more
than 3,000 educational and testing centers around the globe. In 1998, total
system-wide revenues were approximately $622.2 million, composed of $246.6
million from the Sylvan Learning Centers segment ($197.4 million from franchised
Learning Centers and $49.2 million from Company-owned Learning Centers, product
sales, franchise sales fees and other franchise service revenues), $275.1
million from the Sylvan Prometric segment and $100.5 million from the Sylvan
Contract Educational Services segment. Note 21 of the 1998 audited financial
statements contains additional disclosures regarding the Company's business and
geographic segments.
Sylvan Learning Centers
Sylvan is widely recognized as providing high quality educational services
with consistent, quantifiable results, and has delivered its core educational
service to more than 1.2 million students primarily in grades three through
eight over the past 19 years. The Company's Sylvan Learning Centers segment
provides supplemental instruction in reading, mathematics and reading readiness,
featuring an extensive series of standardized diagnostic tests, individualized
instruction, a student motivational system and continued involvement from both
parents and the child's regular school teacher.
Typically, a parent contacts a Sylvan Learning Center because the parent
believes that his or her child may have insufficient reading or mathematics
skills. Parents learn about Sylvan from the Company's media advertising, from a
referral from another parent or from school personnel. Learning Center
personnel ask the parent to bring the student to the Learning Center to complete
a series of standardized diagnostic tests and to receive educational
consultation. Approximately 35% of phone inquiries result in a visit to a
Learning Center. The Learning Center's Sylvan-trained educators use test results
to diagnose students' weaknesses and to design an individual learning program
for each student. After the initial testing and consultation, the Company
estimates that more than 90% of parents enroll the student in a full course of
study. The program typically requires four to six months to complete and
comprises approximately 36 to 60 hours of instruction. Instruction is generally
given twice a week for one hour per visit. Sylvan requires that all instructors
be certified teachers. The cost of the tests and initial consultation ranges
from $95 to $250, and fees average $35 per hour. The Company estimates that the
typical program costs approximately $1,650.
Learning Centers range from 1,000 to 3,500 square feet. Instruction is given
at U-shaped tables designed to ensure that teachers work with no more than three
students at a time. The student's individualized one hour lesson includes a five
segment mastery approach. There are special incentives, such as tokens
redeemable for novelties
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and toys, to motivate the student to achieve the program's objectives and to
strengthen the student's enthusiasm for learning. Personal computers at each
Learning Center are used by the student as a supplemental learning tool. The
Learning Center's Director of Education monitors the progress of each student
after each hour of instruction.
Instructors schedule parent conferences after every 12 hours of a student's
program. Throughout a student's course of study, the Learning Center tests the
student using the same standardized diagnostic tests, and the results are shared
with the parents in personal conferences, during which the student's
continuation in a Sylvan program is discussed.
Franchise Operations. As of December 31, 1998, there were a total of 727
Learning Centers in 49 states, six Canadian provinces, Hong Kong and Guam
operated by the Company or its franchisees. As of that date, there were 420
franchisees operating 663 Sylvan Learning Centers. During 1998, 60 franchised
Learning Centers were opened and seven were closed. In addition, during 1998,
13 franchisee-owned Learning Centers were acquired by the Company.
Approximately 2% of franchisees are currently more than three months in arrears
in the payment of franchise royalties, and the Company does not believe that the
closing of any or all of the Learning Centers of these franchisees would have a
material adverse effect on the Company because the royalties earned from these
franchisees represented less than 1% of total franchise royalties earned by the
Company in 1998.
The Company licenses franchisees to operate Sylvan Learning Centers in a
specified territory, the size of which depends on the number of school-age
children and average household incomes in the area. Franchisees must obtain the
Company's approval for the location and design of the Learning Center and of all
advertising, and must operate the Learning Center in accordance with the
Company's methods, standards and specifications. Most Learning Centers are
located in suburban areas and have approximately 10 employees, two of which are
typically full-time employees and eight of which are part-time instructors. The
cost to open a typical franchised Learning Center ranges from approximately
$79,000 to $145,000, including the franchise license fee, furniture, equipment
and an initial supply of certain items required under the Company's franchise
agreement.
The Company actively manages its franchise system. The Company requires
franchisees and their employees to attend two weeks of initial training in
Learning Center operations and Sylvan's educational programs. The Company also
offers franchisees continuing training each year. The Company employs field
operations managers that act as "consultants" to provide assistance to
franchisees in technology implementation, business development, marketing,
education and operations. These employees also facilitate regular communications
between franchisees and the Company.
Sylvan operates a quality assurance review program to maintain the quality of
Sylvan Learning Centers. Sylvan's field operations managers confirm franchisee
compliance with the Company's standards, including training requirements,
exclusive use of approved educational materials and programs, correct
administration of testing materials, proper execution of supervisory procedures,
sufficient time spent in parent/teacher conferences, staffing and Learning
Center appearance. Sylvan's field managers counsel franchisees that fail to meet
the Company's quality or financial performance standards and assist these
franchisees in developing a plan to improve their Learning Centers' performance.
When necessary, the Company assists franchisees in selling their franchises.
The Company believes there is significant potential for additional franchised
Learning Centers both domestically and internationally. A number of territories
with only one Learning Center could support one or more additional Learning
Centers based upon the number of school-age children in the market area. The
Company is actively encouraging existing franchisees in these territories to
open additional Learning Centers. In addition, management has identified at
least 208 territories in North America, primarily in smaller markets, in which
there are no Learning Centers. The Company is actively seeking franchisees for a
number of these territories. Forty-seven new territories were sold in 1998.
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The Company has sold franchise rights for the operation of Learning Centers in
Hong Kong, China, the United Kingdom and Spain. In pricing international
franchise rights, the Company takes into account estimates of the number of
centers that could be opened in an area.
The Company's typical franchise agreement (the "License Agreement") grants a
license to operate a Sylvan Learning Center and to use Sylvan's trademarks
within a specified territory. The franchisee is required to purchase from Sylvan
certain diagnostic and instructional materials, student record forms, parental
information booklets and explanatory and promotional brochures developed by the
Company. Sylvan specifies requirements for other items necessary for operation
of a Learning Center, such as computers, instructional materials and furniture.
The Company currently offers a License Agreement with an initial term of ten
years, subject to unlimited additional ten year extensions at the franchisee's
option on the same terms and conditions. The initial license fee ranges from
$38,000 to $46,000, depending on factors such as the number of school-age
children in the territory. Royalties are either 8% or 9% of gross revenues of
the Learning Center, and the royalty rate depends upon the demographics of the
territory and is specified in the License Agreement. Advertising spending
requirements range from $1,000 to $3,500 per month, or up to 8% of gross
revenues, whichever is greater. The License Agreement has been revised
periodically, and several franchisees are operating under older agreements with
variations from the above terms. Approximately 9% of franchisees operate under
older agreements with royalties as low as 6% and without any requirement to
contribute to the national advertising fund. The remaining 91% of the
franchisees are required to contribute a minimum of 1.5% of gross revenues to
the national advertising fund. The fund is administered by the SLC National
Advertising Fund, Inc. ("SNAF"). The Franchise Owners Association ("FOA") owns
the SNAF. The FOA is an association whose members consist of Sylvan franchise
owners. Franchisees must submit monthly financial data to the Company.
Company-owned Learning Centers. As of December 31, 1998, Sylvan owned and
operated 63 Learning Centers: five in Baltimore, seven in Dallas, eight in
Houston, six in Los Angeles, five in Orange County, California, nine in the
greater Philadelphia area, seven in South Florida, eight in the greater
Washington, D.C. area, three in the greater Salt Lake City metropolitan area and
five in the greater Minneapolis area. The Company's operation of Learning
Centers enables it to test new educational programs, marketing plans and
Learning Center management procedures. As of December 31, 1998, eleven of the
Company-owned Learning Centers contained Technology Centers for computer-based
testing. Company-owned Learning Centers give the Company a local presence in key
markets, which has been helpful in marketing the Company's services to school
districts utilizing Title I funds and to employers interested in the Sylvan-At-
Work and PACE programs (see "Contract Educational Services" on page 7). The
Company may consider selected acquisitions of additional Learning Centers now
operated by franchisees.
Schulerhilfe. On October 28, 1998, the Company acquired Schulerhilfe, a major
provider of tutoring services in Germany. Schulerhilfe has approximately 177
company-owned centers and approximately 700 franchise locations in Germany,
Italy and Austria. Schulerhilfe operates based on a similar business model as
the Sylvan Learning Centers, with small class sizes and instruction based on
attendance 2 or 3 times per week per student. Competition consists of one other
national provider of tutoring services in Germany combined with small, local
tutors.
Sylvan Prometric
The Company conducts its testing business through 2,437 testing centers, 1,202
of which are located in the United States and Canada and the remainder of which
are located in 128 foreign countries. These centers are classified as either
Sylvan Technology Centers ("STCs") or Authorized Prometric Testing Centers
("APTCs"). STCs are generally located in certain existing Sylvan Learning Center
franchisee and Company-owned and operated sites. During 1998, the Company added
456 testing centers, of which 279 were APTCs. The Company believes that it can
increase capacity by adding workstations at existing testing centers, as well as
by opening new testing centers. Opening a new testing center can take up to 120
days. Computer-based tests, which can be offered during regular school hours
and on weekends at STCs, increase the utilization and the public awareness of
Sylvan Learning Centers.
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For STCs, Sylvan provides the supporting infrastructure and administration,
including computer equipment and software systems in each testing center and
where appropriate, registration and scheduling of candidates, downloading of
individual tests and training and certification of STC personnel in accordance
with procedures established by the sponsoring testing organization. The
franchisee provides the space and staffing for the testing center. The Company
enters into contracts directly with the testing organization, such as
Educational Testing Service, Inc. ("ETS"), under which Sylvan receives a fee
based upon the number of tests given. The Company has entered into a separate
agreement with each franchisee that operates a testing center, whereby the
franchisee receives fees per test that decrease as the volume of the tests
delivered increases.
APTCs must meet certain criteria established by the Company for administering
computer-based testing and are required to furnish the space, equipment and
personnel needed for their operation and receive compensation for test delivery
in various forms including marketing assistance for their core business. APTC's
administer computer-based tests principally in the information technology ("IT")
industry.
Principal customers in the IT industry are Microsoft Corporation and Novell,
Inc. IT customers sponsor worldwide certification programs for various
professionals such as network administrators and engineers, service technicians,
instructors, application specialists and developers, and system administrators,
operators and engineers. Certification testing for Microsoft and Novell
accounted for $52.9 million, or 19%, of Sylvan Prometric's revenues in fiscal
1998.
ETS, a leading educational testing firm, develops and administers more than
9.0 million tests each year, including the Graduate Record Exam ("GRE"), the
Graduate Management Admissions Test ("GMAT"), The Test of English as a Foreign
Language ("TOEFL"), the National Teachers Exam ("NTE") and the Advanced
Placement Program, sponsored by organizations such as the College Board. The
largest tests administered by ETS are the SAT, of which 2.3 million are given
annually to college-bound students, and the PSAT, of which 1.9 million are given
annually to all students in grade 10 or 11. As one of the largest and most
influential test developers and administrators, ETS is leading the conversion of
tests to computer-based format from pencil and paper versions.
The Company developed a working relationship with ETS as a result of a joint
venture between ETS and a predecessor of the Company in the late 1980s. This
relationship facilitated the Company's entering into a master agreement with ETS
(the "ETS Agreement"), under which the Company is the exclusive commercial
provider of computer-based tests administered by ETS. This exclusivity provision
does not apply to the SAT, PSAT and Achievement Tests that are sponsored by the
College Board.
During 1998, the Company recognized approximately $54.4 million, or 20% of
Sylvan Prometric's revenues in fiscal 1998, from all services for ETS. The
Company provides testing services through two contracts with ETS to provide
services both in North America and internationally. Sylvan initially signed a
contract for computer-based test delivery in North America in 1993 with a term
expiring in 1999. This North American contract was renegotiated in 1997 and now
extends through 2005. The North American contract continues to provide that
Sylvan will be ETS's exclusive commercial provider of computer-based testing
services in North America, provided Sylvan can provide sufficient capacity to
meet candidate testing demand, in accordance with the criteria set forth in the
contract. Further, the contract provides that the Company will deliver not less
than 50% of ETS's computer-based testing volume (excluding College Board tests)
in North America.
The North American contract also provides that ETS may establish computer-
based test sites (subject to the requirement for 50% of the computer-based
testing volume being delivered by the Company) at three specific ETS locations,
at ETS client specific locations and at test centers located in colleges,
universities and similar institutions. At present, the Company administers and
delivers ETS examinations at approximately 84 institutional test sites. During
1998, the Company recognized approximately $21.7 million under the North
American contract.
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ETS and the Company entered into an international contract for delivery of ETS
computer-based tests in 1994. The terms of the contract stipulate that the
Company will be compensated for its services through a fee equal to approved
costs, plus 10 percent, and the Company recognizes revenue accordingly. The
Company also is reimbursed for its cost of capital and any foreign exchange
losses. During 1998, the Company recognized revenues of approximately $32.7
million under this contract. In return for the cost plus compensation, the
Company is required to establish a network of international computer-based
testing sites and to deliver ETS's computer-based tests. The contract provides
that the Company shall be the exclusive provider of computerized commercial
testing capacity to ETS for all secure testing programs outside North America.
ETS may establish its own test sites only where Sylvan fails to provide
sufficient capacity as defined by the contract or where the Company's costs of
providing the service would be prohibitive. There are no ETS sites for
computer-based testing operated internationally. During 1998, the Company
expanded international testing for ETS to a total of 116 permanent and 30
temporary sites in 79 countries.
Under the ETS agreements, the Company offers computer-based versions of ETS'
PRAXIS examination, which is used to license beginning teachers, the GRE, which
is used by graduate schools to evaluate applicants, and through a contract with
the National Council of State Boards of Nursing, a computer-based licensing
examination (NCLEX) for registered and practical nurses. In October 1997,
Sylvan and ETS converted the GMAT examination to computer-based delivery on a
world-wide basis. In July 1998, Sylvan and ETS converted the TOEFL examination
to computer-based delivery in the Americas, Europe, Africa, Middle East,
Australia and certain Asia-Pacific countries.
In addition to the tests offered through its partnership with ETS, the Company
is one of three entities licensed by the FAA to deliver computer-based versions
of various pilot and mechanical licensing tests for general aviation and the
sole source provider for certain pre-employment tests. In addition to FAA
testing, the Company provides testing services for organizations in many other
fields, such as for computer professionals, securities dealers, medical
laboratory technicians and military candidates.
During 1998, the Company won a contract with the Driving Standards Agency
(DSA) of Great Britain to deliver all drivers' license theory tests in the
countries of England, Scotland and Wales. The contract has an estimated value of
$125 million over a six-year term through August 2004. Currently, more than one
million people per year take the theory test for student drivers. Under the
contract, Sylvan will operate 158 testing centers at which it will deliver a
computer-based version of the drivers' exam. The centers will be located within
20 miles of most testing candidates' homes. Sylvan expects to begin delivering
tests through these centers in January 2000.
The Company, in December 1996, purchased Wall Street Institute International,
B.V. and its commonly controlled affiliates (collectively, "WSI"), a European
based franchisor and operator of learning centers where English is taught
through a combination of computer-based and live instruction. Typically, the
instructional programs are approximately nine months to one year in duration.
WSI has more than 250 company-owned and franchised centers in operation
throughout Europe and Latin America.
The 1996 acquisition of WSI was an important step in Sylvan's strategy to
increase its services to the adult education marketplace and to expand
internationally. Sylvan began building a global network for the delivery of
computer-based testing services in early 1994 through an exclusive international
alliance with ETS. In addition to offering the English language programs, WSI
locations will be utilized by Sylvan to administer certain computer-based
testing programs throughout Europe and Latin America, and accordingly is
considered part of the Company's Sylvan Prometric testing division.
WSI has 86 centers in Spain (65 franchised and 21 company-owned) with the
remainder in France, Germany, Italy, Portugal, Switzerland, Mexico, Chile, and
Venezuela. WSI's international expansion was accomplished by selling Master
Licensing agreements, with each Master Licensor obtaining franchisees to open
centers in their development areas. Sylvan plans to continue this strategy to
expand WSI's presence globally, with a focus on the Middle East, Africa and the
Pacific Rim region.
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Effective December 1, 1997, the Company purchased Block Testing Services L.P.
, Block State Testing Services L.P. and National Assessment Institute, Inc.,
(collectively "NAI/Block"), commonly-controlled companies engaged in the
business of designing, marketing, selling, distributing and administering paper
and pencil and computer-based electronic tests for the licensing of individuals.
NAI/Block operates 14 regional offices that administer licensing examinations on
the state, county and local municipality level for various industries, including
but not limited to the construction, cosmetology, real estate and medical
industries. These 14 regional offices provide examinations for 44 states, the
District of Columbia and the Virgin Islands. On January 1, 1999, the Company
entered into an agreement with The Chauncey Group International, Ltd.
("Chauncey") to form Experior Assessments LLC ("Experior"), a joint venture to
be engaged in the business of developing and administering state and municipal
sponsored licensing and certification programs and other related services. In
exchange for a 50% interest in Experior, Sylvan contributed the net assets of
NAI/Block, excluding certain working capital balances. Chauncey will contribute
the net assets of the Insurance Testing Corp ("ITC") in exchange for its 50%
interest in Experior. ITC provides computer-based testing, licensing and
continuing education services to state insurance departments.
On May 6, 1998 the Company acquired all of the outstanding common stock of
Aspect International Language Schools, B.V. and subsidiaries ("Aspect"). Aspect
is a leading provider of English language training programs for college students
from non-English speaking companies. Founded in 1992, Aspect delivers intensive
English language programs at 27 schools in five countries.
Sylvan Contract Educational Services
Title I and state-based programs. The federal government and various state and
local governmental agencies allocate funds to local school districts to provide
supplemental remedial education to academically and economically disadvantaged
students. The main program is the Title I program, administered by the U.S.
Department of Education. Federal law now contains minimum student performance
standards for each school district receiving Title I funds. The Company believes
that because of its proven record of achieving measurable improvement in the
reading and mathematics skills of its students nationwide, it is positioned to
provide supplemental educational services to school districts receiving Title I
and similar state funds. As of December 31, 1998, the Company had contracts to
provide supplemental remedial educational services to 139 public schools,
including 33 in Los Angeles, 19 in Compton, California, 11 in Detroit, Michigan
and 9 in Chicago, Illinois.
Using Company personnel, Sylvan offers virtually the same educational
services to students in schools as is offered at Sylvan Learning Centers. The
school designates a classroom to be the Learning Center for the duration of the
contract and modifies the classroom to resemble a typical Sylvan Learning
Center. Sylvan personnel administer standardized diagnostic tests and, based on
the results, prescribe an individualized learning program for each child.
Students typically receive two hours of instruction per week, which includes the
use of personal computers as in a Sylvan Learning Center. The Company can
provide these services to students after school, on Saturdays, during the summer
or as a "pullout" program during the regular school day, which is the method
currently prescribed by most current contracts. There is a high degree of
individual attention, with student to teacher ratios of no more than three to
one. The program is designed to include a high degree of parental involvement,
and teachers make a special effort to have the parents involved.
Under most of its contracts, the Company has guaranteed that each student who
receives instruction in the Sylvan program and meets prescribed attendance
requirements will achieve some minimum measure of improvement required by the
school districts, as measured by standardized tests. Improvement is measured
using various standardized measures, including normal curve equivalents
("NCE's") a generally accepted statistical measure of student performance. The
typical minimum improvement required is two NCE's per year. If a student does
not achieve the required improvement, the Company will provide 12 hours of
remedial instruction to that student during the following summer or school year
without charge. The Company has not incurred significant expense related to
this guarantee. Under the contracts, the school districts pay the Company a set
fee for all
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services, materials and equipment. The contracts have terms of one to three
years, with the latest expiring in June 2001. All of the contracts contain
provisions for cancellation by school district officials based on funding
constraints.
The Company is actively seeking contracts to provide its core educational
program to other school systems, offering to tailor its program to the system's
specific needs, and is in discussions with several other major school districts.
In addition to serving public school students, Sylvan can provide its service to
parochial or private school students through contracts with public school
districts. Public school districts are responsible for administering the Title I
funding for the non-public schools. Because government-funded services to any
parochial school students generally cannot legally be provided in the parochial
school, Sylvan offers the flexibility of conducting the program at a nearby
Learning Center, or providing temporary facilities.
Educational Inroads. On May 30, 1997 the Company acquired by merger all of
the outstanding stock of I-R, Inc. and Independent Child Study Teams, Inc.
(collectively, "Educational Inroads") in exchange for 1,414,000 shares of common
stock. I-R, Inc. and Independent Child Study Teams, Inc. were commonly owned by
two shareholders. Educational Inroads provides remedial and special education
services to public and non-public school systems, with current contracts in New
Jersey, Maryland, Louisiana, Washington D.C. and other school districts.
PACE. In March 1995, the Company acquired The PACE Group ("PACE"), a provider
of educational and training services to large corporations throughout the United
States. Services offered by PACE include racial and gender workplace diversity
training and skills improvement programs such as writing, advanced reading,
listening and public speaking. PACE licenses most of these programs from the
individuals who developed them and pays royalties ranging from 5% to 15% of the
revenues generated from the programs. These programs are typically offered on-
site from one to several days at a time and are conducted by trained instructors
employed by PACE, or, in some cases, PACE will train the customer's employees to
conduct the programs. Additionally, a corporation may purchase a site license to
offer a particular PACE program. PACE currently has 14 sales offices throughout
the United States and markets the programs locally through its sales force. PACE
customers include Ford Motor Company, IBM, BankOne, General Motors and AT&T.
The Canter Group. In January 1998, the Company acquired Canter and
Associates, Inc. and Canter Educational Productions, Inc. (collectively, "The
Canter Group" or "Canter"), a leading provider of training, staff development
and graduate courseware for educators. This acquisition will allow Sylvan to
provide teachers with advanced degree programs and professional development at a
time when the demand for teachers is in excess of supply.
Marketing
The Company and its franchisees market Sylvan's Learning Center services to
parents of school-aged children at all grade levels and academic abilities. Far
beyond tutoring, Sylvan Learning Centers' supplemental education utilizes a
diagnostic and prescriptive approach to address the specific needs of each and
every student. A portion of Sylvan's advertising includes commercials on
morning and evening news on the national networks. Sylvan's advertising
campaign demonstrates the benefits of its personalized educational services
through testimonials of actual parents and Sylvan teachers. It positions Sylvan
as the leader in supplemental education and emphasizes Sylvan's high quality
curriculum, personalized attention and positive results: better grades and
improved self-esteem. Franchisees form local cooperatives to collectively
purchase local television and radio advertising and usually supplement their
efforts with local newspaper and direct mail. The company also has additional
marketing support for specific programs, including Reading, Math, Algebra,
Geometry, Study Skills, SAT/ACT College Prep, and Writing.
The Company is actively involved in marketing computer-based testing services
to national and international academic testing organizations, such as ETS, and
licensing and professional certification organizations. The Company's network of
testing centers, centralized registration capability and computer-based testing
experience
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offers important competitive advantages. The Company markets its school-based
educational services to several public school systems and state education
departments. This marketing effort has been expanded to seek contracts for both
public and non-public schools, where both are administered by the local public
school district. WSI markets its English language instruction services through
the use of national television and radio advertising programs in Spain as well
as through locally-placed advertising by its franchisees and company-owned
centers in various countries.
Marketing efforts for the PACE programs are focused on large corporations
seeking to outsource their training and educational programs, through PACE's 14
sales offices throughout the United States. PACE's strategy is to offer
solutions to the customer's training needs rather than marketing specific
products.
Marketing efforts for Aspect are focused mainly through sales agents
worldwide, primarily through direct response advertising brochures.
Competition
The Company is aware of only three direct national corporate competitors in
its Sylvan Learning Centers segment: Huntington Learning Centers, Inc., Kumon
Educational Institute and Kaplan Educational Centers. The Company believes these
competitors operate fewer centers than Sylvan and that these firms concentrate
their services within a smaller geographic area. In most areas served by Sylvan
Learning Centers, the primary competition is from individual tutors. State and
local education agencies also fund tutoring by individuals, which competes with
the Company's Sylvan Learning Centers segment.
The Company's contract educational services segment's most significant
competitor remains the public school system itself. Given the unique position of
public education in the United States, the Company believes that educational
reforms implemented directly by school officials will not face the same degree
of public resistance that the Company may face. The Company also competes with
school reform efforts sponsored by private organizations and universities and
with consultants hired by school districts to provide assistance in the
identification of problems and implementation of solutions. The Company is aware
of several entities that currently provide Title I and state-based programs for
students attending parochial and private schools on a contract basis.
Sylvan Prometric also has a small number of direct competitors. These
competitors include organizations that have opened centers to offer specific
computer-based tests under contracts with the administrators of those tests,
including National Computer System's Virtual University Enterprises division and
Harcourt General, which offers computer-based testing at approximately 180
sites. The language training market is highly fragmented with numerous public
and private sector operators. These include Berlitz/ELS, E.F. (a Swedish
company) and Opening (a Spanish company). Berlitz is the largest of these
companies in this market segment, with annual revenues of approximately $220
million.
Government Regulation
Title I. Title I school districts are responsible for implementing Title I in
carrying out their educational programs. Title I regulations, as well as
provisions of Title I itself, direct Title I school districts to satisfy
obligations including involving parents in their children's education,
evaluating and reporting on student progress, providing equitable services and
other benefits to eligible non-public school students in the district and other
programmatic and fiscal requirements. In contracting with school districts to
provide Title I services, the Company has become and will continue to be,
subject to various Title I requirements and may become responsible to the school
district for carrying out specific functions required by law. For example, under
the Baltimore City Schools' contract, Sylvan has responsibility for soliciting
parental involvement, introducing program content adequate to achieve certain
educational gains and maintaining the confidentiality of student records. The
Company's failure to adhere to Title I requirements or to carry out regulatory
responsibilities undertaken by contract may result in contract termination,
financial liability, or other sanctions.
10
<PAGE>
Franchise. The sales of franchises are regulated by various state authorities
as well as the Federal Trade Commission (the "FTC"). The FTC requires that
franchisors make extensive disclosure to prospective franchisees but does not
require registration. A number of states require registration and prior approval
of the franchise offering document. In addition, several states have "franchise
relationship laws" or "business opportunity laws" that limit the ability of a
franchisor to terminate franchise agreements or to withhold consent to the
renewal or transfer of these agreements. While the Company's franchising
operations have not been materially adversely affected by such existing
regulation, the Company cannot predict the effect of any future legislation or
regulation.
Trademarks
The Company has a federal trademark registration for the words "Sylvan
Learning Center" and distinctive logo (a reading child), a federal service mark
registration for the words "Sylvan Prometric", and various other trademarks and
service marks and has applications pending for a number of other distinctive
phrases. The Company also has obtained foreign registrations of a number of the
same trademarks. The Company's License Agreement grants the franchisee the right
to use the Company's trademarks in connection with operation of the franchisee's
Learning Center. Additionally, the Company has a federal trademark registration
for the words "Wall Street Institute" and distinctive logo (Statue of Liberty),
as well as foreign trademark registrations and pending applications for the WSI
trademark and logo.
Employees
As of December 31, 1998, the Company had approximately 6,300 employees, 3,800
of whom were classified as full-time and 2,500 of whom were classified as part-
time. Most of the Company's part-time employees are teachers in school-based
programs, Company-owned Learning Centers and Schulerhilfe centers. None of the
Company's employees are represented by a union and the Company considers its
relationship with its employees to be good.
Effect of Environmental Laws
The Company is in compliance with all environmental laws. Future compliance
with environmental laws is not expected to have a material effect on the
business.
Item 2. Properties
The Company leases most of its facilities, consisting principally of
administrative office space and Learning Centers and testing sites. The Company
leases three facilities in Baltimore, Maryland for its administrative offices.
In addition, the Company leases: a facility in Minneapolis, Minnesota for
general office space and a registration center; space in Woodlawn, Maryland for
a registration center; and, space in Baltimore, Maryland for a Logistics Center.
The Company also leases: space for the 63 Company-owned Learning Centers in
Maryland, Texas, California, Pennsylvania, Delaware, New Jersey, Florida,
Minnesota, Virginia and Utah; the Company also leases space for 53 international
testing sites; and, 177 Schulerhilfe centers in Germany. In addition, the
Company's Aspect subsidiary owns 5 buildings in the United Kingdom.
Item 3. Legal Proceedings
The Company is the defendant in a legal proceeding pending in the United
States District Court for the Northern District of Iowa, Civil Action No. C96-
334MJM, filed on November 18, 1996 by ACT, Inc., an Iowa nonprofit corporation
formerly known as American College Testing Program, Inc. ("ACT"). ACT's claim
arises out of the Company's acquisition of rights to administer testing services
for the National Association of Securities Dealers, Inc. ("NASD"). ACT has
asserted that the Company tortuously interfered with ACT's relations,
11
<PAGE>
contractual and quasi-contractual, with the NASD, that the Company caused ACT to
suffer the loss of its advantageous economic prospects with the NASD and other
ACT clients and that the Company has monopolized and attempted to monopolize the
computer-based testing services market. ACT has claimed unspecified amounts of
compensatory, treble and punitive damages, as well as injunctive relief. If ACT
were awarded significant compensatory or punitive damages, it could materially
adversely affect the Company's results of operations and financial condition.
Additionally, if ACT were granted significant injunctive relief, the Company may
be required to dispose of, limit expansion or curtail existing operations of its
Sylvan Prometric division, which, in turn, would materially adversely affect the
Company's results of operations, financial condition and prospects for growth.
In February 1998, the Court ruled that ACT may proceed only on three of its five
antitrust theories and otherwise narrowed the scope of ACT's antitrust claims.
In March 1998, the Court denied the Company's motion to dismiss ACT's state law
claims. Formal discovery commenced in 1998 with document production and is
expected to continue at least through the summer of 1999 with depositions. The
Company believes that all of ACT's claims are without merit but is unable to
predict the outcome of the ACT litigation at this time.
At this time the Company is not a party, either as plaintiff or defendant, in
any other material litigation.
Item 4. Submission of matters to a vote of security holders
No matters were submitted to a vote of security holders during the fourth
quarter ended December 31, 1998.
PART II.
--------
Item 5. Market for Registrants's Common
Equity and Related Stockholder Matters
The Company's Common Stock is traded on the NASDAQ National Market. The
Company's trading symbol is SLVN. The high and low trade prices for 1997 and
1998 for the Company's common stock are set out in the following table. These
prices are as reported by NASDAQ, and reflect inter-dealer price quotations,
without retail mark-up, mark down or commission and may not necessarily
represent actual transactions. All amounts reported in the 1998 Annual Report on
Form 10-K and in the 1998 audited financial statements have been retroactively
restated to reflect the effects of a 3 for 2 stock split which occurred in May
1998.
<TABLE>
<CAPTION>
1997 High Low
- --------------- ------ ------
<S> <C> <C>
1st Quarter $25.17 $16.17
2nd Quarter $24.92 $15.92
3rd Quarter $29.67 $21.83
4th Quarter $30.83 $25.33
1998 High Low
- --------------- ------ ------
1st Quarter $32.33 $21.67
2nd Quarter $35.00 $28.00
3rd Quarter $36.88 $19.88
4th Quarter $32.25 $17.13
</TABLE>
No dividends were declared on the Company's Common Stock during the years
ended December 31, 1997 and 1998, and the Company does not anticipate paying
dividends in the future.
The number of registered shareholders of record as of March 15, 1999 was 435.
12
<PAGE>
During the year ended December 31, 1998, the Company issued 123,973 shares of
its common stock that were not registered under the Securities Act of 1933. On
November 10, 1998 the Company issued 123,973 shares to Embassy & Company
pursuant to the acquisition of ZGS Zentrale Gelsenkirchener SCHULERHILFE J.
Gratze + M. Mohr GbR mbH ("Schulerhilfe Partnership") and all of the outstanding
common stock of SCHULERHILFE Gesellschaft fur Nachhilfeunterricht mbH
("Schulerhilfe Corporation").
Item 6. Selected Consolidated Financial Data
The selected financial data for the years ended December 31, 1994, 1995, 1996,
1997 and 1998 have been derived from Sylvan's financial statements which have
been audited by Ernst & Young LLP. The financial data should be read in
conjunction with the historical Consolidated Financial Statements and Notes
thereto.
The Company consummated significant purchase business combinations in each of
the four years in the period ended December 31, 1998. These business
combinations affect the comparability of the amounts presented, and the
following data should be read in conjunction with Note 3 to the Consolidated
Financial Statements.
Selected Consolidated Financial Data
<TABLE>
<CAPTION>
Year Ended Year Ended Year Ended Year Ended Year Ended
December 31, December 31, December 31, December 31, December 31,
1994 1995 (1) 1996 (2) 1997 (3) 1998 (4) (5)
----------- ---------- ------------ ------------ ------------
(in thousands, except per share data)
<S> <C> <C> <C> <C> <C>
Statements of Operations Data:
Revenues............................................ $ 94,205 $ 139,286 $ 219,973 $ 301,011 $ 440,330
Cost and expenses:
Direct costs (6)................................... 85,037 124,146 187,819 263,523 359,613
General and administrative expense (6)............. 4,998 6,205 8,049 19,693 15,530
Transaction costs related to pooling-of-interests.. - - - 5,000
Restructuring and asset impairment charges......... - 3,316 - 4,000 3,730
----------- ---------- ------------ ------------ ------------
Total costs and expenses.......................... 90,035 133,667 195,868 287,216 383,873
----------- ---------- ------------ ------------ ------------
Operating income.................................... 4,170 5,619 24,105 13,795 56,457
Non-operating income................................ 277 1,402 2,108 31,330 1,777
Interest income, net................................ (313) (2,623) (1,320) (801) (943)
----------- ---------- ------------ ------------ ------------
Income before income taxes.......................... 4,134 4,398 24,893 44,324 57,291
Income taxes........................................ (187) (356) (9,139) (16,420) (21,582)
----------- ---------- ------------ ------------ ------------
Net income $ 3,947 $ 4,042 $ 15,754 $ 27,904 $ 35,709
=========== ========== ============ ============ ============
Earnings per common share, diluted (7): ....... $ 0.15 $ 0.15 $ 0.40 $ 0.62 $ 0.70
=========== ========== ============ ============ ============
Diluted shares (7) 26,512 27,701 38,963 44,890 51,286
=========== ========== ============ ============ ============
Balance Sheet Data (at period end):
Cash and cash equivalents...................... $ 7,118 $ 6,652 $ 18,720 $ 29,818 $ 33,170
Available-for-sale securities.................. 2,357 30,735 16,474 82,951 6,166
Net working capital............................ 12,999 39,044 28,836 112,874 15,100
Intangible assets and deferred contract costs.. 8,104 83,289 123,461 193,192 293,710
Total assets................................... 62,679 19,238 278,078 496,779 659,796
Long-term debt, including current portion...... 12,093 12,272 39,621 74,744 67,611
Stockholders' equity........................... 34,294 139,131 182,768 340,460 488,833
</TABLE>
(1) Effective September 30, 1995, Sylvan acquired Drake Prometric, L.P.
("Drake"), a leading provider of computer-based certification, licensure and
assessment testing. The transaction was accounted for using the purchase
method of accounting, and Sylvan's results of operations from October 1,
1995 include the operations of Drake.
13
<PAGE>
(2) Effective December 1, 1996, Sylvan acquired Wall Street International, B.V.,
and its commonly controlled affiliates (collectively "Wall Street"), a
European-based franchisor and operator of learning centers that teach the
English language. This transaction was accounted for using the purchase
method of accounting and Sylvan's results of operations from December 1,
1996 include the operations of Wall Street.
(3) Effective December 1, 1997, the Company purchased the assets and liabilities
of Block Testing Services L.P. and Block State Testing Services L.P. and
also acquired all of the outstanding common stock of National Assessment
Institute, Inc., (collectively, "NAI/Block"), commonly controlled companies
engaged in the business of designing, marketing, selling, distributing and
administering paper and pencil tests for the licensing of individuals. The
acquisition, which was paid for by issuing 642,901 shares of common stock
valued at $24.6 million in January 1998, was accounted for using the
purchase method of accounting, and Sylvan's results of operations from
December 1, 1997 include the operations of NAI/Block.
(4) On January 1, 1998, the Company acquired all of the outstanding capital
stock of Canter for $25 million plus additional consideration if Canter
achieves certain EBITDA targets. The acquisition was accounted for as a
purchase, and Sylvan's results of operations from January 1, 1998 include
the operations of Canter.
Effective October 28, 1998, the Company acquired all the operating assets
and liabilities of ZGS Zentrale Gelsenkirchener SCHULERHILFE J. Gratze + M.
Mohr GbR mbH ("Schulerhilfe Partnership") and all of the outstanding common
stock of SCHULERHILFE Gesellschaft fur Nachhilfeunterricht mbH
("Schulerhilfe Corporation," and collectively with Schulerhilfe Partnership,
"Schulerhilfe"), in exchange for an initial purchase price of $16.5 million
in cash and 123,973 shares of restricted common stock valued at $2.5
million. The results of operations of Schulerhilfe for the period from
October 28, 1998 through December 31, 1998 are included in Sylvan's 1998
results of operations.
(5) Includes certain non-recurring expenses related to the merger with Aspect.
These expenses include $5.0 million of transaction-related costs, such as
legal, accounting and advisory fees, $1.2 million of compensation to former
shareholders of Aspect, who are no longer with the Company and were not
replaced and $3.7 million of costs, classified in the financial statements
as restructuring costs that relate to the integration of Aspect with Sylvan.
The net effect of the above items was a decrease in pre-tax income of $9.9
million and net income of $8.9 million, or $0.17 per diluted share.
(6) The Company has reclassified certain operating expenses previously included
in general and administrative expense to direct costs. This change has been
reflected for all periods presented.
(7) All share and per share data have been restated to reflect a 3-for-2 stock
dividend paid on November 7, 1996 and a 3-for-2 stock dividend paid on May
22, 1998.
14
<PAGE>
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
All statements contained herein that are not historical facts, including but
not limited to, statements regarding the anticipated impact of uncollectible
accounts receivable on future liquidity, expenditures to develop licensing and
certification tests under existing contracts, the Company's contingent payment
obligations relating to the Schulerhilfe and Canter acquisitions, future
capital requirements, potential acquisitions, the failure to remediate or the
cost of remediating Year 2000 Issues and the Company's future development plans
are based on current expectations. These statements are forward looking in
nature and involve a number of risks and uncertainties. Actual results may
differ materially. Among the factors that could cause actual results to differ
materially are the following: Changes in the financial resources of the
Company's clients; timing and extent of testing clients conversions to
computer-based testing; amount of revenues earned by the Company's tutorial and
teacher training operations; the availability of sufficient capital to finance
the Company's business plan on terms satisfactory to the Company; the failure
to remediate or the cost of remediating Year 2000 Issues; general business and
economic conditions; and other risk factors described in the Company's reports
filed from time to time with the Commission. The Company wishes to caution
readers not to place undue reliance on any such forward looking statements,
which statements are made pursuant to the Private Securities Litigation Reform
Act of 1995 and, as such, speak only as of the date made.
Overview
The Company generates revenues from three business segments: Sylvan Learning
Centers, which primarily consist of franchise royalties, franchise sales fees
and Company-owned Learning Center revenues; Sylvan Contract Educational
Services, which consists of revenues attributable to providing supplemental
remedial education services to public and non-public schools and major
corporations as well as providing teacher training services; and Sylvan
Prometric, which consists of computer-based testing fees paid to the Company
and the operations of WSI and Aspect. The following selected segment data is
derived from the Company's audited consolidated financial statements.
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------
1996 1997 1998
------------ ------------ ------------
<S> <C> <C> <C>
Operating revenue:
Sylvan Learning Centers............... $ 38,898 $ 46,629 $ 64,754
Sylvan Contract Educational Services.. 58,186 66,582 100,519
Sylvan Prometric...................... 122,889 187,800 275,057
-------- -------- --------
Total revenue..................... $219,973 $301,011 $440,330
======== ======== ========
Direct costs:
Sylvan Learning Centers............... $ 27,442 $ 39,186 $ 45,415
Sylvan Contract Educational Services.. 53,459 56,352 85,870
Sylvan Prometric...................... 106,918 167,985 228,328
-------- -------- --------
Total direct costs................ $187,819 $263,523 $359,613
======== ======== ========
</TABLE>
Results of Operations
Comparison of results for the year ended December 31, 1998 to the year ended
December 31, 1997.
Revenues. Total revenues increased by $139.3 million, or 46%, to $440.3
million for the year ended December 31, 1998, compared to the same period in
1997. This increase resulted from higher revenues in all business segments
Sylvan Learning Centers, Sylvan Contract Educational Services and Sylvan
Prometric.
15
<PAGE>
Sylvan Learning Centers revenue consists primarily of Learning Services
royalties, franchise sales fees and revenue from Company-owned Centers.
Learning Centers revenue increased by $18.1 million, or 39%, for the year ended
December 31, 1998, compared to the same period in 1997. Overall, franchise
royalties increased by $2.5 million or 19% for the year ended December 31,
1998, despite the acquisition of 13 franchised Centers during 1998. Excluding
the effect of the Center acquisitions, franchise royalties increased 24% in
1998. The increase in royalties was due to a net increase of 60 new Centers
opened during 1998, combined with same center revenue increases of 18% for the
year ended December 31, 1998.
Franchise sales fees increased by $1.2 million, or 27%, to $5.8 million for
the year ended December 31, 1998, compared to the same period in 1997. The
increase in sales is principally due to international sales increasing by $0.5
million compared to 1997. Domestic territory and area development sales
increased by $0.7 million in 1998.
Revenues from Company-owned Learning Centers increased by $9.3 million, or
37%, to $34.4 million during 1998. The acquisition of 13 centers in 1998
resulted in $8.2 million of additional revenue in 1998. On a full year basis,
same center revenues increased by $3.5 million, or 16%, in 1998 compared to
revenues in 1997.
On October 28, 1998, the Company acquired a major German tutoring company
known as Schulerhilfe. The business has over 700 franchised centers and 178
Company-owned locations. This purchase resulted in an additional $2.4 million
in revenue in 1998. The remaining revenue increase in 1998 of $2.7 million is
principally due to increased product sales.
Sylvan Contract Educational Services revenue increased by $33.9 million, or
51%, to $100.5 million for the year ended December 31, 1998. Canter, acquired
in January 1998, contributed $24.8 million of the increase. Public and
nonpublic school contracts contributed $11.1 million of the increase, while
PACE services revenue decreased by $2.0 million.
The $11.1 million increase in revenue from public and nonpublic schools for
the year ended December 31, 1998 is the result of $17.4 million in revenue from
new contracts, offset by a decrease of $3.7 million in revenue from contracts
in existing districts lost or reduced due to local district budget
constraints. This segment's revenue also declined by $2.6 million as a result
of the disposition in late 1997 of an unrelated business assumed upon the
acquisition of Educational Inroads.
Sylvan Prometric revenue increased by $87.3 million, or 46%, to $275.1
million during the year ended December 31, 1998, compared to the same period in
1997. The increase in testing services revenues resulted mainly from volume
increases in Information Technology (IT) ($26.8 million), Academic admissions
($6.0 million) and Professional certification testing ($3.6 million), the full
year impact of the December 1997 NAI/Block acquisition ($11.6 million), and
increased revenue from English language instruction businesses ($23.4 million).
Increases in testing volumes resulted primarily from increased testing volumes
with Microsoft and certain other IT clients, and increased services under
Educational Testing Service (ETS) contracts, which included the cost-plus
international contract for delivery of the GRE, GMAT, and TOEFL examinations
($15.9 million).
Cost and Expenses. Total direct costs increased 36%, from $263.5 million in
1997 to $359.6 million in 1998, but decreased as a percentage of total revenues
from 88% in 1997 to 82% in 1998. However, both periods presented contain
certain non-recurring costs, as further discussed below. Excluding these non-
recurring costs, total direct costs decreased as a percentage of total revenues
from 82% in 1997 to 81% in 1998.
Sylvan Learning Centers expenses increased $6.2 million to $45.4 million or
70% of Learning Centers revenue in 1998 compared to $39.2 million, or 84% of
Learning Centers revenue in 1997. Included in Sylvan Learning Centers expenses
for the 1997 period is a non-recurring $5.0 million contribution of the
Company's Common Stock to a corporation whose sole purpose is to develop and
fund advertising programs for Sylvan Learning Centers. Excluding this
contribution, Sylvan Learning Centers expenses as a percentage of revenue
16
<PAGE>
would have been 73% in 1997. Approximately $9.8 million of the increase in
recurring expenses was due to direct costs associated with higher revenues at
existing centers and the acquisition of 13 franchised learning centers in 1998.
As a percentage of revenues, expenses for Company-owned centers decreased from
85% in 1997 to 84% in 1998. The Company's fourth quarter 1998 acquisition of
Schulerhilfe accounted for $2.0 million of increased expenses.
Sylvan Contract Educational Services expenses increased by $29.5 million to
$85.9 million, or 85% of Sylvan Contract Educational Services revenue during
the year ended December 31, 1998, compared to $56.4 million or 85% of Sylvan
Contract Educational Services revenue during the year ended December 31, 1997.
Sylvan Prometric expenses for the year ended December 31, 1998 increased by
$60.3 million to $228.3 million, or 83% of total Sylvan Prometric revenue,
compared to $168.0 million, or 89% of total Sylvan Prometric revenue for the
year ended December 31, 1997. The 1998 period included $1.2 million of
compensation to the former owners of Aspect, who are no longer with the Company
and have not been replaced. During the second quarter of 1997, Sylvan Prometric
expenses included contributions of $10.0 million to a nonprofit corporation
whose sole purpose is to fund promotional and channel support programs for the
Sylvan Prometric distribution channel. The 1997 period included $2.2 million in
non-recurring charges related to the Aspect merger. Excluding these non-
recurring expenditures, expenses as a percentage of total Sylvan Prometric
revenue remained constant at 83% in both years. Lower delivery costs per
computer-based test as a result of increased volumes and efficiencies in the
1998 period were offset by certain favorable volume-based pricing adjustments
in 1997 and higher expenses as a percentage of revenue in the English language
business in 1998 as a result of the 1997 period containing a higher level of
franchise sales.
General and administrative expenses decreased by $4.2 million to $15.5
million during 1998, and decreased as a percentage of revenues from 7% to 4%.
Included in 1997 general and administrative expenses were non-recurring
expenses related to a contribution of the Company's common stock valued at $6.5
million to Sylvan Learning Foundation, Inc., a nonprofit foundation formed to
promote various educational pursuits, and a $3.2 million contribution to
International Education Forum, Inc., a not-for-profit foundation formed to
provide exchange programs for international students in the United States.
Excluding these non-recurring expenses, general and administrative expenses
increased from 3.3% of total revenues for 1997 to 3.5% of total revenues for
1998.
During the year ended December 31, 1998, Sylvan incurred $5.0 million of non-
recurring transaction-related costs relating to the pooling-of-interests with
Aspect. The transaction costs consist principally of legal, accounting and
advisory fees.
In connection with the acquisition of Aspect in 1998, the Company recorded a
$3.7 million restructuring charge associated with the merger and integration of
the combined operations. These charges consist primarily of contract
cancellation costs of $2.6 million, severance and other employee related costs
of $0.4 million, and liabilities of $0.7 million incurred to discontinue
certain foreign exchange programs of Aspect. The contract cancellation costs
are payments made to repurchase master franchise rights under which Sylvan is
in default of contractual non-competition provisions as a result of the
acquisition of Aspect. Through December 31, 1998, $1.1 million of contract
cancellation costs and $0.7 million of other restructuring charges have been
paid, with the remainder expected to be paid during 1999. The net effect of the
$3.7 million restructuring charge, the $1.2 million in compensation paid to
former owners and the $5.0 million of transaction-related costs was a decrease
in pre-tax income of $9.9 million and net income of $8.9 million, or $0.17 per
diluted share for the year ended December 31, 1998.
Non-Operating Income. Non-operating income, consisting of investment and
other income and equity in net losses of investees accounted for under the
equity method, decreased from $31.3 million in 1997 to $1.8 million in 1998.
The decrease is principally attributable to a $28.5 million net termination fee
from the breakup
17
<PAGE>
of the NEC acquisition recorded in 1997, and an increase in the allocable
losses of Caliber of $1.5 million in 1998.
The Company's effective tax rate has increased from 37% in 1997 to 38% in
1998 due primarily to $5.0 million of transaction costs related to the
acquisition of Aspect for which there is no allowable income tax deduction.
Comparison of results for the year ended December 31, 1997 to the year ended
December 31, 1996.
Revenues. Total revenues increased by $81.0 million, or 37%, to $301.0
million for the year ended December 31, 1997, compared to the same period in
1996. This increase resulted from higher revenues in all business segments
Sylvan Learning Centers, Sylvan Contract Educational Services and Sylvan
Prometric.
Sylvan Learning Centers revenues increased by $7.7 million, or 20%, to $46.6
million for 1997. Franchise royalties increased $1.9 million or 20%, for 1997.
This increase in franchise royalties was due to an overall 10% increase in
revenues at existing Learning Centers open for more than one year combined with
a net increase of 60 new Learning Centers opened in 1997.
Franchise sales fees increased by $1.3 million, or 41%, to $4.5 million for
the year ended December 31, 1997, compared to the same period in 1996. During
1997, there were six area development agreements sold for $2.9 million and 42
franchise Learning Center licenses sold, compared to four area development
agreements sold for $1.7 million and 38 franchise Center licenses sold during
1996. Product sales decreased by $190,000, or 5%, to $3.7 million for 1997.
Revenues from Company-owned Learning Centers increased by $4.4 million, or
21%, to $25.0 million during 1997, primarily as a result of student enrollment
increases for Centers operating over 12 months as of December 31, 1997 and, to
a lesser extent, the Company's acquisition in 1997 of thirteen Learning Centers
from five franchisees.
Sylvan Contract Educational Services revenue increased by $8.4 million, or
14%, to $66.6 million for the year ended December 31, 1997. Revenue from public
and non-public contracts increased by $2.2 million for the year ended December
31, 1997, primarily the result of contracts with new school districts. Revenue
from PACE contracts accounted for $6.2 million of the increase for 1997. The
PACE increase resulted primarily from contracts with new customers.
Revenue from new public and non-public contracts obtained after December 31,
1996 contributed $5.3 million to revenue for 1997. Revenue from existing
public and non-public contracts obtained before December 31, 1996 decreased by
$3.1 million in 1997, primarily related to reduced funding in certain school
districts and certain contracts expiring in 1997.
Sylvan Prometric revenue increased by $64.9 million, or 53%, to $187.8
million during the year ended December 31, 1997, compared to the year ended
December 31, 1996. The increase in testing services revenues resulted mainly
from increased services under Educational Testing Service (ETS) contracts,
which included the cost-plus international contract, GRE, GMAT, and TOEFL, and
certain volume-based pricing adjustments, testing in the information technology
and professional licensure businesses. WSI, acquired in December 1996,
contributed $19.0 million of the revenue increase. Revenues for Aspect
increased by $16.5 million, or 46%, as a result of volume growth.
Cost and Expenses. Total direct costs increased 40%, from $187.8 million in
1996 to $263.5 million in 1997 and increased as a percentage of total revenues
from 85% in 1996 to 88% in 1997 primarily as a result of non-recurring expenses
of $15.0 million being included in direct costs in 1997, as discussed below.
Total direct costs in 1997 also include $2.2 million of non-recurring expenses
related to Aspect. Excluding the non-recurring
18
<PAGE>
expenses, total direct costs as a percentage of total revenues would be 82% for
the year ended December 31, 1997.
Sylvan Learning Centers expense increased 43% from $27.4 million in 1996 to
$39.2 million in 1997 and increased as a percentage of revenue from 71% in 1996
to 84% in 1997. Included in Sylvan Learning Centers expense for the 1997 period
is advertising expense related to a non-recurring $5.0 million contribution of
the Company's common stock to a non-profit corporation whose sole purpose is to
develop and fund advertising programs for the Sylvan Learning Centers.
Excluding the non-recurring contribution, 1997 expense was 73% of revenues.
Franchise services expense increased by $8.4 million, to $18.0 million or 83%
of franchise related revenues for the year ended December 31, 1997, compared to
$9.6 million, or 53% of franchise related revenues for the year ended December
31, 1996. The lower margin in franchise services was primarily due to the non-
recurring expense discussed above, as well as to costs incurred for development
of new financing and after-school programs and additional management staff for
the Sylvan Learning Centers division.
Company-owned Learning Center expense increased by $3.4 million, to $21.2
million or 85% of Company-owned Learning Center services revenue for the year
ended December 31, 1997, compared to $17.8 million, or 86% of Company-owned
Learning Center services revenues for the year ended December 31, 1996. The
increase resulted from $1.1 million of expenses associated with 13 acquired
Learning Centers, and increases in advertising, labor and general overhead
associated with increased Center enrollment. Expenses for Centers operating
over 12 months as of December 31, 1997 accounted for $2.3 million of the
increase for 1997.
Sylvan Contract Educational Services expense increased by $2.9 million to
$56.4 million, or 85% of Sylvan Contract Educational Services revenues during
1997, compared to $53.5 million, or 92% of contract educational services
revenues during 1996. Operating expenses for public and non-public schools
decreased $1.1 million, while operating expenses for PACE increased by $3.5
million for the year ended December 31, 1997. The decrease in Sylvan Contract
Educational Services expense as a percentage of revenue for 1997 versus 1996 is
the result of increased profit margins for PACE and public and non-public
services in 1997, as well a higher mix of revenue from PACE contracts which
generate a higher profit margin than public and non-public services. In March
1998, the additional contingent consideration payable to the former
shareholders of PACE resulting from the purchase of PACE in 1995 was determined
to be $25.8 million, which was recorded as additional goodwill and is being
amortized over the estimated remaining useful life of 22 years. This amount
increased the amount of amortization associated with the Sylvan Contract
Educational Services segment by $1.2 million in 1998.
Sylvan Prometric expenses for the year ended December 31, 1997 increased by
$61.1 million to $168.0 million, or 89% of total Sylvan Prometric revenue,
compared to $106.9 million, or 87% of total Sylvan Prometric revenue for the
year ended December 31, 1996. The increase in Sylvan Prometric expense as a
percentage of Sylvan Prometric revenues was predominantly a result of a non-
recurring marketing expense of $10.0 million related to a contribution to IT
Training Marketing Company, a nonprofit corporation whose sole purpose is to
fund promotional and channel support programs for the Sylvan Prometric
distribution channel. The 1996 expense includes $2.4 million of non-recurring
charges related to the Drake acquisition, incurred during the first and second
quarter of 1996. Excluding these effects, expenses as a percentage of total
testing revenue for 1996 and 1997 were 85% and 84%, respectively. This
decrease in recurring expenses as a percentage of Sylvan Prometric revenue was
primarily due to the fixed expenses of the division being spread over a higher
revenue base as well as the effects of a full year of results of WSI, at higher
incremental margins, being included in 1997 compared to only one month for the
1996 period.
General and administrative expenses increased by $11.6 million to $19.7
million during 1997 and increased as a percentage of revenues from 4% to 7%.
Included in general and administrative expenses is a non-recurring expense of
$9.7 million related to a contribution of the Company's common stock valued at
$6.5 million to Sylvan Learning Foundation, Inc., a nonprofit foundation formed
to promote various educational pursuits and a $3.2 million contribution to
International Forum, Inc., a not-for-profit foundation formed to provide
exchange
19
<PAGE>
programs for international students in the United States. Excluding these non-
recurring expenses, general and administrative expenses were 3.7% of total
revenues for 1996 and 3.3% of total revenues for 1997.
In March 1997, the Company and National Education Corporation ("NEC")
executed a definitive agreement pursuant to which the Company was to acquire
NEC. In May 1997, NEC accepted a competing offer which resulted in the
termination of NEC's agreement with the Company. As a result, NEC paid the
Company a $30.0 million termination fee, which has been recorded, net of $1.5
million of transaction costs, as a separate component of non-operating income.
In May 1997, the Company determined that certain assets of Sylvan Prometric
were impaired as a result of certain strategic changes that were made as a
result of pursuing the NEC acquisition. During and after the acquisition
negotiations with NEC, the Company developed certain plans that resulted in
required changes in both software systems and hardware currently utilized in
Sylvan Prometric's network of centers. The plans continued to be valid for the
Company even after the NEC acquisition was terminated. The impaired assets,
consisting of computer equipment and software, were impaired as a result of
changes in the technical requirements and specifications of certain computer
hardware and software. The amount of the impairment loss was determined by
evaluating the likely sales proceeds from the disposition of the assets
compared to their book value. The Company determined that it was unlikely that
the net cash proceeds from the sale of any assets would be significant, and
therefore recorded an impairment loss equal to the net book value of the assets
of $4.0 million. During 1998, these assets were disposed of for no significant
consideration.
Investment and other income increased by $3.1 million to $4.8 million during
1997, primarily due to the $2.0 million non-cash dividend income received from
the Company's investment in JLC Holdings, Inc. and the higher cash and
investment balances resulting from the NEC termination fee and the proceeds
received from the sale of the Company's common stock during 1997. The
Company's interest expense decreased by $0.5 million due to the repayment of
all outstanding Educational Inroads debt in the second quarter of 1997.
The Company reported losses of $2.0 million in 1997 from its investment in
affiliates, consisting primarily of $1.4 million attributable to Caliber
Learning Network, Inc., in which the Company has an equity investment. The
Company and MCI Communications Corp. organized Caliber in November of 1996.
The Company's effective tax rate remained constant at 37% in 1996 and 1997.
Future Assessment of Recoverability and Impairment of Goodwill
In connection with its various acquisitions, the Company recorded goodwill,
which is being amortized on a straight-line basis over periods of 10 to 25
years, its estimated periods that the Company will be benefited by such
goodwill. At December 31, 1998, the unamortized goodwill was $275.8 million
(which represented 42% of total assets and 56% of stockholders' equity).
Goodwill arises when an acquirer pays more for a business than the fair value
of the tangible and separately measurable intangible net assets. For financial
reporting purposes, goodwill and all other intangible assets are amortized over
the estimated period benefited. The Company has determined the life for
amortizing goodwill based upon several factors, the most significant of which
are the relative size, historical financial viability and growth trends of the
acquired companies and the relative lengths of time such companies have been in
existence.
Management of the Company periodically reviews the Company's carrying value
and recoverability of unamortized goodwill. If the facts and circumstances
suggest that the goodwill may be impaired, the carrying value of such goodwill
will be adjusted which will result in an immediate charge against income during
the period of the adjustment and/or the length of the remaining amortization
period may be shortened, which will result in an increase in the amount of
goodwill amortization during the period of adjustment and each period
thereafter until fully amortized. Once adjusted, there can be no assurance that
there will not be further
20
<PAGE>
adjustments for impairment and recoverability in future periods. Of the various
factors to be considered by management of the Company in determining whether
goodwill is impaired, the most significant will be (i) losses from operations,
(ii) loss of customers, and (iii) industry developments, including the
Company's inability to maintain its market share, development of competitive
products or services, and imposition of additional regulatory requirements.
Liquidity and Capital Resources
The Company in 1998 generated $58.1 million of cash flow from operations, a
decrease of $1.1 million as compared to 1997. This decrease is attributable to
an increase in net income excluding non-cash charges (principally depreciation
and amortization) of $9.5 million, offset by a net additional investment in
operating assets (principally accounts and notes receivable) of 10.6 million.
The Company's investment in working capital continues to reduce net cash flow
from operations, particularly as a result of the growth in accounts and notes
receivable. The $18.5 million increase in accounts and notes receivable is
principally the result of a 47% increase in revenue during 1998. Of the $18.5
million cash flow reduction attributable to an increase in accounts and notes
receivable, approximately $8.4 million relates to Sylvan's expanding testing
contracts, with the remainder of the increase related to the Company's other
operating segments. The increase in amounts due from expanding testing
contracts resulted from higher domestic testing volumes and a significant
increase in billings under the international contract with ETS to establish
overseas testing capacity. ETS typically makes monthly payments for domestic
activity and quarterly payments for international services. Notes receivable
for new area development agreements accounted for $5.0 million of the increase
in 1998. Notes receivable from tuition financing activities increased by
$5.4 million. Sylvan believes that uncollectible accounts receivable will not
have a significant effect on future liquidity, as a significant portion of its
accounts receivable are due from enterprises with substantial financial
resources, such as ETS and governmental units.
The Company's investing activities include the net sale of $77.1 million in
available-for-sale securities. The proceeds were used in part to fund the
acquisitions of Canter and Schulerhilfe and to settle a portion of the
contingent consideration that was payable to the former shareholders of PACE.
The remaining securities are readily marketable and available for use in
current operations. The Company also made $11.6 million of additional
investments in or loans to affiliates accounted for using the equity method,
consisting primarily of additional investments in Caliber Learning Network,
Inc.
Effective January 1, 1998, the Company acquired all of the outstanding stock
of Canter & Associates, Inc. and Canter Educational Productions, Inc.
(collectively, "Canter"), commonly controlled companies engaged in the business
of providing materials and training programs for educators, for an initial
purchase price of $25.0 million in cash.
Effective October 28, 1998, the Company acquired all the operating assets and
liabilities of ZGS Zentrale Gelsenkirchener SCHULERHILFE J. Gratze + M. Mohr
GbR mbH ("Schulerhilfe Partnership") and all of the outstanding common stock of
SCHULERHILFE Gesellschaft fur Nachhilfeunterricht mbH ("Schulerhilfe
Corporation," and collectively with Schulerhilfe Partnership, "Schulerhilfe"),
in exchange for an initial purchase price of $16.5 million in cash and 123,973
shares of restricted common stock valued at $2.5 million.
21
<PAGE>
Sylvan continues to incur expenditures for additions to property and
equipment, which totaled $58.3 million in 1998. These additions consist
primarily of furniture and equipment for general business expansion, including
expenditures for the headquarters facility, new public school-based programs'
classrooms, and equipment needed for overseas testing centers operated by
Sylvan. Under the international testing contract with ETS, Sylvan is reimbursed
for overseas equipment expenditures as the equipment is depreciated. This
reimbursement includes a financing charge over the reimbursement period.
The Company has entered into a long-term revolving credit facility with a
group of banks, (hereinafter the "credit facility") that provides an unsecured
revolving line of credit. The credit facility allows the Company to borrow a
maximum of $100.0 million through the expiration date of December 31, 2003.
The credit facility bears interest at either the prime rate, the federal funds
rate plus 0.5%, or rates based on the Eurodollar rate plus a contractual
margin. The credit facility had outstanding prime rate borrowings of $8.0
million at December 31, 1998, bearing interest at 7.75%. Effective January 7,
1999, the borrowings began to bear interest at 6.06%, based on the Eurodollar
rate.
During 1998, the Company received $6.4 million of cash as a result of the
exercise of stock options and warrants to purchase 653,652 shares of common
stock.
Sylvan believes that its capital resources will be sufficient over the next
12 to 24 months to fund expected expansion of its existing business, including
working capital needs and expected investments in property and equipment.
Sylvan continues to review other companies in the education or computer-based
testing industries for potential acquisitions. Additional capital resources may
be necessary to acquire and thereafter operate additional businesses.
The Company has entered into an agreement providing an exclusive option to
acquire 54 percent of the shares of Universidad Europea de Madrid (UEM) for
approximately $51 million. The purchase price would include payment of
approximately $28.5 million in cash and the assumption of approximately $22.5
million in existing debt. Total revenues for the year ended December 31, 1998
for UEM are estimated to be $49 million and recurring earnings before interest,
taxes and depreciation are estimated to be $15.5 million. All required
regulatory approvals have been received and this transaction is expected to
close during the second or third quarter of 1999.
Year 2000 Compliance
The Year 2000 Issue is the result of computer programs written using two
digits (rather than four) to define the applicable year. Absent corrective
actions, programs with date-sensitive logic may recognize "00" as 1900 rather
than 2000. This could result in a system failure or miscalculations causing
disruptions of operations, including, among other things, production
difficulties, a temporary inability to process transactions, send invoices, or
engage in similar normal business activities.
The Company has established a corporate-wide Year 2000 task force with
representatives from all divisions. The task force has conducted a
comprehensive review of the Company's information technology and non-
information technology systems affected by the Year 2000 issue and has
developed an implementation plan to resolve them. The Company measures its
progress towards completion based on the level of efforts completed to date
compared to the total expected. The process involves five phases:
Phase I Inventory and Data Collection. This phase involves conducting a
comprehensive inventory of the Company's information systems which includes but
is not limited to telecommunications systems, computer hardware, software and
networks as well as building infrastructure such as HVAC, elevators and
security systems. The identification of key third party vendors is also
involved. During this phase, all new systems are
22
<PAGE>
required to have passed Year 2000 compliance tests before being purchased and
implemented. The Company commenced this phase in the first quarter of 1998 and
the phase is complete.
Phase II Assessment / Date Impact. In this phase, systems identified during
Phase I are reviewed to determine what impact, if any, the Year 2000 Issue has
on the operation of these systems. This phase also identifies the effects of
Year 2000 being a leap year. This phase is 95% complete.
Phase III Remediation. This phase involves modifying, replacing or
upgrading the systems that have failed during Phase II. The remediation phase
is 55% complete and is expected to be completed by the middle of the second
quarter of 1999.
Phase IV Testing. This phase involves review of systems for compliance and
re-testing as necessary. The testing phase is 55% complete and is expected to
be completed by the end of the second quarter of 1999.
Phase V Implementation. This phase involves implementing the systems after
they have been successfully remediated and tested. This is the final step in
assuring that the systems are Year 2000 complaint. The phase is 55% complete
and is expected to be completed by the end of the third quarter of 1999.
The Company believes the cost to remedy all Year 2000 Issues to be $4.5
million and has expended $1.0 million through December 31, 1998. The Company is
not aware of any material non-compliance that would require repair or
replacement that would have a material effect on its financial position. As
part of the Year 2000 Issue process, formal communication with the Company's
suppliers, customers and other support services has been initiated and efforts
will continue until positive statements of readiness have been received from
all third parties. To date, the Company is not aware of any non-compliance by
its customers or suppliers that would have material impact on the Company's
business. Nevertheless, there can be no assurance that unanticipated non-
compliance will not occur, and such non-compliance could require material costs
to repair or could cause material disruptions if not repaired. The Company is
in the process of developing a strategy to address these potential consequences
that may result from unresolved Year 2000 Issues, which will include the
development of one or more contingency plans by mid 1999.
Euro Conversion
On January 1, 1999, certain countries of the European Union established fixed
conversion rates between their existing currencies and one common currency, the
euro. The euro is now traded on currency exchanges and may be used in business
transactions. Beginning in January 2002, new euro-denominated currencies will
be issued and the existing currencies will be withdrawn from circulation. The
Company is currently evaluating the systems and business issues raised by the
euro conversion. These issues include the need to adapt computer and other
business systems and equipment and the competitive impact of cross-border
transparency. The Company has not yet completed its estimate of the potential
impact likely to be caused by the euro conversion; however, at present the
Company has no reason to believe the euro conversion will have a material
impact on the Company's financial condition or results of operations.
Contingent Matters
In connection with the Company's acquisition of Canter and based on Canter's
earnings in 1998, additional consideration of $28.5 million is payable to the
seller in cash of $16.3 million and the remainder in shares of restricted
common stock which has been valued at $12.2 million. As of December 31, 1998,
the Company has recorded this additional consideration as a liability and
additional goodwill which will be amortized over the remaining amortization
period of 24 years. Additional variable amounts of contingent consideration are
also payable to the seller if specified levels of earnings are achieved in 1999
and 2000, payable in equal amounts of cash and stock. The Company will record
the contingent consideration when the contingencies are resolved and the
additional consideration is payable.
23
<PAGE>
In connection with the Company's acquisition of Schulerhilfe, the Company may
be obligated to pay the sellers up to an additional $13.3 million of
consideration in February 2000 (payable in either cash or common stock at the
discretion of the Company) based on the amount of 1999 franchise fees which
have been collected by Schulerhilfe on or before January 31, 2000. The Company
will record this contingent consideration when the contingencies are resolved
and the additional consideration is payable.
Effects of Inflation
Inflation has not had a material effect on Sylvan's revenues and income from
continuing operations in the past three years. Inflation is not expected to
have a material future effect.
Quarterly Fluctuations
Sylvan's revenues and operating results have varied substantially from
quarter to quarter and may continue to vary, depending upon the timing of
implementation of new computer-based testing contracts and contracts funded
under Title I or similar programs. Based on Sylvan's experience, revenues
generated by computer-based testing services may vary based on the frequency or
timing of delivery of individual tests and the speed of test administrators
conversion of tests to computer-based format. In addition, franchise license
fees earned by the Company in its Sylvan Learning Centers and testing services
segments may vary significantly from quarter to quarter. Revenues or profits
in any period will not necessarily be indicative of results in subsequent
periods.
24
<PAGE>
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to market risk from changes in interest rates and
foreign currency exchange rates, which could affect its future results of
operations and financial condition. The Company manages its exposure to these
risks through its regular operating and financing activities.
Foreign Currency Risk
The Company derives approximately 29% of its revenues from customers outside
of the United States. This business is transacted through a network of
international subsidiaries, generally in the local currency that is considered
the functional currency of that foreign subsidiary. The Company generally
views its investment in the majority of its foreign subsidiaries as long-term.
The functional currencies of these foreign subsidiaries are principally
denominated in the Spanish peseta, the British pound sterling, and the
Australian dollar. The effects of a change in foreign currency exchange rates
on the Company's net investment in foreign subsidiaries are reflected in other
comprehensive income. A 10% depreciation in year-end 1998 functional
currencies relative to the U.S. dollar would result in a $300,000 decrease in
consolidated stockholders' equity.
The Company's investment in certain foreign subsidiaries providing
information technology testing services is considered temporary. These
subsidiaries regularly remit collected testing fees, generally paid in advance
of the test and denominated in foreign currencies, to the U.S. parent, which
upon test delivery, pays the test sponsor's fee and retains the residual. The
principal currencies of these subsidiaries are the British pound sterling, the
German deutsche mark and the Japanese yen. The Company is generally not
exposed to foreign exchange rate fluctuations related to collected fees on
undelivered tests as a result of contractual provisions with test sponsors.
Foreign exchange gains and losses during the period from the date of test
delivery through the date of payment of the test sponsor have not been
material, and the Company's exposure to such exchange losses at December 31,
1998, assuming a 10% deterioration in foreign exchange rates, would not be
material.
The Company's foreign operations providing international academic testing
services under a cost-plus contract with ETS are not exposed to foreign
currency risk. Under the contract, foreign exchange rate gains and losses are
a component of the reimbursable contract costs.
Interest Rate Risk
The fair value of the Company's cash and cash equivalents would not be
significantly impacted by either a 100 basis point increase or decrease in
interest rates due to the short-term nature of the Company's portfolio. At
December 31, 1998, the Company's investment in available-for-sale, interest-
bearing securities is not material.
The Company's long-term revolving credit facility bears interest at variable
rates, and the fair value of this instrument is not significantly affected by
changes in market interest rates. A hypothetical 100 basis points increase in
interest rates under the credit facility for one year would increase interest
expense by an immaterial amount.
Item 8. Financial Statements
The financial statements of the Company are included on pages 32 through 68
of the report as indicated on page 31.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
There were no changes in accountants, disagreements, or other events
requiring reporting under this Item.
25
<PAGE>
PART III.
---------
Item 10. Directors and Executive Officers of Sylvan Learning Systems, Inc.
Information required is set forth under the caption "Election of Directors"
in the Proxy Statement relating to the 1999 Annual Meeting of Shareholders,
which is incorporated by reference.
Information required pertaining to compliance with Section 16 (a) of the
Securities and Exchange Act of 1934 is set forth under the caption "Election of
Directors" in the Proxy Statement relating to the 1999 Annual Meeting of
Shareholders, which is incorporated by reference.
Item 11. Executive Compensation
Information required is set forth under the caption "Executive Compensation"
in the Proxy Statement relating to the 1999 Annual Meeting of Shareholders,
which is incorporated by reference.
Item 12. Security Ownership and Certain Beneficial Owners and Management
Information required is set forth under the caption "Security Ownership" in
the Proxy Statement relating to the 1999 Annual Meeting of Shareholders, which
is incorporated by reference.
Item 13. Certain Relationships and Related Transactions
Information required is set forth under the caption "Certain Transactions" in
the Proxy Statement relating to the 1999 Annual Meeting of Shareholders, which
is incorporated by reference.
PART IV.
--------
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) The following documents are filed as a part of this report:
1. Financial Statements
The response to this portion of Item 14 is submitted as a separate section
of this Report.
2. Financial Statement Schedules
All schedules for which provision is made in the applicable accounting
regulation of the Securities and Exchange Commission are inapplicable or
immaterial and therefore have been omitted.
(b) Reports on Form 8-K:
The Registrant did not file any reports on Form 8-K during the fourth
quarter ended December 31, 1998.
26
<PAGE>
3. Exhibits
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit
Number Description
- ----------- -----------
<C> <S>
3.01 Articles of Amendment and Restatement of the Charter.(b)
3.03 Amended and Restated Bylaws dated September 27, 1996.(n)
4.01 Specimen Common Stock Certificate.(b)
4.02 Form of Warrant to Purchase Common Stock of Sylvan KEE Systems,
Inc. dated January 26, 1993.(b)
4.03 Form of Warrant to Purchase Common Stock of Sylvan KEE Systems,
Inc. dated July 14, 1993.(b)
4.07 Rights Agreement by and between Registrant and State Street Bank & Trust Company dated as of October 1,
1996.(i)
5.01 Opinion of Piper & Marbury L.L.P.(a)
10.01 Agreement of Lease by and between Rouse & Associates-Quarry and
KEE Systems, Inc. dated May 15, 1990.(b)
10.02 Agreement of Lease by and between Rouse & Associated-Quarry and
KEE Systems, Inc. dated May 6, 1990.(b)
10.03 Lease Agreement between Harbor East Parcel G-Office, LLC and Sylvan Learning Systems, Inc. dated August
24, 1995(c)
10.04 Master Agreement Between Educational Testing Service and Sylvan Learning Systems, Inc. for
Computer-Based Testing Services at Sylvan Technology Centers dated September 1, 1993. (Portions of this
document have been omitted pursuant to a request for confidential treatment.)(b)
10.05 Term Lease Master Agreement between Sylvan Learning Systems and IBM Credit Corporation dated March 31,
1992.(b)
10.06 Director Stock Option Plan.(b)
10.07 Employee Stock Option Plan.(b)
10.08 Management Stock Option Plan.(b)
10.19 KEE, Incorporated Non-Qualified Stock Option Plan.(b)
10.10 Sylvan Employee Confidentiality and Non-Disclosure Agreement and Covenant Not to Compete.(b)
10.11 $2.5 Million Revolving Loan, $3.76 Million Term Loan and $5.0 Million Revolving Loan with NationsBank.(d)
10.12 Indemnification Agreement by and between Sylvan KEE Systems, Tom D. Wippman and David H. Jacobson dated
September 17, 1992.(b)
10.13 Guaranty Agreement by Sylvan KEE Systems in favor of Encyclopedia Britannica, Inc. dated October 1,
1992.(b)
10.14 Form of Non-Competition Agreement by and between Sylvan KEE Systems, Inc. and Douglas L. Becker dated
January 26, 1993.(b)
10.15 Certification and Testing Services Agreement by and between TRO Learning, Inc. and
Sylvan Learning Systems, Inc. dated August 31, 1993.(b)
10.16 Plato Educational Products Purchase and License Agreement by and between TRO Learning, Inc. and Sylvan
Learning Systems, Inc. Dated August 31, 1993.(b)
10.17 Form of Franchise Agreement.(b)
10.18 Form of Technology Center Agreement.(b)
10.19 Agreement and Plan of Reorganization dated July 14, 1994 by and between Registrant and Learning
Services, Inc.(e)
10.20 Agreement and Plan of Reorganization dated July 14, 1994 by and between Registrant and Loralex Learning,
Inc.(e)
</TABLE>
27
<PAGE>
<TABLE>
<CAPTION>
Exhibit
Number Description
- ----------- -----------
<C> <S>
10.21 Agreement and Plan of Reorganization dated February 17, 1995 by and between Registrant
and Remedial Education and Diagnostic Services, Inc.(f)
10.22 Agreement and Plan of Reorganization dated as of March 1, 1995, by and between Registrant and the PACE
Group.(g)
10.23 Agreement and Plan of Reorganization dated as of July 28, 1995, by and between Registrant and Drake
Prometric, L.P.(h)
10.24 Lease Agreement dated August 24, 1995, First Amendment dated May 13, 1996 and Second Amendment dated
November 11, 1996 by and between Registrant and Harbor East, LLC.(n)
10.25 Revolving Credit Note to NationsBank, N.A. dated December 31, 1996.(n)
10.26 Senior Management Option Plan dated March 29, 1996.(n)
10.27 Securities Purchase Agreement by and between Registrant and JLC Holdings, Inc., Software Systems
10.28 Corporation and JLC Learning Corporation dated November 1, 1996.(j)
Agreement and Plan of Reorganization dated January 28, 1997 by and between Registrant and Wall Street
Institute.(k)
10.29 Agreement and Plan of Reorganization dated May 30, 1997 among Registrant and I-R, Inc. and Independent
Child Study Teams, Inc.(l)
10.30 Sylvan Learning Systems, Inc. Employee Stock Purchase Plan.(m)
10.31 Sylvan Learning Systems, Inc. 1998 Stock Incentive Plan.(o)
10.32 Asset Purchase Agreement by and among Sylvan Learning Systems, Inc., Block Testing Services L.P. and
Block State Testing Services L.P, dated as of December 1, 1997.(p)
10.33 Agreement and Plan of Reorganization by and among Sylvan Learning Systems, Inc., Block Testing Services
L.P., National Assessment Institute, Inc. and NAI Merger Corp, dated as of December 1, 1997.(p)
10.34 Stock Exchange Agreement dated as of April 7, 1998 between Aspect International Language Schools, B.V.,
the Stockholders and Sylvan Learning Systems, Inc.(q)
10.35 Agreement and Plan of Reorganization dated January 28, 1997 by and between Registrant and ZGS Zentrale
Gelsenkirchener SCHULERHILFE J. Gratze + M. Mohr GbR mbH and SCHULERHILFE Gesellschaft fur
Nachhilfeunterricht mbH.
10.36 Credit Agreement among Sylvan Learning Systems, Inc., Various Banks, NationsBank, N.A., as Syndication
Agent and Bankers Trust Company, as Lead Arranger and Administrative Agent.
10.37 Stock Purchase Agreement effective as of January 1, 1998, by and among Sylvan Learning Systems, Inc., a
Maryland corporation, Marlene Canter, the sole stockholder of Canter & Associates, Inc. and Canter
Educational Productions, Inc.
21.00 Subsidiaries of the Registrant.
23.01 Consent of Ernst & Young LLP.
23.02 Consent of Deloitte & Touche L.L.P.
23.03 Consent of Deloitte & Touche
23.04 Consent of Smith, Lange & Phillips L.L.P.
27.01 Financial Data Schedule for the years ended December 31, 1996 and 1997.
27.02 Financial Data Schedule for the year ended December 31, 1998.
99.01 Opinion of Deloitte & Touche L.L.P.
99.02 Opinion of Deloitte & Touche L.L.P.
99.03 Opinion of Deloitte & Touche
99.04 Opinion of Smith, Lange & Phillips L.L.P.
99.05 Opinion of Smith, Lange & Phillips L.L.P.
</TABLE>
(a) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-1 dated February 26, 1996.
(b) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-1 (Registration No. 33-69558).
(c) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-3 as amended by a Registration Statement on Form S-1
(No. 33-97870).
28
<PAGE>
(d) Incorporated by reference from the Exhibits to the Company's Quarterly
Report for the Quarter ended September 30, 1995.
(e) Incorporated by reference to the Company's Current Report on Form 8-K dated
July 20, 1994.
(f) Incorporated by reference to the Company's Current Report on Form 8-K dated
February 27, 1995.
(g) Incorporated by reference to the Company's Current Report on Form 8-K dated
May 5, 1995.
(h) Incorporated by reference to the Company's Current Report on Form 8-K dated
July 21, 1995.
(i) Incorporated by reference to the Company's Current Report on Form 8-K dated
September 27, 1996.
(j) Incorporated by reference to the Company's Current Report on Form 8-K dated
November 1, 1996.
(k) Incorporated by reference to the Company's Current Report on Form 8-K dated
January 28, 1997.
(l) Incorporated by reference to the Company's Current Report on Forms 8-K and
Form 8-K/A dated April 17, 1997 and May 30, 1997.
(m) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-8 dated February 18, 1997.
(n) Incorporated by reference from the Exhibits to the Company's Form 10-K
filed March 31, 1997.
(o) Incorporated by reference from the Exhibits to the Company's 1998 Proxy
Statement filed April 21, 1998.
(p) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-3 dated February 23, 1998.
(q) Incorporated by reference from the Exhibits to the Company's Registration
Statement on Form S-3 dated August 10, 1998.
29
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of Section 13 of the Securities Exchange Act
of 1934, the Registrant has duly caused this report to be signed on its behalf
of the undersigned, thereunto duly authorized on March 31, 1999.
SYLVAN LEARNING SYSTEMS, INC.
(Registrant)
By: /s/R. Christopher Hoehn-Saric
-----------------------------
R. Christopher Hoehn-Saric
Chairman of the Board
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on March 31, 1999
Signature Capacity
--------- --------
/s/R. Christopher Hoehn-Saric Director and Chairman of the Board
------------------------------------------
R. Christopher Hoehn-Saric
/s/Douglas L. Becker Secretary
------------------------------------------
Douglas L. Becker
/s/B. Lee McGee Vice President and Chief
------------------------------------------ Financial Officer
B. Lee McGee
/s/Donald Berlanti Director
------------------------------------------
Donald Berlanti
/s/Phillip Samper Director
------------------------------------------
Phillip Samper
/s/James H. McGuire Director
------------------------------------------
James H. McGuire
/s/Rick Inatome Director
------------------------------------------
Rick Inatome
/s/R. William Pollock Director
------------------------------------------
R. William Pollock
/s/Nancy S. Cole Director
------------------------------------------
Nancy S. Cole
30
<PAGE>
Item 14 (a) (1)
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
The Company: Page
----
<S> <C>
Report of Independent Auditors............................................................... 32
Consolidated Balance Sheets as of December 31, 1997 and December 31, 1998.................... 33
Consolidated Statements of Income for the years ended December 31, 1996, 1997 and 1998....... 35
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996, 1997
and 1998................................................................................... 36
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1997 and 1998... 37
Notes to Consolidated Financial Statements................................................... 38
</TABLE>
31
<PAGE>
Report of Independent Auditors
The Board of Directors and Stockholders
Sylvan Learning Systems, Inc.
We have audited the consolidated balance sheets of Sylvan Learning Systems, Inc.
as of December 31, 1998 and 1997, and the related consolidated statements of
income, stockholders' equity, and cash flows for each of the three years in the
period ended December 31, 1998. These financial statements are the
responsibility of the management of Sylvan Learning Systems, Inc. Our
responsibility is to express an opinion on these financial statements based on
our audits. We did not audit the 1996 combined financial statements of I-R,
Inc. and Independent Child Study Teams, Inc., or the 1997 and 1996 financial
statements of Aspect, Inc. and Anglo World Education Limited and subsidiaries,
each wholly-owned subsidiaries. Those statements reflect total assets of
$17,198,487 as of December 31, 1997, and total revenues of $35,613,484, and
$48,152,198 for the years ended December 31, 1997 and 1996, respectively. Those
statements were audited by other auditors whose reports have been furnished to
us, and our opinion, insofar as it relates to data included for these
subsidiaries, is based solely on the reports of the other auditors.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall financial statement
presentation. We believe that our audits and the reports of other auditors
provide a reasonable basis for our opinion.
In our opinion, based on our audits and the reports of other auditors, the
financial statements referred to above present fairly, in all material respects,
the consolidated financial position of Sylvan Learning Systems, Inc. at December
31, 1998 and 1997, and the consolidated results of its operations and its cash
flows for each of the three years in the period ended December 31, 1998, in
conformity with generally accepted accounting principles.
/s/ Ernst & Young LLP
- ----------------------------
Baltimore, Maryland
February 25, 1999
32
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------------- ------------
(Restated - Note 1)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 29,818 $ 33,170
Available-for-sale securities 82,951 6,166
Receivables:
Accounts receivable 59,721 71,248
Costs and estimated earnings in excess of billings
on uncompleted contracts 3,900 7,806
Notes receivable from tuition financing 978 2,977
Other notes receivable 2,943 8,922
Other receivables 8,752 2,404
------------ ------------
76,294 93,357
Allowance for doubtful accounts (2,509) (2,963)
------------ ------------
73,785 90,394
Inventory 4,999 9,841
Deferred income taxes 3,755 1,831
Prepaid expenses 6,303 10,093
Other current assets 265 1,843
------------ ------------
Total current assets 201,876 153,338
Notes receivable from tuition financing, less current portion - 3,415
Other notes receivable, less current portion 6,232 9,882
Costs and estimated earnings in excess of billings
on uncompleted contracts, less current portion 352 637
Property and equipment:
Land and buildings 5,710 9,917
Furniture and equipment 59,201 111,490
Leasehold improvements 7,988 13,156
------------ ------------
72,899 134,563
Accumulated depreciation (21,532) (36,682)
------------ ------------
51,367 97,881
Intangible assets:
Goodwill 183,172 292,693
Contract rights 13,973 13,973
Other 2,522 3,111
------------ ------------
199,667 309,777
Accumulated amortization (16,799) (26,322)
------------ ------------
182,868 283,455
Deferred contract costs, net of accumulated amortization
of $6,205 as of December 31, 1997 and $11,740
as of December 31, 1998 10,324 10,255
Investments in and advances to affiliates 12,464 18,532
Other investments 28,017 44,230
Net assets to be transferred to joint venture - 31,575
Other assets 3,279 6,596
------------ ------------
Total assets $ 496,779 $ 659,796
============ ============
</TABLE>
33
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Consolidated Balance Sheets
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
December 31, December 31,
1997 1998
------------------ ------------
(Restated - Note 1)
<S> <C> <C>
Liabilities and stockholders' equity
Current liabilities:
Accounts payable and accrued expenses $ 40,754 $ 57,177
Income taxes payable 5,590 11,784
Current portion of long-term debt 1,253 1,128
Current portion of due to shareholders of
acquired companies 13,794 40,719
Deferred revenue 26,323 27,411
Other current liabilities 1,288 19
------- -------
Total current liabilities 89,002 138,238
Long-term debt, less current portion 2,428 12,504
Deferred income taxes 7,620 6,961
Due to shareholders of acquired companies,
less current portion 56,366 12,239
Other long-term liabilities 903 1,021
------- -------
Total liabilities 156,319 170,963
Stockholders' equity:
Preferred stock, par value $.01 per share--authorized
10,000 shares, no shares issued and
outstanding as of December 31, 1997 and 1998 - -
Common stock, par value $.01 per share--authorized
90,000 shares, issued and outstanding shares of
45,450 as of December 31, 1997 and 50,952
as of December 31, 1998 455 510
Additional paid-in capital 302,022 410,694
Retained earnings 39,144 75,852
Accumulated other comprehensive income (loss) (1,161) 1,777
------- -------
Total stockholders' equity 340,460 488,833
------- -------
Total liabilities and stockholders' equity $496,779 $659,796
======= =======
</TABLE>
See accompanying notes.
34
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Consolidated Statements of Income
(Amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------------
1996 1997 1998
------------ ------------ ------------
(Restated - Note 1) (Restated - Note 1)
<S> <C> <C> <C>
Revenues $ 219,973 $ 301,011 $ 440,330
Cost and expenses
Direct costs 187,819 263,523 359,613
General and administrative expense 8,049 19,693 15,530
Transaction costs related to pooling-of-interests - - 5,000
Restructuring and asset impairment charges - 4,000 3,730
----------- ----------- ------------
Total expenses 195,868 287,216 383,873
Operating income 24,105 13,795 56,457
Other income (expense)
Termination fee, net of direct costs - 28,500 -
Investment and other income 1,747 4,836 5,281
Interest expense (1,320) (801) (943)
Equity in net income (loss) of affiliates 361 (2,006) (3,504)
----------- ----------- ------------
Income before income taxes 24,893 44,324 57,291
Income taxes (9,139) (16,420) (21,582)
----------- ----------- ------------
Net income $ 15,754 $ 27,904 $ 35,709
=========== =========== ============
Earnings per common share, basic $0.43 $0.66 $0.73
=========== =========== ============
Earnings per common share, diluted $0.40 $0.62 $0.70
============ ============ ============
</TABLE>
See accompanying notes.
35
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(Amounts in thousands)
<TABLE>
<CAPTION>
Retained Accumulated
Additional Earnings Other Total
Common Paid-In (Accumulated Comprehensive Stockholders'
Stock Capital Deficit) Income Equity
------ ---------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1996 - as restated (Note 1) $ 356 $ 140,450 $ (1,768) $ 93 $ 139,131
Options and warrants exercised for purchase of 993
shares of common stock, including income tax
benefit of $1,887 10 6,988 6,998
Issuance of 1,236 shares of common stock in connection
with the investment in JLC Learning Corporation 12 21,206 21,218
Issuance of 175 shares of common stock in
connection with other acquisitions 2 27 (320) (291)
Exercise of underwriter's overallotment option to purchase
51 shares of common stock in connection with 1995
public stock offering 533 533
Comprehensive income:
Net income for 1996 15,754 15,754
Other comprehensive income:
Foreign currency translation adjustment (269) (269)
Unrealized loss on available-for-sale securities (6) (6)
-----------
Total comprehensive income 15,479
-----------
Distributions to former shareholders (300) (300)
-------- -------- ------- ------- -----------
Balance at December 31, 1996 - as restated (Note 1) 380 169,204 13,366 (182) 182,768
Options and warrants exercised for purchase of 1,706
shares of common stock, including income tax
benefit of $8,156 17 13,102 13,119
Issuance of 536 shares of common stock in connection with
contingent consideration related to the acquisition of Drake 5 8,137 8,142
Issuance of 1,072 shares of common stock in connection
with the acquisition of WSI 11 15,309 15,320
Issuance of 404 shares of common stock to Sylvan
Learning Foundation as charitable contribution 4 6,537 6,541
Issuance of 309 shares of common stock to IT Training
Marketing Company as marketing expense 3 6,997 7,000
Issuance of 265 shares of common stock to SLC National
Advertising Fund, Inc. as advertising expense 3 4,997 5,000
Issuance of 3,098 shares of common stock for cash -
net of offering costs of $3,645 31 73,660 73,691
Capital contribution by former shareholders of Educational Inroads 2,811 2,811
Issuance of 94 shares of common stock in connection
with other acquisitions 1 718 719
Stock options to purchase 317 shares of common stock
granted to non-employees 550 550
Comprehensive income:
Net income for 1997 27,904 27,904
Other comprehensive income:
Foreign currency translation adjustment (990) (990)
Unrealized loss on available-for-sale securities 11 11
-----------
Total comprehensive income 26,925
-----------
Distributions to former shareholders (2,126) (2,126)
-------- -------- ------- ------- -----------
Balance at December 31, 1997 - as restated (Note 1) 455 302,022 39,144 (1,161) 340,460
Options and warrants exercised for purchase of 654
shares of common stock, including income tax
benefit of $5,176 7 11,531 11,538
Stock options granted to non-employees 539 539
Issuance of 27 shares of common stock in connection
with the Employee Stock Purchase Plan 527 527
Issuance of 2,570 shares of common stock in connection with
contingent consideration related to the acquisition of Drake 26 39,179 39,205
Issuance of 964 shares of common stock in connection
with the acquisition of NAI / Block 10 24,990 25,000
Issuance of 345 shares of common stock in connection with
contingent consideration related to the acquisition of PACE 3 11,305 11,308
Issuance of 277 shares of common stock in connection
with other investments 3 7,997 8,000
Issuance of 258 shares of common stock in connection
with the purchase of assets 3 7,454 7,457
Issuance of 124 shares of common stock in connection
with the acquisition of Schulerhilfe 1 2,527 2,528
Issuance of 205 shares of common stock in connection
with other acquisitions 2 1,477 681 2,160
Capital contribution by former shareholders of Aspect 1,300 1,300
Comprehensive income:
Net income for 1998 35,709 35,709
Other comprehensive income:
Foreign currency translation adjustment 2,938 2,938
-----------
Total comprehensive income 38,647
-----------
Other (154) 318 164
------- ---------- ----------- ---------- -----------
Balance at December 31, 1998 $ 510 $ 410,694 $ 75,852 $ 1,777 $ 488,833
======= ========== =========== ========== ===========
</TABLE>
See accompanying notes.
36
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(Amounts in thousands)
<TABLE>
<CAPTION>
Year Ended
December 31,
--------------------------------------------------------
1996 1997 1998
---------------- ------------------ ------------
(Restated - Note 1) (Restated - Note 1)
<S> <C> <C> <C>
Operating activities
Net income $ 15,754 $ 27,904 $ 35,709
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Depreciation 6,462 8,790 15,599
Amortization 7,494 10,071 16,724
Non-cash marketing and advertising expense - 11,500 -
Non-cash compensation expense - - 1,300
Non-cash issuance of options to non-employees - 550 539
Non-cash dividend income - (2,000) (1,167)
Loss on impairment of assets - 4,000 -
Gain on sale of property and equipment - (651) -
Equity in net (income) loss of affiliates (361) 2,006 3,504
Deferred income taxes 2,073 1,834 1,265
Changes in operating assets and liabilities:
Accounts and notes receivable (10,269) (27,304) (18,543)
Cost and estimated earnings in excess of billings
on uncompleted contracts (413) (137) (4,191)
Inventory (183) (398) (4,202)
Prepaid expenses and other current assets (299) (1,892) (4,451)
Accounts payable and accrued expenses 3,428 4,831 8,475
Income taxes payable 2,197 13,437 11,346
Deferred revenue and other current liabilities 4,458 6,684 (3,781)
---------------- ---------------- -----------
Net cash provided by operating activities 30,341 59,225 58,126
---------------- ---------------- -----------
Investing activities
Purchase of available-for-sale securities (31,286) (92,522) (2,502)
Proceeds from sale of available-for-sale securities 45,542 26,045 79,611
Investment in and advances to affiliates (3,445) (9,653) (11,572)
Increase in other investments (2,330) (4,136) (5,046)
Purchase of property and equipment (14,866) (30,964) (58,294)
Proceeds from sale of property and equipment 11 1,916 -
Purchase of contract rights (4,891) - -
Purchase of Canter, including direct costs of
acquisition, net of cash acquired - - (24,086)
Purchase of Schulerhilfe, including direct costs of
acquisition, net of cash acquired - - (16,649)
Payment of contingent consideration for PACE acquisition - - (13,532)
Purchase of Wall Street Institute, including direct costs of
acquisition, net of cash acquired 2,013 (4,671) -
Cash paid for other businesses, net of cash acquired 570 (1,851) (13,777)
Expenditures for deferred contract costs (6,942) (1,443) (2,771)
Increase in other assets (999) (731) (5,895)
---------------- ---------------- -----------
Net cash used in investing activities (16,623) (118,010) (74,513)
---------------- ---------------- -----------
Financing activities
Payments on loans to stockholders of acquired companies (38) (493) -
Proceeds from exercise of options and warrants 5,111 4,964 6,362
Proceeds from issuance of common stock 533 73,691 527
Proceeds from issuance of long-term debt 364 452 22,039
Payments on long-term debt and capital lease obligations (2,793) (5,675) (11,985)
Distributions (301) (793) -
Proceeds from bank lines of credit 200 13,575 114,396
Payments on bank lines of credit (3,812) (14,575) (114,107)
---------------- ---------------- -----------
Net cash provided by (used in) financing activities (736) 71,146 17,232
---------------- ---------------- -----------
Effects of exchange rate changes on cash (914) (1,263) 2,507
---------------- ---------------- -----------
Net increase in cash and cash equivalents 12,068 11,098 3,352
Cash and cash equivalents at beginning of period 6,652 18,720 29,818
---------------- ---------------- -----------
Cash and cash equivalents at end of period $ 18,720 $ 29,818 $ 33,170
================ ================ ============
</TABLE>
See accompanying notes.
37
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
1. Basis of Presentation and Description of Business
Sylvan Learning Systems, Inc. and subsidiaries ("the Company" or "Sylvan") is an
international provider of educational and testing services. The Company
conducts operations in three separate business segments Sylvan Learning
Centers, Sylvan Prometric, and Sylvan Contract Educational Services. The Sylvan
Learning Centers segment designs and delivers individualized tutorial programs
to school-age children and adults through a network of 727 franchised and
Company-owned Sylvan Learning Centers in operation in 49 states, six Canadian
provinces, Hong Kong and Guam. The Sylvan Prometric segment administers
computer-based tests for major corporations, professional associations and
governmental agencies through a network of certification centers which are
located throughout the world. This segment also includes the operations of
Wall Street Institute, B.V., a European-based franchisor and operator of
learning centers that teach the English language through a combination of
computer-based and live instruction, as well as Aspect International Language
Schools, B.V. ("Aspect"). Aspect focuses principally on intensive English
language instruction to students and professionals worldwide through its 27
language schools in five countries. The Sylvan Contract Educational Services
segment principally provides educational programs to employees of large
corporations and to public and non-public school districts through contracts
funded by federal Title I and state-based programs.
The consolidated financial statements include the accounts of Sylvan Learning
Systems, Inc. and its wholly-owned subsidiaries. All intercompany accounts and
transactions have been eliminated in consolidation. Investments in affiliates
owned more than 20%, but not in excess of 50%, and corporate joint ventures are
reported using the equity method.
The preparation of the financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect reported amounts and related disclosures. Actual
results could differ from those estimates.
As discussed in Note 3, during fiscal year 1998, the Company consummated mergers
with three franchisees of Sylvan Learning Centers and with Aspect. These
mergers were each consummated by the exchange of all of the outstanding shares
of voting common stock of the acquired company for shares of common stock of the
Company and were accounted for as poolings-of-interest. The accompanying
consolidated financial statements have been restated to retroactively combine
the financial statements of the combining companies as if the mergers had
occurred on January 1, 1996, the beginning of the earliest period presented.
The Company's fiscal year ends on December 31. The accounts of its wholly-owned
subsidiary, Aspect, have been consolidated on the basis of a year ending on
September 30. Such fiscal period corresponds with Aspect's natural business
year.
38
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
2. Accounting Policies
Cash Equivalents
The Company considers all highly-liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
Investments
Available-for-sale securities are carried at fair value, with any unrealized
gains and losses, net of tax, reported in other comprehensive income. The
amortized cost of debt securities in this category is adjusted for amortization
of premiums and accretion of discounts to maturity. Such amortization is
included in investment income. Realized gains and losses and declines in value
judged to be other than temporary on available-for-sale securities are included
in investment income. The cost of securities sold is based on the specific
identification method. Interest and dividends on securities classified as
available-for-sale are included in investment income.
Inventory
Inventory, consisting primarily of computer software and educational,
instructional, and marketing materials and supplies, is stated at the lower of
cost (first-in, first-out) or market value.
Property and Equipment
Property and equipment is stated at cost. Depreciation is determined using the
straight-line method over the estimated useful lives of the assets.
Included in property and equipment are the direct costs of developing or
obtaining software for internal use. In March 1998, the AICPA issued Statement
of Position 98-1 ("SOP 98-1") Accounting for the Costs of Computer Software
Developed or Obtained For Internal Use. SOP 98-1 is effective beginning January
1, 1999 and requires the capitalization of direct costs incurred in connection
with developing or obtaining software for internal use. The adoption of SOP 98-
1 in 1999 will not have any effect on the Company's current accounting policies.
39
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
2. Accounting Policies (continued)
Intangible Assets
Goodwill consists of the cost in excess of fair value of the identifiable net
assets of entities acquired in purchase transactions, and is amortized on a
straight-line basis, over the estimated future periods to be benefited, which
range from 10 to 25 years. At December 31, 1997 and 1998, accumulated
amortization of goodwill was $8,873 and $16,886, respectively.
Contract rights consist of the allocated cost of acquiring computer-based
testing contracts in business combinations accounted for as purchases. Contract
rights are being amortized on a straight-line basis, over the term of the
related contract, which range from nine months to 10 years. At December 31,
1997 and 1998, accumulated amortization of contract rights was $6,899 and
$8,068, respectively.
Deferred Contract Costs
Deferred contract costs include direct costs incurred to develop computer-based
tests under contractual arrangements with customers. Under these arrangements,
the Company incurs certain costs related to the development of new computer-
based tests on behalf of the customer in return for the right to deliver the
computer-based tests and collect a testing fee from either the candidate or the
sponsoring organization. These costs are capitalized and amortized over the
shorter of the estimated utility period of the test or the contractual period
for delivery of the test.
Deferred contract costs also include payments of approximately $10,400 made in
1996 to non-affiliated computer-based testing centers that have entered into
three-year contracts with the Company to deliver information technology
computer-based certification tests. In accordance with the terms of these
contracts, the independent testing centers have received an advance payment and
will receive no additional fees upon delivery of the computer-based
certification tests. These costs are being amortized over the contractual term
of three years.
Impairment of Long-Lived Assets
Long-lived assets, including intangible assets, are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be fully recoverable. If an impairment indicator is present,
the Company evaluates whether an impairment exists on the basis of undiscounted
expected future cash flows from operations for the remaining amortization
period. If an impairment exists, the asset is reduced by the estimated
shortfall of discounted cash flows.
40
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
2. Accounting Policies (continued)
Revenue Recognition
Revenue related to single-center and area franchise sales is recognized when all
material services or conditions relating to the sales have been substantially
performed or satisfied by the Company. For single-center franchise sales, the
criteria for substantial performance include: (1) receipt of an executed
franchise license agreement, (2) receipt of full payment of the franchise fee,
(3) completion of requisite training by the franchisee or center director, and
(4) completion of site selection assistance and site approval. Area franchise
sales generally transfer to the licensee the right to develop and operate
centers in a specified territory, primarily in a foreign country, and the
Company's future obligations are insignificant. Area franchise fees are
recognized upon the signing of the license agreement and the determination that
(1) all material services or conditions relating to the sale have been satisfied
and the fee is non-refundable, (2) a minimum payment of 50% of the fee is
required within 90 days of the date of the agreement, and (3) the Company has
the ability to estimate the collectibility of any unpaid amounts. Franchise
sales fees not meeting the recognition criteria are recorded as deferred revenue
if not refundable, or deposits from franchisees if refundable.
Fixed price contracts with school districts receiving funds under the federal
Title I program and state-based programs are accounted for using the percentage-
of-completion method. Income is recognized based on the percentage of contract
completion determined by the total expenses incurred to date as a percentage of
total estimated expenses at the completion of the contract. Total contract
income is estimated as contract revenue less total estimated costs considering
the most recent cost information. Revenues from cost-plus-fee contracts are
recognized on the basis of costs incurred during the period plus the fee earned.
Franchise royalties are reported as revenue as the royalties are earned and
become receivable, unless collection is not reasonably assured. Revenues from
educational services, including English language instruction, are recognized in
the period the services are provided.
Revenue from the sale of products to franchisees is recognized when shipped.
Testing revenues are recognized upon the completion of tests.
Advertising
The Company expenses advertising costs as incurred, except for direct-response
advertising, which is capitalized and amortized over its expected period of
future benefit.
41
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
2. Accounting Policies (continued)
Capitalized direct-response advertising consists primarily of the costs to
produce direct-mail order catalogues and brochures that are used to solicit
students of educational programs who have responded directly to the advertising.
The capitalized production costs are amortized over the period of the respective
programs, ranging from one to three years.
At December 31, 1997 and 1998, advertising costs totaling approximately $1,800
and $5,000, respectively, were reported as assets. The acquisition of
Canter in 1998 contributed to the majority of this increase. Advertising expense
for the year ended December 31, 1996, 1997 and 1998 was $5,952, $8,514 and
$13,950, respectively.
Stock Options Granted to Employees and Non-Employees
The Company records compensation expense for all stock-based compensation plans
using the intrinsic value method prescribed by APB Opinion 25, Accounting for
Stock Issued to Employees ("APB 25"). Under APB 25, if the exercise price of
the Company's employee stock options equals the estimated fair value of the
underlying stock on the date of grant, no compensation expense is generally
recognized. Statement of Financial Accounting Standards No. 123, Accounting
for Stock-Based Compensation ("Statement 123") encourages companies to recognize
expense for stock-based awards based on their estimated fair value on the date
of grant. Statement 123 requires disclosure of pro forma income and earnings
per share data in the notes to the financial statements if the fair value method
is not elected. The Company supplementally discloses in Note 12 to these
financial statements the pro forma information as if the fair value method had
been adopted.
The Company records compensation expense for all stock options granted to non-
employees in an amount equal to the estimated fair value at the date of grant,
determined using the Black-Scholes option valuation model. The compensation
expense is recognized ratably over the vesting period.
Foreign Currency Translation
The financial statements of certain foreign subsidiaries that are measured in
local functional currencies are translated into U.S. dollars using the current
rate method. All balance sheet accounts are translated using the exchange rates
at the balance sheet date. Income statement amounts have been translated using
the average exchange rates for the year. Translation gains or losses resulting
from the changes in exchange rates from year to year, are reported in other
comprehensive income.
The financial statements of other foreign subsidiaries, primarily those
subsidiaries providing services overseas to Educational Testing Services, Inc.
("ETS") (see Note 19), prepare financial statements using the U.S. dollar as the
functional currency. The transactions of these subsidiaries
42
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
2. Accounting Policies (continued)
that are denominated in foreign currencies have been remeasured into U.S.
dollars. Any resulting gain or loss is recorded as an adjustment of the amount
due from ETS as the contract with ETS requires ETS to bear the risk of foreign
currency gains or losses.
Comprehensive Income
As of January 1, 1998, the Company adopted Statement of Financial Accounting
Standards No. 130, Reporting Comprehensive Income ("Statement 130"). Statement
130 establishes new rules for the reporting and display of comprehensive income
and its components. The adoption of Statement 130 had no impact on the
Company's net income or stockholders' equity. Statement 130 requires
non-owner changes in stockholders' equity, including unrealized gains or losses
on the Company's available-for-sale securities and foreign currency translation
adjustments, which prior to adoption were reported separately in stockholders'
equity, to be included in other comprehensive income. Statement 130 requires
the disclosure of comprehensive income in a financial statement. The Company
has elected to report comprehensive income in the statement of stockholders'
equity. Prior year financial statements have been reclassified to conform to
the requirements of Statement 130.
Impact of Recently Issued Accounting Standard
In 1998, the AICPA issued SOP 98-5, Reporting the Costs of Start-up Activities
("SOP 98-5"). SOP 98-5 is effective beginning on January 1, 1999, and requires
that start-up costs capitalized prior to January 1, 1999 be written-off and any
future start-up costs to be expensed as incurred. The Company previously
capitalized pre-contract costs directly associated with specific anticipated
contracts as well as development costs for new educational programs that were
estimated to be recoverable. SOP 98-5 defines start-up costs to include pre-
contract costs and costs to introduce a new product, and accordingly, previously
capitalizable costs are required to be written-off upon adoption of SOP 98-5.
The unamortized balance of pre-contract and new product development costs
(approximately $2,000 as of December 31, 1998) will be written-off as a
cumulative effect of an accounting change as of January 1, 1999.
Reclassifications
Certain amounts in the 1996 and 1997 consolidated financial statements have been
reclassified to conform to the 1998 presentation.
43
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
3. Acquisitions
Canter & Associates, Inc. and Canter Educational Productions, Inc.
Effective January 1, 1998, the Company acquired all of the outstanding stock of
Canter & Associates, Inc. and Canter Educational Productions, Inc.
(collectively, "Canter"), commonly controlled companies engaged in the business
of providing materials and training programs for educators, for an initial
purchase price of $25,000 in cash. The acquisition was accounted for using the
purchase method of accounting and goodwill of $24,559 was recorded and is being
amortized over a period of 25 years. The results of operations of Canter for
the period from January 1, 1998 through December 31, 1998 are included in the
accompanying 1998 consolidated statement of income.
In connection with the Company's acquisition of Canter and based on Canter's
earnings in 1998, additional consideration of $28,558 is payable to the seller
in cash of $16,319 and the remainder in shares of restricted common stock which
has been valued at $12,239. As of December 31, 1998, the Company has recorded
this additional consideration as a liability and additional goodwill which will
be amortized over the remaining amortization period of 24 years. Additional
variable amounts of contingent consideration are also payable to the seller if
specified levels of earnings are achieved in 1999 and 2000, payable in equal
amounts of cash and stock. The Company will record the contingent consideration
when the contingencies are resolved and the additional consideration is payable.
Schulerhilfe
Effective October 28, 1998, the Company acquired all the operating assets and
liabilities of ZGS Zentrale Gelsenkirchener SCHULERHILFE J. Gratze + M. Mohr GbR
mbH ("Schulerhilfe Partnership") and all of the outstanding common stock of
SCHULERHILFE Gesellschaft fur Nachhilfeunterricht mbH ("Schulerhilfe
Corporation," and collectively with Schulerhilfe Partnership, "Schulerhilfe"),
in exchange for an initial purchase price of $16,554 in cash and 124 shares of
restricted common stock valued at $2,528. The Schulerhilfe Partnership designs
and delivers individualized tutorial services to school-age children and adults
through a network of 700 franchised learning centers throughout Germany and
Austria. The Schulerhilfe Corporation designs and delivers individualized
tutorial programs to school-age children and adults through a network of 177
company-owned learning centers throughout Germany.
The acquisition was accounted for using the purchase method of accounting and
goodwill of $19,749 was recorded and is being amortized over a period of 25
years. The results of operations of Schulerhilfe for the period from October
28, 1998 through December 31, 1998 are included in the accompanying 1998
consolidated statement of income.
44
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
3. Acquisitions (continued)
In addition to the initial purchase price, the sellers may receive up to an
additional $13,300 in February 2000 (payable in either cash or common stock at
the discretion of the Company) based on the amount of 1999 franchise fees which
have been collected by Schulerhilfe on or before January 31, 2000. The Company
will record this contingent consideration when the contingencies are resolved
and the additional consideration is payable.
The following combined unaudited pro forma results of operations of the Company
give effect to the Canter and Schulerhilfe acquisitions as though they had
occurred on January 1, 1997.
<TABLE>
<CAPTION>
Year ended December 31
----------------------------------
1997 1998
----------------------------------
<S> <C> <C>
Revenues $336,208 $452,087
Net income 30,581 37,352
Earnings per share diluted 0.67 0.73
</TABLE>
Sylvan Learning Center Franchises
During March 1998, the Company consummated acquisitions of all of the
outstanding common stock of three Sylvan Learning Center franchise businesses in
exchange for a total of 79 shares of Sylvan common stock. The acquisitions were
accounted for as poolings-of-interest, and accordingly, the Company's
consolidated financial statements for periods prior to the mergers have been
restated to include the results of operations, financial position and cash flows
of these businesses.
Aspect
On May 6, 1998 the Company acquired all of the outstanding common stock of
Aspect International Language Schools, B.V. and subsidiaries ("Aspect") in
exchange for 2,004 shares of Sylvan common stock. The acquisition was accounted
for as a pooling-of-interests, and accordingly, the Company's consolidated
financial statements for periods prior to the merger have been restated to
include the results of operations, financial position and cash flows of Aspect.
Aspect is a leading provider of English language training programs for college
students from non-English speaking companies. Founded in 1992, Aspect delivers
intensive English language programs at 27 schools in five countries.
45
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
3. Acquisitions (continued)
Combined and separate results of operations of Sylvan, Aspect and the Sylvan
Learning Center Franchises during the years prior to the mergers are as follows:
<TABLE>
<CAPTION>
Sylvan
Company Prior Learning
to Restatement Aspect Centers Combined
------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1997
Revenues $246,212 $52,460 $2,339 $301,011
Net income (loss) 29,434 (1,810) 280 27,904
Earnings per share - diluted 0.69 0.62
Year ended December 31, 1996
Revenues $181,936 $35,938 $2,099 $219,973
Net income 14,796 641 317 15,754
Earnings per share - diluted 0.40 0.40
</TABLE>
The following table presents the combined and separate results of operations of
the companies from January 1, 1998 through the date of merger. The table
excludes the Sylvan Learning Centers which were acquired on March 1, 1998
(unaudited):
<TABLE>
<CAPTION>
Sylvan Aspect Combined
--------------------------------------------------
<S> <C> <C> <C>
Three months ended March 31, 1998
Revenues $75,356 $10,967 $86,323
Net income (loss) 5,647 (1,380) 4,267
Earnings per share diluted 0.12 0.09
</TABLE>
In connection with the acquisition of Aspect, the Company recorded a $3,730
restructuring charge associated with the merger and integration of the combined
operations. These charges consist primarily of contract cancellation costs of
$2,600, severance and other employee related costs of $390, and liabilities of
$590 incurred to discontinue certain foreign exchange programs of Aspect. The
contract cancellation costs are payments made to repurchase master franchise
rights under which Sylvan is in default of contractual non-competition
provisions as a result of the acquisition of Aspect.
46
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
3. Acquisitions (continued)
Details of the restructuring charge are as follows:
<TABLE>
<CAPTION>
Paid Through Balance at
Original December 31, December 31,
Accrual 1998 1998
--------------------------------------------------
<S> <C> <C> <C>
Contract cancellation costs $2,600 $1,100 $1,500
Severance and other employee costs 390 87 303
Costs to exit foreign exchange program 590 590 -
Other 150 - 150
--------------------------------------------------
$3,730 $1,777 $1,953
==================================================
</TABLE>
It is expected that the remaining unpaid amounts will be paid in 1999.
NAI/Block
Effective December 1, 1997, the Company purchased the assets and liabilities of
Block Testing Services L.P. and Block State Testing Services L.P. and also
acquired all of the outstanding stock of National Assessment Institute, Inc.,
(collectively "NAI/Block"), commonly controlled companies engaged in the
business of designing, marketing, selling, distributing and administering paper
and pencil tests and the licensing of individuals. The consideration for the
acquisition was 964 shares of common stock having an aggregate market value of
$25,000. The acquisition was accounted for using the purchase method of
accounting and goodwill of $27,113 was recorded and is being amortized over a
period of 25 years.
I-R, Inc. and Independent Child Study Teams, Inc.
On May 30, 1997, the Company acquired by merger all of the outstanding stock of
I-R, Inc. and Independent Child Study Teams, Inc. (collectively, "Educational
Inroads") in exchange for 2,121 shares of common stock. I-R, Inc. and
Independent Child Study Teams, Inc. were commonly owned by two shareholders that
provide remedial and special educational services to public and non-public
school systems.
The acquisition was accounted for as a pooling-of-interests and accordingly, the
Company's consolidated financial statements for periods prior to the merger have
been restated to include the combined results of operations, financial position
and cash flows of Educational Inroads.
47
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
3. Acquisitions (continued)
Wall Street Institute International, B.V. and Affiliates
Effective December 1, 1996, the Company acquired substantially all of the
operating net assets of Wall Street Institute International, B.V. and its
commonly controlled affiliates (collectively, "WSI"). The Company recorded the
acquisition using the purchase method of accounting. WSI is a European-based
franchisor and operator of learning centers that teach the English language
through a combination of computer-based and live instruction. WSI has a network
of franchised centers in operation throughout Europe and Latin America.
The total purchase price of WSI of $21,071 consisted of cash of $4,921; 758
shares of restricted common stock valued at $9,250; 314 shares of unrestricted
common stock valued at $5,900 and $1,000 of direct acquisition costs. The
sellers may not transfer the restricted stock for a period of three years from
the date of issuance, unless the Company, in its sole discretion, removes the
restriction. Of the 758 shares of restricted common stock issued to the
sellers, 186 shares are held in escrow to indemnify the Company against any
subsequent losses resulting from any misrepresentation or breach of certain
covenants. The unrestricted common stock held in escrow will be released in
varying amounts to the sellers through 2001. Goodwill of $21,163 is being
amortized over its estimated useful life of 25 years.
The Company on the closing date of the acquisition entered into option
agreements to purchase two franchisees of WSI, and granted the owners of these
same franchisees put rights that require, in certain circumstances and at the
election by the right holders, the Company to purchase the
franchisees. At the Company's option it may purchase the two franchisees at any
time during the period from September 1, 2001 through September 1, 2005 for an
amount equal to seven times the previous fiscal year's earnings before interest
and taxes, adjusted for certain defined items. The franchisees may require the
Company to purchase substantially all of their net assets during the same four-
year period if defined levels of operating results are met or exceeded at the
end of the most recently completed fiscal year. The purchase price is payable
10% in cash and 90% in common stock, or at the Company's option, entirely in
cash.
The PACE Group
Effective February 28, 1995, the Company purchased the assets and liabilities of
The PACE Group ("PACE"), a provider of educational services to corporations.
Under the purchase agreement, additional contingent consideration was payable in
an amount equal to 6.5 times PACE's earnings before interest and income taxes
(EBIT) in 1997 as elected by the sellers, determined in accordance with
generally accepted accounting principles. EBIT in 1997 was $3,966, resulting in
additional consideration of $25,777 of which $14,469 was paid in cash and
the remainder in 345 shares of
48
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
3. Acquisitions (continued)
common stock (see Note 8). The Company has recorded this additional
consideration as additional goodwill, and is amortizing that amount over the
remaining amortization period of 22 years.
Drake Prometric, L.P.
Effective September 30, 1995, the Company acquired Drake Prometric, L.P.
("Drake"), a provider of computer-based certification, licensure and assessment
testing programs. The Company acquired Drake for an initial purchase price of
$70,600, consisting of $20,000 in cash and 8,571 shares of restricted common
stock. The purchase agreement further provided for the payment of contingent
consideration to the extent that certain revenue targets relating to portions of
the combined computer-based testing business were achieved from 1996 through
1998. In addition, the sellers could receive up to an additional $40,000 of
consideration to the extent other revenue targets were achieved in 1998 or 1999,
with the measuring year selected by the sellers. As of December 31, 1998, all
contingencies surrounding the payment of additional consideration to the sellers
were resolved and total contingent consideration of $71,748 was recorded in
1996, 1997 and 1998, consisting of restricted common stock valued at $47,348 and
amounts to be paid in cash of $24,400 (see Note 8).
4. Available-For-Sale Securities
The following is a summary of available-for-sale securities (cost approximates
fair value):
<TABLE>
<CAPTION>
December 31,
---------------
1997 1998
------- ------
<S> <C> <C>
Municipal securities funds $ 8,200 $ --
Cash reserve fund 38,246 3,366
Municipal bonds 36,505 2,800
------- ------
$82,951 $6,166
======= ======
</TABLE>
The Company has not had any significant realized or unrealized gains or losses
on its investments during the periods presented. As of December 31, 1998, the
Company has approximately $3,400 of investments that mature within one year,
$1,800 of investments that mature between one and five years, and $1,000 of
investments that mature beyond five years. These investments are classified as
current as the Company views its available-for-sale securities as available for
use in its current operations.
49
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
5. Investments
Investments in Affiliates
At December 31, 1998 and 1997, the Company's investments in and advances to
affiliates consists primarily of its 10% voting interest in Caliber Learning
Network, Inc. ("Caliber"), including related loans. Caliber is a publicly-
traded company formed for the purpose of providing adults throughout the United
States with university-quality continuing education using multimedia technology.
The Company's investment in and advances to Caliber consisted of the following
at December 31:
<TABLE>
<CAPTION>
1997 1998
---------- ----------
<S> <C> <C>
Invested capital $ 3,936 $14,300
Loans and related interest 3,362 -
Amounts due for management fee 2,880 517
---------- ----------
10,178 14,817
Allocable share of losses from inception (1,501) (4,403)
---------- ----------
$ 8,677 $10,414
========== ==========
</TABLE>
From its inception in 1996 through December 31, 1997, Caliber relied almost
entirely on the Company's resources, systems and personnel for administrative,
management, accounting and financial functions. In consideration for these
services, the Company charged Caliber a management fee of $2,880 which was paid
in May 1998 upon the consummation of Caliber's initial public offering.
Although Caliber has developed its own infrastructure, the Company continues to
provide to Caliber certain accounting and administrative services. Caliber has
agreed to pay an annual management fee of $2,000 in 1998 and 1999 for these
services.
During 1997, the Company assigned the leases for 32 testing centers to Caliber
for the use by Caliber in its operations. Upon assignment of the centers,
Caliber assumed the revenue stream from the ongoing testing operations and paid
the Company a fee of $4,000 to manage the continuing testing operations in 1997.
During 1997 and 1998, the Company paid Caliber $1,200 and $2,042, respectively,
for the administration of computer-based tests at these testing centers.
The Company also maintains investments in and advances to other affiliates
totaling $3,787 and $8,118 at December 31, 1997 and 1998, respectively. The
Company's allocable share of losses related to these investments for the years
ended December 31, 1997 and 1998 was $(647) and $(602), respectively.
50
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
5. Investments (continued)
Other Investments
Other investments consist of non-marketable investments in common and preferred
stocks of private companies in which the Company does not exercise significant
influence. These investments are carried at the lower of cost or estimated net
realizable value.
At December 31, 1997 and 1998, other investments consist primarily of an
investment in non-voting convertible preferred stock and junior subordinated
debentures of JLC Learning Corporation ("JLC"), a company that develops
educational software products. At December 31, 1997 and 1998, the Company's
investment in JLC was $24,038 and $25,700, respectively. During 1996, 1997 and
1998, the Company recorded dividend income from this investment in the amount of
$333, $2,000 and $1,167, respectively.
In November 1998, the Company purchased 53 shares of 6% redeemable convertible
preferred stock of The Chauncey Group International, Ltd. ("Chauncey"), a
subsidiary of Educational Testing Services ("ETS"), for consideration of $8,000.
Chauncey designs, develops and administers occupational, certification and
professional assessment programs.
The Company also maintains other investments not readily marketable totaling
$3,979 and $10,530 at December 31, 1997 and 1998, respectively.
6. Net Assets to be Transferred to Joint Venture
On January 1, 1999, the Company entered into an agreement with Chauncey to form
Experior Assessments LLC ("Experior"), a joint venture to be engaged in the
business of developing and administering state and municipal sponsored licensing
and certification programs and other related services. In exchange for a 50%
interest in Experior, Sylvan will contribute the net assets of NAI/Block (see
Note 3), excluding certain working capital balances. These net assets will be
transferred at historical cost with no gain or loss recorded on the
transfer. As of December 31, 1998, the Company has classified the net assets
to be contributed to Experior of $31,575 as net assets to be transferred to
joint venture in the accompanying consolidated balance sheet.
51
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
7. Long-term Debt
Long-term debt consists of the following:
<TABLE>
<CAPTION>
December 31,
----------------------
1997 1998
-------- --------
<S> <C> <C>
Long-term revolving credit facility with banks $ -- $ 8,000
Various notes payable bearing interest
at rates ranging from 8% to 10.75%. 3,681 5,632
-------- --------
3,681 13,632
Less: current portion of long-term debt 1,253 1,128
-------- --------
Total long-term debt $ 2,428 $ 12,504
======== ========
</TABLE>
The revolving credit facility with a group of six banks allows the Company to
borrow up to an aggregate of $100,000. Additionally, the Company has been pre-
approved to increase the aggregate borrowings by $50,000 in increments of
$10,000. Outstanding borrowings under this facility are unconditionally
guaranteed by a pledge of the capital stock of the Company's subsidiaries, and
are due on December 31, 2003. Outstanding borrowings bear interest at either the
prime rate, the federal funds rate plus 0.5%, or rates based on the Eurodollar
rate plus a contractual margin. As of December 31, 1998, $8,000 of prime rate
borrowings bearing interest at 7.75% were outstanding. Effective January 7,
1999, the borrowings began to bear interest at 6.06%, based on the Eurodollar
rate.
52
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
8. Due to Shareholders of Acquired Companies
Due to shareholders of acquired companies consists of the following (see also
Note 3):
<TABLE>
<CAPTION>
December 31,
----------------------------------------
1997 1998
----------------------------------------
<S> <C> <C>
Amounts payable to former owners of NAI/Block, paid
in 964 shares of common stock in January 1998 $ 25,000 $ -
Amounts payable to former shareholder of Canter in cash - 16,319
Amounts payable to former shareholder of Canter in 535
shares of common stock - 12,239
Amounts payable to former shareholders of WSI in cash 262 -
Amounts payable to former shareholders of PACE in cash 13,532 -
Amounts payable to former shareholders of PACE,
paid in 345 shares of common stock in April 1998 11,309 -
Amounts payable to former shareholders of Drake, paid in
1,071 shares of common stock in April 1998 20,057 -
Amounts payable to former shareholders of Drake in cash - 24,400
----------------- -------------------
70,160 52,958
Less: current portion (13,794) (40,719)
----------------- -------------------
$ 56,366 $ 12,239
================= ===================
</TABLE>
9. Leases
The Company conducts all of its operations from leased facilities. These
facilities include the Company's corporate headquarters and other office
locations, warehouse space, certain testing sites, and Company-owned learning
centers. The terms of substantially all of these leases are five years or less,
with the exception of the Company's corporate headquarters, which has a lease
term of ten years, and generally contain renewal options. The Company also
leases certain equipment under operating leases of 36 months or less. Future
minimum lease payments at December 31, 1998 by year and in the aggregate, under
all non-cancelable operating leases are as follows:
<TABLE>
<CAPTION>
Years ending December 31:
<S> <C>
1999 $16,298
2000 14,620
2001 11,357
2002 9,762
2003 8,452
Thereafter 23,333
-------
$83,822
=======
</TABLE>
53
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
9. Leases (continued)
Rent expense under all cancelable and non-cancelable leases was approximately
$7,500, $9,500 and $13,600 for the year ended December 31, 1996, 1997 and 1998,
respectively.
10. Contingencies
On November 18, 1996, ACT, Inc. filed suit against the Company alleging that the
Company violated federal antitrust laws and committed various state law torts in
connection with the operations of its computer-based testing operations and in
obtaining a testing services contract from the NASD. The Company believes the
grounds of the lawsuit are without merit and intends to defend the lawsuit
vigorously. Management is unable to predict the ultimate outcome of the
lawsuit, but believes that the ultimate resolution of the matter will not have a
material effect on consolidated financial position.
The Company is subject to other legal actions arising in the ordinary course of
its business. In management's opinion, the Company has adequate legal defenses
and/or insurance coverage with respect to the eventuality of such actions and
does not believe any settlement would materially affect the Company's financial
position.
11. Fair Value of Financial Instruments
The fair value of the Company's financial instruments, which consist primarily
of cash and cash equivalents, accounts and notes receivable, available-for-sale
investments, accounts payable, due to shareholders of acquired companies (cash
portion), and short and long-term debt, approximate their carrying amounts
reported in the consolidated balance sheets.
It was not practical to estimate the fair value of the Company's other
investments because of the lack of quoted market prices of the underlying equity
securities and the inability to determine fair value without incurring excessive
costs. Management does not believe that the value of these investments has been
impaired.
12. Stock Options
The Company has five stock options plans that provide for the granting of stock
options to employees, officers and directors. The 1998 Stock Incentive Plan
("1998 Plan") is the only plan with significant stock option awards available
for grant. Prior plans have outstanding stock options at December 31, 1998.
The 1998 Plan allows for the grant of up to 3,750 shares of common stock in the
form of incentive and non-qualified stock options, stock appreciation rights,
stock awards, phantom stock awards, convertible securities and performance
awards that expire six years after the date of grant. During 1998, non-
qualified options to purchase 1,095 shares of
54
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
12. Stock Options (continued)
common stock were granted under the 1998 Plan. Options outstanding under all of
the Company's stock option plans have been granted at prices which are equal to
the market value of the stock on the date of grant and vest ratably over periods
not exceeding six years.
During 1997, the Company established the Sylvan Technology Center Stock Option
Plan ("the STC Plan") for the franchisee owners of Sylvan Technology Centers.
The STC Plan provides for the granting of stock options to purchase up to 450
shares of common stock. During 1997, 317 options were granted that vest ratably
over a three-year period and expire 10 years after the date of grant or on the
date of cessation of operations of the center. The fair value of these options,
determined using the Black-Scholes option valuation model, was $1,386, of which
$550 and $539 of expense was recognized in 1997 and 1998, respectively, with the
remainder to be recognized in expense over the next two years as the options
vest.
The following table summarizes the stock option activity of the Company.
<TABLE>
<CAPTION>
1996 1997 1998
--------------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Options Price Options Price Options Price
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of
year 4,853 $ 5.13 6,921 $ 8.71 6,935 $13.75
Granted 2,772 14.61 1,714 23.73 2,989 26.77
Exercised (577) 7.25 (1,621) 2.92 (659) 9.92
Forfeited (127) 7.47 (79) 11.83 (198) 17.03
--------------------------------------------------------------------------------------------
Outstanding at end of year 6,921 $ 8.71 6,935 $13.75 9,067 $17.86
============================================================================================
Exercisable at end of year 2,688 $ 4.45 2,691 $ 8.51 3,584 $10.80
============================================================================================
Weighted-average fair value of
options granted during the year $ 5.55 $ 7.15 $11.26
=============== =============== ===============
</TABLE>
55
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
12. Stock Options (continued)
Exercise prices for options outstanding as of December 31, 1998 ranged from
$3.48 to $31.25 as follows:
<TABLE>
<CAPTION>
Weighted
Weighted Average Weighted
Average Remaining Average
Exercise Contractual Exercise
Prices of Life of Prices of
Range of Outstanding Outstanding Outstanding Exercisable Exercisable
Exercise Prices Options Options Options Options Options
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$3.48-$6.08 1,245 $4.48 0.9 years 1,223 $4.45
- ------------------------------------------------------------------------------------------------------
$6.78-$11.62 850 9.17 2.7 years 605 9.02
- ------------------------------------------------------------------------------------------------------
$13.55-$19.77 2,948 15.30 5.9 years 1,563 14.58
- ------------------------------------------------------------------------------------------------------
$21.50-$31.25 4,024 25.71 6.1 years 193 26.02
- ------------------------------------------------------------------------------------------------------
</TABLE>
For the years ended December 31, 1996, 1997 and 1998, pro forma net income and
earnings per share information required by Statement 123 has been determined as
if the Company had accounted for its stock options using the fair value method.
The fair value of these options was estimated at the date of grant using the
Black-Scholes option pricing model with the following weighted average
assumptions for 1996, 1997 and 1998: risk-free interest rate of 6.00%, dividend
yield of 0%, volatility factors of the expected market price of the Company's
common stock of .399, .280 and .360, respectively, and an expected life of
granted options which varies from four to six years depending upon the vesting
period.
The Black-Scholes option pricing model was developed for use in estimating the
fair value of traded options which have no vesting restrictions and are fully
transferable. In addition, option valuation models require the input of highly
subjective assumptions including the expected stock price volatility. Because
the Company's stock options have characteristics significantly different from
those of traded options and because changes in the subjective input assumptions
can materially affect the fair value estimate, in management's opinion, the
existing models do not necessarily provide a reliable single measure of the fair
value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the options
is amortized to expense over the options' vesting periods. The Company's pro
forma information follows:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ----------
<S> <C> <C> <C>
Pro forma net income $12,896 $24,477 $25,446
Pro forma earnings per share:
Basic 0.35 0.58 0.52
Diluted 0.33 0.55 0.50
</TABLE>
56
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
13. Impairment Loss
In May 1997, the Company determined that certain assets of Sylvan Prometric were
impaired as a result of certain strategic changes that were made as a result of
pursuing the National Education Corporation ("NEC") acquisition (see Note 14).
During and after the acquisition negotiations with NEC, the Company developed
certain plans that resulted in required changes in both software systems and
hardware currently utilized in Sylvan Prometric's network of centers. The plans
continued to be valid for the Company even after the NEC acquisition was
terminated. The impaired assets, consisting of computer equipment and software,
were impaired as a result of changes in the technical requirements and
specifications of certain computer hardware and software. The amount of the
impairment loss was determined by evaluating the likely sales proceeds from the
disposition of the assets compared to their book value. The Company determined
that it was unlikely that the net cash proceeds from the sale of any assets
would be significant, and therefore recorded an impairment loss equal to the net
book value of the assets of $4,000. During 1998, these assets were disposed of
for no significant consideration.
14. Termination Fee
In March 1997, the Company and NEC executed a definitive agreement pursuant to
which the Company was to acquire NEC. In May 1997, NEC accepted the offer of
Harcourt General, Inc. to acquire all of the stock of NEC which resulted in the
termination of NEC's agreement with the Company and NEC's payment to the
Company of the $30,000 termination fee required by that agreement. The Company
also incurred $1,500 of expenses in connection with the NEC transaction, and
reported the net termination fee of $28,500 in 1997.
15. Contributions
During 1997, the Company made certain cash expenditures and common stock
contributions resulting in an aggregate expense to the Company of approximately
$21,500. The $21,500, recorded as operating expenses, was attributable to
contributions of (i) $3,000 in cash and common stock valued at $7,000 to IT
Training Marketing Company, a nonprofit corporation whose sole purpose is to
fund promotional and channel support programs for the Sylvan Prometric
distribution channel, (ii) common stock valued at $5,000 to SLC National
Advertising Fund, Inc., a nonprofit corporation whose sole purpose is to develop
and fund advertising programs for the Sylvan Learning Centers and (iii) common
stock valued at $6,500 to Sylvan Learning Foundation, a nonprofit foundation
formed to promote various educational pursuits.
57
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
16. Income Taxes
Significant components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1996 1997 1998
------ ------- -------
<S> <C> <C> <C>
Current:
Federal $5,078 $ 8,956 $12,367
Foreign 550 1,292 1,521
State 1,403 1,618 2,865
------ ------- -------
Total current 7,031 11,866 16,753
Deferred (benefit):
Federal 1,773 3,396 1,083
Foreign - 306 3,097
State 335 852 649
------ ------- -------
Total deferred 2,108 4,554 4,829
------ ------- -------
Total provision $9,139 $16,420 $21,582
====== ======= =======
</TABLE>
For the year ended December 31, 1996, 1997 and 1998, foreign income before
income taxes was $3,800, $12,900 and $16,470, respectively.
The Company uses the liability method to account for income taxes. Deferred
income taxes reflect the net tax effects of temporary differences between the
carrying amount of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes.
Significant components of the Company's deferred tax assets and liabilities are
as follows:
<TABLE>
<CAPTION>
Year ended December 31,
-----------------------
1997 1998
------- -------
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 765 $ 252
Loss on impairment of assets 779 483
Deferred revenue 630 1,018
Allowance for doubtful accounts 548 853
Advertising costs 5,305 2,360
Amortization of intangible assets 643 204
Equity share of losses from affiliates 827 2,115
Charitable contribution carryforward 2,425 1,535
Tax credit carryforwards 926 1,154
Other 538 1,329
------- -------
Total deferred tax assets 13,386 11,303
</TABLE>
58
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
16. Income Taxes (continued)
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------------
1997 1998
--------------- ---------------
<S> <C> <C>
Deferred tax liabilities:
Deferred contract costs 2,066 917
Contract rights 170 79
Depreciation 1,755 1,521
Deferred income 11,388 11,670
Accrued receivables 559 1,136
Other 565 720
------- -------
Total deferred tax liabilities 16,503 16,043
------- -------
Net future income tax liabilities (3,117) (4,740)
Valuation allowance for deferred
tax assets (765) (252)
------- -------
Net deferred tax liabilities $(3,882) $(4,992)
======= =======
</TABLE>
The net operating loss carryforwards at December 31, 1998 are related to a
subsidiary of the Company, and are available only to offset future taxable
income of the subsidiary. These net operating loss carryforwards will begin to
expire in 2007.
The reconciliation of the reported income tax expense to the amount that would
result by applying the U.S. federal statutory tax rates (34% in 1996 and 1997,
35% in 1998) to income before income taxes is as follows:
<TABLE>
<CAPTION>
Year ended December 31,
--------------------------
1996 1997 1998
------ ------- -------
<S> <C> <C> <C>
Tax expense at U.S. statutory rate $8,464 $15,070 $20,052
Permanent differences 813 2,662 1,237
State income tax expense, net of
federal tax benefit 1,130 1,555 2,284
Tax effect of foreign income taxed at lower rate (734) (3,244) (1,852)
Utilized tax credits (254) - -
Other (280) 377 (139)
------ ------- -------
$9,139 $16,420 $21,582
====== ======= =======
</TABLE>
59
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
17. Earnings Per Share
The following table summarizes the computations of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
Year ended December 31,
-------------------------
1996 1997 1998
------- ------- -------
<S> <C> <C> <C>
Numerator used in basic and diluted
earnings per common share:
Net income $15,754 $27,904 $35,709
======= ======= =======
Denominator:
Denominator for basic earnings per common
share weighted average shares 36,626 42,412 48,962
Effect of dilutive securities:
Employee stock options 2,069 1,850 2,151
Common stock contingently issuable 268 628 173
------- ------- -------
Total dilutive potential common shares 2,337 2,478 2,324
------- ------- -------
Denominator for diluted earnings per common
share weighted average shares and
assumed conversions 38,963 44,890 51,286
======= ======= =======
Earnings per common share, basic $ 0.43 $ 0.66 $ 0.73
Earnings per common share, diluted $ 0.40 $ 0.62 $ 0.70
</TABLE>
18. Shares Reserved For Future Issuance
The Company as of December 31, 1998 has reserved 9,602 shares of common stock
for future issuance upon the exercise of all outstanding stock options and the
issuance of shares of common stock in connection with purchase business
combinations.
19. Major Customers and Concentration of Credit Risk
The Company has an agreement with ETS to be the exclusive commercial provider of
ETS domestic computer-based tests through the year 2005. The contract to
provide international computer-based tests runs through the year 2003. The
international testing contract with ETS stipulates that the Company will be
compensated for its services for a fee equal to approved costs
60
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
19. Major Customers and Concentration of Credit Risk (continued)
plus 10 percent, and the Company recognizes revenues accordingly. Operating
costs under the contract are paid at cost plus 10 percent on a monthly basis by
ETS. Total revenues from ETS represented approximately 8.9%, 11.3% and 12.4% of
consolidated revenues for the years ended December 31, 1996, 1997 and 1998,
respectively.
The Company's information technology testing business is highly concentrated
with two customers. These customers contributed approximately 25.7%, 13.1% and
12.0% to consolidated revenues for the year ended December 31, 1996, 1997 and
1998, respectively. The Company expects the contracts with these two customers
to be renewed at the expiration date of the current contracts. The failure of
these contracts to be renewed under similar terms would have a detrimental
effect on future operating results and significantly impair the Company's
ability to recover the remaining goodwill related to this business of
approximately $130,886.
Financial instruments which potentially subject the Company to credit risk are
investments in available-for-sale securities, accounts receivable and notes
receivable. The Company maintains an allowance for losses on receivables based
on the collectibility of all amounts owed. The Company generally does not
require collateral for trade receivables. Notes receivable are generally
collateralized by assets of the debtors. At December 31, 1998, the Company does
not have any significant concentrations of credit risk.
20. Defined Contribution Retirement Plan
The Company sponsors a defined contribution retirement plan under section 401(k)
of the Internal Revenue Code. The provisions of this plan allow for voluntary
employee contributions, subject to certain annual limitations, and discretionary
Company contributions which are allocated to eligible participants based upon
compensation. All employees are eligible after meeting certain service
requirements. The Company made discretionary contributions to this plan of $248
in 1997 and $315 in 1998.
21. Business and Geographic Segment Information
Description of Services From Which Each Reportable Segment Derives its Revenues
The Company provides lifelong educational services through three distinct
operating segments. The Sylvan Learning Centers division provides personalized
instructional services to students of all ages and skill levels, through its
network of franchised and Company-owned learning centers located in 49 states,
five Canadian provinces, Hong Kong and Guam. The Sylvan Contract Educational
Services division provides educational services and professional development to
children and adults through contracts with school systems and other
organizations. These services
61
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
21. Business and Geographic Segment Information (continued)
to children are delivered at over 700 schools and in the case of its
professional development services for adults, at the contracting parties'
facilities. The Sylvan Prometric division delivers computer-based testing for
academic admissions and professional certification programs through a network of
computer testing centers located throughout the world, and includes the
operations of Wall Street Institute and Aspect. Wall Street Institute is a
European-based franchisor and operator of learning centers for English language
instruction that will administer certain computer-based testing programs
throughout Europe and Latin America. Aspect is an international provider of
intensive English language instruction to professionals worldwide through its 27
language schools in five countries.
Measurement of Segment Profit or Loss and Segment Assets
The Company evaluates performance and allocates resources based on operating
income before corporate general and administrative expenses and income taxes.
The accounting policies used by the reportable segments are the same as those
used by the Company as described in Note 2 to the consolidated financial
statements. There are no significant intercompany sales or transfers.
Factors Management Uses to Identify the Company's Reportable Segments
The Company's reportable segments are business units that offer distinct
services. The segments are managed separately as they have different customer
bases and delivery channels.
The following table sets forth information on the Company's reportable segments:
<TABLE>
<CAPTION>
Year Ended December 31, 1996
---------------------------------------------------------
Sylvan Sylvan Contract
Learning Centers Educational Services Sylvan Prometric
---------------- -------------------- ----------------
<S> <C> <C> <C>
Revenues $38,898 $ 58,186 $122,889
Depreciation and
amortization 998 1,940 9,729
Segment profit 11,456 4,727 15,971
Segment assets 14,432 27,496 171,683
Expenditures for long-
lived assets 914 2,690 7,197
</TABLE>
62
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
21. Business and Geographic Segment Information (continued)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
---------------------------------------------------------
Sylvan Sylvan Contract
Learning Centers Educational Services Sylvan Prometric
---------------- -------------------- ----------------
<S> <C> <C> <C>
Revenues $46,629 $ 66,582 $187,800
Depreciation and
amortization 756 1,614 14,002
Loss on impairment of
assets - - 4,000
Unusual item - contribution
to marketing fund - - 10,000
Significant non-cash
charges (advertising) 5,000 - -
Segment profit 7,443 10,230 15,815
Segment assets 22,309 57,064 275,522
Expenditures for long-
lived assets 1,688 4,661 19,861
<CAPTION>
Year Ended December 31, 1998
---------------------------------------------------------
Sylvan Sylvan Contract
Learning Centers Educational Services Sylvan Prometric
---------------- -------------------- ----------------
<S> <C> <C> <C>
Revenues $64,754 $ 100,519 $ 275,057
Depreciation and
amortization 1,565 5,762 23,016
Unusual item - transaction
costs - - 5,000
Restructuring charges - - 3,730
Segment profit 19,339 14,649 37,999
Segment assets 56,841 127,276 391,434
Expenditures for long-
lived assets 2,274 8,607 42,732
</TABLE>
63
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
21. Business and Geographic Segment Information (continued)
The following tables reconcile the reported information on segment profit and
assets to income before income taxes and total assets reported in the statements
of income and balance sheets for the years ended December 31, 1996, 1997 and
1998:
<TABLE>
<CAPTION>
1996 1997 1998
--------- --------- ---------
<S> <C> <C> <C>
Total profit for
reportable segments $ 32,154 $ 33,488 $ 71,987
Corporate general and
administrative expense (8,049) (19,693) (15,530)
Other income (expense),
net of direct costs 788 30,529 834
-------- -------- --------
Income before income taxes $ 24,893 $ 44,324 $ 57,291
======== ======== ========
1996 1997 1998
--------- --------- ---------
Segment assets $213,611 $354,895 $575,551
Cash and available for sale
securities - corporate 27,381 86,631 5,967
Deferred income taxes 620 3,755 1,832
Property, plant and equipment -
Corporate 5,249 6,810 9,746
Investments in and advances
to affiliates 5,896 12,464 13,919
Other investments 22,220 28,017 40,372
Other non-segment assets 3,102 4,207 12,409
-------- -------- --------
Total assets $278,079 $496,779 $659,796
======== ======== ========
</TABLE>
Included in corporate general and administrative expense for the year ended
December 31, 1997 was a contribution of the Company's common stock valued at
$6,500 as discussed in Note 15 to these financial statements.
Depreciation and amortization expense in the amounts of $1,289, $2,489 and
$1,980 were charged to corporate departments during the year ended December 31,
1996, 1997 and 1998, respectively. Expenditures for corporate long-lived assets
were $4,065, $4,754 and $4,681 during the year ended December 31, 1996, 1997 and
1998, respectively.
64
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
21. Business and Geographic Segment Information (continued)
Enterprise-Wide Disclosures - Information on Geographic Areas
<TABLE>
<CAPTION>
Year Ended December 31, 1996 .
----------------------------
Revenues Long-lived Assets
--------- -----------------
<S> <C> <C>
United States $165,539 $25,679
Foreign countries - total 54,434 7,502
-------- -------
Consolidated total $219,973 $33,181
======== =======
<CAPTION>
Year Ended December 31, 1997 .
----------------------------
Revenues Long-lived Assets
--------- -----------------
<S> <C> <C>
United States $212,336 $40,182
Foreign countries - total 88,675 11,185
-------- -------
Consolidated total $301,011 $51,367
======== =======
<CAPTION>
Year Ended December 31, 1998 .
----------------------------
Revenues Long-lived Assets
--------- -----------------
<S> <C> <C>
United States $313,043 $73,128
Foreign countries - total 127,287 24,753
-------- -------
Consolidated total $440,330 $97,881
======== =======
</TABLE>
Revenues are attributed to countries based on the location of the customer.
Revenues from individual foreign countries did not exceed 10% of consolidated
revenues in any of the years presented. Long-lived assets domiciled in
individual foreign countries did not exceed 10% of consolidated long-lived
assets in any of the years presented. Note 19 to the financial statements
contains information about major customers of the Company.
65
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
22. Supplemental Cash Flow Information
Interest payments were approximately $1,300, $800 and $900 for the year ended
December 31, 1996, 1997 and 1998, respectively. Income tax payments were $4,200,
$2,700 and $8,600 for the year ended December 31, 1996, 1997, and 1998,
respectively.
In connection with the 1998 acquisitions of Canter and Schulerhilfe for combined
consideration of $44,082, the Company acquired assets with a fair value of
$50,465 and assumed liabilities of $6,383.
In connection with the 1997 acquisition of NAI/Block for total consideration of
$25,000, the Company acquired assets with a fair value of $29,616 and assumed
liabilities of $4,616.
In connection with the 1996 acquisition of WSI for total consideration of
$21,071, the Company acquired assets with a fair value of $24,101 and assumed
liabilities of $3,030.
23. Quarterly Financial Data (Unaudited)
<TABLE>
<CAPTION>
Quarter ended
---------------------------------------------------
March 31, June 30, September 30, December 31,
1997 1997 1997 1997
--------- -------- ------------- ------------
<S> <C> <C> <C> <C>
Operating revenues $61,406 $ 69,510 $71,960 $98,135
Operating expenses 57,061 83,810 61,302 81,043
Loss on impairment of assets -- 4,000 -- --
------- -------- ------- -------
Operating income (loss) 4,345 (18,300) 10,658 17,092
Non-operating items, net 333 28,933 805 458
------- -------- ------- -------
Income before income taxes 4,678 10,633 11,463 17,550
Income taxes (1,953) (3,916) (3,993) (6,558)
------- -------- ------- -------
Net income $ 2,725 $ 6,717 $ 7,470 $10,992
======= ======== ======= =======
Net income per common share:
Basic $ 0.07 $ 0.17 $ 0.17 $ 0.24
======= ======== ======= =======
Diluted $ 0.06 $ 0.16 $ 0.16 $ 0.22
======= ======== ======= =======
Shares used in computation:
Basic 40,152 40,332 43,702 45,517
======= ======== ======= =======
Diluted 42,960 42,747 45,966 49,101
======= ======== ======= =======
</TABLE>
66
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
23. Quarterly Financial Data (Unaudited) (continued)
During the second quarter of 1997, the Company recognized an impairment loss of
$4,000, income from a termination fee of $28,500 and recorded expense related to
contributions which totaled $21,500. These transactions are described in Notes
13, 14 and 15, respectively.
The net effect of the above non-recurring items was an increase in pre-tax
income of $3,000 and net income of $1,900, or $.04 per diluted share.
Diluted earnings per common share for the year ended December 31, 1997 is $0.62.
The total diluted earnings per common share derived from the addition of the
quarterly amounts in 1997 is $0.60. This difference is caused by differences in
the estimated effect of contingently issuable shares related to the acquisition
of PACE in the quarterly periods as compared to the annual period.
<TABLE>
<CAPTION>
Quarter ended
---------------------------------------------------
March 31, June 30, September 30, December 31,
<S> <C> <C> <C> <C>
1998 1998 1998 1998
--------- ------- ------------- ------------
Operating revenues $86,323 $99,328 $109,701 $144,978
Operating expenses 80,108 89,384 89,386 116,265
Transaction costs -- 5,000 -- --
Restructuring costs -- 3,730 -- --
------- ------- -------- --------
Operating income 6,215 1,214 20,315 28,713
Non-operating items, net 367 147 (690) 1,010
------- ------- -------- --------
Income before income taxes 6,582 1,361 19,625 29,723
Income taxes (2,315) (2,839) (6,323) (10,105)
------- ------- -------- --------
Net income $ 4,267 $(1,478) $ 13,302 $ 19,618
======= ======= ======== ========
Net income per common share:
Basic $ 0.09 $(0.03) $ 0.27 $ 0.39
======= ======= ======== ========
Diluted $ 0.09 $(0.03) $ 0.26 $ 0.37
======= ======= ======== ========
Shares used in computation:
Basic 47,760 48,185 48,535 50,592
======= ======= ======== ========
Diluted 49,926 48,185 50,596 53,334
======= ======= ======== ========
</TABLE>
During the year ended December 31, 1998, the Company recognized certain non-
recurring expenses related to the merger with ASPECT. These expenses include
$5,000 of transaction-related costs, such as legal, accounting and advisory
fees, and $3,730 of costs, classified in the financial statements as
restructuring costs that relate to the integration of ASPECT with Sylvan.
67
<PAGE>
Sylvan Learning Systems, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
(Dollar and share amounts in thousands, except per share data)
23. Quarterly Financial Data (Unaudited) (continued)
The net effect of the above non-recurring items was a decrease in pre-tax income
of $8,730 and net income of $7,857, or $0.15 per diluted share.
Diluted earnings per common share for the year ended December 31, 1998 is $0.70.
The total diluted earnings per common share derived from the addition of the
quarterly amounts in 1998 is $0.69. This difference is caused by the effect of
in-the-money options and warrants and contingently issuable shares which were
excluded from the second quarter computation because the effect was anti-
dilutive, but included in the annual computation because the effect was
dilutive.
68
<PAGE>
EXHIBIT 10.35
AGREEMENT FOR SALE
entered into between
1. Mr. JURGEN GRATZE, Allmendenweg 10, 45894 Gelsenkirchen, Germany,
- hereinafter referred to as "SELLER 1" -
2. Mr. JURGEN BIRKNER, Westerholter Str. 26, 45894 Gelsenkirchen, Germany,
- hereinafter referred to as "SELLER 2" -
3. Mr. MARTIN MOHR, Frankampstr. 77, 45881 Gelsenkirchen, Germany,
- hereinafter referred to as "SELLER 3" -
- SELLERS 1-3 also collectively referred to as
"SELLERS" and being jointly and severally liable -
and
DORANA EINUNDVIERZIGSTE VERWALTUNGSGESELLSCHAFT MBH, being registered in the
Commercial Register of the Frankfurt Local Court under the file No. HR B 45490,
being represented by Dr. Volker Schacht or Dr. Christof Siefarth, acting with a
power of attorney,
- hereinafter referred to as "CORPORATION PURCHASER" -
DORANA FUNFZIGSTE VERWALTUNGSGESELLSCHAFT MBH, being registered in the
Commercial Register of the Frankfurt Local Court under the file No. HR B 45743,
being represented by Dr. Volker Schacht or Dr. Christof Siefarth, acting with a
power of attorney,
- hereinafter referred to as "PARTNERSHIP PURCHASER" -
- CORPORATION PURCHASER and PARTNERSHIP PURCHASER also
collectively referrerd to as "PURCHASERS" and being
joint and several creditors -
<PAGE>
-2-
WHEREAS, SCHULERHILFE Gesellschaft fur Nachhilfeunterricht mbH ("SCHULERHILFE
CORPORATION") is registered in the Commercial Register of the Local Court of
Gelsenkirchen-Buer under the file no. HRB 1657. SELLER 1 and SELLER 2
participate in the stated capital of Schulerhilfe Corporation in the total
amount of DM50,000.00 paid in full with shares in the nominal amounts of
DM10,000.00 and DM15,000.00 each. SELLER 1 is the sole managing director of
Schulerhilfe Corporation.
WHEREAS, ZGS Zentrale Gelsenkirchener SCHULERHILFE J. Gratze + M. Mohr GbR mbH
("SCHULERHILFE PARTNERSHIP"), is a civil law partnership (Gesellschaft
burgerlichen Rechts) using the abbreviation "mbH" (mit beschrankter Haftung -
with limited liability) in the course of business. Schulerhilfe Partnership is
not registered in the Commercial Register. SELLER 1 owns a ninety-seven and
one-half percent (97.5%) interest in Schulerhilfe Partnership; SELLER 3 owns the
remaining two and one-half (2.5%) interest in Schulerhilfe Partnership.
WHEREAS, Schulerhilfe Corporation and Schulerhilfe Partnership (collectively
also referred to as the "Schulerhilfe Entities") are engaged in the business of
providing extracurricular educational services, including private and group
coaching for pupils, which are either provided by its own employees or by
independent contractors or by franchisees (the "Schulerhilfe Business").
WHEREAS, SELLER 1 and SELLER 2 intend to sell and transfer, and CORPORATION
PURCHASER intends to take over all of the shares in Schulerhilfe Corporation
from SELLERS;
SELLER1 and SELLER 2 subject to the terms of this Agreement;
WHEREAS, SELLER 1 and SELLER 3 intend to sell and transfer, and PARTNERSHIP
PURCHASER intends to take over all interest in Schulerhilfe
<PAGE>
-3-
Partnership from SELLER 1 and SELLER 3 subject to the terms of this Agreement;
WHEREAS, the parties have agreed that the acquisition agreed upon hereinafter
shall be structured and carried out in a way that the sales price agreed upon in
this Agreement shall be paid (a) as a fixed sales price, partly in cash and
partly in Sylvan Restricted Stock (as hereinafter defined) and, (b) as an
Earnout Payment (as hereinafter defined), at Sylvan's option, in cash or in
Sylvan Unrestricted Stock (as hereinafter defined) and/or a combination thereof
subject to the terms and conditions of this Agreement.
NOW, THEREFORE, for and in consideration of the promises and the mutual
covenants and agreements herein contained, the parties hereto hereby agree as
follows:
1. OBJECTS OF SALE
---------------
1.1 SALE OF SHARES IN SCHULERHILFE CORPORATION.
------------------------------------------
SELLER 1 and SELLER 2 hereby sell to CORPORATION PURCHASER their shares
in Schulerhilfe Corporation in the nominal amounts of DM10,000.00 and
DM15,000.00 each (the "Shares"). CORPORATION PURCHASER accepts such
sale. The transfer of the shares shall be made as of today's date and
shall be executed pursuant to the terms and conditions substantially in
the form of the transfer agreement attached hereto as Exhibit 1.
---------
1.2 SALE OF INTEREST IN SCHULERHILFE PARTNERSHIP.
--------------------------------------------
SELLER 1 and SELLER 3 hereby sell to PARTNERSHIP PURCHASER all 100%
interest in Schulerhilfe Partnership (the "Interest"). PARTNERSHIP
PURCHASER accepts such sale. The transfer of the interest shall be made
as of today's date and pursuant to the terms and conditions
<PAGE>
-4-
substantially in the form of the transfer agreement attached hereto as
Exhibit 2.
1.3 PROFIT PARTICIPATION.
--------------------
SELLERS shall not be entitled to any profit distribution of the
Schulerhilfe Corporation and Schulerhilfe Partnership which become due
as of today's date, because the SELLERS will participate in any
profit/loss of the Schulerhilfe Corporation and Schulerhilfe
Partnership arising prior to today's date through the sales price
adjustment set forth in sec. 2.4 of this Agreement.
1.4 CORPORATE CONSENT.
-----------------
In their capacity as shareholders - and SELLER 1 also in his capacity
as managing director of Schulerhilfe Corporation SELLER 1 and SELLER 2
hereby grant the consent required under corporate law pursuant to sec.
13 para.1 of the articles of association of Schulerhilfe Corporation
regarding the sale and transfer of the shares in Schulerhilfe
Corporation, substantially in the form of the shareholders resolution
of Schulerhilfe Corporation attached hereto as Schedule 1.4.
------------
2. SALES PRICE AND PAYMENT
-----------------------
2.1 SALES PRICE.
-----------
The aggregate sales price (the ,,Sales Price") for the Shares in
Schulerhilfe Corporation and for the Interest in Schulerhilfe
Partnership payable to SELLERS shall be
(a) a fixed amount of DM33.5 (Thirty-Three and One-Half) million out
of which
(i) DM27.5 (Twenty-Seven and One-Half) million are payable in
cash to a bank account to be designated by SELLER 1, and
<PAGE>
-5-
(ii) DM6.0 (Six) million in Sylvan Restricted Stock (as defined
and further provided hereinafter) subject to a three-year
restriction, and
(b) an amount of up to DM21.5 (Twenty-One and One-Half) million as an
Earnout Payment (as defined and further provided hereinafter),
payable, in the sole discretion of PURCHASERS, either in cash, or
in Sylvan Unrestricted Stock (as defined and further provided
hereinafter) (the "Earnout Stock").
2.2 PAYMENT OF THE FIXED SALES PRICE.
--------------------------------
(a) The partial Sales Price set forth in sec. 2.1 (a) (i)
hereinbefore shall be paid by PURCHASERS until November 30, 1998
(the "Payment Date") at the latest.
(b) Notwithstanding the obligations set forth in sec. 3.12
hereinafter, the partial Sales Price set forth in sec. 2.1 (a)
(ii) hereinbefore shall be paid by PURCHASERS until the Payment
Date, in shares of the US$ 0.01 par value common stock of Sylvan
Learning Systems, Inc. ("Sylvan") (the,,Sylvan Common Stock"),
with the number of shares to be transferred by PURCHASERS
determined by dividing the portion of the Sales Price by the
average closing price of the Sylvan Common Stock as quoted on
NASDAQ for the fifteen (15) trading days prior to today's date;
provided that, for the purpose of calculating the average stock
price during such fifteen (15) day period, the single highest and
single lowest closing stock prices shall be disregarded. The
currency exchange rate that the parties will use to determine the
value of the Sylvan Common Stock in German Marks is the average
daily exchange rate as published in the Wall Street Journal over
the two-month period prior to today's date.
<PAGE>
-6-
(c) SELLERS shall, for a time period expiring at the third
anniversary of today's date, be restricted from selling, hedging
or in any way disposing of any Sylvan Common Stock held by them
(the "Sylvan Restricted Stock").
(d) Nothing herein shall be construed as requiring PURCHASERS to
transfer any fractional shares; and, PURCHASERS, at their sole
discretion, shall have the right to pay to the SELLERS cash
payments in lieu of any fractional shares.
2.3 PAYMENT OF THE EARNOUT.
----------------------
(a) The exact amount of the partial Sales Price set forth in sec. 2.1
(b) hereinbefore (the "Earnout Payment") shall be determined
pursuant to the terms and conditions set forth in sec. 2.5
hereinafter.
(b) The Earnout payment shall be due on February 15, 2000, but may be
paid, at PURCHASERS' sole discretion, before that date.
(c) If PURCHASERS elect to make the Earnout Payment by providing
Earnout Stock, as set forth in sec. 2.1 (b) hereinbefore, the
following provisions shall apply:
(i) The value of the Earnout Stock shall be determined by
dividing the portion of the Sales Price by the average
closing price of the Sylvan Common Stock as quoted on
NASDAQ for the fifteen (15) trading days prior to date set
forth in sec. 2.3 (b) hereinbefore; provided that, for the
purpose of calculating the average stock price during such
fifteen (15) day period, the single highest and single
lowest closing stock prices shall be disregarded. The
currency exchange rate that the parties will use to
determine the value of the Sylvan Common Stock in German
Marks is the average daily
<PAGE>
-7-
exchange rate as published in the Wall Street Journal over
the two-month period prior to such date.
(ii) For a period of sixty (60) days following the transfer of
the Earnout Stock to SELLERS, SELLERS shall be restricted
from selling, hedging or in anyway disposing of the Earnout
Stock held by them, unless, in the sole discretion of
PURCHASERS, PURCHASERS provide for otherwise in writing.
(iii) If the transfer of Earnout Stock is made within the period
of sixty (60) days as set forth in sec. 2.3 (c)(ii)
hereinbefore, the following shall apply:
(A) If the proceeds from the sale of the Earnout Stock
made at PURCHASERS' direction, as converted in
Deutsche Mark or Euro, as the case may be, at the
exchange rate published in the Wall Street Journal as
of the day of such sale, is less than the amount of
the partial Sales Price determined in accordance with
sec. 2.3 (a) hereinbefore, PURCHASERS shall make an
adjustment in cash payable to SELLERS within fourteen
(14) days following the sale of the Earnout Stock.
(B) If the amount actually received by SELLERS from such
sale exceeds the amount of the partial Sales Price
determined in accordance with sec. 2.3 (a)
hereinbefore, SELLERS shall pay to PURCHASERS the
exceeding amount in cash within fourteen (14) days
following the sale of the Earnout Stock minus the US
and/or German tax imposed on SELLERS on the capital
gain from the sale of the Earnout Stock, and SELLERS
shall retransfer to PURCHASERS all of the Earnout
Stock which was not sold.
<PAGE>
-8-
(d) Nothing herein shall be construed as requiring PURCHASERS to
transfer any fractional shares; and, PURCHASERS, at their sole
discretion, shall have the right to pay to the SELLERS cash
payments in lieu of any fractional shares.
2.4 SALES PRICE ADJUSTMENTS/EQUITY GUARANTEE
----------------------------------------
(a) The parties agree that as of today's date the minimum Working
Capital of Schulerhilfe Corporation shall be DM1.00 [Deutsche
Mark One] (the "Corporation Minimum Working Capital"). The
parties mutually agree that as of today's date the minimum
Working Capital of Schulerhilfe Partnership shall be DM1.00
[Deutsche Mark One] (the ,,Partnership Minimum Working Capital").
(b) For the purposes of this sec. 2.6 (a) "Working Capital" shall be
the working capital, as defined under US generally accepted
accounting principles, i.e. current assets less current
liabilities, including current portions due (one year or less) of
long term liabilities.
(c) Within sixty (60) days after today's date PURCHASERS shall
deliver to SELLERS (the date of such delivery being the
"Adjustment Date") balance sheets of Schulerhilfe Corporation
and Schulerhilfe Partnership set up as of October 31, 1998, in
accordance with the accounting principles set forth in sec. 2.4
(b) hereinbefore, which shall be the basis for calculating the
Working Capital as of today's date of Schulerhilfe Corporation
(the "Corporation Closing Date Working Capital") and of
Schulerhilfe Partnership (the "Partnership Closing Date Working
Capital"), collectively referred to as "Statements". The
Statements shall have been prepared by PURCHASERS and audited by
PURCHASERS' auditors, Ernst & Young (or such other firm of
<PAGE>
-9-
independent certified public accountants appointed by PURCHASERS
for this purpose). In rendering the Statements, PURCHASERS and
their auditors shall consult with the SELLERS or, as the case may
be, with the auditors of the Schulerhilfe Entities; and shall
permit the Schulerhilfe Entities and such auditors at the
earliest practicable date access to and copies of the work papers
and calculations relating to the Statements.
(d) Any dispute which may arise between PURCHASERS and the SELLERS
with respect to the calculation of the Working Capital shall be
resolved in the following manner:
(i) if the SELLERS dispute the calculation of the Working
Capital the SELLERS shall notify the CORPORATION PURCHASER
or the PARTNERSHIP PURCHASER, as the case may be, within
thirty (30) days after the Adjustment Date specifying
therein in detail the basis and reason for such dispute and
the amount which is in dispute;
(ii) during the thirty (30) day period following the date of
such notice(s), the CORPORATION PURCHASER and/or the
PARTNERSHIP PURCHASER and the SELLERS shall attempt to
resolve such dispute(s); and
(iii) if at the end of the thirty (30) day period specified in
clause (ii) above the parties shall have failed to reach an
agreement with respect to such dispute(s), the matter shall
be referred for settlement to one of the worldwide
operating firms of independent certified public accountants
as the parties mutually agree or any such firm to be
elected by the president of the German Institute of
Chartered Accountants (IDW Dusseldorf) at the request of
PURCHASERS and/or SELLERS (the,,Accounting Firm"). The
Accounting Firm shall be instructed to use every reasonable
effort to perform
<PAGE>
-10-
such services within thirty (30) days of the submissions to
it of the applicable Statements and related dispute(s).
Each of the parties to the dispute(s) shall bear all costs
and expenses incurred in connection with this sec 2.4 (d)
(iii), and the fees of the Accounting Firm shall be borne
proportionally to the degree of prevailing in accordance
with secs. 91 ss. German Code on Civil Procedure. The
decision(s) of the Accounting Firm in accordance with the
provisions hereof shall be final and binding and there
shall be no right of appeal therefrom.
(e) (i) Within ten (10) days after the Adjustment Date the
following adjustment payments shall be made in cash:
(A) CORPORATION PURCHASER shall pay to SELLERS an amount
equal to the amount by which the Corporation Closing
Date Working Capital exceeds the Corporation Minimum
Working Capital; or alternatively,
(B) SELLERS shall pay to CORPORATION PURCHASER an amount
equal to the amount by which the Corporation Closing
Date Working Capital is lower than the Corporation
Minimum Working Capital,
AND
(C) PARTNERSHIP PURCHASER shall pay to SELLERS an amount
by which the Partnership Closing Date Working Capital
exceeds the Partnership Minimum Working Capital; or
alternatively,
(D) SELLERS shall pay to PARTNERSHIP PURCHASER an amount
by which the Partnership Closing Date
<PAGE>
-11-
Working Capital is lower than the Partnership Minimum
Working Capital,
(ii) Provided, however, that in the event of any dispute made in
accordance with the provisions of sec. 2.4 (d) (iii)
hereinbefore, the disputed amount shall be paid within ten
(10) days after the settlement or determination of the
dispute, as the case may be.
2.5 DETERMINATION OF EARNOUT PAYMENT.
--------------------------------
(a) The determination of the Earnout Payment referred to in secs. 2.1
(b) and 2.3 (a) hereinbefore shall be based on the franchise and
advertising fees (the "Franchise Fees") for the calendar year
1999 actually collected by PARTNERSHIP PURCHASER until January
31, 2000 at the latest (the "Collected Franchise Fees") from (i)
the 720 franchise centers as to which franchise agreements have
been entered into as of September 18, 1998, and which are
identified in a list to be prepared by the parties jointly and
promptly (the "Franchise Centers"), and (ii) such Franchise
Centers which will be operating in PARTNERSHIP PURCHASER'S
franchise system after today's date.
(b) The projected Franchise Fees for the calendar year 1999 shall
equal an amount of DM6.5 (Six and One-half) million. If the
Collected Franchise Fees equal or exceed an amount of DM6.5 (Six
and One-Half) million, the Earnout Payment shall amount to DM21.5
(Twenty-one and One-half) million. If the Collected Franchise
Fees are less than an amount of DM6.5 (Six and One-Half) million,
the Earnout Payment shall be as follows:
(i) If the Collected Franchise Fees are less than the amount of
DM6.5 (Six and One-Half) million but exceed an amount of
DM6,264,800.00 (or the equivalent to 68 Franchise Centers
<PAGE>
-12-
not paying an amount of DM700.00 per month), the Earnout
Payment shall be reduced Deutschmark for Deutschmark.
(ii) If the Collected Franchise Fees are less than the amount of
DM6,264,800.00 but exceed an amount of DM5,979,200.00 (or
the equivalent to 102 Franchise Centers not paying an
amount of DM700.00 per month), the Earnout Payment shall be
reduced at a multiple of two times the amount less than DM
6,264,800.00 of Collected Franchise Fees plus Deutschmark
for Deutschmark of the amount between DM6,264,800.00 and
DM6.5 million.
(iii) If the Collected Franchise Fees are less than the amount of
DM5,979,200.00 but exceed an amount of DM5,693,600.00 (or
the equivalent to 136 Franchise Centers not paying an
amount of DM700.00 per month), the Earnout Payment shall be
reduced at a multiple of four times the amount less than DM
6.5 million of Collected Franchise Fees.
(iv) If the Collected Franchise Fees are less than the amount of
DM5,693,600.00, the Earnout Payment shall be reduced at a
multiple of nine times the amount less than DM 6.5 million
of Collected Franchise Fees.
The following schedule illustrates the above calculation (Amounts in DM):
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
Total of Collected Franchise Fees obtained by Number of
Partnership Purchaser from January 1, 1999 through Non-Paying Total Payment Made for
December 31, 1999 from an Average of 773 Centers Centers Earnout
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C>
6,500,000 0-40 21,500,000
6,300,000 41-68 21,300,000
6,000,000 69-102 20,735,200
5,700,000 103-136 18,300,000
5,400,000 - 171 11,600,000
5,000,000 - 218 8,000,000
4,111,111 or less - 324 0
- ----------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>
-13-
2.6 TAXES.
-----
The SELLERS shall reimburse to the Partnership Purchaser any taxes,
social security and other public charges, including but not limited to
late charges, penalties and interest thereon - minus any refund of such
taxes - (the "Taxes") of the Schulerhilfe Partnership which relate to
the period until today's date other than those Taxes as to which
amounts were set aside in the balance sheet of Schulerhilfe Partnership
referred to in sec. 2.4 (c) herein. The SELLERS shall reimburse to the
Corporation Purchaser all the Taxes of the Schulerhilfe Corporation
which relate to the time period until today's date other than those
Taxes as to which amounts were set aside in the balance sheet of
Schulerhilfe Corporation referred to in sec. 2.4 (c) herein. Taxes
resulting from the fact that depreciations, value adjustments or
reserves have not been accepted by the tax authorities, shall not be
taken into account in calculating the taxes to be reimbursed, to the
extent that the positions not accepted by the tax authorities lead to
tax reductions in the subsequent five fiscal years. The amounts payable
by the SELLERS shall become due at the same time as the respective
Taxes. The provisions of sec. 6.4 of this Agreement shall apply mutatis
mutandis.
3. ADDITIONAL AGREEMENTS
---------------------
3.1 CONFIDENTIALITY IF TRANSACTIONS ARE NOT CONSUMMATED.
---------------------------------------------------
If the transactions contemplated herein are not consummated, then
PURCHASERS shall return to SELLERS any statements, documents or other
written information furnished by or on behalf of SELLERS. PURCHASERS
shall not reveal to any third party or utilize for any purpose, (i) any
information contained in any such statements, documents or other
written information provided to PURCHASERS or any of their agents or
representatives by or on behalf of SELLERS or (ii) any analyses or
compilations thereof by PURCHASERS, or (iii) any of the trade secrets
or other confidential business or other proprietary
<PAGE>
-14-
information of the Schulerhilfe Entities, provided that the obligations
of PURCHASERS, their agents and representatives hereunder shall not
apply to:
(a) any information which was known to PURCHASERS or any of their
directors, officers, employees, agents, representatives or
affiliates prior to its disclosure by or on behalf of SELLERS;
(b) any information which was in the public domain prior to the
disclosure thereof to PURCHASERS by or on behalf of SELLERS;
(c) any information which comes into the public domain through no
cause of PURCHASERS or any of their directors, officers,
employees, agents, representatives or affiliates; or
(d) any information which is disclosed to PURCHASERS or any of their
directors, officers, employees, agents or representatives by a
third party (which term shall not include the employees,
attorneys, accountants or other representatives of the
Schulerhilfe Entities); or
(e) any information which is required to be disclosed pursuant to
applicable laws, regulations or court order.
3.2 COOPERATION.
-----------
The parties shall cooperate fully with each other and with their
respective counsel and accountants in connection with any steps
required to be taken as part of their respective obligations under this
Agreement, and all parties shall use their commercially practicable
best efforts to satisfy or cause the satisfaction of the conditions
contained in this Agreement, to consummate the transactions
contemplated herein and to fulfill their obligations hereunder.
<PAGE>
-15-
3.3 MANAGEMENT AGREEMENT WITH SELLER 1.
----------------------------------
SELLER 1 is the managing director of Schulerhilfe Corporation. As of
today's date, his employment relationship shall be subject to the
Management Agreement substantially in the form attached as Exhibit 3.
---------
The current employment relationship between SELLER 1 and Schulerhilfe
Corporation shall become ineffective on the day preceding today's date.
SELLERS agree to indemnify CORPORATION PURCHASER from all claims
resulting from this employment relationship, which have been accrued up
to today's date.
3.4 EMPLOYMENT AGREEMENT WITH SELLER 3.
----------------------------------
SELLER 3 is an employee of Schulerhilfe Corporation. As of today's
date, his employment relationship shall be subject to the Employment
Agreement substantially in the form attached as Exhibit 4. The current
---------
employment relationship between SELLER 3 and Schulerhilfe Corporation
shall become ineffective on the day preceding today's date. SELLERS
agree to indemnify CORPORATION PURCHASER from all claims resulting from
this employment relationship, which have been accrued up to today's
date.
3.5 CONSULTING AGREEMENT WITH SELLER 2.
----------------------------------
SELLER 2 has been retained as a free-lance consultant of Schulerhilfe
Corporation pursuant to the terms of a contract for services. As of
today's date, his contractual relationship shall be subject to the
Consulting Agreement substantially in the form attached as Exhibit 5.
---------
The current contractual relationship between SELLER 2 and Schulerhilfe
Corporation shall become ineffective on the day preceding today's date.
SELLERS agree to indemnify CORPORATION PURCHASER from all claims
resulting from this contractual relationship, which have been accrued
up to today's date.
3.6 DISTRIBUTIONS.
-------------
Until today's date, each of the Schulerhilfe Entities shall be entitled
to make distributions to its partners and shareholders, respectively;
<PAGE>
-16-
provided, however, that such distributions are only made to an extent
that they do not cause the Working Capital of each of the Schulerhilfe
Entities to fall below the Minimum Working Capital of the respective
Schulerhilfe Entity as defined in sec. 2.4 (a) hereinbefore.
3.7 PURCHASER'S ACCESS AND INSPECTION.
---------------------------------
Upon reasonable notice, SELLERS shall cause the Schulerhilfe Entities
to provide PURCHASERS and their authorized representatives full access
during normal business hours from and after the date hereof to all the
Assets and all the assets of the Schulerhilfe Entities (collectively,
the "Schulerhilfe Assets") and to the books and records of the
Schulerhilfe Business, wherever situated, for the purpose of making
such investigation with respect to the transactions contemplated hereby
as PURCHASERS may reasonably desire; provided, however, that in
conducting such activities, PURCHASERS shall not, and shall cause their
representatives not to, unduly interfere with the business, employees
and franchisees of the Schulerhilfe Entities. SELLERS shall cause the
Schulerhilfe Entities to furnish PURCHASERS with such information
concerning the Schulerhilfe Business as PURCHASERS may reasonably
request. SELLERS shall cause the Schulerhilfe Entities' personnel to
assist PURCHASERS in making such investigation and shall cause their
respective counsel, accountants and other non-employee representatives
to be reasonably available to Purchasers for such purposes. No
investigation made heretofore or hereafter by PURCHASERS shall affect
the representations or warranties of hereunder, each of which shall
survive any such investigation.
3.8 ASSIGNMENT OF TRADEMARK REGISTRATIONS AND TRADEMARK APPLICATIONS.
----------------------------------------------------------------
SELLER 1 individually, or SELLER 2 individually, or SELLER 1 and SELLER
2 jointly, are proprietors of the trademark and service mark
registrations and applications (including registrations and
applications therefor and goodwill associated therewith)
("Trademarks") set forth in Schedule 3.8. All registered Trademarks
------------
have been used, except the registered German Trademark with the file
number 111 89 48, which has not been used in
<PAGE>
-17-
the last five years. Prior to the Payment Date, SELLER 1 and/or SELLER
2 shall take such measures as are necessary to assign to PARTNERSHIP
PURCHASER those Trademarks: (i) used in connection with the
Schulerhilfe Business; and (ii) either (A) not comprising a portion of
the Assets or (B) not owned exclusively by the Schulerhilfe
Corporation, substantially in the form set forth in Exhibit 6. The
---------
SELLER 1 and/or the SELLER 2 shall submit to PARTNERSHIP PURCHASER all
files and documents regarding the registrations of and applications for
the Trademarks, particularly, but not limited to, the trademark
certificates and the correspondence with the respective trademark
offices.
3.9 RESTRICTIONS FROM DISPOSING OF SYLVAN RESTRICTED STOCK AND EARNOUT
------------------------------------------------------------------
STOCK.
-----
Notwithstanding SELLERS' restriction on the disposition of Sylvan
Restricted Stock and/or Earnout Stock set forth hereinbefore, SELLERS
shall provide written notice to PURCHASERS at least five (5) business
days prior to engaging in any sale, hedge or other disposition of any
Sylvan Restricted Stock and/or Earnout Stock held by SELLERS.
3.10 RELEASE FROM RESTRICTIONS OF SALE OF SYLVAN RESTRICTED STOCK.
------------------------------------------------------------
At the time the Earnout Payment as set forth in sec. 2.1 (b)
hereinbefore is paid, PURCHASERS may release SELLERS from the
restrictions of the Sylvan Restricted Stock as set forth in sec. 2.2
(c) hereinbefore and SELLERS are obliged to sell the Sylvan Restricted
Stock upon the order of PURCHASERS, if the stock exchange price of the
Sylvan Restricted Stock, as quoted on NASDAQ at the last trading day
prior to that date, exceeds an amount of DM6.4 million (Six Million
Four-Hundred Thousand). The proceeds from such sale of the Sylvan
Restricted Stock exceeding an amount of DM6.4 million (Six Million
Four-Hundred Thousand) shall be paid to PURCHASERS, at PURCHASERS sole
discretion, in cash or by retransferring the corresponding number of
Sylvan Common Stock to SELLERS.
<PAGE>
-18-
3.11 EXCLUSION OF SCHULERHILFE BUSINESS HEADQUARTERS.
-----------------------------------------------
Prior to signing this Agreement, SELLERS shall have executed a transfer
agreement satisfactory in substance and form, by which SELLER 1 and
SELLER 3 acquire the real property including the real property and all
of the headquarters building of the Schulerhilfe Business, as further
described, including the excerpt from the land register, in Schedule
--------
3.11 (the "Schulerhilfe Business Headquarters") at the book value as
----
set forth in the financial accounts of SCHULERHILFE PARTNERSHIP as of
today's date with economic effect as of today's date and by assuming
any and all liabilities, including, but not limited to those, listed in
Schedule 3.11, relating to the or in connection with the Schulerhilfe
-------------
Business Headquarters.
3.12 ESCROW ACCOUNT.
--------------
At the Payment Date, the Sylvan Restricted Stock shall be paid into an
escrow account, and held pursuant to an escrow agreement, substantially
in the form attached hereto as Exhibit 7 (the "Escrow Agreement")
---------
providing for the escrow of the Sylvan Restricted Stock payable to
SELLERS to secure for a period of two (2) years after the Payment Date
PURCHASERS' claims resulting from this Agreement. PURCHASERS shall bear
the fee of the Escrow Agent to the extent that such fee exceeds an
amount of DM4,000.00, while SELLERS shall bear the fee up to that
amount. The Escrow Agent shall be the State Street Bank, as set forth
in the Escrow Agreement.
4. ADDITIONAL OBLIGATIONS.
----------------------
4.1 CERTIFICATE OF SELLERS.
----------------------
The SELLERS shall deliver to PURCHASERS a certificate, dated as of the
Payment Date or, at an earlier date designated by PURCHASERS,
certifying in such detail as PURCHASERS may reasonably request, (a) the
absence of any material adverse change in the Schulerhilfe Business
compared to the state of the business as reflected in the August 31,
<PAGE>
-19-
1998, financial statements of the Schulerhilfe Entities audited by
Ernst & Young, and (b) the accuracy of the representations and
warranties set forth herein as well as the compliance with all
agreements and conditions set forth herein.
4.2 INTERIM STATEMENTS.
------------------
PURCHASERS shall receive until November 20, 1998, a copy of each of the
Schulerhilfe Partnership's and the Schulerhilfe Corporation's unaudited
financial statements as of October 31, 1998, and for the period then
ended (the "Interim Statements"), accompanied by the representation of
the SELLERS that such financial statements are (a) true, correct and
complete in all material respects, and (b) present fairly the financial
condition of each of the Schulerhilfe Entities as of such date and the
result of its operations for the period then ended.
4.3 GENERAL OBLIGATIONS.
-------------------
Each party shall, at the reasonable request of any other party, from
time to time and at any time and without further consideration, do,
execute, acknowledge and deliver, or cause to be done acts, deeds,
assignments, transfers, assumptions, conveyances, powers of attorney,
receipts, acknowledgments, acceptances, notarizations, filings and
assurances as may be necessary or convenient to procure for the party
so requesting, and its successors and assigns, or for aiding and
assisting in collecting and reducing to possession, any and all of the
Assets or otherwise to satisfy and perform the obligations of the
parties hereunder.
5. REPRESENTATIONS AND WARRANTIES OF SELLERS.
-----------------------------------------
SELLERS have submitted and will submit in performing this Agreement to
PURCHASERS several documents and information. SELLERS hereby represent,
warrant and covenant to PURCHASERS that such documents and information
are true and not misleading in any material respect and that they have
not omitted any statement necessary. There is no material
<PAGE>
-20-
fact adversely affecting the Schulerhilfe Business, which has not been
disclosed to PURCHASERS.
INDEPENDENT GUARANTEE AGREEMENT: SELLERS, by the way of an independent
-------------------------------
guarantee agreement and being jointly and severally liable, hereby
represent, warrant and covenant to PURCHASERS as follows:
5.1 ORGANIZATION AND EXISTENCE OF SCHULERHILFE CORPORATION
------------------------------------------------------
(a) Schulerhilfe Corporation is a limited liability company
registered in the Commercial Register of the Local Court in
Gelsenkirchen-Buer under the file no. HRB 1657, and is created
and validly existing under the laws of the Federal Republic of
Germany. SELLER 1 and SELLER 2 participate in the stated capital
of Schulerhilfe Corporation in the total amount of DM50,000.00
paid in full with shares in the nominal amounts of DM10,000.00
and DM15,000.00 each. SELLER 1 is the sole managing director of
Schulerhilfe Corporation.
(b) The articles of association and the entry of Schulerhilfe
Corporation in the Commercial Register of the Local Court in
Gelsenkirchen-Buer, both of which are attached as Schedule 5.1
------------
(b), correspond with the current state of Schulerhilfe
---
Corporation. There are no additional or ancillary agreements to
this shareholders agreement. All shareholders resolutions passed
by Schulerhilfe Corporation modifying the articles of association
are set forth in Schedule 5.1 (b). Further shareholders
----------------
resolutions, particularly those abrogating the shareholders
agreements fully or partly or giving another contents, do not
exist.
(c) The stated capital of the Schulerhilfe Corporation has been paid
in cash and in full as of today's date. Repayments of the assets
required for the preservation of the stated capital have not
occurred.
<PAGE>
-21-
5.2 SELLERS' POWER OF DISPOSING OF SHARES IN SCHULERHILFE CORPORATION.
-----------------------------------------------------------------
SELLER 1 and SELLER 2 are the lawful owners of the shares in
Schulerhilfe Corporation sold under this Agreement. The shares are
unencumbered of any rights of third parties. SELLER 1 and SELLER 2 are
authorized and able to dispose of the shares free and unencumbered.
There are particularly no rights of preemption of third parties or
other rights of preemption and agreements aiming at a transfer or
encumbrance of the shares.
5.3 ORGANIZATION AND EXISTENCE OF SCHULERHILFE PARTNERSHIP
------------------------------------------------------
(a) Schulerhilfe Partnership is a civil law partnership (Gesellschaft
burgerlichen Rechts) using the abbreviation "mbH" (mit
beschrankter Haftung - with limited liability) in the course of
business. Schulerhilfe Partnership is not registered in any
commercial register and is created and validly existing under the
laws of the Federal Republic of Germany.
(b) The articles of association of Schulerhilfe Partnership attached
as Schedule 5.3 (b) correspond with the current state of
----------------
Schulerhilfe Partnership. There are no additional or ancillary
agreements to this articles of association. All partnership
resolutions passed by Schulerhilfe Partnership modifying the
articles of association are set forth in Schedule 5.3 (b).
----------------
Further shareholders resolutions, particularly those abrogating
the articles of association fully or partly or giving another
contents, do not exist.
5.4 SELLERS' POWER OF DISPOSING INTEREST IN SCHULERHILFE PARTNERSHIP.
----------------------------------------------------------------
SELLLER 1 is the lawful owner of a ninety-seven and one-half percent
(97.5%) Interest in Schulerhilfe Partnership; SELLER 3 is the lawful
owner of the remaining two and one-half percent (2.5%) Interest in
Schulerhilfe Partnership. The Interest in Schulerhilfe Partnership is
unencumbered of any rights of third parties. SELLER 1 and SELLER 3 are
<PAGE>
-22-
authorized and able to dispose of the Interest free and unencumbered.
There are particularly no rights of preemption of third parties or
other rights of preemption and agreements aiming at a transfer or
encumbrance of the Interest. SELLER 1 and SELLER 3 particularly
represent and warrant that they are entitled to transfer to PARTNERSHIP
PURCHASER the Interest in Schulerhilfe Partnership.
WARRANTED CHARACTERISTICS: Furthermore, SELLERS, being jointly and
-------------------------
severally liable, hereby represent, warrant and covenant as a warranted
characteristic ("zugesicherte Eigenschaft") within the meaning of sec.
459 para.2 German Civil Code to PURCHASERS as follows:
5.5 TRANSFER OF ASSETS.
------------------
SELLERS warrant and represent that through the transfer of the interest
in the Schulerhilfe Partnership to the PARTNERSHIP PURCHASER, the
PARTNERSHIP PURCHASER acquires all right, title and interest of the
Schulerhilfe Partnership in and to the Assets including, without
limitation, the following:
(a) any and all real property, interests in real property and all
structures, improvements and buildings located thereon used by
the Schulerhilfe Partnership in the Schulerhilfe Business,
including: (i) all real property, interests therein and
improvements, buildings and structures shown as "Property, Plant
and Equipment" on the Schulerhilfe Partnership's balance sheet as
of December 31, 1997, however, with the exclusion of the
Schulerhilfe Business Headquarters as set forth in sec. 3.11
hereinbefore; (ii) the real property described in Schedule 5.14
-------------
(a); and (iii) all leaseholds, easements, rights of way, licenses
---
and other interests in real property used in the Schulerhilfe
Business, including, without limitation, all Realty Use Rights
(as defined in Paragraph 5.14 (c) hereinafter) and interests.
<PAGE>
-23-
(b) all computers, peripherals, printers, hardware, equipment,
vehicles, furniture, fixtures, office equipment and other
tangible personal property used by the Schulerhilfe Partnership
in the conduct and operation of the Schulerhilfe Business,
including, without limitation, all such assets shown as
"Property, Plant and Equipment" on the balance sheet as of
December 31, 1997 and all such assets described and identified in
Schedule 5.5 (b) (all of the aforesaid being hereinafter
----------------
collectively referred to as "Personal Property");
(c) all inventories and materials utilized by the Schulerhilfe
Partnership in the Schulerhilfe Business;
(d) all of the notes and accounts receivable arising from or as a
result of the operation of the Schulerhilfe Business by the
Schulerhilfe Partnership in existence at the close of business on
the last business day before today's date (all such notes and
accounts receivable, the "Receivables");
(e) all of the proprietary and confidential information used in the
conduct and operation of the Schulerhilfe Business by the
Schulerhilfe Partnership, including, without limitation: (i) any
and all computer software, source code, object code, programming
language or other system codes, instructions or algorithms for
individual software used in the Schulerhilfe Business by the
Schulerhilfe Partnership, and any and all rights of copyright
therein; (ii) any and all trade secrets, technical information,
know-how, ideas, designs, processes, procedures, discoveries,
patents, patent applications, and all improvements thereof, used
by the Schulerhilfe Partnership relating to the Schulerhilfe
Business, (iii) all data, files, books and records, customer
lists, and order information of the Schulerhilfe Partnership,
(iv) all of the trademarks, service marks and trade names used by
the Schulerhilfe Partnership in the conduct and operation of the
<PAGE>
-24-
Schulerhilfe Business (including, without limitation, all rights
to the name "Schulerhilfe"), all registrations and pending
applications therefor, and all goodwill associated therewith, and
(v) any and all other information, intellectual property rights
and intangible property rights relating to the Assets or the
operation of the Schulerhilfe Business by the Schulerhilfe
Partnership;
(f) all of the Schulerhilfe Partnership's right, title and interest
under the contracts, leases, licenses and agreements,
particularly the Franchise Agreements (as defined in sec. 5.28
(a) hereinafter), which are identified in Schedule 5.5 (f)
------------
attached hereto (collectively the "Assigned Contracts") to the
extent these Assigned Contracts are assignable without the
consent of the third party. For other contracts which require the
consent of the third party to be assigned and as to which the
third party refuses to consent to the assignment, the parties
shall put each other in a position as if the contract is
assigned;
(g) and all other assets of any nature whatsoever, both tangible and
intangible, of the Schulerhilfe Partnership used by the
Schulerhilfe Partnership in the Schulerhilfe Business, including
but not limited to any and all claims, choses in action, deposits
and prepaid amounts.
5.6 COMPLIANCE WITH AND ABSENCE OF INCONSISTENT OBLIGATIONS.
-------------------------------------------------------
To the extent the Schulerhilfe Assets or the Schulerhilfe Business or
the transactions contemplated herein might be adversely affected, no
Schulerhilfe Entity, nor any predecessor of any Schulerhilfe Entity, is
in default under or in violation of, and each Schulerhilfe Entity has
complied in all material respects with, all provisions of all
applicable laws, regulations, orders, injunctions, rulings and other
public restrictions. No governmental authority has required any change
in the Schulerhilfe Business or the Assets, or of the business or
assets of any Schulerhilfe Entity generally, which may affect the
Schulerhilfe Business or the
<PAGE>
-25-
Schulerhilfe Assets, which has not been fully implemented and paid for
by such Schulerhilfe Entity. Neither the execution and delivery of this
Agreement nor the consummation of the transactions contemplated herein
will result in a violation or breach of, or constitute a default under,
any term or provision of any mortgage, pledge, security agreement,
instrument, order, judgment, decree, rule, regulation, law, contract,
agreement or any other commitment or restriction to which any of the
Schulerhilfe Entities or the SELLERS are a party or by which any of
them or any of their respective assets is subject or bound, nor will
such actions result in (a) the creation of any claim, lien, charge or
encumbrance on any of the assets, shares or interest of any of the
Schulerhilfe Entities, (b) the acceleration or creation of any
obligation of the Schulerhilfe Entities which may impair SELLERS'
ability to perform this Agreement, or (c) the forfeiture of any right
or privilege of any of the Schulerhilfe Entities which may impair
SELLERS' ability to perform this Agreement. Neither Schulerhilfe
Corporation nor Schulerhilfe Partnership have entered into any
corporate relationships of any kind with third parties. Particularly,
the Schulerhilfe Entities have not entered into a participation or sub-
participation agreement with regard to another company. There are no
contracts between enterprises within the meaning of secs. 291, 292
German Stock Corporation Act as well as other agreements regarding
cooperations and no letters of support in favor of other enterprises.
Furthermore, there are no dormant partnerships, participating loans
(partiarische Darlehen) or other obligations with regard to
participations regarding earnings, regardless whether this refers to
the companies or individual participations. Furthermore, there have
been no such relationships, except the Intercompany Agreement
(Pachtvertrag) entered into between Schulerhilfe Partnership and
Schulerhilfe Corporation dated January 2, 1979, plus the amendment to
such tenancy agreement dated December 3, 1996, which are attached as
Schedule 5.6.
------------
<PAGE>
-26-
5.7 REQUIRED CONSENTS.
-----------------
The execution and delivery of this Agreement by the SELLERS and the
consummation of the transactions contemplated by this Agreement do not
require the consent, approval or action of, or any filing with or
notice to, any corporation, person or firm or any public, governmental
or judicial German authority except those listed on Schedule 5.7. With
------------
regard to SELLERS, there are no matrimonial restraints on disposal.
5.8 NO OVERINDEBTEDNESS OR INSOLVENCY OF SCHULERHILFE ENTITIES.
----------------------------------------------------------
Neither the Schulerhilfe Corporation nor the Schulerhilfe Partnership
are overindebted or insolvent. No requests for opening composition or
bankruptcy proceedings regarding their assets have been filed.
5.9 NO OVERINDEBTEDNESS OR INSOLVENCY OF SELLERS.
--------------------------------------------
With regard to the assets of SELLERS neither bankruptcy nor judicial
composition proceedings have been applied for, adjudicated or have not
been opened due to insufficiency of funds. There are no facts which
could justify the avoidance of the sale of the shares in Schulerhilfe
Corporation or the sale of the interest of Schulerhilfe Partnership
pursuant to the provisions of the German Bankruptcy Act and the German
Composition Proceedings Act as well as the German Avoidance Act.
SELLERS do not have liabilities in a material amount against third
parties.
5.10 NO TRANSFER OF ENTIRE ASSETS OF SELLERS.
---------------------------------------
The shares of SELLER 1 and SELLER 2 in Schulerhilfe Corporation or the
Interest of SELLER 1 and SELLER 3 in Schulerhilfe Partnership do not
consist of the entire or almost entire assets of any of the SELLERS.
5.11 LIABILITIES.
-----------
No Schulerhilfe Entity has any debt, liability or obligation of any
kind which relates to or may have any material effect on the
Schulerhilfe Assets or the Schulerhilfe Business after today's date,
whether or not accrued, whether known or unknown, contingent or
absolute or otherwise, including, without limitation: (a) liability for
any taxes related
<PAGE>
-27-
to the Schulerhilfe Business prior to today's date; or (b) products or
warranty liability related to the Schulerhilfe Business prior to
today's date arising from or by virtue of the sale or disposition of
personal property, or the rendering of services, of any type, kind or
variety, by any Schulerhilfe Entity or any of their predecessors; or
(c) unfunded liabilities related to the Schulerhilfe Business prior to
today's date with respect to any national or state mandated employee
social security or welfare program, plan or obligation or any Employee
Benefit Program, except (i) liabilities reflected in the Financial
Statements, (ii) liabilities incurred in the ordinary course of
business which are not in the aggregate materially adverse to the
Schulerhilfe Business or financial condition of the Schulerhilfe
Business, and (iii) liabilities reflected in the Interim Statements or
in Schedule 5.11.
-------------
5.12 AUTHORITY TO OWN ASSETS AND CONDUCT BUSINESS/POSSESSION OF PERMITS AND
----------------------------------------------------------------------
BUSINESS LICENSES.
-----------------
Each of the Schulerhilfe Entities is entitled to own or lease the
properties used or usable in connection with the Schulerhilfe Business
and to carry on the Schulerhilfe Business as and in the places where
such business is now conducted. Each of the Schulerhilfe Entities is
licensed or qualified in all jurisdictions where the character of the
property used in the Schulerhilfe Business or the nature of the
Schulerhilfe Business makes such license or qualification necessary.
The Schulerhilfe Entities, the individuals representing the
Schulerhilfe Entities as well as its personnel are in possession of all
necessary permits, particularly, but not limited to, those permits
required under applicable trade acts (Gewerbeordnungen), school
organization acts (Schulordnungsgesetze) and similar acts or
ordinances. All permits and business licenses granted and required for
conducting the Schulerhilfe Business and all such jurisdictions are
listed on Schedule 5.12. Schedule 5.12 lists (a) all locations where
------------- -------------
the Schulerhilfe Business is conducted and located or where any of the
Schulerhilfe Entities has an office or place of business or maintains
any inventory with respect to the Schulerhilfe Business, and (b) each
name under which each of the Schulerhilfe Entities, or any predecessor
of the
<PAGE>
-28-
Schulerhilfe Entities, has operated the Schulerhilfe Business during
the past two (2) years. Each Schulerhilfe Entity possesses all, and no
Schulerhilfe Entity is in violation of any, certificates, licenses,
permits and other authorizations from governmental or regulatory
authorities that are necessary for the ownership, maintenance and
operation by such Schulerhilfe Entity of the Schulerhilfe Business or
the Schulerhilfe Assets. SELLERS warrant and represent that the
information contained in Schedule 5.12 is correct and complete, that no
-------------
further permits and business licenses are required for conducting the
Schulerhilfe Business and that all such permits and business licenses
are not negatively affected by the transfer to PURCHASERS by this
Agreement.
5.13 TITLE TO ASSETS.
---------------
The Schulerhilfe Entities are the sole and unencumbered legal owners of
the property identified in the respective balance sheets as of December
31, 1997 as well as those laid down in their respective books (the
"Assets"). The Schulerhilfe Entities may freely dispose of the Assets.
There are no rights whatsoever of third parties with regard to the
Assets with the exclusion of those listed in the attached Schedule
--------
5.13. There is no property required for conducting the business being
----
owned by third parties. The Assets include all the properties and
assets necessary to conduct the Schulerhilfe Business as presently
conducted by the Schulerhilfe Entities; the Schulerhilfe Entities own
such Assets. Except as set forth on Schedule 5.13, the Schulerhilfe
-------------
Entities have good title to all such assets, real and personal, movable
and immovable, tangible and intangible, including, without limitation,
those reflected on the respective balance sheets as of December 31,
1997 (except as since sold or otherwise disposed of in the ordinary
course of business), free and clear of all claims, liens, charges,
mortgages, attachments and other encumbrances of any kind or character
except (a) those reflected on the respective balance sheets as of
December 31, 1997 as securing specified liabilities (with respect to
which no default exists), (b) any interim statements, (c) liens for
taxes not yet due and payable, and (d) minor imperfections of title and
liens and encumbrances, if any,
<PAGE>
-29-
which (i) are not substantial in amount, (ii) do not impair the
operations of the Schulerhilfe Business and (iii) have arisen only in
the ordinary course of business.
5.14 REAL PROPERTY INTERESTS.
-----------------------
With the exception of the Schulerhilfe Business Headquarters to be
transferred to SELLER 1 and SELLER 3 prior to signing this Agreement as
set forth in sec. 3.11 hereinbefore:
(a) Schedule 5.14 (a) sets forth and identifies, by street address or
-----------------
parcel number, each and every parcel of real property owned or
used by any of the Schulerhilfe Entities in the conduct of the
Schulerhilfe Business and whether such real property is owned or
leased (the ,,Real Property"). The excerpt from the land register
(Grundbuchauszug) set forth in Schedule 5.14 (a) corresponds with
-----------------
the current state of the Real Property.
(b) The SELLERS warrant and represent that the Schulerhilfe Entities
have good and marketable free title to all Real Property owned by
them, and all buildings, structures and other improvements
thereon and all fixtures thereto which are used or useable in
Schulerhilfe's Business free and clear of any lien, charge, claim
or encumbrance whatsoever, registered or not registered, except
as set forth on Schedule 5.14 (b).
-----------------
(c) All leases, easements, rights of way, licenses and other non-
ownership interests granted to or by the Schulerhilfe Entities in
any of the Real Property (collectively, the "Realty Use Rights")
are valid and effective in accordance with their terms. All such
Realty Use Rights are listed on Schedule 5.14 (c) which have not
-----------------
been modified in any material respect, and all of which are in
full force and effect in accordance with their terms. There is
not under any Realty Use Right: (i) any default or any claimed
default or event of default or event which with notice or lapse
of time, or both, would constitute a default by any of the
Schulerhilfe Entities
<PAGE>
and in respect of which SELLERS or the Schulerhilfe Entities have
not taken adequate steps to prevent a default on their part from
occurring, or (ii) any existing default by the other party to
such Realty Use Right or any event of default or event which with
notice or lapse of time, or both, would constitute a default by
the other party to such Realty Use Right. No Schulerhilfe Entity
has any claims, actions or causes of action against any other
party to a Realty Use Right for failure of such party to perform
and satisfy its duties and obligations under such Realty Use
Right. Each Schulerhilfe Entity is lawfully in possession of all
Real Property which such Schulerhilfe Entity uses under Realty
Use Rights. Each Schulerhilfe Entity is presently occupying the
entirety of each parcel of Real Property for the purposes set
forth in such Realty Use Right, except the lease agreements with
third parties set forth in Schedule 5.14 (c).
-----------------
(d) No Schulerhilfe Entity, nor any predecessor of any Schulerhilfe
Entity, has caused any work or improvements to be performed upon
or made to any Real Property for which there remains outstanding
any payment obligation that would or might serve as the basis for
any lien, charge, claim or encumbrance in favor of the person or
entity which performed the work.
(e) All requisite certificates of occupancy and other permits or
approvals legally required with respect to the improvements on
the Real Property and the occupancy and use thereof have been
obtained and are currently in effect.
(f) The interest of each Schulerhilfe Entity in and under each Realty
Use Right, to which such Schulerhilfe Entity is a party, is
unencumbered and subject to no present claim, contest, dispute,
action or threatened action or proceeding or otherwise other than
minor imperfections of title which do not have a material adverse
effect on the Realty Use Right.
<PAGE>
-31-
(g) Except as set forth in Schedule 5.14 (g), no rent or use fee has
-----------------
been paid in advance, no security deposit has been paid and no
brokerage commission is payable by any Schulerhilfe Entity with
respect to any Realty Use Right.
(h) No Schulerhilfe Entity has received any notice that the owner of
the Real Property used by such Schulerhilfe Entity under any
Realty Use Right has made any assignment, pledge or hypothecation
of such Realty Use Right or the rents or use fees due thereunder.
(i) Limited to real property owned by the Schulerhilfe Entities: All
of such real property is free from any use or occupancy
restrictions. No options have been granted to others to purchase,
lease or otherwise acquire any interest in the Real Property, or
any part thereof. The Schulerhilfe Entities have the exclusive
right of possession of each tract comprising the Real Property.
There is lawfully available to all of the Real Property water,
gas, sewers, electricity, and telephone service sufficient to
allow the Schulerhilfe Business to continue to be conducted as
heretofore conducted by the Schulerhilfe Entities, and all of
which are now being utilized by the Schulerhilfe Entities. All of
the Real Property has reasonably suitable access to existing
paved roads and other public rights of way. All of the Real
Property is free and clear of any liens, charges, claims,
security interests, encumbrances or other restrictions, whether
existing of record or otherwise, except the following (as to
which no event of default has occurred): (i) liens for taxes
which are not past due, (ii) easements for the erection and
maintenance of public utilities servicing the Real Property.
<PAGE>
-32-
(j) All of the real property not owned by the Schulerhilfe Entities
is in all respects fit for the purpose of conducting the
Schulerhilfe Business.
(k) Limited to the real property owned by the Schulerhilfe Entities:
The present use of and improvements on the Real Property are in
conformity in all material respects with all applicable laws,
rules, regulations and ordinances, including, without limitation,
all applicable ordinances and regulations and with all deed
restrictions of record, and there is no proposed change therein
that would affect any of the Real Property or its use. There
exists no conflict or dispute with any regulatory authority or
other person relating to any Real Property or the activities
thereon. All improvements on the Real Property are located within
the lot lines (and within the mandatory set-backs from such lot
lines established by applicable law) and not over areas subject
to easements or rights of way.
(l) Limited to the real property owned by the Schulerhilfe Entities:
All buildings and improvements on the Real Property are in good
condition and repair, suited for the operation of the
Schulerhilfe Business and are in compliance in all material
respects with all applicable laws, rules, regulations, and
ordinances, including, without limitation, all applicable
building, electrical, plumbing, gas, fire, environmental and
other regulatory laws, rules, regulations, and ordinances, and
the Schulerhilfe Entities have not received any notice of any
violation or alleged violation of any thereof. No toxic or
hazardous materials were used, to the best of SELLERS' knowledge,
in the construction or improvements of any building located on
the Real Property or otherwise used by the Schulerhilfe Entities
in connection with the Schulerhilfe Business.
(m) Limited to real property owned by the Schulerhilfe Entities:
Prior to the date hereof, the SELLERS have delivered to
PURCHASERS true and correct copies of all deeds, easements,
servitudes, mortgages
<PAGE>
-33-
and other documents relating to or affecting the title to the
Real Property.
5.15 TANGIBLE PROPERTY.
-----------------
All tangible property owned or used by the Schulerhilfe Entities is in
good working condition, subject to normal wear and tear, is suited for
the use intended and is operated in conformity with all applicable laws
and regulations. There are no defects or conditions which would cause
such tangible property to be or to become inoperable or unsafe if used
as intended.
5.16 FINANCIAL STATEMENTS.
--------------------
The unaudited financial statements of the Schulerhilfe Entities as of
December 31, 1995, December 31, 1996, and as of December 31, 1997 (the
"Reference Dates") which are attached as Schedule 5.16 have been
-------------
prepared in accordance with balance sheet regulations of German
commercial law observing the principle of formal and substantive
balance sheet continuity. They give an accurate and complete
presentation of the companies as of the Reference Dates with regard to
finances, assets and earnings. The present value of the Assets
complies, the present value of the liabilities complies at most, with
the respective balance estimates. With the exclusion of liabilities
resulting from the financial statements as of December 31, 1997 and as
to which liability reserves have been made and have been separately
identified, the companies do not have any liabilities to be recorded in
the balance sheets. SELLERS particularly warrant and represent that
there are no claims against any of the Schulerhilfe Entities resulting
from property civil liability whatsoever and that SELLERS are not aware
of liabilities to be expected other than those occurring in the
ordinary course of business. As to all uncertain liabilities which may
be taken into account because of possible losses resulting from pending
transactions and further facts resulting in a duty to provide for
liability reserves, sufficient liability reserves have been provided
for in the financial statements as of December 31, 1997. Particularly,
the financial statements as of December 31, 1997 and the Interim
<PAGE>
-34-
Statements provide for sufficient liability reserves with regard to tax
liabilities, official levies and social security contributions of the
Schulerhilfe Entities accruing. SELLERS warrant and represent that the
Schulerhilfe Entities have not created claims resulting from
operational pension duties. The receivables resulting from the
financial statements as of December 31, 1997 and from the financial
statements as of August 31, 1998 (as audited by Ernst & Young) are
existing, minus value adjustments identified, to the full extent
lawfully and are free of claims and encumbrances of third parties. They
have the economical value identified and may be collected on their
respective due dates. SELLERS particularly warrant and represent that
with the exclusion of those liabilities mentioned in the annual
statement as of December 31, 1997 and the Interim Statements, or as to
which liability reserves have been made or specifically entered, there
are no liabilities of the Schulerhilfe Entities.
5. 17 EMPLOYMENT AGREEMENTS.
---------------------
Schedule 5.17 lists all employees of all Schulerhilfe Entities and
-------------
others who on the date hereof perform services on a regular basis for
the Schulerhilfe Business, other than those persons who are solely
franchisees or their employees of the Schulerhilfe Entities (the
,,Schulerhilfe Employees"). To the extent required by law, the social
data (name, age, marital status, number and age of dependants, home
address, phone number, salary, length of service, maternity or
handicapped status, etc.) of the Schulerhilfe Employees are completely
and correctly entered into the respective personnel files kept at the
premises of the Schulerhilfe Entities. No key employee has terminated
his or her employment, nor plans not to continue his or her employment
with the Schulerhilfe Business after the date hereof. Except as set
forth in Schedule 5.17, no Schulerhilfe Entity is a party to any
-------------
collective bargaining agreement or any agreement, understanding,
protocol or arrangement of any kind with any union, labor organization
or other employee group or representative, whether public or private,
which relates to the Schulerhilfe Employees. With respect to all of the
<PAGE>
-35-
Schulerhilfe Employees, the Schulerhilfe Entities, and their respective
predecessors, have complied with (i) all laws and regulations
prohibiting or regulating discrimination in employment on the basis of
age, race, sex, nationality, religion or other prohibited
classifications, and (ii) all other labor and employment laws and
regulations applicable to persons employed in connection with the
Schulerhilfe Business, including, without limitation, those laws and
regulations relating to wages, hours, health, safety, employee welfare,
payment of payroll and social security taxes and other obligations,
maintenance of workers' compensation insurance, employee retirement and
redundancy and labor and employment relations. There are no further
liabilities of the Schulerhilfe Entities from any employment
relationships. The PURCHASERS are aware that tutoring teachers render
services to the Schulerhilfe Entities on a free-lance basis and are
being compensated on the basis and are being compensated on the basis
of invoices presented by such tutoring teachers. SELLERS do not
represent that this interpretation of the law will be accepted by the
German tax authorities in the future. The list of salaries set forth in
Schedule 5.17 does correctly state the complete salaries of the
-------------
managing director and the Schulerhilfe Employees of the head office as
of July 31, 1998. There have been no pay raises inbetween, with the
exception of those pay raises identified in the list of salaries
Schedule 5.17.
-------------
5.18 EMPLOYEE BENEFIT MATTERS.
------------------------
(a) Except as set forth in Schedule 5.18 (a) or as generally imposed
-------------
by applicable law, no Schulerhilfe Entity provides, and no
Schulerhilfe Entity is obligated to provide, directly or
indirectly, any benefits for employees of the Schulerhilfe
Business, including, without limitation, any social plan,
pension, profit sharing, retirement, bonus, medical or
hospitalization insurance, vacation or other employee benefits
under any practice, agreement, understanding, law or regulation.
<PAGE>
-36-
(b) Except as set forth in Schedule 5.18 (b) or as generally imposed
-----------------
by applicable law, the transactions contemplated in this
Agreement will not entitle any Schulerhilfe Employee to severance
or redundancy pay and will not accelerate the time of payment or
vesting or increase the amount of any compensation or other
benefits due to any Schulerhilfe Employee.
(c) Schedule 5.18 (c) summarizes the material terms of each employee
-----------------
benefit program (including, without limitation, retirement
benefit schemes, health insurance, pension insurance,
unemployment insurance, workmen's compensation, medical care,
holiday pay, bonuses and life insurance) maintained by or on
behalf of any Schulerhilfe Entity or any other party (including
any terminated pension programs) which covers or covered any
Schulerhilfe Employees (an "Employee Benefit Program"), other
than any Employee Benefit Program generally imposed or required
to be maintained pursuant to applicable law. With respect to each
Employee Benefit Program, except as expressly set forth in
Schedule 5.18 (c), no litigation, administrative or other
-----------------
proceeding or claim is pending, threatened or anticipated and
there are no outstanding requests for information by participants
or beneficiaries of such program. Each Employee Benefit Program
has been administered in compliance in all material respects with
all applicable laws and regulations and all required filings have
been made and notices have been given.
(d) Each Schulerhilfe Entity, or as the case may be each of its
predecessors, has timely made payment in full of all
contributions to each Employee Benefit Program which any of them
is or was obligated to make. There are no contributions declared
or payable by any Schulerhilfe Entity to any Employee Benefit
Program which have not been paid in full.
<PAGE>
-37-
5.19 INSURANCE.
---------
Schedule 5.19 lists all policies of insurance presently maintained by
-------------
or on behalf of the Schulerhilfe Entities with respect to the
Schulerhilfe Assets or the Schulerhilfe Business, all of which are and
will be maintained through today's date in full force and effect.
Schedule 5.19 lists all occurrences which may form the basis for a
-------------
claim by or on behalf of any Schulerhilfe Entity under any such policy
and for which no claim for payment has been made; such Schulerhilfe
Entity has not waived (either intentionally or inadvertently) its right
to make the related claim under any such policy. All premiums due on
the insurance policies listed in Schedule 5.19 have been paid and no
-------------
Schulerhilfe Entity, nor the SELLERS, have received any notice of
cancellation with respect thereto. No Schulerhilfe Entity has ever been
refused any insurance by any insurance carrier to which it has applied
for insurance with respect to the Schulerhilfe Assets, or the
Schulerhilfe Business except for legal expenses insurance
("Rechtsschutzversicherung") having been applied for approx. twenty
(20) years prior to today's date. SELLERS and PURCHASERS shall jointly
use their best efforts to transfer all insurance contracts protecting
the Schulerhilfe Business in order to obtain insurance coverage as of
today's date.
5.20 CONTRACTS.
---------
Schedule 5.20 lists all contracts and commitments with respect to the
-------------
Schulerhilfe Business (including but not limited to Assigned Contracts,
which are designated as such on Schedule 5.5 (f)), or by which the
----------------
Schulerhilfe Assets, or the Schulerhilfe Business may be bound or
affected (collectively, the "Contracts"), whether written or verbal,
including, without limitation, purchase and sales orders individually
involving a payment of more than DM100,000.00 (or the equivalent
thereof in the applicable local currency), employment contracts, labor
and union contracts, leases, shareholder agreements, employee benefit
programs, deferred compensation agreements, notes, bonds, mortgages,
security agreements, guaranties, security deposits, performance bonds,
letters of credit, loan agreements, currency exchange and interest rate
<PAGE>
-38-
positions or agreements, distribution agreements, sales representative
agreements, commercial agency agreements, warranties, contribution
agreements, brokers or agency contracts, powers of attorney and any
contract which involves payments in excess of an aggregate of
DM100,000.00 (or the equivalent thereof in the applicable local
currency) or has a term or requires performance over a period of more
than one year; except for (i) agreements for Realty Use Rights which
are set forth in Schedule 5.14 (c), (ii) Franchise Agreements set forth
-----------------
in Schedule 5.28; and (iii) non-material contracts with pupils relating
-------------
to the provision of services by the Schulerhilfe Entities.
Particularly, the Schulerhilfe Entities have not granted guarantees or
entered into guarantee agreements or have taken over further agreements
providing for a joint liability. The SELLERS have delivered to
PURCHASERS a true and correct copy of each written Contract (including
all amendments thereto), duly signed by both parties, where applicable,
and a summary of the material terms of each oral Contract. SELLERS
warrant and represent that all Contracts continue to be valid without
being terminated. No Schulerhilfe Entity, nor any predecessor of any
Schulerhilfe Entity, is in default or in arrears under any of the terms
of the Contracts. No condition exists or has occurred which with the
giving of notice or the lapse of time, or both, would constitute a
default or accelerate the maturity of, or otherwise modify, any
Contract. All Contracts are in full force and effect. No default by any
other party to any Contract is known or claimed by the SELLERS or the
Schulerhilfe Partnership to exist. No termination of any of the
Contracts has been threatened.
5.21 INTELLECTUAL PROPERTY RIGHTS.
----------------------------
The Schulerhilfe Entities are solely and without encumbrances permitted
to make use of all proprietary inventions, designs, ideas, processes,
methods, software, source and object code, trademarks, service marks,
trade names, copyrights and other know-how including the rights
resulting from applications made as well as all rights of use thereof
comprising the intellectual property of the Schulerhilfe Entities
<PAGE>
-39-
(collectively, the "Schulerhilfe Intellectual Property"). If any
Schulerhilfe Intellectual Property is owned or registered in the name
of any other person than Schulerhilfe Corporation or Schulerhilfe
Partnership, SELLERS shall provide that all such Schulerhilfe
Intellectual Property is or will be transferred to PARTNERSHIP
PURCHASER and that all documents required for such transfer have been
duly executed prior to today's date or will be executed thereafter.
There are neither claims of third parties with regard to these rights
nor have third parties claimed to have such rights. The Schulerhilfe
Entities have the means, rights and information required to conduct the
Schulerhilfe Business as currently conducted without incurring any
liability for license fees or royalties or any claims of infringement
of patents, trade secrets, copyrights, trademarks, service marks or
other proprietary rights. All hardware and software used in the
Schulerhilfe Business is set forth in Schedule 5.21. The operations of
-------------
the Schulerhilfe Entities on or after January 1, 2000, without
limitation to date, shall in no way be different than the operations
prior to that date, and the equipment, systems and software of the
Schulerhilfe Entities will be able to process, store, record and
present data containing dates in the year 2000 and thereafter, without
limitation to date, in the same manner as data containing dates prior
to the year 2000. There are no rights of third parties with respect to
any trademark, service mark, trade secret, trade name, software, source
or object code, copyright, patent, patent application, invention or
device, comprising a part of the Schulerhilfe Intellectual Property.
Without limiting the generality of the foregoing, all of the individual
software of the Schulerhilfe Business, its source code, its object code
and its programs are owned by the Schulerhilfe Entities, free and clear
of any claims of (i) any individual, including any present or former
employee of the Schulerhilfe Entities or (ii) any present or former
independent contractor to or of the Schulerhilfe Entities.
5.22 INVENTORIES AND MATERIALS.
-------------------------
The inventories and materials of the Schulerhilfe Entities reflected on
the December 31, 1997 balance sheets and the inventories and materials
produced or acquired by the Schulerhilfe Entities subsequent to the
date
<PAGE>
-40-
thereof consisted and will consist of items of a quality and
quantity usable in the ordinary course of the Schulerhilfe Business as
presently conducted by the Schulerhilfe Entities. Except as set forth
in Schedule 5.22, no Schulerhilfe Entity, nor any predecessor of any
-------------
Schulerhilfe Entity, has given or will give any express warranty with
respect to any goods or products sold or services performed in
connection with the Schulerhilfe Business prior to today's date.
5.23 TAXES.
-----
The Schulerhilfe Entities each have duly filed or will file when due
all tax returns and reports and all returns and reports of all
governmental units or authorities having jurisdiction, for all periods
prior to or including today's date, with respect to taxes imposed upon
any of the Assets, or taxes imposed on any Schulerhilfe Entity
(including but not limited to income, value added and payroll taxes)
which might create a lien or encumbrance on any of the Assets after
transfer thereof to any of the PURCHASER, impose upon PURCHASERS any
successor liability for taxes, or otherwise affect adversely the
ability of any of the PURCHASER to carry on the Schulerhilfe Business
after today's date, and each Schulerhilfe Entity has paid or will pay
when due all of such taxes. There are no waivers or agreements by any
Schulerhilfe Entity for the extension of time for the assessment of any
taxes. There is not now being presently conducted any audit or
examination of any tax return of any Schulerhilfe Entity by any
governmental unit or authority, nor is there presently proposed by any
such governmental unit or authority any deficiency or assessment of
taxes as a result of any audit or examination of any tax return of any
Schulerhilfe Entity. The PURCHASERS are aware of the fact that
Schulerhilfe Corporation is exempted from the payment of value added
tax and trade tax and that this tax exemption is under permanent
control of the competent authorities; the operator of the Schulerhilfe
Business is solely responsible to achieve this exemption after today's
date.
<PAGE>
-41-
5.24 ENVIRONMENTAL MATTERS.
---------------------
Each Schulerhilfe Entity, and each of its predecessors, has complied
with all laws and regulations relating to pollution and environmental
control which are applicable to, and the failure to comply with which
may have an adverse effect on, the Assets or the Schulerhilfe Business.
Schedule 5.24 describes (a) all permits, regulatory plans and
-------------
compliance schedules with respect to the Assets and the Schulerhilfe
Business, and (b) all litigation, investigations, inquiries and other
proceedings, rulings, orders or citations pending, threatened or
contemplated by government officials or others with respect to the
Schulerhilfe Business or the Assets, in each case relating to emissions
or the proper disposal of materials. The SELLERS have delivered to
PURCHASERS true and correct copies of all permits, regulatory plans and
compliance schedules described in Schedule 5.24. No Schulerhilfe Entity
-------------
is in violation of any of the permits, plans or compliance schedules
described in or required to be described in Schedule 5.24 or of any
-------------
law, regulation, order or decree regulating emissions or the proper
disposal of materials.
5.25 GOVERNMENT REPORTS.
------------------
Schedule 5.25 lists, and SELLERS have furnished PURCHASERS with true
-------------
and correct copies of all material reports filed since January 1, 1995
by the Schulerhilfe Entities which in any way relate to the Assets or
the Schulerhilfe Business with all government agencies and other
regulatory authorities with whom any Schulerhilfe Entity must file
significant reports (other than tax returns, payroll withholding and
similar reports), including, without limitation, agencies and
authorities regulating employment and labor relations, competition,
work place safety, taxes and environmental matters.
5.26 SOLE SOURCE SUPPLIERS.
---------------------
Schedule 5.26 lists the names and addresses of any sole source
-------------
suppliers of significant goods, equipment or services to any
Schulerhilfe Entity used in connection with the Schulerhilfe Business
(other than public utilities) with respect to which practical
alternative sources of
<PAGE>
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supply are not available. Except as set forth in Schedule 5.26 no sole
-------------
source supplier of the Schulerhilfe Business intends to discontinue or
substantially diminish or change its relationship with the Schulerhilfe
Business or the terms thereof, and no sole source supplier of the
Schulerhilfe Business intends to increase prices or charges for goods
or services presently supplied other than in the ordinary course of
business.
5.27 LEGAL DISPUTES.
--------------
Except as set forth in Schedule 5.27 there are no actions, suits,
-------------
claims, proceedings or other legal disputes pending or threatened
against, by or affecting the Schulerhilfe Business in any court or
before any arbitrator or governmental agency which could reasonably be
expected to have a material adverse effect on the operation of the
Schulerhilfe Business or on the Schulerhilfe Assets or which would
prevent or impede the transactions contemplated by this Agreement.
Except as set forth in Schedule 5.27 no Schulerhilfe Entity has been
-------------
charged with, or is under investigation with respect to any charge
concerning, any violation of any provision of any applicable law,
ordinance, regulation, order or governmental restriction, which could
reasonably be expected to have a material adverse effect on the
operation of the Schulerhilfe Business or on the Schulerhilfe Assets or
which would prevent or in any way impede the transactions contemplated
by this Agreement. There are no unsatisfied judgments against any
Schulerhilfe Entity or any orders, injunctions or consent decrees to
which any Schulerhilfe Entity is subject.
5.28 FRANCHISEES.
-----------
Schedule 5.28 sets forth the following information, all of which is
-------------
true and current in all material respects:
(a) names, addresses, and telephone numbers of all current and former
master and unit franchisees of the Schulerhilfe Business
("Franchisee" or "Franchisees"), indicating in each case whether
<PAGE>
-43-
the Franchisee is a master or unit franchisee and the country,
province or other territory covered by such franchise;
(b) a listing of any and all share capital or other equity interests
held by the Schulerhilfe Entities or SELLERS in and to any
Franchisee; and, a listing of any commitment of the Schulerhilfe
Entities or SELLERS, contingent or otherwise, to provide to any
franchisee, (a) any amount of equity or debt capital, or, (b) any
rights of any nature, including but not limited to any share of
revenues or profits in or other financial compensation from, any
other franchise or any territory in which a franchise may be
established at any future date;
(c) a listing of all 720 franchise agreements with all Franchisees
currently in effect (the "Franchisee Agreements"). A binder of
true and correct copies of the different versions of the
Franchise Agreements used has already been provided to
PURCHASERS' representatives;
(d) a listing of the current confidential operation manual or related
manuals, and other documents relating to the franchise operations
of the Schulerhilfe Business, true and correct copies of which
shall be provided to PURCHASERS promptly;
(e) copies of checklists or standard forms used in conjunction with
the Schulerhilfe Business' franchising program;
(f) a listing of all correspondence, along with any other relevant
information, with or between the Schulerhilfe Entities or SELLERS
and any Franchisee after December 31, 1997 relating to any
dispute in excess of DM10,000.00, any threatened termination of
any franchise agreement or any disputed interpretation of any
franchise agreement, true and correct copies of which shall be
provided to PURCHASERS promptly;
<PAGE>
-44-
(g) written details with respect to any Franchisee that, as of the
date hereof, is not in good standing or meeting the payment
condition under the franchise agreement.
5.29 FRANCHISEE TERMINATION.
----------------------
Schedule 5.29 sets forth a list of names and addresses of all
-------------
Franchisees which have left the franchise system of the Schulerhilfe
Business between January 1, 1996 and July 31, 1998, and shall deliver
an amended list containing the terminated Franchisees promptly; and,
SELLERS shall furnish PURCHASERS with a true and correct copy of all
termination agreements and releases with respect thereto.
5.30 NO FRANCHISEE ASSOCIATION
-------------------------
Except as set forth on Schedule 5.30, no franchise association (either
-------------
independent or company-sponsored) is currently in place. The
organization of a franchise association is not currently contemplated
by any Schulerhilfe Entity or by any of the Franchisees.
5.31 RELATED PARTY TRANSACTIONS.
--------------------------
Except as set forth in Schedule 5.31 SELLERS have not entered into any
-------------
contract with or for the benefit of (a) any party owning, or formerly
owning, beneficially or of record, directly or indirectly, any shares
of or any interest in any Schulerhilfe Entity, (b) any natural person
related by blood, adoption or marriage to any such party, (c) any
director, officer or similar representative of any Schulerhilfe Entity
or the SELLERS, or (d) any party or entity in which any of the
foregoing parties has, directly or indirectly, at least a five percent
(5%) beneficial interest (a "Related Party"). Without limiting the
generality of the foregoing, except as set forth in Schedule 5.31, no
-------------
Related Party, directly or indirectly, owns or controls any assets or
properties which are used in the Schulerhilfe Business and no Related
Party, directly or indirectly, engages in or has any significant
interest in or in connection with any business which is, or has been
within the last two (2) years, a competitor, customer or supplier of
any Schulerhilfe Entity or has done business with any Schulerhilfe
Entity or which currently sells or provides products or services which
are similar or related to the products or services sold or provided in
connection with the Schulerhilfe Business. The SELLERS do not engage in
or does not have any interest in or in connection with any business
which is, or
<PAGE>
-45-
has been, within the last five (5) years, a competitor, customer or
supplier of any Schulerhilfe Entity or has done business with any
Schulerhilfe Entity or which currently sells or provides products or
services which are similar or related to the products or services sold
or provided in connection with the Schulerhilfe Business.
5.32 CONDUCT OF THE SCHULERHILFE BUSINESS PENDING PAYMENT DATE
---------------------------------------------------------
Except as expressly otherwise provided herein, without the prior
written consent of PURCHASERS, between the date hereof and the Payment
Date, the SELLERS covenant that:
(a) Business in the Ordinary Course.
-------------------------------
The Schulerhilfe Business shall be conducted only in the ordinary
course.
(b) Extraordinary Agreements.
------------------------
No Schulerhilfe Entity will enter into any contract or other
arrangements for the Schulerhilfe Business except in the ordinary
course of business.
(c) Acquisition of Materials.
------------------------
Without limiting the generality of clause (b) above, no
Schulerhilfe Entity will enter into any contract or commitment
for the purchase of materials, products, services or supplies for
the Schulerhilfe Business, except contracts or commitments which
are entered into in the ordinary course of business at prices and
on terms which are consistent with the Schulerhilfe Entities'
prior operating
<PAGE>
-46-
practices and are necessary to enable the Schulerhilfe Entities
to conduct the Schulerhilfe Business' normal operations.
(d) Maintenance.
-----------
The Schulerhilfe Entities will maintain the Schulerhilfe Assets
in good operating condition, except for ordinary wear and tear
and for damage by fire or other casualty.
(e) Insurance.
---------
The Schulerhilfe Entities will maintain and keep in full force
and effect all of the insurance referred to in sec. 5.19 hereof
or other insurance equivalent thereto in all material respects.
(f) Encumbrances.
------------
The Schulerhilfe Entities will not sell, mortgage, lease, buy or
otherwise acquire, transfer or dispose of the Schulerhilfe
Assets, except (i) sales of inventory in the ordinary course of
business or (ii) in connection with retirement or replacement of
tangible personal property in the ordinary and necessary course
of the Schulerhilfe Business.
(g) Employee Compensation.
---------------------
No increase or decrease will be made in the compensation payable
or to become payable by any of the Schulerhilfe Entities to any
officer, employee or agent of the Schulerhilfe Business nor will
any employment, bonus or profit sharing arrangement be made to or
with any officer, employee or agent of the Schulerhilfe Business.
(h) Related Party Transactions.
--------------------------
SELLERS and the Schulerhilfe Entities will not enter into any
contract or transaction of the kind described in sec. 5.31 hereof
with any Related Party in connection with the Schulerhilfe
Business.
<PAGE>
-47-
(i) No Distributions.
----------------
Except as contemplated by Section 3.6 hereof, no Schulerhilfe
Entity shall pay or declare any dividend or other distribution
with respect to its capital stock, nor shall any Schulerhilfe
Entity, directly or indirectly, redeem, purchase or otherwise
acquire any of its capital stock, except in the ordinary course
of business consistent with past practices.
(j) Preservation of Business.
------------------------
SELLERS shall preserve the Schulerhilfe Business, keep available
the services of its present employees, preserve the goodwill of
the franchisees, suppliers, customers and others having business
relations with it. Without limiting the generality of the
foregoing, no franchise of the Schulerhilfe Business shall be
transferred, sold, assigned or terminated except in the ordinary
course.
5.33 EVENTS SINCE DECEMBER 31, 1997.
------------------------------
Except as expressly contemplated in this Agreement or as set forth in
Schedule 5.33 or specifically identified in the December 31, 1997
-------------
Balance Sheet:
(a) There has been no change in the Schulerhilfe Assets, the
Schulerhilfe Business or the liabilities, results of operations
or financial or other condition of the Schulerhilfe Business or
in the Schulerhilfe Business' relationships with Franchisees,
suppliers, customers, employees, lessors or others, other than
changes in the ordinary course of business.
(b) There has been no damage, destruction or loss, whether or not
insured against, to the Schulerhilfe Assets or the Schulerhilfe
Business which could reasonably be expected to have a material
adverse effect on the operation of the Schulerhilfe Business or
on the Schulerhilfe Assets.
<PAGE>
-48-
(c) The Schulerhilfe Business has been operated only in the ordinary
course of business with the diligence of a prudent businessman.
(d) The books, accounts and records of the Schulerhilfe Entities have
been maintained in the usual, regular and ordinary manner on a
basis consistent with prior practice. Modifications with regard
to the property, financial or earnings situation of the
Schulerhilfe Business with the exclusion of modifications
resulting from the ordinary course of business have not occurred.
SELLERS warrant and represent that such modifications resulting
from the ordinary course of business do not have a negative
impact on the Schulerhilfe Business. Particularly, SELLERS are
not aware of any circumstances or events, which may have a
negative impact on the profitability of the Schulerhilfe Business
or which may be extraordinarily burdensome or which may provide
for an obligation of the Schulerhilfe Entities to provide for
liability reserves in a balance sheet to be drawn as of today's
date.
(e) There has been no (i) increase in the compensation or in the rate
of compensation or commissions payable or to become payable by
any Schulerhilfe Entity to any director, officer, manager or
other employee, agent or other representative with an annual
salary exceeding DM50,000.00, (ii) general increase in the
compensation or in the rate of compensation payable or to become
payable to hourly employees or to any of the Schulerhilfe
Employees, (iii) employee of the Schulerhilfe Business hired at a
salary in excess of DM100,000.00 per annum (or the equivalent in
the currency in which any such person is compensated), or (iv)
payment of or commitment to pay any bonus, profit share or other
extraordinary compensation to any Schulerhilfe Employee. For
purposes of clause (ii) of the foregoing sentence, "general
increase" means any increase generally applicable to a class or
group of employees and does not include increases granted to
individual employees for merit, length of service, change in
<PAGE>
-49-
position or responsibility or other reasons applicable to
specific employees and not generally applicable to a class or
group of employees.
(f) There has been no labor dispute or any organizational effort by
any union or employee charge of any illegal labor or employment
practice involving any Schulerhilfe Entity or the Schulerhilfe
Business.
(g) There has been no mortgage, lien or other encumbrance or security
interest (other than liens for taxes not yet due and payable)
created on or in any asset of the Schulerhilfe Entities or
assumed by any Schulerhilfe Entity with respect to any such
asset.
(h) There has been no indebtedness or other liability or obligation
(whether absolute, accrued, contingent or otherwise) incurred by
any Schulerhilfe Entity with respect to the Schulerhilfe
Business, except in the ordinary course of business.
(i) No obligation or liability has been discharged or satisfied,
other than the liabilities reflected on the Financial Statements
and liabilities incurred since December 31, 1997 in the ordinary
course of business.
(j) There has been no sale, transfer or other disposition of any
asset of the Schulerhilfe Business, except sales for full value
in the ordinary course of business of (i) assets having a fair
market value in each case of less than DM10,000.00 and (ii)
inventory.
(k) There has been no amendment, termination or waiver of any
material right with respect to the Schulerhilfe Business under
any contract or agreement or governmental license, permit or
permission.
<PAGE>
-50-
(l) There have been no amendments or other corporate actions having
the effect of an amendment increasing past or future
contributions of any kind whatsoever to any Employee Benefit
Program, other than Employee Benefit Programs generally imposed
or required to be maintained pursuant to applicable law.
(m) No Schulerhilfe Entity has paid for or agreed to pay for, or
otherwise incurred, any expenses on behalf of the Schulerhilfe
Business with respect to any products or services which were
delivered or rendered to, or for the benefit of, or guaranteed
the indebtedness or any other obligation of, any person, firm or
corporation, including, without limitation, any Schulerhilfe
Entity or any Related Party, other than for the benefit of the
Schulerhilfe Business.
(n) SELLERS have not (i) paid any judgment resulting from any suit,
proceeding, arbitration, claim or counterclaim or (ii) made any
payment to any party of more than DM40,000.00 (or the equivalent
in the currency in which such payment was made) in settlement of
any suit, proceeding, arbitration, claim or counterclaim relating
to the Schulerhilfe Business or any of the Schulerhilfe Assets.
(o) No Schulerhilfe Entity has discontinued or determined to
discontinue the production or sale of any products or services
previously produced in connection with the Schulerhilfe Business
and representing more than one percent (1%) of the sales of the
Schulerhilfe Business during the fiscal periods covered by the
Financial Statements.
(p) There has not been paid nor declared by any Schulerhilfe Entity
any dividend or other distribution with respect to the capital
stock or shares of such Schulerhilfe Entity other than the
interim
<PAGE>
-51-
dividend for the financial year 1998 which has not exceeded the
regular earnings distributable since December 31, 1997, nor has
any Schulerhilfe Entity, directly or indirectly, redeemed,
purchased or otherwise acquired any of its capital stock or
shares.
6. INDEMNITIES.
-----------
6.1 INDEMNIFICATION OF PURCHASERS.
-----------------------------
(a) If any of the warranties and representations set forth in sec. 5
herein or any other information contained in this Agreement or in
any certificate, schedule, instrument or document delivered to
PURCHASERS by or on behalf of the SELLERS pursuant to the
provisions of this Agreement, is incorrect or incomplete or is
not complied with, the SELLERS shall jointly and severally
indemnify and hold harmless PURCHASERS against and in respect of
any and all losses, damages, liabilities, costs and expenses
suffered or incurred by any PURCHASER (including any entity
associated with PURCHASERS within the meaning of sec. 15 German
Stock Corporation Act, as well as their respective officers,
directors, employees and other agents and representatives).
(b) The right to withdraw from this Agreement pursuant to sec. 462
German Civil Code ("Wandlung") shall not be applicable.
6.2 LIMITATION OF CLAIMS.
--------------------
(a) The SELLERS' liability to indemnify PURCHASERS as joint and
several creditors for a non-fulfillment of any of the
representations and warranties set forth in sec. 5 of this
Agreement shall be limited as follows:
(i) PURCHASERS shall not be entitled to raise individual claims
in the amount of less than DM5,000.00 each, unless it is a
<PAGE>
-52-
repetitive claim based on the same economical or legal
issue;
(ii) PURCHASERS shall not be entitled to raise a claim if the
aggregate amount of claims (of both PURCHASERS jointly) is
less than DM250,000.00.
Such limitations shall not apply to SELLERS' obligations set
forth in secs. 2.4 (Sales Price Adjustments) and 2.6 (Taxes).
(b) SELLERS' total liability with regard to indemnification is
limited to DM28,000,000.00 minus fifty percent (50%) of the
amount by which the Earnout Payment as set forth in secs. 2.1
(b), 2.3, and 2.5 hereinbefore is lower than DM 21.5 (Twenty-One
and One-Half) million.
(c) The statute of limitations with regard to all claims of
PURCHASERS resulting out of or in connection with this Agreement
shall expire on October 31, 2001. With regard to Taxes, see sec.
2.6, the statute of limitations shall be six months following the
date the respective assessment becomes final.
6.3 EXCEPTIONS TO INDEMNIFICATIONS AND LIMITATION OF CLAIMS.
-------------------------------------------------------
None of the indemnifications or limitations set forth in secs. 6.1 and
6.2 hereinbefore, shall affect PURCHASERS' claims for performance
regarding an unencumbered transfer of the shares in Schulerhilfe
Corporation, the interest in Schulerhilfe Partnership nor those
obligations of SELLERS set forth in secs. 3, 4 and 5.1 through 5.4
herein. Furthermore, the claims of PURCHASERS resulting from fraudulent
conduct (secs. 123, 476 German Civil Code) and resulting from an
intentional tortious conduct or wilful damage contrary to public policy
(secs. 823 para.2, 826 German Civil Code) shall remain unaffected.
<PAGE>
-53-
6.4 DEFENSE OF CLAIMS.
-----------------
(a) If any claim or action by a third party arises for which the
SELLERS are liable for indemnification under the terms of this
Agreement, then the PURCHASERS shall notify the SELLERS promptly
(but not later than ten (10) business days prior to the time when
an answer or other responsive pleading or notice with respect to
such claim is required) after such claim or action arises and is
known to PURCHASERS, and shall give SELLERS a reasonable
opportunity:
(i) to take part in any examination of the respective books and
records;
(ii) to conduct any proceedings or negotiations in connection
therewith and necessary or appropriate to defend the
PURCHASER(S);
(iii) to take all other required steps or proceedings to settle
or defend any such claim or action; and
(iv) to employ counsel to contest any such claim or action in
the name of the PURCHASER(S) or otherwise.
If SELLERS wish to assume the defense of such claim or action, he
shall give written notice to the PURCHASER(S) within thirty (30)
days after notice from the PURCHASER(S) of such claim or action
(unless the claim or action reasonably requires a response in
less than thirty (30) days after the notice is given to SELLERS,
in which event they shall notify PURCHASER(S) at least five (5)
days prior to such reasonably required response date), and
SELLERS shall thereafter assume the defense of any such claim or
liability through counsel of its choosing (subject to the
PURCHASER(S) approval of such counsel, which approval will not
<PAGE>
-54-
be unreasonably withheld or delayed), shall be responsible for
the expenses of such defense, and shall be bound by the results
of its defense or settlement of claim to the extent it produces
damage or loss to the PURCHASER(S). The SELLERS shall not settle
any such claim without prior written notice to and consultation
with the PURCHASER(S). So long as the SELLERS are diligently
contesting any such claim in good faith, the PURCHASER(S) may pay
or settle such claim only at its/their own expense. The
indemnitee shall have the right to participate in such defense
with separate counsel, at its expense, provided that the
indemnitor shall direct and control any such defense.
(b) If SELLERS shall not assume the defense of, or if after so
assuming shall fail to diligently defend any such claim or
action, the PURCHASER(S) may take over the defense of such claim
or action in such manner as they may deem appropriate (provided
that SELLERS may participate in such defense at his own expense)
and the PURCHASER(S) may settle such claim or litigation on such
terms as they may in good faith deem appropriate, and SELLERS
shall reimburse the PURCHASER(S) as provided herein for the
amount of all expenses, legal and otherwise, reasonably and
necessarily incurred by the PURCHASER(S) in connection with the
defense against and settlement of such claim or action. If no
settlement of such claim or litigation is made, SELLERS shall
satisfy any judgment rendered with respect to such claim or in
such action, before PURCHASER(S) are required to do so, and pay
all expenses, legal or otherwise, reasonably and necessarily
incurred by the PURCHASER(S) in the defense of such claim or
litigation.
(c) If a judgment is rendered against any of the PURCHASER(S) in any
action covered by the indemnification hereunder, or any lien in
respect of such judgment attaches to any of the assets of any of
the PURCHASER(S), then SELLERS shall immediately upon such
<PAGE>
-55-
entry or attachment pay such judgment in full or discharge such
lien unless, at SELLERS' expense and direction, an appeal is
taken under which the execution of the judgment or satisfaction
of the lien is stayed. If and when a final judgment is rendered
in any such action, SELLERS shall forthwith pay such judgment or
discharge such lien before any of PURCHASER(S) is compelled to do
so.
7. COVENANT NOT TO COMPETE
-----------------------
7.1 NO COMPETITION.
--------------
The parties are aware of the fact that the market of the provision of
extracurricular educational services in Germany is currently dominated
by two main competitors and, therefore, extremely vulnerable. The
parties mutually agree that they intend to cooperate closely in the
future with regard to the Schulerhilfe Business. Therefore, in
consideration of the facts described hereinbefore and in consideration
of the substantial Sales Price paid by PURCHASERS to SELLERS, SELLERS
agree to refrain for a time period of ten (10) years from today's date
from engaging in any competition with the Schulerhilfe Business. They
shall be refrained from establishing or taking over or participating,
directly or indirectly, a competing enterprise, particularly the
provision of extracurricular educational services. Furthermore, SELLERS
shall refrain from any conduct or support - as employee or otherwise -
for a competing enterprise, particularly the provision of
extracurricular educational services. Within the scope of the business
of Schulerhilfe Corporation and Schulerhilfe Partnership they shall
refrain from engaging in any business for his own or another person's
account. The territorial application of this covenant not to compete
shall be the current member states of the European Union, Poland and
Switzerland as well as any other country where PURCHASERS are
conducting the Schulerhilfe Business during the term of this covenant
not to compete.
<PAGE>
-56-
7.2 CONTRACTUAL PENALTY.
-------------------
In case of any violation of this covenant not to compete upon
termination, a contractual penalty in the amount of DM450,000.00 (in
words: German Marks Fourhundred-and-fifty Thousand) shall be payable.
In case of a continuing violation (participation or conduct exceeding a
time period of one month) the contractual penalty has to be paid for
each month of the violating conduct. The payment of the contractual
penalty does not exempt SELLERS from observing the covenant not to
compete upon termination.
7.3 FURTHER CLAIMS OF PURCHASERS.
----------------------------
Further claims of PURCHASERS, such as claiming damages or claims for
injunctive relief, shall remain unaffected.
7.4 NO OFFSETTING.
-------------
It shall not be permitted to offset against any claims of PURCHASER
resulting from a violation of this covenant not to compete upon
termination (contractual penalty, damages, claims of all kinds).
8. PUBLICITY
---------
8.1 INFORMATION TO THE PUBLIC.
-------------------------
The public shall only be informed of this Agreement and its contents
following the explicit mutual coordination with regard to time, method
and contents of the publication.
8.2 STATUTORY RESTRICTIONS.
----------------------
The parties understand that mandatory statutory provisions may require
that some information regarding this Agreement and its contents has to
be submitted to some authorities despite the agreement between the
parties described in secs. 3.1 and 9 herein. Particularly, SELLERS are
aware of the fact and agrees to take into account that PURCHASERS are
part of a group of companies and that other companies of such group of
companies are publicly traded companies in the United States of America
<PAGE>
-57-
or elsewhere, and that announcements may be necessary or convenient to
comply with applicable securities laws, particularly with the rules and
regulations of the US Securities Exchange Commission, the US National
Association of Securities Dealers or any other applicable securities
commission, authority or association.
9. CONFIDENTIALITY
---------------
Both parties agree to keep confidential all business and operation
secrets of the respective other party as well as any further matters or
operations made known to such party in the course of the negotiations,
the signing and the performance of this Agreement. This relates
particularly, but not limited to, any information contained in any
statement, document, analysis, compilation, trade secret or other
business as well as proprietary information or any other similar
information submitted by one party. Each party shall provide that no
third parties, including its directors, officers, employees, agents,
representatives or affiliates reveal any such knowledge without the
prior written consent of the other party.
10. TERMINATION
-----------
10.1 RESCISSION RIGHT OF PURCHASERS.
------------------------------
This Agreement may be rescinded by PURCHASERS (Rucktrittsrecht) at any
time and at PURCHASERS' sole discretion, prior to the Payment Date upon
written notice to SELLERS, and, upon such termination of this
Agreement, PURCHASERS shall have no liability whatsoever to SELLERS
except as provided otherwise in this Agreement, but to retransfer the
Shares in SCHULERHILFE CORPORATION and the Interest in SCHULERHILFE
PARTNERSHIP.
10.2 CONTRACTUAL PENALTY.
-------------------
If PURCHASERS make use of their right pursuant to sec. 10.1
hereinbefore, however, due to SELLERS fault taking action having
<PAGE>
-58-
detrimental impact on the Schulerhilfe Business, SELLERS shall
indemnify PURCHASERS or associated enterprises within the meaning of
sec. 15 German Stock Corporation Act, from any and all expenses,
including, but not limited to, attorneys and consultants fees, incurred
in connection with entering into this Agreement, however, limited to a
maximum amount of US$ 700,000.00 (United States Dollars
Seven-hundred-thousand).
10.3 NO EFFECT ON CLAIMS FOR PERFORMANCE.
-----------------------------------
The aforementioned right of rescission of PURCHASERS - as well as any
other exclusion and/or limitation of SELLERS' liability contained in
this Agreement - shall not affect the PURCHASERS' claims set forth in
sec. 6.3 hereinbefore and any right of termination arising thereof.
10.4 OTHER EFFECTS OF TERMINATION FOR CERTAIN CAUSES.
-----------------------------------------------
Notwithstanding anything contained in this sec. 10 to the contrary, the
termination of this Agreement shall not (i) affect any claim hereunder
which accrued prior to the date of termination, or (ii) extinguish or
otherwise affect the obligations of PURCHASERS under secs. 3.1 and 9
herein.
11. EXPENSES
--------
11.1 GENERAL EXPENSES.
----------------
All expenses incurred by the respective party in connection with the
authorization, preparation, execution and performance of this Agreement
by the respective party, including, but not limited to, all fees and
expenses of agents, representatives, counsel and accountants for the
respective party, shall be paid by the respective party which has given
the respective instruction or which has caused such expenses.
<PAGE>
-59-
11.2 COSTS OF NOTARIAL DEEDS.
-----------------------
The costs of any notarial deed, notarized applications to commercial
registers required for the performance of this Agreement shall be paid
by SELLERS.
11.3 SALES AND TRANSFER TAXES
------------------------
The SELLERS shall be jointly and severally responsible for the payment
of all sales, excise, transfer, land transfer tax (Grunderwerbssteuer),
capital value added and similar taxes or fees imposed by any
governmental authority in connection with the sale and transfer of the
shares in Schulerhilfe Corporation and of the Interest in Schulerhilfe
Partnership.
12. MISCELLANEOUS
-------------
12.1 NOTICES
-------
All notices, requests, demands or other communications required or
permitted to be given or made under this Agreement shall be made in
writing and delivered personally or sent by mail, if given or made to a
location within the country in which it is dispatched, or by air mail
if given or made to a location outside the country from which it is
dispatched, or by express courier, or by facsimile transmission to the
intended recipient thereof at its address or facsimile number set out
below (or to such other address or facsimile number as any party may
from time to time duly notify the others). Any such notice, demand or
communication shall be deemed to have been duly given
(a) immediately, if delivered personally, or given or made by
confirmed facsimile; or
(b) the day after dispatch, if given or made by express courier to a
location within the country in which it is dispatched; or
(c) two (2) days after dispatch, if given or made by express courier
to a location outside the country from which it is dispatched; or
<PAGE>
-60-
(d) three (3) days after submitted by mail, if given or made by a
letter addressed to a location within the country in which it is
posted; or
(e) seven (7) days after submitted by air mail, if made or given by
letter addressed to a location outside the country in which it is
posted;
and in proving the same it shall be sufficient to show that receipt of
a facsimile was confirmed by the recipient. The addresses and facsimile
numbers of the parties for purposes of this Agreement are:
If to SELLERS:
Herrn Jurgen Gratze, or
Herrn Jurgen Birkner, or
Herrn Martin Mohr
Allmendenweg 10
45894 Gelsenkirchen
Facsimile No.: (+49)[0]209-36 06 221
With a copy to:
Feddersen Laule Scherzberg & Ohle Hansen Ewerwahn
Stiftstr. 9 - 17
D-60313 Frankfurt am Main
Facsimile No.: (+49) [0]69-28 26 15
Attn.: Prof. Dr. Gerhard Laule or
Dr. Ekkehard Moeser
<PAGE>
-61-
If to CORPORATION PURCHASER:
c/o Sylvan Learning Systems, Inc.
1000 Lancaster Street
Baltimore, Maryland 21202, USA
Facsimile No.: (+1)410-843-8060
Attn.: Robert W. Zentz, Esq.
Vice President, General Counsel
If to PARTNERSHIP PURCHASER:
c/o Sylvan Learning Systems, Inc.
1000 Lancaster Street
Baltimore, Maryland 21202, USA
Facsimile No.: (+1)410-843-8060
Attn.: Robert W. Zentz, Esq.
Vice President, General Counsel
With regard to CORPORATION PURCHASER and PARTNERSHIP PURCHASER with
copies to:
Paul, Hastings, Janofsky & Walker LLP
600 Peachtree Street, N.E., Suite 2400
Atlanta, Georgia 30308-2222, USA
Facsimile No.: (+1)404-815-2424
Attn.: Richard M. Asbill, Esq. or
W. Andrew Scott, Esq.
GORG Rechtsanwalte
Sachsenring 81
D-50677 Koln
Facsimile No.: (+49) [0]221-33 66 080
Attn.: Dr. Volker Schacht or
Dr. Christof Siefarth
<PAGE>
-62-
Any party may change the address to which notices, requests, demands or
other communications to such parties shall be delivered or mailed by
giving notice thereof to the other parties hereto in the manner
provided herein.
12.2 COUNTERPARTS
------------
This Agreement may be executed in any number of counterparts, each of
which shall be deemed an original, and all of which shall constitute
one and the same instrument.
12.3 AGREEMENT
---------
This Agreement supersedes all prior discussions and agreements between
the parties with respect to the subject matters covered hereby. This
Agreement shall not be altered or amended except by an instrument in
writing signed by or on behalf of the parties hereto, provided,
however, notarization is not required by law.
12.4 SUCCESSORS AND ASSIGNS.
----------------------
This Agreement shall be binding upon and for the benefit of the parties
and their respective heirs, beneficiaries, executors, successors and
assigns. SELLERS may not assign this Agreement without the prior
written consent of PURCHASERS. PURCHASERS may assign this Agreement or
any parts thereof, after duly informing SELLERS, to any entity of the
Sylvan group of companies.
12.5 SCHEDULES AND EXHIBITS.
----------------------
All schedules and exhibits attached to this Agreement shall constitute
an integral part of this Agreement.
12.6 HEADINGS.
--------
All headings as to the contents of this Agreement are inserted for
convenience and shall not be construed as a part of this Agreement or
as a limitation of the scope of any terms or provision of this
Agreement.
<PAGE>
-63-
12.7 DISPUTE RESOLUTION.
------------------
The contracting parties shall make all efforts to reach a friendly
understanding with regard to all possible differences resulting from
this Agreement by weighing their mutual interests and the mutual
advantages and disadvantages. If they are unable to reach a friendly
understanding, all disputes arising out of or in connection with this
Agreement shall be finally settled by German ordinary courts. The place
of venue shall be Cologne, Germany.
12.8 APPLICABLE LAW.
--------------
This Agreement and all claims resulting thereof, whether contractual,
in tort or otherwise, shall be exclusively governed by German
substantive law. The application of the United Nations Convention on
the International Sale of Goods (CISG) is explicitly excluded.
12.9 LANGUAGE OF THE AGREEMENT.
-------------------------
This Agreement is drafted in English and will be translated into German
(Exhibit 8). The English version shall be authoritative. However, the
---------
German version shall be agreed upon between Dr. Ekkehard Moeser and Dr.
Christof Siefarth until the Payment Date and will be used in case of
doubt for the purpose of interpretation.
12.10 PARTIAL INVALIDITY AND SEVERABILITY.
-----------------------------------
If any provision of this Agreement is rendered illegal, invalid or
unenforceable, this shall not affect the validity of the remaining
provisions of this Agreement. In this case the respective provision
shall be replaced by a provision which will implement the commercial
purpose of the illegal, invalid or unenforceable provision taking into
account what the parties would have agreed upon if they would have been
aware of the illegality, invalidness or unenforceability. The same
shall apply if this Agreement is incomplete.
<PAGE>
-64-
Place:_____________________ Place:_____________________
Date:______________________ Date:______________________
___________________________ ___________________________
SELLER 1 CORPORATION PURCHASER
___________________________ ___________________________
SELLER 2 PARTNERSHIP PURCHASER
___________________________
SELLER 3
<PAGE>
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LIST OF SCHEDULES
SCHEDULE SCHEDULE DESCRIPTION
-------- --------------------
1.4 Shareholders Resolution of Schulerhilfe
Corporation
3.8 List of Trademark Registrations and Trademark
Applications
3.11 Description and Liabilities of Schulerhilfe
Business Headquarters
5.1(b) Entry of Schulerhilfe Corporation in
Commercial Register and Articles of
Association of Schulerhilfe Corporation / All
Shareholders Resolutions of Schulerhilfe
Corporation
5.3(b) Articles of Association and Shareholders
Resolutions of Schulerhilfe Partnership
5.5(b) Personal Property
5.5(f) Assigned Contracts
5.6 Intercompany Agreement of January 2, 1979,
with amendments
5.7 Required Consents
5.11 Liabilities of Schulerhilfe Entities
5.12 Jurisdictions, Locations and Names of
Schulerhilfe Entities where the Schulerhilfe
Business is conducted / Permits and Business
Licenses
5.13 Exceptions to Title
5.14(a) Real Property
5.14(b) Exceptions to Real Property
<PAGE>
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5.14(c) Realty Use Rights / Third Party Lease
Agreements
5.14(g) Real Property Documents
5.16 Financial Statements
5.17 Social Data of Employees / Collective
Bargaining Agreements
5.18(a) Employee Benefits - Listing
5.18(b) Employee Benefits - Severance
5.18(c) Employee Benefits - Plans
5.19 Insurance
5.20 Contracts
5.21 Hardware and Software
5.22 Inventories and Materials
5.24 Environmental - Permits and Litigation
5.25 Government Reports
5.26 Sole Source Providers
5.27 Legal Disputes
5.28 Franchisees, Franchise Agreements and Related
Information
5.29 Franchise Terminations
5.30 Franchise Associations
5.31 Related Party Transactions
5.33 Events since December 31, 1997
<PAGE>
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LIST OF EXHIBITS
----------------
EXHIBIT REFERRED TO IN SEC. DESCRIPTION
------- ------------------ -----------
1 1.1 Schulerhilfe Corporation
Share Transfer Agreement
2 1.2 Schulerhilfe Partnership
Interest Transfer Agreement
3 3.3 Management Agreement with
SELLER 1
4 3.4 Employment Agreement with
SELLER 3
5 3.5 Consulting Agreement with
SELLER 2
6 3.8 Assignment of Trademark
Registrations and Trademark
Applications
7 3.12 Escrow Agreement
8 12.9 German Version of Agreement
<PAGE>
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INDEX OF DEFINITIONS
--------------------
SCHEDULE DEFINED TERM
- -------- ------------
2.4(d)(iii) Accounting Firm
2.4(c) Adjustment Date
5.13 Assets
5.5(f) Assigned Contracts
2.5 (a) Collected Franchise Fees
5.20 Contracts
2.4(a) Corporation Closing Date Working Capital
2.4(a) Corporation Minimum Working Capital
2.1 Earnout Payment
2.1 Earnout Stock
4.1(b) Effective Time
5.18(c) Employee Benefit Program
5.28 Franchisee
5.28(c) Franchise Agreements
2.5 (a) Franchise Centers
2.5 (a) Franchise Fees
1.1 Interest
4.2(e) Interim Statement
2.4(a) Partnership Closing Date Working Capital
2.4(a) Partnership Minimum Working Capital
<PAGE>
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2.2(a) Payment Date
5.5(b) Personal Property
5.14(a) Real Property
5.14(c) Realty Use Rights
5.5(d) Receivables
5.16 Reference Dates
5.31 Related Party
2.1 Sales Price
3.8 Schulerhilfe Assets
0.0 Schulerhilfe Business
3.11 Schulerhilfe Business Headquarters
0.0 Schulerhilfe Entities
5.21 Schulerhilfe Intellectual Property
1.1 Shares
2.4(a) Statements
2.2(b) Sylvan
2.2(b) Sylvan Common Stock
2.2(b) Sylvan CommonRestricted Stock
2.6 Taxes
3.9 Trademarks
2.4(b) Working Capital
<PAGE>
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TABLE OF CONTENTS
<TABLE>
<S> <C>
1. OBJECTS OF SALE................................................................................ 3
1.1 Sale of Shares in Schulerhilfe Corporation..................................................... 3
1.2 Sale of Interest in Schulerhilfe Partnership................................................... 3
1.3 Profit Participation........................................................................... 4
1.4 Corporate Consent.............................................................................. 4
2. SALES PRICE AND PAYMENT........................................................................ 4
2.1 Sales Price.................................................................................... 4
2.2 Payment of the fixed Sales Price............................................................... 5
2.3 Payment of the Earnout......................................................................... 6
2.4 Sales Price Adjustments/Equity Guarantee....................................................... 8
2.5 Determination of Earnout Payment............................................................... 11
2.6 Taxes.......................................................................................... 13
3. ADDITIONAL AGREEMENTS.......................................................................... 13
3.1 Confidentiality if Transactions are not Consummated............................................ 13
3.2 Cooperation.................................................................................... 14
3.3 Management Agreement with Seller 1............................................................. 15
3.4 Employment Agreement with SELLER 3............................................................. 15
3.5 Consulting Agreement with SELLER 2............................................................. 15
3.6 Distributions.................................................................................. 15
3.7 PURCHASER's Access and Inspection.............................................................. 16
3.8 Assignment of Trademark Registrations and Trademark Applications............................... 16
3.9 Restrictions from Disposing of Sylvan Restricted Stock and Earnout Stock....................... 17
3.10 Release from Restrictions of Sale of Sylvan Restricted Stock................................... 17
3.11 Exclusion of Schulerhilfe Business Headquarters................................................ 18
3.12 Escrow Account................................................................................. 18
4. ADDITIONAL OBLIGATIONS......................................................................... 18
4.1 Certificate of SELLERS......................................................................... 18
4.2 Interim Statements............................................................................. 19
4.3 General Obligations............................................................................ 19
5. REPRESENTATIONS AND WARRANTIES OF SELLERS...................................................... 19
5.1 Organization and Existence of Schulerhilfe Corporation......................................... 20
5.2 SELLERS' Power of Disposing of Shares in Schulerhilfe Corporation.............................. 21
5.3 Organization and Existence of Schulerhilfe Partnership......................................... 21
5.4 SELLERS' Power of Disposing Interest in Schulerhilfe Partnership............................... 21
5.5 Transfer of Assets............................................................................. 22
5.6 Compliance with and Absence of Inconsistent Obligations........................................ 24
5.7 Required Consents.............................................................................. 26
5.8 No Overindebtedness or Insolvency of Schulerhilfe Entities..................................... 26
5.9 No Overindebtedness or Insolvency of SELLERS................................................... 26
5.10 No Transfer of Entire Assets of SELLERS........................................................ 26
5.11 Liabilities.................................................................................... 26
5.12 Authority to Own Assets and Conduct Business/
Possession of Permits and Business Licenses.................................................... 27
5.13 Title to Assets................................................................................ 28
</TABLE>
<PAGE>
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<TABLE>
<S> <C>
5.14 Real Property Interests........................................................................ 29
5.15 Tangible Property.............................................................................. 33
5.16 Financial Statements........................................................................... 33
5.17 Employment Agreements.......................................................................... 34
5.18 Employee Benefit Matters....................................................................... 35
5.19 Insurance...................................................................................... 37
5.20 Contracts...................................................................................... 37
5.21 Intellectual Property Rights................................................................... 38
5.22 Inventories and Materials...................................................................... 39
5.23 Taxes.......................................................................................... 40
5.24 Environmental Matters.......................................................................... 41
5.25 Government Reports............................................................................. 41
5.26 Sole Source Suppliers.......................................................................... 41
5.27 Legal Disputes................................................................................. 42
5.28 Franchisees.................................................................................... 42
5.29 Franchisee Termination......................................................................... 44
5.30 No Franchisee Association...................................................................... 44
5.31 Related Party Transactions..................................................................... 44
5.32 Conduct of the Schulerhilfe Business Pending Payment Date...................................... 45
(a) Business in the Ordinary Course................................................................ 45
(b) Extraordinary Agreements....................................................................... 45
(c) Acquisition of Materials....................................................................... 45
(d) Maintenance.................................................................................... 46
(e) Insurance...................................................................................... 46
(f) Encumbrances................................................................................... 46
(g) Employee Compensation.......................................................................... 46
(h) Related Party Transactions..................................................................... 46
(i) No Distributions............................................................................... 47
(j) Preservation of Business....................................................................... 47
5.33 Events Since December 31, 1997................................................................. 47
6. INDEMNITIES.................................................................................... 51
6.1 Indemnification of PURCHASERS.................................................................. 51
6.2 Limitation of Claims........................................................................... 51
6.3 Exceptions to Indemnifications and Limitation of Claims........................................ 52
6.4 Defense of Claims.............................................................................. 53
7. COVENANT NOT TO COMPETE........................................................................ 55
7.1 No Competition................................................................................. 55
7.2 Contractual Penalty............................................................................ 56
7.3 Further Claims of PURCHASERS................................................................... 56
7.4 No Offsetting.................................................................................. 56
8. PUBLICITY...................................................................................... 56
8.1 Information to the Public...................................................................... 56
8.2 Statutory Restrictions......................................................................... 56
9. CONFIDENTIALITY................................................................................ 57
10. TERMINATION.................................................................................... 57
10.1 Rescission Right of PURCHASERS................................................................. 57
</TABLE>
<PAGE>
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<TABLE>
<S> <C>
10.2 Contractual Penalty............................................................................ 57
10.3 No Effect on Claims for Performance............................................................ 58
10.4 Other Effects of Termination for Certain Causes................................................ 58
11. EXPENSES....................................................................................... 58
11.1 General Expenses............................................................................... 58
11.2 Costs of Notarial Deeds........................................................................ 59
11.3 Sales and Transfer Taxes....................................................................... 59
12. MISCELLANEOUS.................................................................................. 59
12.1 Notices........................................................................................ 59
12.2 Counterparts................................................................................... 62
12.3 Agreement...................................................................................... 62
12.4 Successors and Assigns......................................................................... 62
12.5 Schedules and Exhibits......................................................................... 62
12.6 Headings....................................................................................... 62
12.7 Dispute Resolution............................................................................. 63
12.8 Applicable Law................................................................................. 63
12.9 Language of the Agreement...................................................................... 63
12.10 Partial Invalidity and Severability............................................................ 63
List of Schedules....................................................................................... 65
List of Exhibits........................................................................................ 67
Index of Definitions.................................................................................... 68
Table of Contents....................................................................................... 70
</TABLE>
<PAGE>
EXHIBIT 10.36
================================================================================
CREDIT AGREEMENT
among
SYLVAN LEARNING SYSTEMS, INC.,
VARIOUS BANKS,
NATIONSBANK, N.A.,
as SYNDICATION AGENT
and
BANKERS TRUST COMPANY,
as LEAD ARRANGER and
ADMINISTRATIVE AGENT
_______________________________
Dated as of December 23, 1998
_______________________________
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
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SECTION 1. Amount and Terms of Credit.................................................................. 1
1.01 The Commitments.............................................................................. 1
1.02 Minimum Amount of Each Borrowing............................................................. 3
1.03 Notice of Borrowing.......................................................................... 3
1.04 Disbursement of Funds........................................................................ 4
1.05 Notes........................................................................................ 5
1.06 Conversions.................................................................................. 6
1.07 Pro Rata Borrowings.......................................................................... 6
1.08 Interest..................................................................................... 6
1.09 Interest Periods............................................................................. 7
1.10 Increased Costs, Illegality, etc............................................................. 8
1.11 Compensation................................................................................. 10
1.12 Change of Lending Office..................................................................... 10
1.13 Replacement of Banks......................................................................... 10
1.14 Limitation on Additional Amounts, etc........................................................ 11
SECTION 2. Letters of Credit........................................................................... 12
2.01 Letters of Credit............................................................................ 12
2.02 Maximum Letter of Credit Outstandings; Final Maturities...................................... 12
2.03 Letter of Credit Requests; Minimum Stated Amount............................................. 13
2.04 Letter of Credit Participations.............................................................. 13
2.05 Agreement to Repay Letter of Credit Drawings................................................. 15
2.06 Increased Costs.............................................................................. 16
SECTION 3. Commitment Commission; Fees; Reductions of Commitment....................................... 17
3.01 Fees......................................................................................... 17
3.02 Voluntary Termination of Unutilized Commitments.............................................. 18
3.03 Mandatory Reduction of Commitments........................................................... 18
SECTION 4. Prepayments; Payments; Taxes................................................................ 20
4.01 Voluntary Prepayments........................................................................ 20
4.02 Mandatory Repayments......................................................................... 21
4.03 Method and Place of Payment.................................................................. 21
4.04 Net Payments................................................................................. 22
SECTION 5. Conditions Precedent to the Effective Date.................................................. 23
5.01 Execution of Agreement; Notes................................................................ 23
5.02 Officer's Certificate........................................................................ 24
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5.03 Opinions of Counsel.......................................................................... 24
5.04 Corporate Documents; Proceedings; etc........................................................ 24
5.05 Fees, etc.................................................................................... 24
5.06 Adverse Change, etc.......................................................................... 24
5.07 Litigation................................................................................... 25
5.08 Pledge Agreement............................................................................. 25
5.09 Subsidiaries Guaranty........................................................................ 26
5.10 Financial Statements; Projections............................................................ 26
5.11 Solvency Certificate......................................................................... 26
SECTION 6. Conditions Precedent to All Credit Events................................................... 26
6.01 Effective Date............................................................................... 26
6.02 No Default; Representations and Warranties................................................... 26
6.03 Notice of Borrowing; Letter of Credit Request................................................ 26
SECTION 7. Representations, Warranties and Agreements.................................................. 27
7.01 Status....................................................................................... 27
7.02 Power and Authority.......................................................................... 27
7.03 No Violation................................................................................. 28
7.04 Approvals.................................................................................... 28
7.05 Financial Statements; Financial Condition; Undisclosed Liabilities; Projections; etc......... 28
7.06 Litigation................................................................................... 29
7.07 True and Complete Disclosure................................................................. 30
7.08 Use of Proceeds; Margin Regulations.......................................................... 30
7.09 Tax Returns and Payments..................................................................... 30
7.10 Compliance with ERISA........................................................................ 31
7.11 The Pledge Agreement......................................................................... 32
7.12 Properties................................................................................... 32
7.13 Year 2000.................................................................................... 32
7.14 Subsidiaries................................................................................. 32
7.15 Compliance with Statutes, etc................................................................ 32
7.16 Investment Company Act....................................................................... 33
7.17 Public Utility Holding Company Act........................................................... 33
7.18 Environmental Matters........................................................................ 33
7.19 Labor Relations.............................................................................. 34
7.20 Patents, Licenses, Franchises and Formulas................................................... 34
7.21 Indebtedness.................................................................................. 34
7.22 Subordination Provisions..................................................................... 34
SECTION 8. Affirmative Covenants....................................................................... 34
8.01 Information Covenants........................................................................ 35
8.02 Books, Records and Inspections; Annual Meetings.............................................. 37
8.03 Maintenance of Property; Insurance........................................................... 37
8.04 Corporate Franchises......................................................................... 38
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8.05 Compliance with Statutes, etc................................................................ 38
8.06 Compliance with Environmental Laws........................................................... 38
8.07 ERISA........................................................................................ 38
8.08 End of Fiscal Years; Fiscal Quarters......................................................... 39
8.09 Payment of Taxes............................................................................. 40
8.10 Foreign Subsidiaries......................................................................... 40
8.11 Margin Stock................................................................................. 40
8.12 Year 2000.................................................................................... 40
8.13 Additional Guarantors and Additional Pledge Agreements....................................... 40
SECTION 9. Negative Covenants.......................................................................... 41
9.01 Liens........................................................................................ 41
9.02 Consolidation, Merger, Purchase or Sale of Assets, etc....................................... 43
9.03 Dividends.................................................................................... 46
9.04 Indebtedness................................................................................. 47
9.05 Advances, Investments and Loans.............................................................. 49
9.06 Transactions with Affiliates................................................................. 51
9.07 Capital Expenditures......................................................................... 51
9.08 Consolidated Interest Coverage Ratio......................................................... 52
9.09 Maximum Leverage Ratio....................................................................... 52
9.10 Consolidated Fixed Charge Coverage Ratio..................................................... 52
9.11 Minimum Consolidated Net Worth............................................................... 53
9.12 Limitation on Modifications of Certificate of Incorporation, By-Laws, etc and
Limitations on Payments and Modifications of Permitted
Designated Indebtedness................................................................... 53
9.13 Limitation on Certain Restrictions on Subsidiaries........................................... 53
9.14 Limitation on Issuance of Capital Stock...................................................... 54
9.15 Business..................................................................................... 54
9.16 Limitation on Creation of Subsidiaries....................................................... 54
SECTION 10. Events of Default.......................................................................... 54
10.01 Payments.................................................................................... 54
10.02 Representations, etc........................................................................ 55
10.03 Covenants................................................................................... 55
10.04 Default Under Other Agreements.............................................................. 55
10.05 Bankruptcy, etc............................................................................. 55
10.06 ERISA....................................................................................... 56
10.07 Pledge Agreement............................................................................ 56
10.08 Subsidiaries Guaranty....................................................................... 56
10.09 Judgments................................................................................... 57
10.10 Change of Control........................................................................... 57
SECTION 11. Definitions and Accounting Terms........................................................... 57
11.01 Defined Terms............................................................................... 57
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SECTION 12. The Administrative Agent................................................................... 76
12.01 Appointment................................................................................. 76
12.02 Nature of Duties............................................................................ 76
12.03 Lack of Reliance on the Administrative Agent................................................ 76
12.04 Certain Rights of the Administrative Agent.................................................. 77
12.05 Reliance.................................................................................... 77
12.06 Indemnification............................................................................. 77
12.07 The Administrative Agent in its Individual Capacity......................................... 77
12.08 Holders..................................................................................... 78
12.09 Resignation by the Administrative Agent..................................................... 78
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SCHEDULE I Revolving Loan Commitments
SCHEDULE II Bank Addresses
SCHEDULE III Subsidiaries
SCHEDULE IV Existing Indebtedness
SCHEDULE V Existing Liens
SCHEDULE VI Existing Investments
SCHEDULE VII Litigation
EXHIBIT A Notice of Borrowing
EXHIBIT B-1 Revolving Note
EXHIBIT B-2 Swingline Note
EXHIBIT C Letter of Credit Request
EXHIBIT D Section 4.04(b)(ii) Certificate
EXHIBIT E Opinion of Piper & Marbury L.L.P., Special Counsel to the
Credit Parties
EXHIBIT F Officers' Certificate
EXHIBIT G Pledge Agreement
EXHIBIT H Subsidiaries Guaranty
EXHIBIT I Solvency Certificate
EXHIBIT J Subordination Provisions
EXHIBIT K Assignment and Assumption Agreement
(iv)
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CREDIT AGREEMENT, dated as of December 23, 1998, among SYLVAN LEARNING
SYSTEMS, INC., a Maryland corporation (the "Borrower"), the Banks party hereto
from time to time, NATIONSBANK, N.A., as Syndication Agent, and BANKERS TRUST
COMPANY, as Lead Arranger and Administrative Agent (all capitalized terms used
herein and defined in Section 11 are used herein as therein defined).
W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, subject to and upon the terms and conditions set forth
herein, the Banks are willing to make available to the Borrower the respective
credit facilities provided for herein;
NOW, THEREFORE, IT IS AGREED:
SECTION 1. Amount and Terms of Credit.
--------------------------
1.01 The Commitments. (a) Subject to and upon the terms and
---------------
conditions set forth herein, each Bank severally agrees to make, at any time and
from time to time on and after the Effective Date and prior to the Final
Maturity Date, a revolving loan or revolving loans (each a "Revolving Loan" and,
collectively, the "Revolving Loans") to the Borrower, which Revolving Loans (i)
shall, at the option of the Borrower, be incurred and maintained as, and/or
converted into, Base Rate Loans or Eurodollar Loans, provided that, except as
--------
otherwise specifically provided in Section 1.10(b), all Revolving Loans
comprising the same Borrowing shall at all times be of the same Type, (ii) may
be repaid and reborrowed in accordance with the provisions hereof, (iii) shall
not exceed for any Bank at any time outstanding that aggregate principal amount
which, when added to the product of (x) such Bank's RL Percentage and (y) the
sum of (I) the aggregate amount of all Letter of Credit Outstandings (exclusive
of Unpaid Drawings which are repaid with the proceeds of, and simultaneously
with the incurrence of, the respective incurrence of Revolving Loans) at such
time and (II) the aggregate principal amount of all Swingline Loans (exclusive
of Swingline Loans which are repaid with the proceeds of, and simultaneously
with the incurrence of, the respective incurrence of Revolving Loans) then
outstanding, equals the Revolving Loan Commitment of such Bank at such time and
(iv) shall not exceed for all Banks at any time outstanding that aggregate
principal amount which, when added to the sum of (I) the aggregate amount of all
Letter of Credit Outstandings (exclusive of Unpaid Drawings which are repaid
with the proceeds of, and simultaneously with the incurrence of, the respective
incurrence of Revolving Loans) at such time and (II) the aggregate principal
amount of all Swingline Loans (exclusive of Swingline Loans which are repaid
with the proceeds of, and simultaneously with the incurrence of, the respective
incurrence of Revolving Loans) then outstanding, equals the Total Revolving Loan
Commitment at such time.
(b) Subject to and upon the terms and conditions set forth herein,
the Swingline Bank agrees to make, at any time and from time to time on and
after the Effective Date and prior to the Swingline Expiry Date, a revolving
loan or revolving loans (each a "Swingline Loan" and, collectively, the
"Swingline Loans") to the Borrower, which Swingline Loans (i) shall be made and
maintained as Base Rate Loans, (ii) may be repaid and reborrowed in accordance
<PAGE>
with the provisions hereof, (iii) shall not exceed in aggregate principal amount
at any time outstanding, when combined with the sum of (I) the aggregate
principal amount of all Revolving Loans then outstanding and (II) the aggregate
amount of all Letter of Credit Outstandings at such time, an amount equal to the
Total Revolving Loan Commitment at such time, and (iv) shall not exceed in
aggregate principal amount at any time outstanding the Maximum Swingline Amount.
Notwithstanding anything to the contrary contained in this Section 1.01(b), (x)
the Swingline Bank shall not be obligated to make any Swingline Loans at a time
when a Bank Default exists unless the Swingline Bank has entered into
arrangements satisfactory to it and the Borrower to eliminate the Swingline
Bank's risk with respect to the Defaulting Bank's or Banks' participation in
such Swingline Loans, including by cash collateralizing such Defaulting Bank's
or Banks' RL Percentage of the outstanding Swingline Loans and (y) the Swingline
Bank shall not make any Swingline Loan after it has received written notice from
the Borrower, any other Credit Party or the Required Banks stating that a
Default or an Event of Default exists and is continuing until such time as the
Swingline Bank shall have received written notice (I) of rescission of all such
notices from the party or parties originally delivering such notice or (II) of
the waiver of such Default or Event of Default by the Required Banks.
(c) On any Business Day, the Swingline Bank may, in its sole
discretion, give notice to the Banks that the Swingline Bank's outstanding
Swingline Loans shall be funded with one or more Borrowings of Revolving Loans
(provided that such notice shall be deemed to have been automatically given upon
--------
the occurrence of a Default or an Event of Default under Section 10.05 or upon
the exercise of any of the remedies provided in the last paragraph of Section
10), in which case one or more Borrowings of Revolving Loans constituting Base
Rate Loans (each such Borrowing, a "Mandatory Borrowing") shall be made on the
immediately succeeding Business Day by all Banks pro rata based on each Bank's
--- ----
RL Percentage (determined before giving effect to any termination of the
Revolving Loan Commitments pursuant to the last paragraph of Section 10) and the
proceeds thereof shall be applied directly by the Swingline Bank to repay the
Swingline Bank for such outstanding Swingline Loans. Each Bank hereby
irrevocably agrees to make Revolving Loans upon one Business Day's notice
pursuant to each Mandatory Borrowing in the amount and in the manner specified
in the preceding sentence and on the date specified in writing by the Swingline
Bank notwithstanding (i) the amount of the Mandatory Borrowing may not comply
with the Minimum Borrowing Amount otherwise required hereunder, (ii) whether any
conditions specified in Section 6 are then satisfied, (iii) whether a Default or
an Event of Default then exists, (iv) the date of such Mandatory Borrowing and
(v) the amount of the Total Revolving Loan Commitment at such time. In the
event that any Mandatory Borrowing cannot for any reason be made on the date
otherwise required above (including, without limitation, as a result of the
commencement of a proceeding under the Bankruptcy Code with respect to the
Borrower), then each Bank hereby agrees that it shall forthwith purchase (as of
the date the Mandatory Borrowing would otherwise have occurred, but adjusted for
any payments received from the Borrower on or after such date and prior to such
purchase) from the Swingline Bank such participations in the outstanding
Swingline Loans as shall be necessary to cause the Banks to share in such
Swingline Loans ratably based upon their respective RL Percentages (determined
before giving effect to any termination of the Revolving Loan Commitments
pursuant to the last paragraph of Section 10), provided that (x) all interest
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payable on the Swingline Loans shall be for the account of the Swingline Bank
until the date as of which the respective participation is required to
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be purchased and, to the extent attributable to the purchased participation,
shall be payable to the participant from and after such date and (y) at the time
any purchase of participations pursuant to this sentence is actually made, the
purchasing Bank shall be required to pay the Swingline Bank interest on the
principal amount of participation purchased for each day from and including the
day upon which the Mandatory Borrowing would otherwise have occurred to but
excluding the date of payment for such participation, at the overnight Federal
Funds Rate for the first three days and at the rate otherwise applicable to
Revolving Loans maintained as Base Rate Loans hereunder for each day thereafter.
1.02 Minimum Amount of Each Borrowing. The aggregate principal
--------------------------------
amount of each Borrowing of Revolving Loans or Swingline Loans shall not be less
than the Minimum Borrowing Amount applicable thereto. More than one Borrowing
may occur on the same date, but at no time shall there be outstanding more than
ten Borrowings of Eurodollar Loans; provided, however that the Borrower may
-------- -------
incur one additional Borrowing of Eurodollar Loans for every $10,000,000
increase in the Total Revolving Loan Commitment pursuant to Section 13.17.
1.03 Notice of Borrowing. (a) Whenever the Borrower desires to
-------------------
incur (x) Eurodollar Loans hereunder, the Borrower shall give the Administrative
Agent at the Notice Office at least three Business Days' prior notice of each
Eurodollar Loan to be incurred hereunder and (y) Base Rate Loans hereunder
(excluding Swingline Loans), the Borrower shall give the Administrative Agent at
the Notice Office at least one Business Day's prior notice of each Base Rate
Loan to be incurred hereunder, provided that (in each case) any such notice
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shall be deemed to have been given on a certain day only if given before 11:00
A.M. (New York time) on such day. Each such notice (each a "Notice of
Borrowing"), except as otherwise expressly provided in Section 1.10, shall be
irrevocable and shall be given by the Borrower in writing, or by telephone
promptly confirmed in writing, in the form of Exhibit A, appropriately completed
to specify the aggregate principal amount of the Revolving Loans to be incurred
pursuant to such Borrowing, the date of such Borrowing (which shall be a
Business Day), and whether the Revolving Loans being incurred pursuant to such
Borrowing are to be initially maintained as Base Rate Loans or, to the extent
permitted hereunder, Eurodollar Loans and, if Eurodollar Loans, the initial
Interest Period to be applicable thereto. The Administrative Agent shall
promptly give each Bank notice of such proposed Borrowing, of such Bank's
proportionate share thereof and of the other matters required by the immediately
preceding sentence to be specified in the Notice of Borrowing.
(b)(i) Whenever the Borrower desires to incur Swingline Loans
hereunder, the Borrower shall give the Swingline Bank and the Administrative
Agent no later than 1:00 P.M. (New York time) on the date that a Swingline Loan
is to be incurred hereunder, written notice or telephonic notice promptly
confirmed in writing of each Swingline Loan to be incurred hereunder. Each such
notice shall be irrevocable and specify in each case (A) the date of Borrowing
(which shall be a Business Day) and (B) the aggregate principal amount of the
Swingline Loans to be incurred pursuant to such Borrowing.
(ii) Mandatory Borrowings shall be made upon the notice specified in
Section 1.01(c), with the Borrower irrevocably agreeing, by its incurrence of
any Swingline Loan, to the making of the Mandatory Borrowings as set forth in
Section 1.01(c).
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(c) Without in any way limiting the obligation of the Borrower to
confirm in writing any telephonic notice of any Borrowing or prepayment of
Loans, the Administrative Agent or the Swingline Bank, as the case may be, may
act without liability upon the basis of telephonic notice of such Borrowing or
prepayment, as the case may be, believed by the Administrative Agent or the
Swingline Bank, as the case may be, in good faith to be from the Chairman of the
Board, the Chief Executive Officer, the President, a Senior Vice-President, the
Chief Financial Officer, a Vice-President, the Treasurer or any Assistant
Treasurer of the Borrower, or from any other authorized officer of the Borrower
designated in writing by any of the foregoing officers of the Borrower to the
Administrative Agent as being authorized to give such notices, prior to receipt
of written confirmation. In each such case, the Borrower hereby waives the
right to dispute the Administrative Agent's or Swingline Bank's record of the
terms of such telephonic notice of such Borrowing or prepayment of Loans, as the
case may be, absent manifest error.
(d) Notwithstanding the foregoing provisions of this Section 1.03,
the Borrower and the Swingline Bank may from time to time, upon prompt written
notice to the Administrative Agent, agree to make a Swingline Loan pursuant to
an "auto-borrow" and "zero balance" or other similar arrangement, subject
however to the conditions and limitations relating to the Swingline Loans set
forth herein.
1.04 Disbursement of Funds. No later than 12:00 Noon (New York time)
---------------------
on the date specified in each Notice of Borrowing (or (x) in the case of
Swingline Loans, no later than 3:00 P.M. (New York time) on the date specified
pursuant to Section 1.03(b)(i) or (y) in the case of Mandatory Borrowings, no
later than 1:00 P.M. (New York time) on the date specified in Section 1.01(c)),
each Bank will make available its pro rata portion (determined in accordance
--- ----
with Section 1.07) of each such Borrowing requested to be made on such date (or
in the case of Swingline Loans, the Swingline Bank will make available the full
amount thereof). All such amounts will be made available in Dollars and in
immediately available funds at the Payment Office, and, except for Revolving
Loans made pursuant to a Mandatory Borrowing, the Administrative Agent (or the
Swingline Lender, as the case may be) will make available to the Borrower at the
Payment Office the aggregate of the amounts so made available by the Banks.
Unless the Administrative Agent shall have been notified by any Bank prior to
the date of Borrowing that such Bank does not intend to make available to the
Administrative Agent such Bank's portion of any Borrowing to be made on such
date, the Administrative Agent may assume that such Bank has made such amount
available to the Administrative Agent on such date of Borrowing and the
Administrative Agent may (but shall not be obligated to), in reliance upon such
assumption, make available to the Borrower a corresponding amount. If such
corresponding amount is not in fact made available to the Administrative Agent
by such Bank, the Administrative Agent shall be entitled to recover such
corresponding amount on demand from such Bank. If such Bank does not pay such
corresponding amount forthwith upon the Administrative Agent's demand therefor,
the Administrative Agent shall promptly notify the Borrower and the Borrower
shall immediately pay such corresponding amount to the Administrative Agent.
The Administrative Agent also shall be entitled to recover on demand from such
Bank or the Borrower, as the case may be, interest on such corresponding amount
in respect of each day from the date such corresponding amount was made
available by the Administrative Agent to the Borrower until the date such
corresponding amount is recovered by the Administrative Agent, at a rate per
annum equal to (i) if recovered from such Bank, at the overnight Federal Funds
Rate
-4-
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for the first three days and at the rate of interest otherwise applicable to the
respective Borrowing for each day thereafter and (ii) if recovered from the
Borrower, the rate of interest applicable to the respective Borrowing, as
determined pursuant to Section 1.08. Nothing in this Section 1.04 shall be
deemed to relieve any Bank from its obligation to make Loans hereunder or to
prejudice any rights which the Borrower may have against any Bank as a result of
any failure by such Bank to make Loans hereunder.
1.05 Notes. (a) The Borrower's obligation to pay the principal of,
-----
and interest on, the Loans made by each Bank shall be evidenced in the Register
maintained by the Administrative Agent pursuant to Section 13.15 and shall, if
requested by such Bank, also be evidenced (i) if Revolving Loans, by a
promissory note duly executed and delivered by the Borrower to each Bank
substantially in the form of Exhibit B-1, with blanks appropriately completed in
conformity herewith (each a "Revolving Note" and, collectively, the "Revolving
Notes") and (ii) if Swingline Loans, by a promissory note duly executed and
delivered by the Borrower to the Swingline Bank substantially in the form of
Exhibit B-2, with blanks appropriately completed in conformity herewith (the
"Swingline Note").
(b) The Revolving Note issued to each Bank shall (i) be executed by
the Borrower, (ii) be payable to such Bank or its registered assigns and be
dated the Effective Date (or, if issued after the Effective Date, be dated the
date of the issuance thereof), (iii) be in a stated principal amount equal to
the Revolving Loan Commitment of such Bank (or, if issued after the termination
thereof, be in a stated principal amount equal to the outstanding Revolving
Loans of such Bank at such time) and be payable in the outstanding principal
amount of the Revolving Loans evidenced thereby, (iv) mature on the Final
Maturity Date, (v) bear interest as provided in the appropriate clause of
Section 1.08 in respect of the Base Rate Loans and Eurodollar Loans, as the case
may be, evidenced thereby, (vi) be subject to voluntary prepayment as provided
in Section 4.01, and mandatory repayment as provided in Section 4.02, and (vii)
be entitled to the benefits of this Agreement and the other Credit Documents.
(c) The Swingline Note issued to the Swingline Bank shall (i) be
executed by the Borrower, (ii) be payable to the Swingline Bank or its
registered assigns and be dated the Effective Date, (iii) be in a stated
principal amount equal to the Maximum Swingline Amount and be payable in the
outstanding principal amount of the Swingline Loans evidenced thereby from time
to time, (iv) mature on the Swingline Expiry Date, (v) bear interest as provided
in the appropriate clause of Section 1.08 in respect of the Base Rate Loans
evidenced thereby, (vi) be subject to voluntary prepayment as provided in
Section 4.01, and mandatory repayment as provided in Section 4.02, and (vii) be
entitled to the benefits of this Agreement and the other Credit Documents.
(d) Each Bank will note on its internal records the amount of each
Loan made by it and each payment in respect thereof and will prior to any
transfer of any of its Notes endorse on the reverse side thereof the outstanding
principal amount of Loans evidenced thereby. Failure to make any such notation
or any error in such notation shall not affect the Borrower's obligations in
respect of such Loans.
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1.06 Conversions. The Borrower shall have the option to convert, on
-----------
any Business Day, all or a portion equal to at least the Minimum Borrowing
Amount of the outstanding principal amount of Revolving Loans made pursuant to
one or more Borrowings of one or more Types of Revolving Loans into a Borrowing
of another Type of Revolving Loan, provided that, (i) except as otherwise
--------
provided in Section 1.10(b), Eurodollar Loans may be converted into Base Rate
Loans only on the last day of an Interest Period applicable to the Revolving
Loans being converted and no such partial conversion of Eurodollar Loans shall
reduce the outstanding principal amount of such Eurodollar Loans made pursuant
to a single Borrowing to less than the Minimum Borrowing Amount applicable
thereto, (ii) unless the Required Banks otherwise agree, Base Rate Loans may
only be converted into Eurodollar Loans if no Default or Event of Default is in
existence on the date of such conversion, and (iii) no conversion pursuant to
this Section 1.06 shall result in a greater number of Borrowings of Eurodollar
Loans than is permitted under Section 1.02. Each such conversion shall be
effected by the Borrower by giving the Administrative Agent at the Notice Office
prior to 11:00 A.M. (New York time) at least three Business Days' prior notice
(each a "Notice of Conversion") specifying the Revolving Loans to be so
converted, the Borrowing or Borrowings pursuant to which such Revolving Loans
were made and, if to be converted into Eurodollar Loans, the Interest Period to
be initially applicable thereto. The Administrative Agent shall give each Bank
prompt notice of any such proposed conversion affecting any of its Revolving
Loans. Swingline Loans may not be converted pursuant to this Section 1.06.
1.07 Pro Rata Borrowings. All Borrowings of Revolving Loans under
-------------------
this Agreement shall be incurred from the Banks pro rata on the basis of their
--- ----
Revolving Loan Commitments. It is understood that no Bank shall be responsible
for any default by any other Bank of its obligation to make Revolving Loans
hereunder and that each Bank shall be obligated to make the Revolving Loans
provided to be made by it hereunder, regardless of the failure of any other Bank
to make its Revolving Loans hereunder.
1.08 Interest. (a) The Borrower agrees to pay interest in respect
--------
of the unpaid principal amount of each Base Rate Loan from the date of Borrowing
thereof until the earlier of (i) the maturity thereof (whether by acceleration
or otherwise) and (ii) the conversion of such Base Rate Loan to a Eurodollar
Loan at a rate per annum which shall be equal to the sum of the Applicable Base
Rate Margin plus the Base Rate each as in effect from time to time.
(b) The Borrower agrees to pay interest in respect of the unpaid
principal amount of each Eurodollar Loan from the date of Borrowing thereof
until the earlier of (i) the maturity thereof (whether by acceleration or
otherwise) and (ii) the conversion of such Eurodollar Loan to a Base Rate Loan
at a rate per annum which shall, during each Interest Period applicable thereto,
be equal to the sum of the Applicable Eurodollar Rate Margin plus the Eurodollar
Rate for such Interest Period.
(c) Overdue principal and, to the extent permitted by law, overdue
interest in respect of each Loan and any other overdue amount payable hereunder
shall, in each case, bear interest at a rate per annum equal to the greater of
(x) the rate which is 2% in excess of the rate then borne by such Loans and (y)
the rate which is 2% in excess of the rate otherwise applicable
-6-
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to Base Rate Loans from time to time. Interest which accrues under this Section
1.08(c) shall be payable on demand.
(d) Accrued (and theretofore unpaid) interest shall be payable (i)
in respect of each Base Rate Loan (other than Swingline Loans), quarterly in
arrears on each Quarterly Payment Date, (ii) in respect of Swingline Loans,
monthly in arrears on the first day of each month, (iii) in respect of each
Eurodollar Loan, on the last day of each Interest Period applicable thereto and,
in the case of an Interest Period in excess of three months, on each date
occurring at three month intervals after the first day of such Interest Period,
and (iv) in respect of each Loan, on any repayment or prepayment (on the amount
repaid or prepaid), at maturity (whether by acceleration or otherwise) and,
after such maturity, on demand, provided that, in the case of Base Rate Loans,
--------
interest shall not be payable pursuant to preceding clause (iv) at the time of
any repayment or prepayment thereof (but shall otherwise be payable as provided
in preceding clause (i) or (ii), as the case may be) unless the respective
repayment or prepayment is made in conjunction with a permanent reduction of the
Total Revolving Loan Commitment.
(e) Upon each Interest Determination Date, the Administrative Agent
shall determine the Eurodollar Rate for each Interest Period applicable to the
respective Eurodollar Loans and shall promptly notify the Borrower and the Banks
thereof. Each such determination shall, absent manifest error, be final and
conclusive and binding on all parties hereto.
1.09 Interest Periods. At the time the Borrower gives any Notice of
----------------
Borrowing or Notice of Conversion in respect of the making of, or conversion
into, any Eurodollar Loan (in the case of the initial Interest Period applicable
thereto) or on the third Business Day prior to the expiration of an Interest
Period applicable to such Eurodollar Loan (in the case of any subsequent
Interest Period), the Borrower shall have the right to elect, by giving the
Administrative Agent notice thereof, the interest period (each an "Interest
Period") applicable to such Eurodollar Loan, which Interest Period shall, at the
option of the Borrower, be a one, two, three or six-month period, provided that:
--------
(i) all Eurodollar Loans comprising a Borrowing shall at all times
have the same Interest Period;
(ii) the initial Interest Period for any Eurodollar Loan shall
commence on the date of Borrowing of such Eurodollar Loan (including the
date of any conversion thereto from a Base Rate Loan) and each Interest
Period occurring thereafter in respect of such Eurodollar Loan shall
commence on the day on which the next preceding Interest Period applicable
thereto expires;
(iii) if any Interest Period for a Eurodollar Loan begins on a day
for which there is no numerically corresponding day in the calendar month
at the end of such Interest Period, such Interest Period shall end on the
last Business Day of such calendar month;
(iv) if any Interest Period for a Eurodollar Loan would otherwise
expire on a day which is not a Business Day, such Interest Period shall
expire on the next succeeding Business Day; provided, however, that if any
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Interest Period for a Eurodollar Loan would
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otherwise expire on a day which is not a Business Day but is a day of the
month after which no further Business Day occurs in such month, such
Interest Period shall expire on the next preceding Business Day;
(v) unless the Required Banks otherwise agree, no Interest Period
may be selected at any time when a Default or an Event of Default is then
in existence; and
(vi) no Interest Period in respect of any Borrowing of Eurodollar
Loans shall be selected which extends beyond the Final Maturity Date.
If upon the expiration of any Interest Period applicable to a
Borrowing of Eurodollar Loans, the Borrower has failed to elect, or is not
permitted to elect, a new Interest Period to be applicable to such Eurodollar
Loans as provided above, the Borrower shall be deemed to have elected to convert
such Eurodollar Loans into Base Rate Loans effective as of the expiration date
of such current Interest Period.
1.10 Increased Costs, Illegality, etc. (a) In the event that any
---------------------------------
Bank shall have determined (which determination shall, absent manifest error, be
final and conclusive and binding upon all parties hereto but, with respect to
clause (i) below, may be made only by the Administrative Agent):
(i) on any Interest Determination Date that, by reason of any
changes arising after the date of this Agreement affecting the interbank
Eurodollar market, adequate and fair means do not exist for ascertaining
the applicable interest rate on the basis provided for in the definition of
Eurodollar Rate; or
(ii) at any time, that such Bank shall incur increased costs or
reductions in the amounts received or receivable hereunder with respect to
any Eurodollar Loan because of (x) any change since the Effective Date in
any applicable law or governmental rule, regulation, order, guideline or
request (whether or not having the force of law) or in the interpretation
or administration thereof and including the introduction of any new law or
governmental rule, regulation, order, guideline or request, such as, for
example, but not limited to: (A) a change in the basis of taxation of
payment to any Bank of the principal of or interest on the Notes or any
other amounts payable hereunder (except for changes in the rate of tax on,
or determined by reference to, the net income or profits of such Bank
pursuant to the laws of the jurisdiction in which it is organized or in
which its principal office or applicable lending office is located or any
subdivision thereof or therein) or (B) a change in official reserve
requirements, but, in all events, excluding reserves required under
Regulation D to the extent included in the computation of the Eurodollar
Rate and/or (y) other circumstances since the Effective Date affecting the
interbank Eurodollar market or the position of such Bank in such market; or
(iii) at any time, that the making or continuance of any Eurodollar
Loan has been made (x) unlawful by any law or governmental rule, regulation
or order, (y) impossible by compliance by any Bank in good faith with any
governmental request (whether or not having force of law) or (z)
impracticable as a result of a contingency
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<PAGE>
occurring after the Effective Date which materially and adversely affects
the interbank Eurodollar market;
then, and in any such event, such Bank (or the Administrative Agent,
in the case of clause (i) above) shall promptly give notice (by telephone
promptly confirmed in writing) to the Borrower and, except in the case of
clause (i) above, to the Administrative Agent of such determination (which
notice the Administrative Agent shall promptly transmit to each of the
other Banks). Thereafter (x) in the case of clause (i) above, Eurodollar
Loans shall no longer be available until such time as the Administrative
Agent notifies the Borrower and the Banks that the circumstances giving
rise to such notice by the Administrative Agent no longer exist, and any
Notice of Borrowing or Notice of Conversion given by the Borrower with
respect to Eurodollar Loans which have not yet been incurred (including by
way of conversion) shall be deemed rescinded by the Borrower, (y) in the
case of clause (ii) above, the Borrower shall, subject to Section 1.14, pay
to such Bank, upon such Bank's written request therefor, such additional
amounts (in the form of an increased rate of, or a different method of
calculating, interest or otherwise as such Bank in its sole discretion
shall determine) as shall be required to compensate such Bank for such
increased costs or reductions in amounts received or receivable hereunder
(a written notice as to the additional amounts owed to such Bank, showing
in reasonable detail the basis for the calculation thereof, submitted to
the Borrower by such Bank shall, absent manifest error, be final and
conclusive and binding on all the parties hereto) and (z) in the case of
clause (iii) above, the Borrower shall take one of the actions specified in
Section 1.10(b) as promptly as possible and, in any event, within the time
period required by law.
(b) At any time that any Eurodollar Loan is affected by the
circumstances described in Section 1.10(a)(ii) or (iii), the Borrower may (and
in the case of a Eurodollar Loan affected by the circumstances described in
Section 1.10(a)(iii) the Borrower shall) either (x) if the affected Eurodollar
Loan is then being made initially or pursuant to a conversion, cancel such
Borrowing by giving the Administrative Agent telephonic notice (confirmed in
writing) on the same date that the Borrower was notified by the affected Bank or
the Administrative Agent pursuant to Section 1.10(a)(ii) or (iii) or (y) if the
affected Eurodollar Loan is then outstanding, upon at least three Business Days'
written notice to the Administrative Agent, require the affected Bank to convert
such Eurodollar Loan into a Base Rate Loan, provided that, if more than one Bank
--------
is so affected at any time, then all affected Banks must be treated the same
pursuant to this Section 1.10(b).
(c) If any Bank determines that after the Effective Date the
introduction of or any change in any applicable law or governmental rule,
regulation, order, guideline, directive or request (whether or not having the
force of law) concerning capital adequacy, or any change in interpretation or
administration thereof by the NAIC or any governmental authority, central bank
or comparable agency, in each case to the extent that any such introduction or
change occurs, is adopted or is effective after the Effective Date and will have
the effect of increasing the amount of capital required or expected to be
maintained by such Bank or any corporation controlling such Bank based on the
existence of such Bank's Revolving Loan Commitment hereunder or its obligations
hereunder, then the Borrower shall, subject to Section 1.14, pay to such Bank,
upon its written demand therefor, such additional amounts as shall be required
to compensate such
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<PAGE>
Bank or such other corporation for the increased cost to such Bank or such other
corporation or the reduction in the rate of return to such Bank or such other
corporation as a result of such increase of capital. In determining such
additional amounts, each Bank will act reasonably and in good faith and will use
averaging and attribution methods which are reasonable, provided that such
--------
Bank's determination of compensation owing under this Section 1.10(c) shall,
absent manifest error, be final and conclusive and binding on all the parties
hereto. Each Bank, upon determining that any additional amounts will be payable
pursuant to this Section 1.10(c), will give prompt written notice thereof to the
Borrower, which notice shall show in reasonable detail the basis for calculation
of such additional amounts.
1.11 Compensation. The Borrower shall, subject to Section 1.14,
------------
compensate each Bank, upon its written request (which request shall set forth in
reasonable detail the basis for requesting such compensation), for all losses,
expenses and liabilities (including, without limitation, any loss, expense or
liability incurred by reason of the liquidation or reemployment of deposits or
other funds required by such Bank to fund its Eurodollar Loans but excluding
loss of anticipated profits) which such Bank may sustain: (i) if for any reason
(other than a default by such Bank or the Administrative Agent) a Borrowing of,
or conversion from or into, Eurodollar Loans does not occur on a date specified
therefor in a Notice of Borrowing or Notice of Conversion (whether or not
withdrawn by the Borrower or deemed withdrawn pursuant to Section 1.10(a)); (ii)
if any repayment (including any repayment made pursuant to Section 4.01, Section
4.02 or as a result of an acceleration of the Loans pursuant to Section 10) or
conversion of any of its Eurodollar Loans occurs on a date which is not the last
day of an Interest Period with respect thereto; (iii) if any prepayment of any
of its Eurodollar Loans is not made on any date specified in a notice of
prepayment given by the Borrower; or (iv) as a consequence of (x) any other
default by the Borrower to repay its Eurodollar Loans when required by the terms
of this Agreement or any Note held by such Bank or (y) any election made
pursuant to Section 1.10(b).
1.12 Change of Lending Office. Each Bank agrees that upon the
------------------------
occurrence of any event giving rise to the operation of Section 1.10(a)(ii) or
(iii), Section 1.10(c), Section 2.06 or Section 4.04 with respect to such Bank,
it will, if requested by the Borrower, use reasonable efforts (subject to
overall policy considerations of such Bank) to designate another lending office
for any Loans or Letters of Credit affected by such event, provided that such
--------
designation is made on such terms that such Bank and its lending office suffer
no economic, legal or regulatory disadvantage, with the object of avoiding the
consequence of the event giving rise to the operation of such Section. Nothing
in this Section 1.12 shall affect or postpone any of the obligations of the
Borrower or the right of any Bank provided in Sections 1.10, 2.06 and 4.04.
1.13 Replacement of Banks. (x) If any Bank becomes a Defaulting
--------------------
Bank or otherwise defaults in its obligations to make Loans, (y) upon the
occurrence of an event giving rise to the operation of Section 1.10(a)(ii) or
(iii), Section 1.10(c), Section 2.06 or Section 4.04 with respect to any Bank
which results in such Bank charging to the Borrower increased costs or (z) in
the case of a refusal by a Bank to consent to certain proposed changes, waivers,
discharges or terminations with respect to this Agreement which have been
approved by the Required Banks as (and to the extent) provided in Section
13.12(b), the Borrower shall have the right, if no Default or Event of Default
then exists (or, in the case of preceding clause (z), no Default or Event of
Default will exist immediately after giving effect to such replacement), to
replace such
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<PAGE>
Bank (the "Replaced Bank") with one or more other Eligible Transferees, none of
whom shall constitute a Defaulting Bank at the time of such replacement
(collectively, the "Replacement Bank") and each of whom shall be required to be
reasonably acceptable to the Administrative Agent, provided that (i) at the time
--------
of any replacement pursuant to this Section 1.13, the Replacement Bank shall
enter into one or more Assignment and Assumption Agreements pursuant to Section
13.04(b) (and with all fees payable pursuant to said Section 13.04(b) to be paid
by the Replacement Bank) pursuant to which the Replacement Bank shall acquire
the entire Revolving Loan Commitment and outstanding Revolving Loans of, and
participations in Letters of Credit by, the Replaced Bank and, in connection
therewith, shall pay to (x) the Replaced Bank in respect thereof an amount equal
to the sum of (I) an amount equal to the principal of, and all accrued interest
on, all outstanding Revolving Loans of the Replaced Bank, (II) an amount equal
to all Unpaid Drawings that have been funded by (and not reimbursed to) such
Replaced Bank, together with all then unpaid interest with respect thereto at
such time and (III) an amount equal to all accrued, but theretofore unpaid, Fees
owing to the Replaced Bank pursuant to Section 3.01, (y) the Issuing Bank an
amount equal to such Replaced Bank's RL Percentage of any Unpaid Drawing (which
at such time remains an Unpaid Drawing) to the extent such amount was not
theretofore funded by such Replaced Bank to the Issuing Bank and (z) the
Swingline Bank an amount equal to such Replaced Bank's RL Percentage of any
Mandatory Borrowings to the extent such amount was not theretofore funded by
such Replaced Bank to the Swingline Bank and (ii) all obligations of the
Borrower due and owing to the Replaced Bank at such time (other than those
specifically described in clause (i) above in respect of which the assignment
purchase price has been, or is concurrently being, paid) shall be paid in full
to such Replaced Bank concurrently with such replacement. Upon the execution of
the respective Assignment and Assumption Agreement, the payment of amounts
referred to in clauses (i) and (ii) above and, if so requested by the
Replacement Bank, delivery to the Replacement Bank of the appropriate Revolving
Note executed by the Borrower, the Replacement Bank shall become a Bank
hereunder and the Replaced Bank shall cease to constitute a Bank hereunder,
except with respect to indemnification provisions under this Agreement as to the
events occurring prior to the date of replacement (including, without
limitation, Sections 1.10, 1.11, 2.06, 4.04, 12.06 and 13.01), which shall
survive as to such Replaced Bank.
1.14 Limitation on Additional Amounts, etc. Notwithstanding anything
--------------------------------------
to the contrary contained in Sections 1.10, 1.11, 2.06 or 4.04, unless a Bank
gives notice to the Borrower that the Borrower is obligated to pay an amount
under any such Section within 180 days after the later of (x) the date such Bank
incurs the respective increased costs, Taxes, loss, expense or liability,
reduction in amounts received or receivable or reduction in return on capital or
(y) the date such Bank has actual knowledge of its incurrence of the respective
increased costs, Taxes, loss, expense or liability, reductions in amounts
received or receivable or reduction in return on capital, then such Bank shall
only be entitled to be compensated for such amount by the Borrower pursuant to
said Section 1.10, 1.11, 2.06 or 4.04, as the case may be, to the extent the
costs, Taxes, loss, expense or liability, reduction in amounts received or
receivable or reduction in return on capital are incurred or suffered on or
after the date which occurs 180 days prior to such Bank giving notice to the
Borrower that the Borrower is obligated to pay the respective amounts pursuant
to said Section 1.10, 1.11, 2.06 or 4.04, as the case may be. This Section 1.14
shall
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have no applicability to any Section of this Agreement or any other Credit
Document other than said Sections 1.10, 1.11, 2.06 and 4.04.
SECTION 2. Letters of Credit.
-----------------
2.01 Letters of Credit. (a) Subject to and upon the terms and
-----------------
conditions set forth herein, the Borrower may request that the Issuing Bank
issue, at any time and from time to time on and after the Effective Date and
prior to the 30th day prior to the Final Maturity Date, for the account of the
Borrower and for the benefit of any holder (or any trustee, agent or other
similar representative for any such holders) of L/C Supportable Obligations of
the Borrower or any of its Subsidiaries, an irrevocable standby letter of
credit, in a form customarily used by the Issuing Bank or in such other form as
has been approved by the Issuing Bank (each such letter of credit issued
pursuant to this Section 2.01, a "Letter of Credit"). All Letters of Credit
shall be denominated in Dollars or an Alternate Currency and shall be issued on
a sight basis only.
(b) Subject to and upon the terms and conditions set forth herein,
the Issuing Bank agrees that it will, at any time and from time to time on and
after the Effective Date and prior to the 30th day prior to the Final Maturity
Date, following its receipt of the respective Letter of Credit Request, issue
for the account of the Borrower, one or more Letters of Credit as are permitted
to remain outstanding hereunder without giving rise to a Default or an Event of
Default, provided that the Issuing Bank shall not be under any obligation to
--------
issue any Letter of Credit of the types described above if at the time of such
issuance:
(i) any order, judgment or decree of any governmental authority or
arbitrator shall purport by its terms to enjoin or restrain the Issuing
Bank from issuing such Letter of Credit or any requirement of law
applicable to the Issuing Bank or any request or directive (whether or not
having the force of law) from any governmental authority with jurisdiction
over the Issuing Bank shall prohibit, or request that the Issuing Bank
refrain from, the issuance of letters of credit generally or such Letter of
Credit in particular or shall impose upon the Issuing Bank with respect to
such Letter of Credit any restriction or reserve or capital requirement
(for which the Issuing Bank is not otherwise compensated) not in effect on
the Effective Date, or any unreimbursed loss, cost or expense which was not
applicable or in effect with respect to the Issuing Bank as of the date
hereof; or
(ii) the Issuing Bank shall have received notice from the Borrower,
any other Credit Party or the Required Banks prior to the issuance of such
Letter of Credit of the type described in the second sentence of Section
2.03(b).
2.02 Maximum Letter of Credit Outstandings; Final Maturities.
-------------------------------------------------------
Notwithstanding anything to the contrary contained in this Agreement, (i) no
Letter of Credit shall be issued the Stated Amount of which, when added to the
Letter of Credit Outstandings (exclusive of Unpaid Drawings which are repaid on
the date of, and prior to the issuance of, the respective Letter of Credit) at
such time would exceed either (x) $5,000,000 or (y) when added to the sum of (I)
the aggregate principal amount of all Revolving Loans then outstanding and (II)
the aggregate principal amount of all Swingline Loans then outstanding, an
amount equal to the Total Revolving Loan Commitment at such time and (ii) each
Letter of Credit shall by its terms terminate on or
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<PAGE>
before the earlier of (x) the date which occurs 12 months after the date of the
issuance thereof (although any such Letter of Credit may be extendible for
successive periods of up to 12 months, but not beyond the third Business Day
prior to the Final Maturity Date, on terms reasonably acceptable to the Issuing
Bank) and (y) three Business Days prior to the Final Maturity Date.
2.03 Letter of Credit Requests; Minimum Stated Amount. (a) Whenever
------------------------------------------------
the Borrower desires that a Letter of Credit be issued for its account, the
Borrower shall give the Administrative Agent and the Issuing Bank at least five
Business Days' (or such shorter period as is acceptable to the Issuing Bank)
written notice thereof (including by way of facsimile transmission, to
telecopier number (212) 250-5817 (or such alternative telecopier number as may
be provided by the Administrative Agent to the Borrower from time to time),
immediately confirmed in writing by submission of the original of such request
by mail to the Issuing Bank). Each notice shall be in the form of Exhibit C
appropriately completed (each a "Letter of Credit Request").
(b) The making of each Letter of Credit Request shall be deemed to
be a representation and warranty by the Borrower that such Letter of Credit may
be issued in accordance with, and will not violate the requirements of, Section
2.02. Unless the Issuing Bank has received notice from the Borrower, any other
Credit Party or the Required Banks before it issues a Letter of Credit that one
or more of the conditions specified in Section 5 or 6 are not then satisfied, or
that the issuance of such Letter of Credit would violate Section 2.02, then the
Issuing Bank shall, subject to the terms and conditions of this Agreement, issue
the requested Letter of Credit for the account of the Borrower in accordance
with the Issuing Bank's usual and customary practices. Upon its issuance of or
amendment to any Letter of Credit, the Issuing Bank shall promptly notify the
Borrower, each Participant and the Administrative Agent of such issuance or
amendment and such notification shall be accompanied, if so requested by a
Participant, by a copy of the issued Letter of Credit or amendment.
Notwithstanding anything to the contrary contained in this Agreement, in the
event that a Bank Default exists, the Issuing Bank shall not be required to
issue any Letter of Credit unless the Issuing Bank has entered into an
arrangement satisfactory to it and the Borrower to eliminate the Issuing Bank's
risk with respect to the participation in Letters of Credit by the Defaulting
Bank or Banks, including by cash collateralizing such Defaulting Bank's or
Banks' RL Percentage of the Letter of Credit Outstandings.
(c) The initial Stated Amount of each Letter of Credit shall not be
less than $100,000 or such lesser amount as is acceptable to the Issuing Bank.
2.04 Letter of Credit Participations. (a) Immediately upon the
-------------------------------
issuance by the Issuing Bank of any Letter of Credit, the Issuing Bank shall be
deemed to have sold and transferred to each Bank, other than the Issuing Bank
(each such Bank, in its capacity under this Section 2.04, a "Participant"), and
each such Participant shall be deemed irrevocably and unconditionally to have
purchased and received from the Issuing Bank, without recourse or warranty, an
undivided interest and participation, to the extent of such Participant's RL
Percentage, in such Letter of Credit, each drawing or payment made thereunder
and the obligations of the Borrower under this Agreement with respect thereto,
and any security therefor or guaranty pertaining thereto. Upon any change in
the Revolving Loan Commitments or RL Percentages of the Banks
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pursuant to Section 1.13 or 13.04, it is hereby agreed that, with respect to all
outstanding Letters of Credit and Unpaid Drawings, there shall be an automatic
adjustment to the participations pursuant to this Section 2.04 to reflect the
new RL Percentages of the assignor and assignee Bank, as the case may be.
(b) In determining whether to pay under any Letter of Credit issued
by it, the Issuing Bank shall not have an obligation relative to the other Banks
other than to confirm that any documents required to be delivered under such
Letter of Credit appear to have been delivered and that they appear to
substantially comply on their face with the requirements of such Letter of
Credit. Any action taken or omitted to be taken by the Issuing Bank under or in
connection with any Letter of Credit issued by it shall not create for the
Issuing Bank any resulting liability to the Borrower, any other Credit Party,
any Bank or any other Person unless such action was taken or omitted by reason
of the gross negligence or willful misconduct of the Issuing Bank (as finally
determined by a court of competent jurisdiction).
(c) In the event that the Issuing Bank makes any payment under any
Letter of Credit issued by it and the Borrower shall not have reimbursed such
amount in full to the Issuing Bank pursuant to Section 2.05(a), the Issuing Bank
shall promptly notify the Administrative Agent, which shall promptly notify each
Participant of such failure, and, except as provided in the proviso of the
immediately succeeding sentence, each Participant shall promptly and
unconditionally pay to the Issuing Bank the amount of such Participant's RL
Percentage of such unreimbursed payment in Dollars (or, in the case of any
unreimbursed payments made in respect of a Letter of Credit issued in an
Alternate Currency, the Dollar Equivalent of such unreimbursed payments) and in
same day funds. If the Administrative Agent so notifies, prior to 11:00 A.M.
(New York time) on any Business Day, any Participant required to fund a payment
under a Letter of Credit, such Participant shall make available to the Issuing
Bank in Dollars (or in the case of any unreimbursed payments made in respect of
a Letter of Credit issued in an Alternate Currency, the Dollar Equivalent of
such unreimbursed payments) such Participant's RL Percentage of the amount of
such payment on such Business Day in same day funds; provided, however, that no
-------- -------
Participant shall be obligated to pay to the Issuing Bank its RL Percentage of
such unreimbursed amount for any wrongful payment made by the Issuing Bank under
a Letter of Credit issued by it as a result of acts or omissions constituting
willful misconduct or gross negligence on the part of the Issuing Bank (as
finally determined by a court of competent jurisdiction). If and to the extent
such Participant shall not have so made its RL Percentage of the amount of such
payment available to the Issuing Bank, such Participant agrees to pay to the
Issuing Bank, forthwith on demand such amount, together with interest thereon,
for each day from such date until the date such amount is paid to the Issuing
Bank at the overnight Federal Funds Rate for the first three days and at the
interest rate applicable to Base Rate Loans for each day thereafter. The failure
of any Participant to make available to the Issuing Bank its RL Percentage of
any payment under any Letter of Credit shall not relieve any other Participant
of its obligation hereunder to make available to the Issuing Bank its RL
Percentage of any Letter of Credit on the date required, as specified above, but
no Participant shall be responsible for the failure of any other Participant to
make available to the Issuing Bank such other Participant's RL Percentage of any
such payment.
(d) Whenever the Issuing Bank receives a payment of a reimbursement
obligation as to which it has received any payments from the Participants
pursuant to clause (c) above, the
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Issuing Bank shall pay to each Participant which has paid its RL Percentage
thereof, in Dollars (or, in the case of any payment received in respect of a
Letter of Credit issued in an Alternate Currency, of the Dollar Equivalent
thereof) and in same day funds, an amount equal to such Participant's share
(based upon the proportionate aggregate amount originally funded by such
Participant to the aggregate amount funded by all Participants) of the principal
amount of such reimbursement obligation and interest thereon accruing after the
purchase of the respective participations.
(e) Upon the request of any Participant, the Issuing Bank shall
furnish to such Participant copies of any Letter of Credit issued by it and such
other documentation as may reasonably be requested by such Participant.
(f) The obligations of the Participants to make payments to the
Issuing Bank with respect to Letters of Credit issued by it shall be irrevocable
and not subject to any qualification or exception whatsoever (except as
otherwise provided in the proviso to the second sentence of Section 2.04(c)) and
shall be made in accordance with the terms and conditions of this Agreement
under all circumstances, including, without limitation, any of the following
circumstances:
(i) any lack of validity or enforceability of this Agreement or any
of the other Credit Documents;
(ii) the existence of any claim, setoff, defense or other right
which the Borrower or any of its Subsidiaries may have at any time against
a beneficiary named in a Letter of Credit, any transferee of any Letter of
Credit (or any Person for whom any such transferee may be acting), the
Administrative Agent, the Issuing Bank, any Participant, or any other
Person, whether in connection with this Agreement, any Letter of Credit,
the transactions contemplated herein or any unrelated transactions
(including any underlying transaction between the Borrower or any
Subsidiary of the Borrower and the beneficiary named in any such Letter of
Credit);
(iii) any draft, certificate or any other document presented under
any Letter of Credit proving to be forged, fraudulent, invalid or
insufficient in any respect or any statement therein being untrue or
inaccurate in any respect;
(iv) the surrender or impairment of any security for the performance
or observance of any of the terms of any of the Credit Documents; or
(v) the occurrence of any Default or Event of Default.
2.05 Agreement to Repay Letter of Credit Drawings. (a) The Borrower
--------------------------------------------
agrees to reimburse the Issuing Bank, by making payment to the Administrative
Agent in Dollars (or, in the case of payments or disbursements made by the
Issuing Bank in respect of a Letter of Credit issued in an Alternate Currency,
the Dollar Equivalent thereof) and in immediately available funds at the Payment
Office, for any payment or disbursement made by the Issuing Bank under any
Letter of Credit issued by it (each such amount (or the Dollar Equivalent
thereof, as the case may be), so paid until reimbursed, an "Unpaid Drawing"),
not later than one Business Day following
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<PAGE>
receipt by the Borrower of notice of such payment or disbursement (provided that
--------
no such notice shall be required to be given if a Default or an Event of Default
under Section 10.05 shall have occurred and be continuing, in which case the
Unpaid Drawing shall be due and payable immediately without presentment, demand,
protest or notice of any kind (all of which are hereby waived by the Borrower)),
with interest on the amount so paid or disbursed by the Issuing Bank, to the
extent not reimbursed prior to 12:00 Noon (New York time) on the date of such
payment or disbursement, from and including the date paid or disbursed to but
excluding the date the Issuing Bank was reimbursed by the Borrower therefor at a
rate per annum which shall be the sum of the Applicable Base Rate Margin plus
the Base Rate in effect from time to time; provided, however, to the extent such
-------- -------
amounts are not reimbursed prior to 12:00 Noon (New York time) on the third
Business Day following the receipt by the Borrower of notice of such payment or
disbursement or following the occurrence of a Default or an Event of Default
under Section 10.05, interest shall thereafter accrue on the amounts so paid or
disbursed by such Issuing Bank (and until reimbursed by the Borrower) at a rate
per annum which shall be the sum of the Applicable Base Rate Margin plus the
Base Rate each as in effect from time to time plus 2%, in each such case, with
interest to be payable on demand. The Issuing Bank shall give the Borrower
prompt written notice of each Drawing under any Letter of Credit issued by it,
provided that the failure to give any such notice shall in no way affect, impair
- --------
or diminish the Borrower's obligations hereunder.
(b) The obligations of the Borrower under this Section 2.05 to
reimburse the Issuing Bank with respect to Unpaid Drawings (including, in each
case, interest thereon) 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 any Bank (including in its
capacity as issuer of the Letter of Credit or as Participant), including,
without limitation, any defense based upon the failure of any drawing or payment
under a Letter of Credit (each a "Drawing") to conform to the terms of the
Letter of Credit or any nonapplication or misapplication by the beneficiary of
the proceeds of such Drawing; provided, however, that the Borrower shall not be
-------- -------
obligated to reimburse the Issuing Bank for any wrongful payment made by the
Issuing Bank under a Letter of Credit issued by it as a result of acts or
omissions constituting willful misconduct or gross negligence on the part of the
Issuing Bank (as finally determined by a court of competent jurisdiction).
2.06 Increased Costs. If at any time after the Effective Date, the
---------------
introduction of or any change in any applicable law, rule, regulation, order,
guideline or request or in the interpretation or administration thereof by the
NAIC or any governmental authority charged with the interpretation or
administration thereof, or compliance by any Issuing Bank or any Participant
with any request or directive by the NAIC or by any such authority (whether or
not having the force of law), shall either (i) impose, modify or make applicable
any reserve, deposit, capital adequacy or similar requirement against letters of
credit issued by the Issuing Bank or participated in by any Participant, or (ii)
impose on the Issuing Bank or any Participant any other conditions relating,
directly or indirectly, to this Agreement; and the result of any of the
foregoing is to increase the cost to the Issuing Bank or any Participant of
issuing, maintaining or participating in any Letter of Credit, or reduce the
amount of any sum received or receivable by the Issuing Bank or any Participant
hereunder or reduce the rate of return on its capital with respect to Letters of
Credit (except for changes in the rate of tax on, or determined by reference to,
the net income or
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<PAGE>
profits of the Issuing Bank or such Participant pursuant to the laws of the
jurisdiction in which it is organized or in which its principal office or
applicable lending office is located or any subdivision thereof or therein),
then, upon the delivery of the certificate referred to below to the Borrower by
the Issuing Bank or such Participant (a copy of which certificate shall be sent
by the Issuing Bank or such Participant to the Administrative Agent), the
Borrower shall, subject to Section 1.14, pay to the Issuing Bank or such
Participant such additional amount or amounts as will compensate the Issuing
Bank or such Participant for such increased cost or reduction in the amount
receivable or reduction on the rate of return on its capital. The Issuing Bank
or Participant, upon determining that any additional amounts will be payable to
it pursuant to this Section 2.06, will give prompt written notice thereof to the
Borrower, which notice shall include a certificate submitted to the Borrower by
the Issuing Bank or such Participant (a copy of which certificate shall be sent
by such Issuing Bank or such Participant to the Administrative Agent), setting
forth in reasonable detail the basis for the calculation of such additional
amount or amounts necessary to compensate such Issuing Bank or such Participant.
The certificate required to be delivered pursuant to this Section 2.06 shall,
absent manifest error, be final and conclusive and binding on the Borrower.
SECTION 3. Commitment Commission; Fees; Reductions of Commitment.
-----------------------------------------------------
3.01 Fees. (a) The Borrower agrees to pay to the Administrative
----
Agent for distribution to each Non-Defaulting Bank, a commitment commission (the
"Commitment Commission") for the period from and including the Effective Date to
and including the Final Maturity Date (or such earlier date on which the Total
Revolving Loan Commitment shall have been terminated), computed at a rate per
annum for each day equal to the Applicable Commitment Commission Percentage on
the daily average Unutilized Revolving Loan Commitment of such Non-Defaulting
Bank. Accrued Commitment Commission shall be due and payable quarterly in
arrears on each Quarterly Payment Date and on the Final Maturity Date (or such
earlier date on which the Total Revolving Loan Commitment shall have been
terminated).
(b) The Borrower agrees to pay to the Administrative Agent for
distribution to each Bank (based on each such Bank's respective RL Percentage) a
fee in respect of each Letter of Credit issued hereunder (the "Letter of Credit
Fee") for the period from and including the date of issuance of such Letter of
Credit to and including the date of termination or expiration of such Letter of
Credit, computed at a rate per annum equal to the Applicable Eurodollar Rate
Margin then in effect on the daily Stated Amount of such Letter of Credit.
Accrued Letter of Credit Fees shall be due and payable quarterly in arrears on
each Quarterly Payment Date and on the first day on or after the termination of
the Total Revolving Loan Commitment upon which no Letters of Credit remain
outstanding.
(c) The Borrower agrees to pay to the Issuing Bank, for its own
account, a facing fee in respect of each Letter of Credit issued by the Issuing
Bank hereunder (the "Facing Fee") for the period from and including the date of
issuance of such Letter of Credit to and including the date of the termination
of such Letter of Credit, computed at a rate per annum equal to 1/8 of 1% on the
daily Stated Amount of such Letter of Credit, provided that in any event the
minimum amount of the Facing Fee payable in any 12 month period for each Letter
of Credit shall be $500; it being agreed that, on the date of issuance of any
Letter of Credit and on each anniversary
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<PAGE>
thereof prior to the termination of such Letter of Credit, if $500 will exceed
the amount of Facing Fees that will accrue with respect to such Letter of Credit
for the immediately succeeding 12 month period, the full $500 shall be payable
on the date of issuance of such Letter of Credit and on each such anniversary
thereof so long as such Letter of Credit is outstanding. Except as otherwise
provided in the proviso to the immediately preceding sentence, accrued Facing
Fees shall be due and payable quarterly in arrears on each Quarterly Payment
Date and upon the first day on or after the termination of the Total Revolving
Loan Commitment upon which no Letters of Credit remain outstanding.
(d) The Borrower agrees to pay to the Issuing Bank, for its own
account, upon each payment under, issuance of, or amendment to, any Letter of
Credit, such amount as shall at the time of such event be the administrative
charge and the reasonable expenses which the Issuing Bank is generally imposing
in connection with such occurrence with respect to letters of credit.
(e) The Borrower agrees to pay to the Administrative Agent, for its
own account, such other fees as have been agreed to in writing by the Borrower
and the Administrative Agent.
3.02 Voluntary Termination of Unutilized Commitments. (a) Upon at
-----------------------------------------------
least one Business Day's prior written notice to the Administrative Agent at the
Notice Office (which notice the Administrative Agent shall promptly transmit to
each of the Banks), the Borrower shall have the right, at any time or from time
to time, without premium or penalty, to terminate the Total Unutilized Revolving
Loan Commitment, in whole or in part, pursuant to this Section 3.02(a), in an
integral multiple of $1,000,000, in the case of partial reductions to the Total
Unutilized Revolving Loan Commitment, provided that each such reduction shall
--------
apply proportionately to permanently reduce the Revolving Loan Commitment of
each Bank.
(b) In the event of a refusal by a Bank to consent to certain
proposed changes, waivers, discharges or terminations with respect to this
Agreement which have been approved by the Required Banks as (and to the extent)
provided in Section 13.12(b), the Borrower may, subject to its compliance with
the requirements of Section 13.12(b), upon five Business Days' prior written
notice to the Administrative Agent at the Notice Office (which notice the
Administrative Agent shall promptly transmit to each of the Banks) terminate the
Revolving Loan Commitment of such Bank, so long as all Revolving Loans, together
with accrued and unpaid interest, Fees and all other amounts, owing to such Bank
are repaid concurrently with the effectiveness of such termination pursuant to
Section 4.01(b) (at which time Schedule I shall be deemed modified to reflect
such changed amounts), and at such time, such Bank shall no longer constitute a
"Bank" for purposes of this Agreement, except with respect to indemnifications
under this Agreement as to the events occurring prior to the date of termination
(including, without limitation, Sections 1.10, 1.11, 2.06, 4.04, 12.06 and
13.01), which shall survive as to such repaid Bank.
3.03 Mandatory Reduction of Commitments. (a) The Total Revolving
----------------------------------
Loan Commitment (and the Revolving Loan Commitment of each Bank) shall terminate
in their entirety on January 31, 1999 unless the Effective Date has occurred on
or before such date.
(b) In addition to any other mandatory commitment reductions
pursuant to this Section 3.03, on each date on or after the Effective Date on
which the Borrower or any of its
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<PAGE>
Subsidiaries receives any cash proceeds from any Asset Sale, the Total Revolving
Loan Commitment shall be permanently reduced on such date by an amount equal to
100% of the Net Sale Proceeds from such Asset Sale, provided that such Net Sale
--------
Proceeds shall not give rise to a reduction to the Total Revolving Loan
Commitment pursuant to this Section 3.03(b) on such date to the extent that no
Default or Event of Default then exists on such date and such Net Sale Proceeds
shall be used to purchase assets used or to be used in the businesses permitted
pursuant to Section 9.15 (including, without limitation (but only to the extent
permitted by Section 9.02), the purchase of the assets or 100% of the capital
stock of a Person engaged in such businesses) within 180 days following the date
of receipt of such Net Sale Proceeds from such Asset Sale, and provided further,
-------- -------
that if all or any portion of such Net Sale Proceeds are not so used within such
180 day period (or such earlier date, if any, as the Borrower or such
Subsidiary, as the case may be, determines not to reinvest such Net Sale
Proceeds), the Total Revolving Loan Commitment shall be permanently reduced on
the last day of such period (or such earlier date, as the case may be) by an
amount equal to such remaining portion.
(c) In addition to any other mandatory commitment reductions
pursuant to this Section 3.03, (i) on each date on or after the Effective Date
on which the Borrower or any of its Subsidiaries receives any cash proceeds from
any incurrence of Indebtedness for borrowed money (other than Indebtedness
permitted to be incurred pursuant to Section 9.04 as such Section is in effect
on the Effective Date) by the Borrower or any of its Subsidiaries, the Total
Revolving Loan Commitment shall be permanently reduced on such date by an amount
equal to 100% of the Net Debt Proceeds of the respective incurrence of
Indebtedness and (ii) on each date on or after the Effective Date on which the
Borrower receives any cash proceeds from any incurrence of Permitted Designated
Indebtedness, the Total Revolving Loan Commitment shall be permanently reduced
on such date by an amount equal to 50% of the Net Debt Proceeds of the
respective incurrence of Permitted Designated Indebtedness, provided that the
provisions of this clause (ii) shall not apply to the first $200,000,000 of
Permitted Designated Indebtedness issued on or after the Effective Date.
(d) In addition to any other mandatory commitment reductions
pursuant to this Section 3.03, within 10 days following each date on or after
the Effective Date on which the Borrower or any of its Subsidiaries receives any
cash proceeds from any Recovery Event (other than cash proceeds from Recovery
Events in an amount less than $500,000 per Recovery Event), the Total Revolving
Loan Commitment shall be permanently reduced on such date by an amount equal to
100% of the Net Insurance Proceeds of such Recovery Event, provided that so long
--------
as no Default or Event of Default then exists, such proceeds shall not give rise
to a reduction to the Total Revolving Loan Commitment pursuant to this Section
3.03(d) on such date to the extent that the Borrower has delivered a certificate
to the Administrative Agent on or prior to such date stating that such proceeds
shall be used to replace or restore any properties or assets in respect of which
such proceeds were paid within 180 days following the date of receipt of such
proceeds (which certificate shall set forth the estimates of the proceeds to be
so expended), and provided further, that if all or any portion of such proceeds
-------- -------
are not so used within such 180 day period (or such earlier date, if any, as the
Borrower or such Subsidiary, as the case may be, determines not to reinvest such
Net Insurance Proceeds), the Total Revolving Loan Commitment shall be
permanently reduced on the last day of such period (or such earlier date, as the
case may be) by an amount equal to such remaining portion.
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<PAGE>
(e) In addition to any other mandatory commitment reductions
pursuant to this Section 3.03, the Total Revolving Loan Commitment (and the
Revolving Loan Commitment of each Bank) shall terminate in its entirety on the
earlier of (i) the date on which a Change of Control occurs and (ii) the Final
Maturity Date.
(f) Each reduction to the Total Revolving Loan Commitment pursuant
to this Section 3.03 shall apply proportionately to permanently reduce the
Revolving Loan Commitment of each Bank.
SECTION 4. Prepayments; Payments; Taxes.
----------------------------
4.01 Voluntary Prepayments. (a) The Borrower shall have the right
---------------------
to prepay the Loans, without premium or penalty, in whole or in part at any time
and from time to time on the following terms and conditions: (i) the Borrower
shall give the Administrative Agent prior to 12:00 Noon (New York time) at the
Notice Office and, in the case of Swingline Loans, the Swingline Bank, at least
three Business Days' prior written notice (or telephonic notice promptly
confirmed in writing) of its intent to prepay Eurodollar Loans or same day
notice in the case of a prepayment of Base Rate Loans, the amount of such
prepayment, whether Revolving Loans or Swingline Loans are to be prepaid, and
the Types of Loans to be prepaid and, in the case of Eurodollar Loans, the
specific Borrowing or Borrowings pursuant to which made, which notice the
Administrative Agent shall, except in the case of Swingline Loans, promptly
transmit to each of the Banks; (ii) each partial prepayment of Revolving Loans
pursuant to this Section 4.01(a) shall be in an aggregate principal amount of at
least $500,000 and each partial prepayment of Swingline Loans pursuant to this
Section 4.01(a) shall be in an aggregate principal amount of at least $50,000,
provided that if any partial prepayment of Eurodollar Loans made pursuant to any
- --------
Borrowing shall reduce the outstanding principal amount of Eurodollar Loans made
pursuant to such Borrowing to an amount less than the Minimum Borrowing Amount
applicable thereto, then such Borrowing may not be continued as a Borrowing of
Eurodollar Loans and any election of an Interest Period with respect thereto
given by the Borrower shall have no force or effect; and (iii) each prepayment
pursuant to this Section 4.01(a) in respect of any Revolving Loans made pursuant
to a Borrowing shall be applied pro rata among such Revolving Loans, provided
--- ---- --------
that at the Borrower's election in connection with any prepayment of Revolving
Loans pursuant to this Section 4.01(a), such prepayment shall not, so long as no
Default or Event of Default then exists, be applied to any Revolving Loan of a
Defaulting Bank.
(b) In the event of a refusal by a Bank to consent to certain
proposed changes, waivers, discharges or terminations with respect to this
Agreement which have been approved by the Required Banks as (and to the extent)
provided in Section 13.12(b), the Borrower may, upon five Business Days' prior
written notice to the Administrative Agent at the Notice Office (which notice
the Administrative Agent shall promptly transmit to each of the Banks), repay
all Revolving Loans of such Bank, together with accrued and unpaid interest,
Fees and other amounts owing to such Bank in accordance with, and subject to the
requirements of, said Section 13.12(b) so long as (A) the Revolving Loan
Commitment of such Bank is terminated concurrently with such repayment pursuant
to Section 3.02(b) (at which time Schedule I shall be deemed modified to reflect
the changed Revolving Loan Commitments) and (B) the consents, if any, required
under Section 13.12(b) in connection with the repayment pursuant to this clause
(b) have been obtained.
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<PAGE>
4.02 Mandatory Repayments. (a) On any day on which the sum of (I)
--------------------
the aggregate outstanding principal amount of all Revolving Loans (after giving
effect to all other repayments thereof on such date), (II) the aggregate
outstanding principal amount of all Swingline Loans (after giving effect to all
other repayments thereof on such date) and (III) the aggregate amount of all
Letter of Credit Outstandings exceeds the Total Revolving Loan Commitment as
then in effect, the Borrower shall prepay on such day the principal of Swingline
Loans and, after all Swingline Loans have been repaid in full or if no Swingline
Loans are outstanding, Revolving Loans in an amount equal to such excess. If,
after giving effect to the prepayment of all outstanding Swingline Loans and
Revolving Loans, the aggregate amount of the Letter of Credit Outstandings
exceeds the Total Revolving Loan Commitment as then in effect, the Borrower
shall pay to the Administrative Agent at the Payment Office on such day an
amount of cash and/or Cash Equivalents equal to the amount of such excess (up to
a maximum amount equal to the Letter of Credit Outstandings at such time), such
cash and/or Cash Equivalents to be held as security for all obligations of the
Borrower to the Issuing Bank and the Banks hereunder in a cash collateral
account to be established by the Administrative Agent.
(b) With respect to each repayment of Revolving Loans required by
this Section 4.02, the Borrower may designate the Types of Revolving Loans which
are to be repaid and, in the case of Eurodollar Loans, the specific Borrowing or
Borrowings pursuant to which made, provided that: (i) repayments of Eurodollar
--------
Loans pursuant to this Section 4.02 may only be made on the last day of an
Interest Period applicable thereto unless all Eurodollar Loans with Interest
Periods ending on such date of required repayment and all Base Rate Loans have
been paid in full; (ii) if any repayment of Eurodollar Loans made pursuant to a
single Borrowing shall reduce the outstanding Eurodollar Loans made pursuant to
such Borrowing to an amount less than the Minimum Borrowing Amount applicable
thereto, such Borrowing shall be converted at the end of the then current
Interest Period into a Borrowing of Base Rate Loans; and (iii) each repayment of
any Revolving Loans made pursuant to a Borrowing shall be applied pro rata among
--- ----
such Revolving Loans. In the absence of a designation by the Borrower as
described in the preceding sentence, the Administrative Agent shall, subject to
the above, make such designation in its sole discretion.
(c) Notwithstanding anything to the contrary contained in this
Agreement or in any other Credit Document, (i) all then outstanding Revolving
Loans shall be repaid in full on the Final Maturity Date, (ii) all then
outstanding Swingline Loans shall be repaid in full on the Swingline Expiry Date
and (iii) all then outstanding Loans shall be repaid in full on the date on
which a Change of Control occurs.
4.03 Method and Place of Payment. Except as otherwise specifically
---------------------------
provided herein, all payments under this Agreement or under any Note shall be
made to the Administrative Agent for the account of the Bank or Banks entitled
thereto not later than 12:00 Noon (New York time) on the date when due and shall
be made in Dollars in immediately available funds at the Payment Office.
Whenever any payment to be made hereunder or under any Note shall be stated to
be due on a day which is not a Business Day, the due date thereof shall be
extended to the next succeeding Business Day and, with respect to payments of
principal, interest shall be payable at the applicable rate during such
extension.
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<PAGE>
4.04 Net Payments. (a) All payments made by the Borrower hereunder
------------
or under any Note will be made without setoff, counterclaim or other defense.
Except as provided in Section 4.04(b), all such payments will be made free and
clear of, and without deduction or withholding for, any present or future taxes,
levies, imposts, duties, fees, assessments or other charges of whatever nature
now or hereafter imposed by any jurisdiction or by any political subdivision or
taxing authority thereof or therein with respect to such payments (but
excluding, except as provided in the second succeeding sentence, any tax imposed
on or measured by the net income or net profits of a Bank pursuant to the laws
of the jurisdiction in which it is organized or the jurisdiction in which the
principal office or applicable lending office of such Bank is located or any
subdivision thereof or therein) and all interest, penalties or similar
liabilities with respect to such non-excluded taxes, levies, imposts, duties,
fees, assessments or other charges (all such non-excluded taxes, levies,
imposts, duties, fees, assessments or other charges being referred to
collectively, as "Taxes"). If any Taxes are so levied or imposed, the Borrower
agrees to pay the full amount of such Taxes, and such additional amounts as may
be necessary so that every payment of all amounts due under this Agreement or
under any Note, after withholding or deduction for or on account of any Taxes,
will not be less than the amount provided for herein or in such Note. If any
amounts are payable in respect of Taxes pursuant to the preceding sentence, the
Borrower agrees to reimburse each Bank, upon the written request of such Bank,
for taxes imposed on or measured by the net income or net profits of such Bank
pursuant to the laws of the jurisdiction in which such Bank is organized or in
which the principal office or applicable lending office of such Bank is located
or under the laws of any political subdivision or taxing authority of any such
jurisdiction in which such Bank is organized or in which the principal office or
applicable lending office of such Bank is located and for any withholding of
taxes as such Bank shall determine are payable by, or withheld from, such Bank,
in respect of such amounts so paid to or on behalf of such Bank pursuant to the
preceding sentence and in respect of any amounts paid to or on behalf of such
Bank pursuant to this sentence. The Borrower will furnish to the Administrative
Agent within 45 days after the date the payment of any Taxes is due pursuant to
applicable law certified copies of tax receipts evidencing such payment by the
Borrower. The Borrower agrees to indemnify and hold harmless each Bank, and
reimburse such Bank upon its written request, for the amount of any Taxes so
levied or imposed and paid by such Bank.
(b) Each Bank that is not a United States person (as such term is
defined in Section 7701(a)(30) of the Code) for U.S. Federal income tax purposes
agrees to deliver to the Borrower and the Administrative Agent on or prior to
the Effective Date, or in the case of a Bank that is an assignee or transferee
of an interest under this Agreement pursuant to Section 1.13 or 13.04 (unless
the respective Bank was already a Bank hereunder immediately prior to such
assignment or transfer), on the date of such assignment or transfer to such
Bank, (i) two accurate and complete original signed copies of Internal Revenue
Service Form 4224 or 1001 (or successor forms) certifying to such Bank's
entitlement as of such date to a complete exemption from United States
withholding tax with respect to payments to be made under this Agreement and
under any Note, or (ii) if the Bank is not a "bank" within the meaning of
Section 881(c)(3)(A) of the Code and cannot deliver either Internal Revenue
Service Form 1001 or 4224 pursuant to clause (i) above, (x) a certificate
substantially in the form of Exhibit D (any such certificate, a "Section
4.04(b)(ii) Certificate") and (y) two accurate and complete original signed
copies of Internal Revenue Service Form W-8 (or successor form) certifying to
such Bank's entitlement as
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<PAGE>
of such date to a complete exemption from United States withholding tax with
respect to payments of interest to be made under this Agreement and under any
Note. In addition, each Bank agrees that from time to time after the Effective
Date, when a lapse in time or change in circumstances renders the previous
certification obsolete or inaccurate in any material respect, such Bank will
deliver to the Borrower and the Administrative Agent two new accurate and
complete original signed copies of Internal Revenue Service Form 4224 or 1001
(or successor forms), or Form W-8 (or successor form) and a Section 4.04(b)(ii)
Certificate, as the case may be, and such other forms as may be required in
order to confirm or establish the entitlement of such Bank to a continued
exemption from or reduction in United States withholding tax with respect to
payments under this Agreement and any Note, or such Bank shall immediately
notify the Borrower and the Administrative Agent of its inability to deliver any
such Form or Certificate, in which case such Bank shall not be required to
deliver any such Form or Certificate pursuant to this Section 4.04(b).
Notwithstanding anything to the contrary contained in Section 4.04(a), but
subject to Section 13.04(b) and the immediately succeeding sentence, (x) the
Borrower shall be entitled, to the extent it is required to do so by law, to
deduct or withhold income or similar taxes imposed by the United States (or any
political subdivision or taxing authority thereof or therein) from interest,
Fees or other amounts payable hereunder for the account of any Bank which is not
a United States person (as such term is defined in Section 7701(a)(30) of the
Code) for U.S. Federal income tax purposes to the extent that such Bank has not
provided to the Borrower U.S. Internal Revenue Service Forms that establish a
complete exemption from such deduction or withholding and (y) the Borrower shall
not be obligated pursuant to Section 4.04(a) hereof to gross-up payments to be
made to a Bank in respect of income or similar taxes imposed by the United
States if (I) such Bank has not provided to the Borrower the Internal Revenue
Service Forms required to be provided to the Borrower pursuant to this Section
4.04(b) or (II) in the case of a payment, other than interest, to a Bank
described in clause (ii) above, to the extent that such Forms do not establish a
complete exemption from withholding of such taxes. Notwithstanding anything to
the contrary contained in the preceding sentence or elsewhere in this Section
4.04 and except as set forth in Section 13.04(b), the Borrower agrees to pay any
additional amounts and to indemnify each Bank in the manner set forth in Section
4.04(a) (without regard to the identity of the jurisdiction requiring the
deduction or withholding) in respect of any Taxes deducted or withheld by it as
described in the immediately preceding sentence as a result of any changes that
are effective after the Effective Date in any applicable law, treaty,
governmental rule, regulation, guideline or order, or in the interpretation
thereof, relating to the deducting or withholding of such Taxes.
SECTION 5. Conditions Precedent to the Effective Date. The
------------------------------------------
occurrence of the Effective Date pursuant to Section 13.10 is subject to the
satisfaction of the following conditions:
5.01 Execution of Agreement; Notes. On or prior to the Effective
-----------------------------
Date, (i) this Agreement shall have been executed and delivered as provided in
Section 13.10 and (ii) there shall have been delivered to the Administrative
Agent for the account of each of the Banks that has requested same, the
appropriate Revolving Note executed by the Borrower and to the Swingline Bank to
the extent requested by it, the Swingline Note executed by the Borrower, in each
case, in the amount, maturity and as otherwise provided herein.
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<PAGE>
5.02 Officer's Certificate. On the Effective Date, the
---------------------
Administrative Agent shall have received a certificate, dated the Effective Date
and signed on behalf of the Borrower by the Chairman of the Board, the Chief
Executive Officer, the President or any Vice President of the Borrower,
certifying on behalf of the Borrower that all of the conditions in Sections
5.06, 5.07, 5.12 and 6.02 have been satisfied on such date.
5.03 Opinions of Counsel. On the Effective Date, the Administrative
-------------------
Agent shall have received from (i) Piper & Marbury L.L.P., special counsel to
the Credit Parties, an opinion addressed to the Administrative Agent, the
Collateral Agent and each of the Banks and dated the Effective Date covering the
matters set forth in Exhibit E and such other matters incident to the
transactions contemplated herein as the Administrative Agent may reasonably
request and (ii) the General Counsel of the Borrower, an opinion addressed to
the Administrative Agent, the Collateral Agent and each of the Banks and dated
the Effective Date in form and substance reasonably acceptable to the
Administrative Agent with respect to the transactions contemplated by this
Agreement.
5.04 Corporate Documents; Proceedings; etc. (a) On the Effective
-------------------------------------
Date, the Administrative Agent shall have received a certificate from each
Credit Party, dated the Effective Date, signed on behalf of such Credit Party by
the Chairman of the Board, the Chief Executive Officer, the President or any
Vice President of such Credit Party, and attested to by the Secretary or any
Assistant Secretary of such Credit Party, in the form of Exhibit F with
appropriate insertions, together with copies of the certificate or articles of
incorporation (or equivalent organizational document) and by-laws of such Credit
Party and the resolutions of such Credit Party referred to in such certificate,
and the foregoing shall be in form and substance reasonably acceptable to the
Administrative Agent.
(b) All corporate, partnership, limited liability company and legal
proceedings and all instruments and agreements in connection with the
transactions contemplated by this Agreement and the other Credit Documents shall
be reasonably satisfactory in form and substance to the Administrative Agent and
the Required Banks, and the Administrative Agent shall have received all
information and copies of all documents and papers, including records of
corporate proceedings, governmental approvals, good standing certificates and
bring-down telegrams or facsimiles, if any, which the Administrative Agent
reasonably may have requested in connection therewith, such documents and papers
where appropriate to be certified by proper corporate or governmental
authorities.
5.05 Fees, etc. On the Effective Date, the Borrower shall have paid
----------
to the Administrative Agent and each Bank all costs, fees and expenses
(including, without limitation, reasonable legal fees and expenses) payable to
the Administrative Agent and such Bank to the extent then due.
5.06 Adverse Change, etc. (a) Since December 31, 1997, nothing
--------------------
shall have occurred (and neither the Administrative Agent nor the Banks shall
have become aware of any facts or conditions not previously known) which the
Administrative Agent or the Required Banks shall reasonably determine (x) has
had, or could reasonably be expected to have, a material adverse effect on the
rights or remedies of the Banks or the Administrative Agent, or on the
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<PAGE>
ability of any Credit Party to perform its obligations to the Banks or the
Administrative Agent hereunder or under any other Credit Document or (y) has
had, or could reasonably be expected to have, a material adverse effect on the
business, operations, property, assets, liabilities, condition (financial or
otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole.
(b) On or prior to the Effective Date, all necessary governmental
(domestic and foreign) and third party approvals and/or consents in connection
with the transactions contemplated by this Agreement and the other Credit
Documents and otherwise referred to herein or therein shall have been obtained
and remain in effect. Additionally, there shall not exist any judgment, order,
injunction or other restraint issued or filed or a hearing seeking injunctive
relief or other restraint pending or notified prohibiting or imposing materially
adverse conditions upon the transactions contemplated by this Agreement and the
other Credit Documents or otherwise referred to herein or therein.
5.07 Litigation. Except as disclosed on Schedule VII (but only so
----------
long as no adverse determination is made with respect thereto which could
reasonably be expected to have a material adverse effect on the business,
operations, property, assets, liabilities, condition (financial or otherwise) or
prospects of the Borrower and its Subsidiaries taken as whole), on the
Effective Date, there shall be no actions, suits or proceedings pending or
threatened (i) with respect to this Agreement or any other Credit Document or
(ii) which the Administrative Agent or the Required Banks shall reasonably
determine could reasonably be expected to have a material adverse effect on (a)
the business, operations, property, assets, liabilities, condition (financial or
otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole,
(b) the rights or remedies of the Banks or the Administrative Agent hereunder or
under any other Credit Document or (c) the ability of any Credit Party to
perform its respective obligations to the Banks or the Administrative Agent
hereunder or under any other Credit Document.
5.08 Pledge Agreement. On the Effective Date, each Credit Party
----------------
shall have duly authorized, executed and delivered a Pledge Agreement in the
form of Exhibit G, with such changes thereto, or additional pledge agreements
(or amendments thereto) entered into in connection therewith, as foreign counsel
may suggest in connection with the Pledge Agreement Collateral issued by any
Foreign Subsidiary (such Pledge Agreement, together with such additional pledge
agreements, as modified, amended or supplemented from time to time in accordance
with the terms thereof an hereof, collectively, the "Pledge Agreement") and
shall have delivered to the Collateral Agent, as Pledgee thereunder, all of the
Certificated Securities, if any, referred to therein and then owned by such
Credit Party, (x) together (i) executed and undated stock powers, (ii) proper
Financing Statements (Form UCC-1 or the equivalent) fully executed for filing
under the UCC or other appropriate filing offices of each jurisdiction as may be
necessary or, in the reasonable opinion of the Collateral Agent, desirable to
perfect the security interests purported to be created by the Pledge Agreement,
and (iii) certified copies of Requests for Information or Copies (Form UCC-11),
or equivalent reports, listing all effective financing statements that name any
Credit Party as debtor (none of which shall cover the assets or property of the
Borrower or any of its Subsidiaries except to the extent evidencing Permitted
Liens or in respect of which the Collateral Agent shall have received
termination statements (Form UCC-3 or the equivalent) as shall be required by
local law fully executed for filing).
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<PAGE>
5.09 Subsidiaries Guaranty. On the Effective Date, each Subsidiary
---------------------
Guarantor shall have duly authorized, executed and delivered a Guaranty in the
form of Exhibit H (as amended, modified or supplemented from time to time, the
"Subsidiaries Guaranty").
5.10 Financial Statements; Projections. On or prior to the Effective
---------------------------------
Date, the Administrative Agent shall have received true and correct copies of
the historical financial statements and the Projections referred to in Sections
7.05(a) and (d), which historical financial statements and Projections shall be
in form and substance reasonably satisfactory to the Administrative Agent and
the Required Banks.
5.11 Solvency Certificate. On the Effective Date, the Borrower shall
--------------------
have delivered to the Administrative Agent a solvency certificate from the Chief
Financial Officer of the Borrower in the form of Exhibit I.
5.12 Existing Lines of Credit. On or prior to the Effective Date,
------------------------
(i) the Borrower and its Subsidiaries shall have terminated their existing line
of credit with NationsBank, N.A., and shall have repaid all amounts owing
thereunder and caused the termination and release of all security interests and
guaranties supporting such lines of credit and (ii) the Administrative Agent
shall have received evidence (including pay-off letters and lien releases and
termination statements), in form and substance reasonably satisfactory to it, as
to the matters set forth in preceding clause (i).
SECTION 6. Conditions Precedent to All Credit Events. The obligation
-----------------------------------------
of each Bank to make Loans (including any Loans made on the Effective Date), and
the obligation of the Issuing Bank to issue Letters of Credit, is subject, at
the time of each such Credit Event (except as hereinafter indicated), to the
satisfaction of the following conditions:
6.01 Effective Date. The Effective Date shall have occurred.
--------------
6.02 No Default; Representations and Warranties. At the time of each
------------------------------------------
such Credit Event and also after giving effect thereto (i) there shall exist no
Default or Event of Default and (ii) all representations and warranties
contained herein and in the other Credit Documents shall be true and correct in
all material respects with the same effect as though such representations and
warranties had been made on the date of such Credit Event (it being understood
and agreed that any representation or warranty which by its terms is made as of
a specified date shall be required to be true and correct in all material
respects only as of such specified date).
6.03 Notice of Borrowing; Letter of Credit Request. (a) Prior to
---------------------------------------------
the making of each Revolving Loan (other than a Revolving Loan made pursuant to
a Mandatory Borrowing), the Administrative Agent shall have received a Notice of
Borrowing meeting the requirements of Section 1.03(a). Prior to the making of
each Swingline Loan, the Administrative Agent and the Swingline Bank shall have
received the notice referred to in Section 1.03(b)(i).
(b) Prior to the issuance of each Letter of Credit, the
Administrative Agent and the Issuing Bank shall have received a Letter of Credit
Request meeting the requirements of Section 2.03.
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<PAGE>
The occurrence of the Effective Date and the acceptance of the
benefits of each Credit Event shall constitute a representation and warranty by
the Borrower to the Administrative Agent and each of the Banks that all the
conditions specified in Section 5 (with respect to the Effective Date and Credit
Events to occur on the Effective Date) and in this Section 6 (with respect to
the Effective Date and Credit Events to occur on or after the Effective Date)
and applicable to such Credit Event exist as of that time. All of the Notes,
certificates, legal opinions and other documents and papers referred to in
Section 5 and in this Section 6, unless otherwise specified, shall be delivered
to the Administrative Agent at the Notice Office for the account of each of the
Banks and, except for the Notes, in sufficient counterparts or copies for each
of the Banks and shall be in form and substance satisfactory to the
Administrative Agent and the Required Banks.
SECTION 7. Representations, Warranties and Agreements. In order to
------------------------------------------
induce the Banks to enter into this Agreement and to make the Loans, and issue
(or participate in) the Letters of Credit as provided herein, the Borrower makes
the following representations, warranties and agreements, in each case after
giving effect to the Effective Date, all of which shall survive the execution
and delivery of this Agreement and the Notes and the making of the Loans and
issuance of the Letters of Credit, with the occurrence of the Effective Date and
the occurrence of each Credit Event on or after the Effective Date being deemed
to constitute a representation and warranty that the matters specified in this
Section 7 are true and correct on and as of the Effective Date and on the date
of each such Credit Event (it being understood and agreed that any
representation or warranty which by its terms is made as of a specified date
shall be required to be true and correct only as of such specified date).
7.01 Status. Each of the Borrower and each of its Subsidiaries (i)
------
is a duly organized and validly existing corporation, partnership or limited
liability company in good standing under the laws of the jurisdiction of its
organization, (ii) has the corporate, partnership or limited liability company
power and authority, as the case may be, to own its property and assets and to
transact the business in which it is engaged and presently proposes to engage
and (iii) is duly qualified and is authorized to do business and is in good
standing in each jurisdiction where the ownership, leasing or operation of its
property or the conduct of its business requires such qualifications except for
failures to be so qualified which, either individually or in the aggregate,
could not reasonably be expected to have a material adverse effect on the
business, operations, property, assets, liabilities, condition (financial or
otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole.
7.02 Power and Authority. Each Credit Party has the corporate,
-------------------
partnership or limited liability company power and authority, as the case may
be, to execute, deliver and perform the terms and provisions of each of the
Credit Documents to which it is party and has taken all necessary corporate,
partnership or limited liability company action, as the case may be, to
authorize the execution, delivery and performance by it of each of such Credit
Documents. Each Credit Party has duly executed and delivered each of the Credit
Documents to which it is party, and each of such Credit Documents constitutes
its legal, valid and binding obligation enforceable in accordance with its
terms, except to the extent that the enforceability thereof may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws generally
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<PAGE>
affecting creditors' rights and by equitable principles (regardless of whether
enforcement is sought in equity or at law).
7.03 No Violation. Neither the execution, delivery or performance by
------------
any Credit Party of the Credit Documents to which it is a party, nor compliance
by it with the terms and provisions thereof, (i) will contravene any provision
of any law, statute, rule or regulation or any order, writ, injunction or decree
of any court or governmental instrumentality, (ii) will conflict with or result
in any breach of any of the terms, covenants, conditions or provisions of, or
constitute a default under, or result in the creation or imposition of (or the
obligation to create or impose) any Lien (except pursuant to the Pledge
Agreement) upon any of the property or assets of the Borrower or any of its
Subsidiaries pursuant to the terms of any indenture, mortgage, deed of trust,
credit agreement or loan agreement, or any other material agreement, contract or
instrument, to which the Borrower or any of its Subsidiaries is a party or by
which it or any of its property or assets is bound or to which it may be subject
or (iii) will violate any provision of the certificate or articles of
incorporation or by-laws (or equivalent organizational documents) of the
Borrower or any of its Subsidiaries.
7.04 Approvals. No order, consent, approval, license, authorization
---------
or validation of, or filing, recording or registration with (except for (i) the
filing of UCC-1 financing statements to perfect the security interests created
under the Pledge Agreement in any partnership or limited liability company
interests covered thereby and (ii) those that have otherwise been obtained or
made on or prior to the Effective Date and which remain in full force and effect
on the Effective Date), or exemption by, any governmental or public body or
authority, or any subdivision thereof, is required by any Credit Party to
authorize, or is required in connection with, (i) the execution, delivery and
performance of any Credit Document by any Credit Party or (ii) the legality,
validity, binding effect or enforceability of any such Credit Document against
any Credit Party.
7.05 Financial Statements; Financial Condition; Undisclosed
------------------------------------------------------
Liabilities; Projections; etc. (a) The consolidated balance sheets of the
- ------------------------------
Borrower and its Subsidiaries for its fiscal year ended on December 31, 1997 and
its fiscal quarter ended on September 30, 1998, and the related consolidated
statements of income, cash flows and shareholders' equity of the Borrower and
its Subsidiaries for the fiscal year and fiscal quarter ended on such dates, as
the case may be, copies of which have been furnished to the Banks on or prior to
the Effective Date, present fairly in all material respects the consolidated
financial position of the Borrower and its Subsidiaries at the dates of such
balance sheets and the consolidated results of the operations of the Borrower
and its Subsidiaries for the periods covered thereby. All of the foregoing
financial statements have been prepared in accordance with generally accepted
accounting principles consistently applied. Since December 31, 1997, there has
been no material adverse change in the business, operations, property, assets,
liabilities, condition (financial or otherwise) or prospects of the Borrower and
its Subsidiaries taken as a whole.
(b) On and as of the Effective Date and after giving effect thereto,
(a) the sum of the assets, at a fair valuation, of each of the Borrower on a
stand-alone basis and of the Borrower and its Subsidiaries taken as a whole will
exceed its debts; (b) each of the Borrower on a stand-alone basis and the
Borrower and its Subsidiaries taken as a whole has not incurred and does not
intend to incur, and does not believe that it will incur, debts beyond its
ability to pay such debts as
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<PAGE>
such debts mature; and (c) each of the Borrower on a stand alone basis and the
Borrower and its Subsidiaries taken as a whole will have sufficient capital with
which to conduct its business. For purposes of this Section 7.05(b), "debt"
means any liability on a claim, and "claim" means (i) right to payment, whether
or not such a right is reduced to judgment, liquidated, unliquidated, fixed,
contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured,
or unsecured or (ii) right to an equitable remedy for breach of performance if
such breach gives rise to a payment, whether or not such right to an equitable
remedy is reduced to judgment, fixed, contingent, matured, unmatured, disputed,
undisputed, secured or unsecured. The amount of contingent liabilities at any
time shall be computed as the amount that, in the light of all the facts and
circumstances existing at such time, represents the amount that can reasonably
be expected to become an actual or matured liability.
(c) Except as fully disclosed in the financial statements (including
the notes thereto) delivered pursuant to Section 7.05(a), there were as of the
Effective Date no liabilities or obligations with respect to the Borrower or any
of its Subsidiaries which are required under generally accepted accounting
principles to be disclosed on a consolidated balance sheet of the Borrower or in
the notes to such balance sheet (whether absolute, accrued, contingent or
otherwise and whether or not due) which, either individually or in aggregate,
could reasonably be expected to be material to the Borrower and its Subsidiaries
taken as a whole. Except as disclosed on Schedule VII (but only so long as no
adverse determination is made with respect thereto which could reasonably be
expected to have a material adverse effect on the business, operations,
property, assets, liabilities, condition (financial or otherwise) or prospects
of the Borrower and its Subsidiaries taken as a whole), as of the Effective
Date, the Borrower does not know of any basis for the assertion against it or
any of its Subsidiaries of any liability or obligation of any nature whatsoever
that is not fully disclosed in the financial statements delivered pursuant to
Section 7.05(a) which, either individually or in the aggregate, could reasonably
be expected to be material to the Borrower and its Subsidiaries taken as a
whole.
(d) On and as of the Effective Date, the Projections delivered to
the Administrative Agent and the Banks prior to the Effective Date have been
prepared in good faith and are based on reasonable assumptions, and there are no
statements or conclusions in the Projections which are based upon or include
information known to the Borrower to be misleading in any material respect or
which fail to take into account material information known to the Borrower
regarding the matters reported therein. On the Effective Date, the Borrower
believes that the Projections are reasonable and attainable, it being recognized
by the Banks, however, that projections as to future events are not to be viewed
as facts and that the actual results during the period or periods covered by the
Projections may differ from the projected results and that the differences may
be material.
7.06 Litigation. Except as disclosed on Schedule VII (but only so
----------
long as no adverse determination is made with respect thereto which could
reasonably be expected to have a material adverse effect on the business,
operations, property, assets, liabilities, condition (financial or otherwise) or
prospects of the Borrower and its Subsidiaries taken as a whole), there are no
actions, suits or proceedings pending or, to the best knowledge of the Borrower,
threatened (i) with respect to this Agreement or any other Credit Document, (ii)
with respect to any material Indebtedness of the Borrower or any of its
Subsidiaries or (iii) that are reasonably likely to
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<PAGE>
materially and adversely affect the business, operations, property, assets,
liabilities, condition (financial or otherwise) or prospects of the Borrower and
its Subsidiaries taken as a whole.
7.07 True and Complete Disclosure. All factual information (taken as
----------------------------
a whole) furnished by or on behalf of any Credit Party in writing to the
Administrative Agent or any Bank for purposes of or in connection with this
Agreement, the other Credit Documents or any transaction contemplated herein or
therein is, and all other such factual information (taken as a whole) hereafter
furnished by or on behalf of any Credit Party in writing to the Administrative
Agent or any Bank will be, true and accurate in all material respects on the
date as of which such information is dated or certified and not incomplete by
omitting to state any fact necessary to make such information (taken as a whole)
not misleading in any material respect at such time in light of the
circumstances under which such information was provided.
7.08 Use of Proceeds; Margin Regulations. (a) All proceeds of the
-----------------------------------
Revolving Loans and the Swingline Loans shall be used for the working capital
and general corporate purposes of the Borrower and its Subsidiaries (including,
without limitation, (i) for Permitted Acquisitions and repurchases of the stock
of the Borrower in accordance with the terms of this Agreement and (ii) for the
repayment of existing Indebtedness as contemplated by Section 5.12).
(b) No part of any Credit Event (or the proceeds thereof) will be
used to purchase or carry any Margin Stock or to extend credit for the purpose
of purchasing or carrying any Margin Stock except (i) in connection with the
repurchase of shares of stock of the Borrower as permitted by Section 9.03 and
(ii) for purchases of Margin Stock not exceeding 1% of the outstanding capital
stock of any Person, in each case to the extent such purchases are otherwise
permitted under this Agreement and would not violate Regulations T, U and X.
The value of all Margin Stock at any time owned by the Borrower and its
Subsidiaries does not, and will not, exceed 25% of the value of the assets of
the Borrower and its Subsidiaries taken as a whole. Neither the making of any
Loan nor the use of the proceeds thereof nor the occurrence of any other Credit
Event will violate or be inconsistent with the provisions of Regulation T, U or
X.
7.09 Tax Returns and Payments. Each of the Borrower and each of its
------------------------
Subsidiaries has filed all federal and state income tax returns and all other
material tax returns, domestic and foreign, required to be filed by it and has
paid all taxes and assessments payable by it which have become due, except for
those contested in good faith and adequately disclosed and fully provided for on
the financial statements of the Borrower and its Subsidiaries in accordance with
generally accepted accounting principles. The Borrower and each of its
Subsidiaries have paid, or have provided adequate reserves (in the good faith
judgment of the management of the Borrower) for the payment of, all federal,
state, local and foreign income taxes applicable for all prior fiscal years and
for the current fiscal year to date. There is no material action, suit,
proceeding, investigation, audit, or claim now pending or, to the knowledge of
the Borrower threatened, by any authority regarding any taxes relating to the
Borrower or any of its Subsidiaries. As of the Effective Date, neither the
Borrower nor any of its Subsidiaries has entered into an agreement or waiver or
been requested to enter into an agreement or waiver extending any statute of
limitations relating to the payment or collection of taxes of the Borrower or
any of its Subsidiaries, or is aware of any circumstances that would cause the
taxable years or other taxable periods of the
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<PAGE>
Borrower or any of its Subsidiaries not to be subject to the normally applicable
statute of limitations.
7.10 Compliance with ERISA. Except to the extent that any of the
---------------------
matters set forth in clause (i) or (ii) below, either individually or in the
aggregate, could not reasonably be expected to have a material adverse effect on
the business, operations, property, assets, liabilities, condition (financial or
otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole:
(i) Each Plan (and each related trust, insurance contract or fund) is in
compliance with its terms and with all applicable laws, including without
limitation ERISA and the Code; each Plan (and each related trust, if any) which
is intended to be qualified under Section 401(a) of the Code has received a
determination letter from the Internal Revenue Service to the effect that it
meets the requirements of Sections 401(a) and 501(a) of the Code; no Reportable
Event has occurred and is continuing; no Plan which is a multiemployer plan (as
defined in Section 4001(a)(3) of ERISA) is insolvent or in reorganization; no
Plan has an Unfunded Current Liability; no Plan which is subject to Section 412
of the Code or Section 302 of ERISA has an accumulated funding deficiency,
within the meaning of such sections of the Code or ERISA, or has applied for or
received a waiver of an accumulated funding deficiency or an extension of any
amortization period, within the meaning of Section 412 of the Code or Section
303 or 304 of ERISA; all contributions required to be made with respect to a
Plan have been made and no liability has occurred as a result of any failure to
make any such contribution in a timely manner; neither the Borrower nor any
Subsidiary of the Borrower nor any ERISA Affiliate has incurred any liability
(including any indirect, contingent or secondary liability) to or on account of
a Plan pursuant to Section 409, 502(i), 502(l), 515, 4062, 4063, 4064, 4069,
4201, 4204 or 4212 of ERISA or Section 401(a)(29), 4971 or 4975 of the Code
reasonably expects to incur any such liability under any of the foregoing
sections with respect to any Plan; no condition exists which presents a risk to
the Borrower or any Subsidiary of the Borrower or any ERISA Affiliate of
incurring a liability to or on account of a Plan pursuant to the foregoing
provisions of ERISA and the Code; no proceedings have been instituted to
terminate or appoint a trustee to administer any Plan which is subject to Title
IV of ERISA; no action, suit, proceeding, hearing, audit or investigation with
respect to the administration, operation or the investment of assets of any Plan
(other than routine claims for benefits) is pending or the Borrower reasonably
believes is expected or threatened; using actuarial assumptions and computation
methods consistent with Part 1 of subtitle E of Title IV of ERISA, the aggregate
liabilities of the Borrower and its Subsidiaries and its ERISA Affiliates to all
Plans which are multiemployer plans (as defined in Section 4001(a)(3) of ERISA)
in the event of a complete withdrawal therefrom, as of the close of the most
recent fiscal year of each such Plan ended prior to the date of the most recent
Credit Event, would not be material; each group health plan (as defined in
Section 607(1) of ERISA or Section 4980B(g)(2) of the Code) which covers or has
covered employees or former employees of the Borrower, any Subsidiary of the
Borrower, or any ERISA Affiliate has at all times been operated in compliance
with the provisions of Part 6 of subtitle B of Title I of ERISA and Section
4980B of the Code and any failure to so comply would not result in a liability;
no lien imposed under the Code or ERISA on the assets of the Borrower or any
Subsidiary of the Borrower or any ERISA Affiliate exists or is likely to arise
on account of any Plan; and the Borrower and its Subsidiaries may cease
contributions to or terminate any employee benefit plan maintained by any of
them without incurring any liability.
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<PAGE>
(ii) Each Foreign Pension Plan has been maintained in compliance with
its terms and with the requirements of any and all applicable laws, statutes,
rules, regulations and orders and has been maintained, where required, in good
standing with applicable regulatory authorities. All contributions required to
be made with respect to a Foreign Pension Plan have been made and no liability
has occurred as a result of any failure to make any such contribution in a
timely manner. Neither the Borrower nor any of its Subsidiaries has incurred any
obligation in connection with the termination of or withdrawal from any Foreign
Pension Plan. The present value of the accrued benefit liabilities (whether or
not vested) under each Foreign Pension Plan, determined as of the end of the
Borrower's most recently ended fiscal year on the basis of actuarial
assumptions, each of which is reasonable, did not exceed the current value of
the assets of such Foreign Pension Plan allocable to such benefit liabilities.
7.11 The Pledge Agreement. The security interests created in favor
--------------------
of the Collateral Agent, as Pledgee, for the benefit of the Secured Creditors,
under the Pledge Agreement constitute first priority perfected security
interests in the Pledge Agreement Collateral, subject to no security interests
of any other Person. Except as otherwise provided in Section 7.04, filings or
recordings are required in order to perfect (or maintain the perfection or
priority of) the security interests created in the Pledge Agreement Collateral.
7.12 Properties. The Borrower and each of its Subsidiaries have good
----------
and marketable title to all material properties owned by them, including all
property reflected in the balance sheets referred to in Section 7.05(a) (except
as sold or otherwise disposed of since the date of such balance sheet in the
ordinary course of business or as permitted by the terms of this Agreement),
free and clear of all Liens, other than Permitted Liens.
7.13 Year 2000. All material Information Systems and Equipment are
---------
either Year 2000 Compliant, or any reprogramming, remediation, or any other
corrective action, including the internal testing of all such Information
Systems and Equipment, will be completed by June 30, 1999. Further, to the
extent that such reprogramming/remediation and testing action is required, the
cost thereof, as well as the cost of the reasonably foreseeable consequences of
failure to become Year 2000 Compliant, to the Borrower and its Subsidiaries
(including, without limitation, reprogramming errors and the failure of other
systems or equipment) will not result in a Default, an Event of Default or a
material adverse effect on the business, operations, property, assets,
liabilities, condition (financial or otherwise) or prospects of the Borrower and
its Subsidiaries taken as a whole.
7.14 Subsidiaries. As of the Effective Date, the Borrower has no
------------
Subsidiaries other than those Subsidiaries listed on Schedule III. Schedule III
correctly sets forth, as of the Effective Date, the percentage ownership (direct
or indirect) of the Borrower in each class of capital stock or other equity of
each of its Subsidiaries and also identifies the direct owner thereof.
7.15 Compliance with Statutes, etc. Each of the Borrower and each of
------------------------------
its Subsidiaries is in compliance with all applicable statutes, regulations and
orders of, and all applicable restrictions imposed by, all governmental bodies,
domestic or foreign, in respect of the conduct of its business and the ownership
of its property (including applicable statutes, regulations, orders and
restrictions relating to environmental standards and controls), except such non-
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<PAGE>
compliances as could not, either individually or in the aggregate, reasonably
be expected to have a material adverse effect on the business, operations,
property, assets, liabilities, condition (financial or otherwise) or prospects
of the Borrower and its Subsidiaries taken as a whole.
7.16 Investment Company Act. Neither the Borrower nor any of its
----------------------
Subsidiaries is an "investment company" or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
7.17 Public Utility Holding Company Act. Neither the Borrower nor
----------------------------------
any of its Subsidiaries is 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.
7.18 Environmental Matters. (a) The Borrower and each of its
---------------------
Subsidiaries have complied with, and on the date of each Credit Event are in
compliance with, all applicable Environmental Laws and the requirements of any
permits issued under such Environmental Laws. There are no pending or, to the
best knowledge of the Borrower, threatened Environmental Claims against the
Borrower or any of its Subsidiaries (including any such claim arising out of the
ownership, lease or operation by the Borrower or any of its Subsidiaries of any
Real Property no longer owned, leased or operated by the Borrower or any of its
Subsidiaries) or any Real Property owned, leased or operated by the Borrower or
any of its Subsidiaries. There are no facts, circumstances, conditions or
occurrences with respect to the business or operations of the Borrower or any of
its Subsidiaries, or any Real Property owned, leased or operated by the Borrower
or any of its Subsidiaries (including any Real Property formerly owned, leased
or operated by the Borrower or any of its Subsidiaries but no longer owned,
leased or operated by the Borrower or any of its Subsidiaries) or any property
adjoining or adjacent to any such Real Property that could be expected (i) to
form the basis of an Environmental Claim against the Borrower or any of its
Subsidiaries or any Real Property owned, leased or operated by the Borrower or
any of its Subsidiaries or (ii) to cause any Real Property owned, leased or
operated by the Borrower or any of its Subsidiaries to be subject to any
restrictions on the ownership, lease, occupancy or transferability of such Real
Property by the Borrower or any of its Subsidiaries under any applicable
Environmental Law.
(b) Hazardous Materials have not at any time been generated, used,
treated or stored on, or transported to or from, any Real Property owned, leased
or operated by the Borrower or any of its Subsidiaries where such generation,
use, treatment or storage has violated or could be expected to violate any
Environmental Law. Hazardous Materials have not at any time been Released on or
from any Real Property owned, leased or operated by the Borrower or any of its
Subsidiaries where such Release has violated or could be expected to violate any
applicable Environmental Law.
(c) Notwithstanding anything to the contrary in this Section 7.18
the representations made in this Section 7.18 shall not be untrue unless the
effect of any or all violations, claims, restrictions, failures and
noncompliances of the types described above, either individually or in the
aggregate, could reasonably be expected to have a material adverse effect on the
business, opera-
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<PAGE>
tions, property, assets, liabilities, condition (financial or otherwise) or
prospects of the Borrower and its Subsidiaries taken as a whole.
7.19 Labor Relations. Neither the Borrower nor any of its
---------------
Subsidiaries is engaged in any unfair labor practice that could reasonably be
expected to have a material adverse effect on the Borrower and its Subsidiaries
taken as a whole. There is (i) no unfair labor practice complaint pending
against the Borrower or any of its Subsidiaries or, to the best knowledge of the
Borrower, threatened against any of them, before the National Labor Relations
Board, and no grievance or arbitration proceeding arising out of or under any
collective bargaining agreement is so pending against the Borrower or any of its
Subsidiaries or, to the best knowledge of the Borrower, threatened against any
of them, (ii) no strike, labor dispute, slowdown or stoppage pending against the
Borrower or any of its Subsidiaries or, to the best knowledge of the Borrower,
threatened against the Borrower or any of its Subsidiaries and (iii) no union
representation question exists with respect to the employees of the Borrower or
any of its Subsidiaries, except (with respect to any matter specified in clause
(i), (ii) or (iii) above, either individually or in the aggregate) such as could
not reasonably be expected to have a material adverse effect on the business,
operations, property, assets, liabilities, condition (financial or otherwise) or
prospects of the Borrower and its Subsidiaries taken as a whole.
7.20 Patents, Licenses, Franchises and Formulas. Each of the
------------------------------------------
Borrower and each of its Subsidiaries owns or has the right to use all the
patents, trademarks, permits, service marks, trade names, copyrights, licenses,
franchises, proprietary information (including but not limited to rights in
computer programs and databases) and formulas, or rights with respect to the
foregoing, and has obtained assignments of all leases and other rights of
whatever nature, necessary for the present conduct of its business, without any
known conflict with the rights of others which, or the failure to obtain which,
as the case may be, could reasonably be expected to result in a material adverse
effect on the business, operations, property, assets, liabilities, condition
(financial or otherwise) or prospects of the Borrower and its Subsidiaries taken
as a whole.
7.21 Indebtedness. Schedule IV sets forth a true and complete list
------------
of all Indebtedness (including Contingent Obligations) of the Borrower and its
Subsidiaries as of the Effective Date (excluding the Loans and the Letters of
Credit, the "Existing Indebtedness"), in each case showing the aggregate
principal amount thereof and the name of the respective borrower and any Credit
Party or any of its Subsidiaries which directly or indirectly guarantees such
debt.
7.22 Subordination Provisions. From and after the issuance thereof,
------------------------
the subordination provisions contained in any Permitted Designated Indebtedness
that is subordinated indebtedness will be enforceable against the respective
Credit Parties party thereto and the holders of such Permitted Designated
Indebtedness, and all Obligations and Guaranteed Obligations (as defined in the
Subsidiaries Guaranty) will be within the definition of "Senior Indebtedness" or
"Guarantor Senior Indebtedness", as the case may be, included in such
subordination provisions.
SECTION 8. Affirmative Covenants. The Borrower hereby covenants and
---------------------
agrees that on and after the Effective Date and until the Total Revolving Loan
Commitment and all
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<PAGE>
Letters of Credit have terminated and the Loans, Notes and Unpaid Drawings,
together with interest, Fees and all other Obligations incurred hereunder and
thereunder, are paid in full:
8.01 Information Covenants. The Borrower will furnish to each Bank:
---------------------
(a) Quarterly Financial Statements. Within 45 days after the close
------------------------------
of the first three quarterly accounting periods in each fiscal year of the
Borrower, (i) the consolidated balance sheet of the Borrower and its
Subsidiaries as at the end of such quarterly accounting period and the related
consolidated statements of income and retained earnings and statement of cash
flows for such quarterly accounting period and for the elapsed portion of the
fiscal year ended with the last day of such quarterly accounting period, in each
case setting forth comparative figures for the related periods in the prior
fiscal year and the respective budgeted figures for such quarterly accounting
period, all of which shall be certified by the Chief Financial Officer of the
Borrower, subject to normal year-end audit adjustments and the absence of
footnotes and, (ii) management's discussion and analysis of the important
operational and financial developments during such quarterly accounting period
(it being understood that any management's discussion and analysis set forth in
the Borrower's Form 10-Q and filed with the SEC for such quarterly accounting
period shall satisfy this provision).
(b) Annual Financial Statements. Within 90 days after the close of
---------------------------
each fiscal year of the Borrower, (i) the consolidated balance sheet of the
Borrower and its Subsidiaries as at the end of such fiscal year and the related
consolidated statements of income and retained earnings and statement of cash
flows for such fiscal year setting forth comparative figures for the preceding
fiscal year and certified by Ernst & Young LLP or such other independent
certified public accountants of recognized national standing reasonably
acceptable to the Administrative Agent, together with a report of such
accounting firm stating that in the course of its regular audit of the financial
statements of the Borrower and its Subsidiaries, which audit was conducted in
accordance with generally accepted auditing standards, such accounting firm
obtained no knowledge of any Default or an Event of Default which has occurred
and is continuing or, if in the opinion of such accounting firm such a Default
or Event of Default has occurred and is continuing, a statement as to the nature
thereof and (ii) management's discussion and analysis of the important
operational and financial developments during such fiscal year (it being
understood that any management's discussion and analysis set forth in the
Borrower's Form 10-K for such fiscal year shall satisfy this provision).
(c) Management Letters. Promptly after the Borrower's or any of its
------------------
Subsidiaries' receipt thereof, a copy of any "management letter" received from
its certified public accountants and management's response thereto.
(d) Budgets. No later than 30 days following the first day of each
-------
fiscal year of the Borrower, a budget, in form reasonably satisfactory to the
Administrative Agent, consisting of budgeted statements of income and sources
and uses of cash and balance sheets prepared by the Borrower for each of the
four fiscal quarters of such fiscal year.
(e) Officers Certificates. At the time of the delivery of the
---------------------
financial statements provided for in Sections 8.01(a) and (b), a certificate of
the Chief Financial Officer of the Bor-
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<PAGE>
rower to the effect that, to the best of such officer's knowledge, no Default or
Event of Default has occurred and is continuing or, if any Default or Event of
Default has occurred and is continuing, specifying the nature and extent
thereof, which certificate shall set forth in reasonable detail the calculations
required to establish (A) whether the Borrower and its Subsidiaries were in
compliance with the provisions of Sections 3.03(b), 3.03(d), 9.03, 9.04, 9.05
and 9.07 through 9.11, inclusive, at the end of such fiscal quarter or year, as
the case may be, and (B) the Applicable Base Rate Margin, the Applicable
Eurodollar Rate Margin and the Applicable Commitment Commission Percentage for
the Applicable Margin Period commencing with the delivery of the respective
financial statements.
(f) Notice of Default or Litigation. Promptly upon, and in any
-------------------------------
event within five Business Days after, any officer of the Borrower obtains
knowledge thereof, notice of (i) the occurrence of any event which constitutes a
Default or an Event of Default and/or (ii) any litigation or governmental
investigation or proceeding pending (x) against the Borrower or any of its
Subsidiaries which could reasonably be expected to materially and adversely
affect the business, operations, property, assets, liabilities, condition
(financial or otherwise) or prospects of the Borrower and its Subsidiaries taken
as a whole, (y) with respect to any material Indebtedness of the Borrower or any
of its Subsidiaries or (z) with respect to any Credit Document.
(g) Other Reports and Filings. Promptly after the filing or
-------------------------
delivery thereof, copies of all reports on Forms 10-K, 10-Q and 8-K and all
proxy materials, if any, which the Borrower or any of its Subsidiaries shall
publicly file with the Securities and Exchange Commission or any successor
thereto (the "SEC").
(h) Environmental Matters. Promptly after any officer of the
---------------------
Borrower obtains knowledge thereof, notice of one or more of the following
environmental matters, unless such environmental matters could not, individually
or when aggregated with all other such environmental matters, be reasonably
expected to materially and adversely affect the business, operations, property,
assets, liabilities, condition (financial or otherwise) or prospects of the
Borrower and its Subsidiaries taken as a whole:
(i) any pending or threatened Environmental Claim against the
Borrower or any of its Subsidiaries or any Real Property owned, leased or
operated by the Borrower or any of its Subsidiaries;
(ii) condition or occurrence on or arising from any Real Property
owned, leased or operated by the Borrower or any of its Subsidiaries that
(a) results in noncompliance by the Borrower or any of its Subsidiaries
with any applicable Environmental Law or (b) could be expected to form the
basis of an Environmental Claim against the Borrower or any of its
Subsidiaries or any such Real Property;
(iii) any condition or occurrence on any Real Property owned, leased
or operated by the Borrower or any of its Subsidiaries that could be
expected to cause such Real Property to be subject to any restrictions on
the ownership, lease, occupancy, use or transferability by the Borrower or
any of its Subsidiaries of such Real Property under any Environmental Law;
and
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<PAGE>
(iv) the taking of any removal or remedial action in response to the
actual or alleged presence of any Hazardous Material on any Real Property
owned, leased or operated by the Borrower or any of its Subsidiaries as
required by any Environmental Law or any governmental or other
administrative agency; provided, that in any event the Borrower shall
--------
deliver to each Bank all notices received by the Borrower or any of its
Subsidiaries from any government or governmental agency under, or pursuant
to, CERCLA which identify the Borrower or any of its Subsidiaries as
potentially responsible parties for remediation costs or which otherwise
notify the Borrower or any of its Subsidiaries of potential liability under
CERCLA.
All such notices shall describe in reasonable detail the nature of the
claim, investigation, condition, occurrence or removal or remedial action and
the Borrower's or such Subsidiary's response thereto.
(i) Other Information. From time to time, such other information
-----------------
or documents (financial or otherwise) with respect to the Borrower or any of its
Subsidiaries as the Administrative Agent or any Bank may reasonably request.
8.02 Books, Records and Inspections; Annual Meetings. (a) The
-----------------------------------------------
Borrower will, and will cause each of its Subsidiaries to, keep proper books of
record and accounts in which entries sufficient to prepare the financial
statements required to be delivered pursuant to this Agreement in conformity
with generally accepted accounting principles and all requirements of law shall
be made of all dealings and transactions in relation to its business and
activities. The Borrower will, and will cause each of its Subsidiaries to,
permit officers and designated representatives of the Administrative Agent or
any Bank to visit and inspect, under guidance of officers of the Borrower or
such Subsidiary, any of the properties of the Borrower or such Subsidiary, and
to examine the books of account of the Borrower or such Subsidiary and discuss
the affairs, finances and accounts of the Borrower or such Subsidiary with, and
be advised as to the same by, its and their officers and independent
accountants, provided, unless a Default or an Event of Default has occurred and
--------
is continuing, neither the Administrative Agent nor any Bank may exercise its
rights under this sentence more than once in any fiscal year of the Borrower.
(b) At a date to be mutually agreed upon between the Administrative
Agent and the Borrower occurring on or prior to the 120th day after the close of
each fiscal year of the Borrower, the Borrower will, at the request of the
Administrative Agent, hold a meeting with all of the Banks at which meeting
shall be reviewed the financial results of the Borrower and its Subsidiaries for
the previous fiscal year and the budgets presented for the current fiscal year
of the Borrower.
8.03 Maintenance of Property; Insurance. The Borrower will, and
----------------------------------
will cause each of its Subsidiaries to, (i) keep all material property necessary
to the business of the Borrower and its Subsidiaries in reasonably good working
order and condition, ordinary wear and tear excepted, (ii) maintain insurance in
at least such amounts and against at least such risks as is consistent and in
accordance with industry practice for companies similarly situated owning
similar properties in the same general areas in which the Borrower or any of its
Subsidiaries operates, and (iii) furnish to the Administrative Agent or any
Bank, upon written request, full information as to the
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<PAGE>
insurance carried. If the Borrower or any of its Subsidiaries shall fail to
maintain insurance in accordance with this Section 8.03, the Administrative
Agent shall have the right (but shall be under no obligation) to procure such
insurance and the Borrower agrees to reimburse the Administrative Agent for all
costs and expenses of procuring such insurance.
8.04 Corporate Franchises. The Borrower will, and will cause each of
--------------------
its Subsidiaries to, do or cause to be done, all things necessary to preserve
and keep in full force and effect its existence and its material rights,
franchises, licenses and patents; provided, however, that nothing in this
-------- -------
Section 8.04 shall prevent (i) sales of assets and other transactions by the
Borrower or any of its Subsidiaries in accordance with Section 9.02 or (ii) the
withdrawal by the Borrower or any of its Subsidiaries of its qualification as a
foreign corporation in any jurisdiction where such withdrawal could not
reasonably be expected to have a material adverse effect on the business,
operations, property, assets, liabilities, condition (financial or otherwise) or
prospects of the Borrower and its Subsidiaries taken as a whole.
8.05 Compliance with Statutes, etc. The Borrower will, and will
------------------------------
cause each of its Subsidiaries to, comply with all applicable statutes,
regulations and orders of, and all applicable restrictions imposed by, all
governmental bodies, domestic or foreign, in respect of the conduct of its
business and the ownership of its property (including applicable statutes,
regulations, orders and restrictions relating to environmental standards and
controls), except such noncompliances as could not, either individually or in
the aggregate, reasonably be expected to have a material adverse effect on the
business, operations, property, assets, liabilities, condition (financial or
otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole.
8.06 Compliance with Environmental Laws. The Borrower will, and will
----------------------------------
cause each of its Subsidiaries to, comply in all respects with all Environmental
Laws applicable to the ownership or use of its Real Property now or hereafter
owned, leased or operated by the Borrower or any of its Subsidiaries, will
promptly pay or cause to be paid all costs and expenses incurred in connection
with such compliance, and will keep or cause to be kept all such Real Property
free and clear of any Liens imposed pursuant to such Environmental Laws, except
such noncompliances as could not, either individually or in the aggregate,
reasonably be expected to have a material adverse effect on the business,
operations, property, assets, liabilities, condition (financial or otherwise) or
prospects of the Borrower and its Subsidiaries taken as a whole. Neither the
Borrower nor any of its Subsidiaries will generate, use, treat, store, Release
or dispose of, or permit the generation, use, treatment, storage, Release or
disposal of Hazardous Materials on any Real Property now or hereafter owned,
leased or operated by the Borrower or any of its Subsidiaries, or transport or
permit the transportation of Hazardous Materials to or from any such Real
Property, except for Hazardous Materials generated, used, treated, stored,
Released or disposed of at any such Real Properties in compliance in all
material respects with all applicable Environmental Laws and reasonably required
in connection with the operation, use and maintenance of the business or
operations of the Borrower or any of its Subsidiaries.
8.07 ERISA. As soon as possible and, in any event, within ten (10)
-----
days after the Borrower, any Subsidiary of the Borrower or any ERISA Affiliate
knows of the occurrence of any of the following, the Borrower will deliver to
each of the Banks a certificate of the Chief Financial Officer of the Borrower
setting forth the full details as to such occurrence and the
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<PAGE>
action, if any, that the Borrower, such Subsidiary or such ERISA Affiliate is
required or proposes to take, together with any notices required or proposed to
be given to or filed with or by the Borrower, the Subsidiary, the ERISA
Affiliate, the PBGC, a Plan participant or the Plan administrator with respect
thereto: that a Reportable Event has occurred (except to the extent that the
Borrower has previously delivered to the Banks a certificate and notices (if
any) concerning such event pursuant to the next clause hereof); that a
contributing sponsor (as defined in Section 4001(a)(13) of ERISA) of a Plan
subject to Title IV of ERISA is subject to the advance reporting requirement of
PBGC Regulation Section 4043.61 (without regard to subparagraph (b)(1) thereof),
and an event described in subsection .62, .63, .64, .65, .66, .67 or .68 of PBGC
Regulation Section 4043 is reasonably expected to occur with respect to such
Plan within the following 30 days; that an accumulated funding deficiency,
within the meaning of Section 412 of the Code or Section 302 of ERISA, has been
incurred or an application may be or has been made for a waiver or modification
of the minimum funding standard (including any required installment payments) or
an extension of any amortization period under Section 412 of the Code or Section
303 or 304 of ERISA with respect to a Plan; that any contribution required to be
made with respect to a Plan or Foreign Pension Plan has not been timely made;
that a Plan has been or may be terminated, reorganized, partitioned or declared
insolvent under Title IV of ERISA; that a Plan has an Unfunded Current
Liability; that proceedings may be or have been instituted to terminate or
appoint a trustee to administer a Plan which is subject to Title IV of ERISA;
that a proceeding has been instituted pursuant to Section 515 of ERISA to
collect a delinquent contribution to a Plan; that the Borrower, any Subsidiary
of the Borrower or any ERISA Affiliate will or may incur any material liability
(including any indirect, contingent, or secondary liability) to or on account of
the termination of or withdrawal from a Plan under Section 4062, 4063, 4064,
4069, 4201, 4204 or 4212 of ERISA or with respect to a Plan under Section
401(a)(29), 4971, 4975 or 4980 of the Code or Section 409 or 502(i) or 502(l) of
ERISA or with respect to a group health plan (as defined in Section 607(1) of
ERISA or Section 4980B(g)(2) of the Code) under Section 4980B of the Code; or
that the Borrower or any Subsidiary of the Borrower may incur any material
liability pursuant to any employee welfare benefit plan (as defined in Section
3(1) of ERISA) that provides benefits to retired employees or other former
employees (other than as required by Section 601 of ERISA) or any Plan or any
Foreign Pension Plan. Upon the request of the Administrative Agent, the Borrower
will deliver to each of the Banks a complete copy of the annual report (on
Internal Revenue Service Form 5500-series) of each Plan (including, to the
extent required, the related financial and actuarial statements and opinions and
other supporting statements, certifications, schedules and information) required
to be filed with the Internal Revenue Service. In addition to any certificates
or notices delivered to the Banks pursuant to the first sentence hereof, copies
of any records, documents or other information that must be furnished to the
PBGC with respect to any Plan pursuant to Section 4010 of ERISA, and any
material notices received by the Borrower, any Subsidiary of the Borrower or any
ERISA Affiliate with respect to any Plan or Foreign Pension Plan shall be
delivered to the Banks no later than ten (10) days after the date such records,
documents and/or information has been furnished to the PBGC or such notice has
been received by the Borrower, the Subsidiary or the ERISA Affiliate, as
applicable.
8.08 End of Fiscal Years; Fiscal Quarters. The Borrower will cause
------------------------------------
(i) its fiscal year to end on December 31, and (ii) its fiscal quarters to end
on March 31, June 30, September 30 and December 31.
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<PAGE>
8.09 Payment of Taxes. The Borrower will pay and discharge, and will
----------------
cause each of its Subsidiaries to pay and discharge, all taxes, assessments and
governmental charges or levies imposed upon it or upon its income or profits, or
upon any properties belonging to it, prior to the date on which penalties attach
thereto, and all lawful claims for sums that have become due and payable which,
if unpaid, might become a Lien not otherwise permitted under Section 9.01(i);
provided, that neither the Borrower nor any of its Subsidiaries shall be
- --------
required to pay any such tax, assessment, charge, levy or claim which is being
contested in good faith and by proper proceedings if it has maintained adequate
reserves with respect thereto in accordance with generally accepted accounting
principles.
8.10 Foreign Subsidiaries. If following a change in the relevant
--------------------
sections of the Code or the regulations, rules, rulings, notices or other
official pronouncements issued or promulgated thereunder, counsel for the
Borrower reasonably acceptable to the Administrative Agent does not within 30
days after a request from the Administrative Agent or the Required Banks deliver
its opinion, in form and substance mutually satisfactory to the Administrative
Agent and the Borrower, with respect to any Foreign Subsidiary of the Borrower
which has not already had all of its stock pledged pursuant to the Pledge
Agreement that a pledge of 66-2/3% or more of the total combined voting power of
all classes of capital stock of such Foreign Subsidiary entitled to vote could
reasonably be expected to cause (I) the undistributed earnings of such Foreign
Subsidiary as determined for federal income tax purposes to be treated as a
deemed dividend to such Foreign Subsidiary's United States parent for federal
income tax purposes or (II) other material adverse federal income tax
consequences to the Credit Parties, then in the case of a failure to deliver the
evidence described above, (i) that portion of such Foreign Subsidiary's
outstanding capital stock owned by a Credit Party and not theretofore pledged
pursuant to the Pledge Agreement shall be pledged to the Collateral Agent for
the benefit of the Secured Creditors pursuant to the Pledge Agreement and (ii)
each such Foreign Subsidiary shall execute and deliver to the Administrative
Agent counterparts of the Subsidiaries Guaranty and the Pledge Agreement.
8.11 Margin Stock. The Borrower will, and will cause each of the
------------
Subsidiary Guarantors to, take any and all actions as may be required to ensure
that no capital stock pledged, or required to be pledged, pursuant to the Pledge
Agreement shall constitute Margin Stock.
8.12 Year 2000. The Borrower will ensure that its and its
---------
Subsidiaries' Information Systems and Equipment are at all times after June 30,
1999 Year 2000 Compliant, except insofar as the failure to do so, could not
reasonably be expected to result in a material adverse effect on the business,
operations, property, assets, liabilities, condition (financial or otherwise) or
prospects of the Borrower and its Subsidiaries taken as a whole, and shall
notify the Administrative Agent and each Bank promptly upon detecting any
failure of the Information Systems and Equipment to be Year 2000 Compliant. In
addition, the Borrower shall provide the Administrative Agent and any Bank with
such information about its year 2000 computer readiness (including, without
limitation, information as to contingency plans, budgets and testing results) as
the Administrative Agent or such Bank shall reasonably request.
8.13 Additional Guarantors and Additional Pledge Agreements. (a) On
------------------------------------------------------
February 1, 1999, each of Sylvan Properties (California), Inc.,
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<PAGE>
Educational Consultants International Inc. and Travel Selections, Inc. shall
execute and deliver to the Administrative Agent counterparts of the Subsidiaries
Guaranty and the Pledge Agreement, although no such Wholly-Owned Domestic
Subsidiary of the Borrower shall be required to execute and deliver such Credit
Documents to the extent that same has been merged with and into the Borrower or
a Subsidiary Guarantor as permitted pursuant to Section 9.02(x) or (xi). In
addition, until such time as such Wholly-Owned Domestic Subsidiaries have
executed and delivered counterparts of the Subsidiaries Guaranty and Pledge
Agreement or have been so merged with and into the Borrower or a Subsidiary
Guarantor as provided above, the Borrower shall cause each such Wholly-Owned
Domestic Subsidiary to continue to be an inactive company and, as such, shall
not have any significant assets or liabilities.
(b) No later than February 1, 1999 (and notwithstanding anything to
the contrary contained in Section 5.08), the Borrower shall have delivered, or
cause to be delivered, one or more additional Pledge Agreements, in form and
substance reasonably satisfactory to the Administrative Agent, pursuant to which
the capital stock of SLS I B.V. and Aspect International Language Schools B.V.,
each a Netherlands corporation, shall be duly pledged to the Collateral Agent
under the laws of The Netherlands.
(c) Together with the delivery of each Credit Document pursuant to
clause (a) or (b) of this Section 8.13, the Borrower shall deliver, or cause to
be delivered, one or more opinions of counsel, in form and substance reasonably
satisfactory to the Administrative Agent, with respect to the transactions
contemplated by such Credit Documents and such other matters incident thereto as
the Administrative Agent may reasonably request.
SECTION 9. Negative Covenants. The Borrower hereby covenants and
------------------
agrees that on and after the Effective Date and until the Total Revolving Loan
Commitment and all Letters of Credit have terminated and the Loans, Notes and
Unpaid Drawings, together with interest, Fees and all other Obligations incurred
hereunder and thereunder, are paid in full:
9.01 Liens. The Borrower will not, and will not permit any of its
-----
Subsidiaries to, create, incur, assume or suffer to exist any Lien upon or with
respect to any property or assets (real or personal, tangible or intangible) of
the Borrower or any of its Subsidiaries, whether now owned or hereafter
acquired, or sell any such property or assets subject to an understanding or
agreement, contingent or otherwise, to repurchase such property or assets
(including sales of accounts receivable with recourse to the Borrower or any of
its Subsidiaries), or assign any right to receive income or permit the filing of
any financing statement under the UCC or any other similar notice of Lien under
any similar recording or notice statute; provided that the provisions of this
--------
Section 9.01 shall not prevent the creation, incurrence, assumption or existence
of the following or the filing of any financing statements in connection
therewith (Liens described below are herein referred to as "Permitted Liens"):
(i) inchoate Liens for taxes, assessments or governmental charges or
levies not yet due or Liens for taxes, assessments or governmental charges
or levies being contested in good faith and by appropriate proceedings for
which adequate reserves have been established in accordance with generally
accepted accounting principles;
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<PAGE>
(ii) Liens in respect of property or assets of the Borrower or any of
its Subsidiaries imposed by law, which were incurred in the ordinary course
of business and do not secure Indebtedness for borrowed money, such as
carriers', warehousemen's, materialmen's and mechanics' liens and other
similar Liens arising in the ordinary course of business, and (x) which do
not in the aggregate materially detract from the value of the Borrower's or
such Subsidiary's property or assets or materially impair the use thereof
in the operation of the business of the Borrower or such Subsidiary or (y)
which are being contested in good faith by appropriate proceedings, which
proceedings have the effect of preventing the forfeiture or sale of the
property or assets subject to any such Lien;
(iii) Liens in existence on the Effective Date which are listed, and
the property subject thereto described, in Schedule V, but only to the
respective date, if any, set forth in such Schedule V for the removal,
replacement and termination of any such Liens, plus renewals, replacements
and extensions of such Liens to the extent set forth on such Schedule V,
provided that (x) the aggregate principal amount of the Indebtedness, if
--------
any, secured by such Liens does not increase from that amount outstanding
at the time of any such renewal, replacement or extension and (y) any such
renewal, replacement or extension does not encumber any additional assets
or properties of the Borrower or any of its Subsidiaries;
(iv) Liens created pursuant to the Pledge Agreement;
(v) leases or subleases granted to other Persons not materially
interfering with the conduct of the business of the Borrower or any of its
Subsidiaries;
(vi) Liens upon assets of the Borrower or any of its Subsidiaries
subject to Capitalized Lease Obligations to the extent such Capitalized
Lease Obligations are permitted by Section 9.04(iv), provided that (x) such
--------
Liens only serve to secure the payment of Indebtedness arising under such
Capitalized Lease Obligation and (y) the Lien encumbering the asset giving
rise to the Capitalized Lease Obligation does not encumber any other asset
of the Borrower or any Subsidiary of the Borrower;
(vii) Liens placed upon (x) equipment or machinery used in the
ordinary course of business of the Borrower or any of its Subsidiaries at
the time of the acquisition thereof by the Borrower or any such Subsidiary
or (y) Real Property used in the ordinary course of business of the
Borrower or any of its Subsidiaries at the time of construction thereof by
the Borrower or any of its Subsidiaries or (in either case) within 90 days
thereafter to secure Indebtedness incurred to pay all or a portion of the
purchase price or construction cost thereof, as the case may be, or to
secure Indebtedness incurred solely for the purpose of financing the
acquisition of any such equipment or machinery or the construction of any
such Real Property or extensions, renewals or replacements of any of the
foregoing for the same or a lesser amount, provided that (x) such
--------
Indebtedness is permitted by Section 9.04(iv) and (y) in all events, the
Lien encumbering the asset so acquired or constructed does not encumber any
other asset of the Borrower or such Subsidiary other than the proceeds of
such asset, substitutions for and replacements of such asset and accessions
to such asset;
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(viii) easements, rights-of-way, restrictions, encroachments and
other similar charges or encumbrances, and minor title deficiencies, in
each case not securing Indebtedness and not materially interfering with the
conduct of the business of the Borrower or any of its Subsidiaries;
(ix) Liens arising from precautionary UCC financing statement
filings regarding operating leases;
(x) Liens arising out of the existence of judgments or awards not
constituting an Event of Default under Section 10.09, provided that the
aggregate amount of all cash and the fair market value of all property
pledged or deposited to secure all such judgments or awards shall not
exceed $2,000,000 at any time outstanding;
(xi) statutory and common law landlords' liens under leases to which
the Borrower or any of its Subsidiaries is a party;
(xii) Liens (other than Liens imposed under ERISA) incurred in the
ordinary course of business in connection with workers compensation claims,
unemployment insurance and social security benefits;
(xiii) Liens securing (x) the performance of bids, tenders, leases
and contracts in the ordinary course of business and consistent with past
practices and (y) statutory obligations, surety bonds, performance bonds
and other obligations of a like nature incurred in the ordinary course of
business and consistent with past practices (exclusive of obligations in
respect of the payment for borrowed money);
(xiv) Liens on property or assets acquired pursuant to a Permitted
Acquisition, or on property or assets of a Subsidiary of the Borrower in
existence at the time such Subsidiary is acquired pursuant to a Permitted
Acquisition, provided that (x) any Indebtedness that is secured by such
--------
Liens is permitted to exist under Section 9.04(ix), and (y) such Liens are
not incurred in connection with, or in contemplation or anticipation of,
such Permitted Acquisition and do not attach to any other asset of the
Borrower or any of its Subsidiaries; and
(xv) Liens which constitute rights of set-off of a customary nature
or bankers' Liens with respect to amounts on deposit, whether arising by
operation of law or by contract, in connection with arrangements entered
into with banks in the ordinary course of business.
9.02 Consolidation, Merger, Purchase or Sale of Assets, etc. The
------------------------------------------------------
Borrower will not, and will not permit any of its Subsidiaries to, wind up,
liquidate or dissolve its affairs or merge or consolidate, or convey, sell,
lease or otherwise dispose of all or any part of its property or assets, or
enter into any sale-leaseback transactions, or purchase or otherwise acquire (in
one or a series of related transactions) any part of the property or assets
(other than purchases or other acquisitions of inventory, materials and
equipment in the ordinary course of business) of any Person, except that:
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(i) Capital Expenditures by the Borrower and its Subsidiaries shall
be permitted to the extent not in violation of Section 9.07;
(ii) each of the Borrower and its Subsidiaries may (x) make sales of
inventory and license intellectual property in the ordinary course of
business and (y) enter into franchise agreements, as franchisors, in the
ordinary course of business;
(iii) each of the Borrower and its Subsidiaries may sell obsolete or
worn-out equipment or materials in the ordinary course of business;
(iv) each of the Borrower and its Subsidiaries may sell or discount,
in each case without recourse and in the ordinary course of business,
accounts receivable arising in the ordinary course of business, but only in
connection with the compromise or collection thereof and not as part of any
financing transaction;
(v) each of the Borrower and its Subsidiaries may sell other assets
(other than the capital stock of any Subsidiary Guarantor) so long as (i)
no Default or no Event of Default then exists or would result therefrom,
(ii) each such sale is in an arm's-length transaction and the Borrower or
the respective Subsidiary receives at least fair market value (as
determined in good faith by the Borrower or such Subsidiary, as the case
may be), (iii) the total consideration received by the Borrower or such
Subsidiary is at least 90% cash and is paid at the time of the closing of
such sale, (iv) the Net Sale Proceeds therefrom are applied and/or
reinvested as (and to the extent) required by Section 3.03(b) and (v) the
aggregate amount of the proceeds received from all assets sold pursuant to
this clause (v) shall not exceed $10,000,000 in any fiscal year of the
Borrower; provided, however, to the extent that the amount of asset sales
-------- -------
made pursuant to this clause (v) in any fiscal year of the Borrower is less
than the amount of asset sales permitted to be made in such fiscal year,
such excess may be carried forward and utilized to make asset sales in the
immediately succeeding fiscal year of the Borrower (but not in any fiscal
year thereafter);
(vi) Investments may be made to the extent permitted by Section
9.05;
(vii) each of the Borrower and its Subsidiaries may lease (as
lessee) real or personal property (so long as any such lease does not
create a Capitalized Lease Obligation except to the extent permitted by
Section 9.04(iv));
(viii) the Borrower and its Wholly-Owned Subsidiaries may acquire
all or substantially all of the assets of any Person (or all or
substantially all of the assets of a product line or division of any
Person) or at least 50.1% of the voting and economic interest in the
capital stock or other equity interest of any Person (including by
purchasing all or any portion of the capital stock or other equity interest
of any Person in which the Borrower or a Wholly-Owned Subsidiary already
has an ownership interest and as a result of which such Person already is,
or shall become, a Subsidiary of the Borrower) (any such acquisition
permitted by this clause (viii), a "Permitted Acquisition"), so long as (i)
no Default or Event of Default then exists or would result therefrom, (ii)
each of the representations and warranties contained in Section 7 shall be
true and correct in all
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material respects both before and after giving effect to such Permitted
Acquisition, (iii) any Liens or Indebtedness assumed or issued in
connection with any Permitted Acquisition are otherwise permitted under
Section 9.01 or 9.04, as the case may be, (iv) the Acquired Entity or
Business acquired pursuant to such Permitted Acquisition is in a line of
business permitted under Section 9.15, (v) the only consideration paid by
the Borrower or any of its Wholly-Owned Subsidiaries in connection with any
Permitted Acquisition consists solely of cash, common stock or Qualified
Preferred Stock of the Borrower and/or Indebtedness permitted under Section
9.04, (vi) at least 10 Business Days prior to the consummation of any
Permitted Acquisition, the Borrower shall deliver to the Administrative
Agent and each of the Banks (A) a certificate of the Borrower's Chief
Financial Officer certifying (and showing the calculations therefor in
reasonable detail) (x) that the Borrower would have been in compliance with
the financial covenants set forth in Sections 9.08, 9.09, 9.10 and 9.11 for
the Test Period then most recently ended prior to the date of the
consummation of such Permitted Acquisition and for which financial
statements are available, in each case with such financial covenants to be
determined on a pro forma basis as if such Permitted Acquisition had been
--- -----
consummated on the first day of such Test Period (and assuming that any
Indebtedness incurred, issued or assumed in connection therewith had been
incurred, issued or assumed on the first day of, and had remained
outstanding throughout, such Test Period) and (y) necessary to establish
the Acquired EBITDA of the Acquired Entity or Business acquired pursuant to
each Permitted Acquisition for the most recently ended 12 month period for
which financial statements are available for such Acquired Entity or
Business, and (B) projections (in reasonable detail) prepared by the
Borrower for the period from the date of the consummation of such Permitted
Acquisition to the date which is one year thereafter calculated after
giving effect to the respective Permitted Acquisition, demonstrating that
the level of financial performance measured by the financial covenants set
forth in Sections 9.08, 9.09, 9.10 and 9.11 shall be better than or equal
to such level as would be required to provide that no Default or Event of
Default will exist under such financial covenants, as compliance with such
financial covenants will be required through the date which is one year
from the date of the consummation of the respective Permitted Acquisition,
(vii) the sum of (I) the aggregate cash consideration paid in connection
with any Permitted Acquisition, including, without limitation, any earn-
out, non-compete or deferred compensation arrangements (based on reasonable
estimates of the amount thereof), (II) the aggregate principal amount of
any Indebtedness assumed and/or issued in connection therewith and (III)
the fair market value of any common stock and/or Qualified Preferred Stock
of the Borrower issued in connection therewith (as determined in good faith
by the Borrower) does not exceed $50,000,000 (or, in the case of a
potential Permitted Acquisition previously disclosed to the Banks in
writing, $60,000,000), and (viii) the sum of (I) the aggregate cash
consideration paid in connection with all Permitted Acquisitions
consummated in any fiscal year of the Borrower including, without
limitation, any earn-out, non-compete or deferred compensation arrangements
(based on reasonable estimates of the amount thereof) and (II) the
aggregate principal amount of any Indebtedness assumed and/or issued in
connection therewith does not exceed $150,000,000 in any such fiscal year
of the Borrower;
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<PAGE>
(ix) each of the Borrower and its Subsidiaries may grant leases or
subleases to other Persons not materially interfering with the conduct of
the business of the Borrower or any of its Subsidiaries;
(x) any Subsidiary of the Borrower may (i) be merged or
consolidated with or into the Borrower or liquidated so long as the
Borrower is the surviving corporation of such merger or consolidation or
receives the assets of such Subsidiary upon such liquidation and (ii) may
transfer its assets to the Borrower;
(xi) any Subsidiary of the Borrower may be merged or consolidated
with or into any other Subsidiary of the Borrower or liquidated so long as
(i) in the case of any (x) such merger or consolidation involving a
Subsidiary Guarantor, a Subsidiary Guarantor is the surviving corporation
of such merger or consolidation or (y) such liquidation, a Subsidiary
Guarantor receives the assets of such Subsidiary upon such liquidation and
(ii) in the case of any (x) such merger or consolidation involving a
Wholly-Owned Subsidiary of the Borrower, in addition to the requirements of
preceding clause (i), a Wholly-Owned Subsidiary is the surviving
corporation of such merger or consolidation or (y) such liquidation, a
Wholly-Owned Subsidiary receives the assets of such Subsidiary upon such
liquidation;
(xii) any Subsidiary Guarantor may transfer assets to another
Subsidiary Guarantor; and
(xiii) each of the Borrower and its Subsidiaries may sell Cash
Equivalents so long as (i) each such sale is in an arm's-length transaction
and the Borrower or the respective Subsidiary receives at least fair market
value (as determined in good faith by the Borrower or such Subsidiary, as
the case may be), and (ii) the total consideration received by the Borrower
or such Subsidiary is 100% cash and is paid at the time of the closing of
such sale.
To the extent the Required Banks waive the provisions of this Section
9.02 with respect to the sale of any Collateral, or any Collateral is sold as
permitted by this Section 9.02 (other than to the Borrower or a Subsidiary
thereof), such Collateral shall be sold free and clear of the Liens created by
the Pledge Agreement and the Administrative Agent and the Collateral Agent shall
be authorized to take any actions deemed appropriate in order to effect the
foregoing.
9.03 Dividends. The Borrower will not, and will not permit any of
---------
its Subsidiaries to, authorize, declare or pay any Dividends with respect to the
Borrower or any of its Subsidiaries, except that:
(i) any Subsidiary of the Borrower may pay Dividends to the
Borrower or to any Wholly-Owned Subsidiary of the Borrower;
(ii) any non-Wholly-Owned Subsidiary of the Borrower may pay cash
Dividends to its shareholders generally so long as the Borrower or its
respective Subsidiary which owns the equity interest in the Subsidiary
paying such Dividends receives at least its
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proportionate share thereof (based upon its relative holding of the equity
interest in the Subsidiary paying such Dividends and taking into account
the relative preferences, if any, of the various classes of equity
interests of such Subsidiary);
(iii) so long as there shall exist no Default or Event of Default
(both before and after giving effect to the payment thereof), the Borrower
may repurchase or redeem shares of its common stock, provided that the
aggregate amount of all Dividends paid by the Borrower pursuant to this
clause (iii) shall not exceed $200,000,000; and
(iv) the Borrower may pay Dividends on its shares of its Qualified
Preferred Stock solely through the issuance of additional shares of its
Qualified Preferred Stock rather than in cash.
9.04 Indebtedness. The Borrower will not, and will not permit any
------------
of its Subsidiaries to, contract, create, incur, assume or suffer to exist any
Indebtedness, except:
(i) Indebtedness incurred pursuant to this Agreement and the other
Credit Documents;
(ii) Existing Indebtedness outstanding on the Effective Date and
listed on Schedule IV, and giving effect to any subsequent extension,
renewal or refinancing thereof to the extent permitted on such Schedule IV,
provided that the aggregate principal amount of the Indebtedness to be
extended, renewed or refinanced does not increase from that amount
outstanding at the time of any such extension, renewal or refinancing;
(iii) Indebtedness under Interest Rate Protection Agreements entered
into with respect to Indebtedness under this Agreement and other
Indebtedness permitted under this Section 9.04;
(iv) Indebtedness of the Borrower and its Subsidiaries evidenced by
Capitalized Lease Obligations and purchase money Indebtedness of the type
described in Section 9.01(vii), provided that in no event shall the sum of
--------
(I) the aggregate principal amount of all Capitalized Lease Obligations and
(II) the aggregate principal amount of all such purchase money Indebtedness
exceed $30,000,000 at any time outstanding;
(v) intercompany Indebtedness among the Borrower and its
Subsidiaries to the extent permitted by Sections 9.05(ix), (xiii), (xiv)
and (xv), provided that any intercompany indebtedness owed to any
Subsidiary of the Borrower which is not a Subsidiary Guarantor shall
contain (and shall be subject to) the subordination provisions set forth on
Exhibit J;
(vi) Indebtedness consisting of guaranties by the Borrower and its
Subsidiaries of other Indebtedness of the Borrower and its Subsidiaries
otherwise permitted to be incurred under this Section 9.04;
(vii) Indebtedness under Other Hedging Agreements providing
protection against fluctuations in currency values in connection with the
Borrower's or any of its
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<PAGE>
Subsidiaries' foreign operations so long as management of the Borrower or
such Subsidiary, as the case may be, has determined in good faith that the
entering into of such Other Hedging Agreements are bona fide hedging
---- ----
activities and are not for speculative purposes;
(viii) Indebtedness of the Borrower and the Subsidiary Guarantors
under Permitted Designated Indebtedness, so long as (i) at the time of the
issuance of the Permitted Designated Indebtedness, no Default or Event of
Default then exists or would result therefrom, (ii) at least 10 Business
Days prior to the issuance of any Permitted Designated Indebtedness, the
Borrower shall have delivered to the Administrative Agent and each of the
Banks a certificate of the Borrower's Chief Financial Officer certifying
(and showing the calculations therefor in reasonable detail) that the
Borrower and its Subsidiaries would have been in compliance with the
financial covenants set forth in Sections 9.08, 9.09, 9.10 and 9.11 for
which financial statements are available for the Test Period then most
recently ended prior to the date of the issuance of such Permitted
Designated Indebtedness, in each case with such financial covenants to be
determined on a pro forma basis as if such Permitted Designated
--- -----
Indebtedness had been incurred on the first day of, and had remained
outstanding throughout, such Test Period (and using a conservative range of
interest rates), (iii) such Permitted Designated Indebtedness is unsecured
and does not have any required maturity, redemption, amortization or
sinking fund obligations prior to the six year anniversary of the Effective
Date. (iv) such Permitted Designated Indebtedness is issued pursuant to an
effective registration statement under the Securities Act or pursuant to
Rule 144A promulgated thereunder, (v) all of the terms and conditions of
(and the documentation for) such Permitted Designated Indebtedness
(including covenants, events of default, remedies and subordination
provisions (if applicable)) are in form and substance reasonably
satisfactory to the Administrative Agent, and (vi) 50% of the Net Debt
Proceeds from the issuance of such Permitted Designated Indebtedness are
applied as, and to the extent, required by Section 3.03(c)(ii);
(ix) Indebtedness of a Subsidiary acquired pursuant to a Permitted
Acquisition (or Indebtedness assumed at the time of a Permitted Acquisition
of an asset securing such Indebtedness), provided that (x) such
Indebtedness was not incurred in connection with, or in anticipation or
contemplation of, such Permitted Acquisition and (y) such Indebtedness does
not constitute debt for borrowed money (other than debt for borrowed money
incurred in connection with industrial revenue or industrial development
bond financings), it being understood and agreed that Capitalized Lease
Obligations and purchase money Indebtedness of the type described in
Section 9.01(vii) shall not constitute debt for borrowed money for purposes
of this clause (y);
(x) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument inadvertently
(except in the case of daylight overdrafts) drawn against insufficient
funds in the ordinary course of business, so long as such Indebtedness not
otherwise constituting Indebtedness permitted under this Section 9.04 is
extinguished within two Business Days of the incurrence thereof;
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(xi) Indebtedness in respect of bid, performance, advance payment or
surety bonds entered into in the ordinary course of business and consistent
with past practices;
(xii) unsecured Indebtedness of the Borrower or any of its
Subsidiaries in the form of earn-out, non-compete or deferred compensation
arrangements incurred pursuant to a Permitted Acquisition and to extent
permitted by clauses (vii) and (viii) of Section 9.02(viii); and
(xiii) additional unsecured Indebtedness incurred by the Borrower and
its Subsidiaries in an aggregate principal amount not to exceed $20,000,000
at any one time outstanding.
9.05 Advances, Investments and Loans. The Borrower will not, and
-------------------------------
will not permit any of its Subsidiaries to, directly or indirectly, lend money
or credit or make advances to any Person, or purchase or acquire any stock,
obligations or securities of, or any other interest in, or make any capital
contribution to, any other Person, or purchase or own a futures contract or
otherwise become liable for the purchase or sale of currency or other
commodities at a future date in the nature of a futures contract, or hold any
cash or Cash Equivalents (each of the foregoing an "Investment" and,
collectively, "Investments"), except that the following shall be permitted:
(i) the Borrower and its Subsidiaries may acquire and hold accounts
receivables owing to any of them, if created or acquired in the ordinary
course of business and payable or dischargeable in accordance with
customary trade terms of the Borrower or such Subsidiary;
(ii) the Borrower and its Subsidiaries may acquire and hold cash and
Cash Equivalents;
(iii) the Borrower and its Subsidiaries may hold the Investments
held by them on the Effective Date and described on Schedule VI, provided
that any additional Investments made with respect thereto shall be
permitted only if independently permitted under the other provisions of
this Section 9.05;
(iv) the Borrower and its Subsidiaries may acquire and own
investments (including debt obligations) received in connection with the
bankruptcy or reorganization of suppliers and customers and in good faith
settlement of delinquent obligations of, and other disputes with, customers
and suppliers arising in the ordinary course of business;
(v) the Borrower and its Subsidiaries may make loans and advances
in the ordinary course of business to their respective employees so long as
the aggregate principal amount thereof at any time outstanding (determined
without regard to any write-downs or write-offs of such loans and advances)
shall not exceed $5,000,000;
(vi) the Borrower may acquire and hold obligations of one or more
officers or other employees of the Borrower or any of its Subsidiaries in
connection with such officer's or employee's acquisition of shares of
common stock of the Borrower so long as
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no cash is paid by the Borrower or any of its Subsidiaries to such officers
or employees in connection with the acquisition of any such obligations;
(vii) the Borrower may enter into Interest Rate Protection
Agreements to the extent permitted by Section 9.04(iii);
(viii) the Borrower and its Subsidiaries may enter into Other
Hedging Agreements to the extent permitted by Section 9.04(vii);
(ix) the Borrower and the Subsidiary Guarantors may make
intercompany loans and advances between or among one another;
(x) the Borrower may make cash common equity contributions to the
capital of the Subsidiary Guarantors and the Subsidiary Guarantors may make
cash common equity contributions to the capital of their respective
Subsidiaries which are Subsidiary Guarantors;
(xi) Permitted Acquisitions shall be permitted pursuant to Section
9.02(viii);
(xii) the Borrower and its Subsidiaries may acquire and hold
promissory notes issued by the purchaser of assets in connection with a
sale of such assets to the extent permitted by Sections 9.02(v);
(xiii) the Borrower and the Subsidiary Guarantors may make
additional intercompany loans and/or cash equity contributions to Wholly-
Owned Foreign Subsidiaries of the Borrower for the purpose of enabling such
Wholly-Owned Foreign Subsidiaries to consummate a Permitted Acquisition
pursuant to Section 9.02(viii);
(xiv) the Borrower and its Subsidiaries may make additional
intercompany loans and/or cash equity contributions to their respective
Subsidiaries for the purpose of enabling such Subsidiaries to make an
Investment permitted by clause (xvi) of this Section 9.05;
(xv) the Borrower and its Subsidiaries may make intercompany loans
to, and/or cash equity contributions in, Subsidiaries of the Borrower which
are not Subsidiary Guarantors in an aggregate amount not to exceed
$10,000,000 at any time outstanding (determined without regard to any
write-downs or write-offs thereof);
(xvi) the Borrower and its Subsidiaries may make loans and advances
to their franchisees in an aggregate amount not to exceed $4,000,000 at any
time outstanding (determined without regard to any write-downs or write-
offs thereof); and
(xvii) so long as no Default or Event of Default then exists or
would result therefrom, the Borrower and its Subsidiaries may make
additional Investments so long as the aggregate amount of all such
Investments made subsequent to the Effective Date and outstanding at any
time (determined without regard to any write-downs or write-offs thereof)
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pursuant to this clause (xvii) does not exceed $10,000,000 in any fiscal
year of the Borrower.
9.06 Transactions with Affiliates. (a) The Borrower will not, and
----------------------------
will not permit any of its Subsidiaries to, directly or indirectly, enter into
or permit to exist any transaction or series of related transactions (including,
without limitation, the purchase, sale, lease or exchange of any property or the
rendering of any service), with, or for the benefit of, any Affiliate of the
Borrower or any of its Subsidiaries (each an "Affiliate Transaction"), other
than (x) Affiliate Transactions permitted under clause (b) of this Section 9.06
and (y) Affiliate Transactions on terms that are no less favorable than those
that might reasonably have been obtained in a comparable transaction at such
time on an arm's length basis from a Person that is not an Affiliate of the
Borrower or such Subsidiary. All Affiliate Transactions (and each series of
related Affiliate Transactions which are similar or part of a common plan)
involving aggregate payments or other property with a fair market value (as
determined in good faith by the Board of Directors of the Borrower or such
Subsidiary, as the case may be) in excess of $1,000,000 shall be approved by the
Board of Directors of the Borrower or such Subsidiary, as the case may be, and
with such approval to be evidenced by a Board resolution stating that such Board
of Directors has determined that such transaction complies with the foregoing
provisions. If the Borrower or any Subsidiary of the Borrower enters into an
Affiliate Transaction (or a series of related Affiliate Transactions related to
a common plan) that involves an aggregate fair market value (as determined in
good faith by the Board of Directors of the Borrower or such Subsidiary, as the
case may be) of more than $10,000,000, the Borrower or such Subsidiary, as the
case may be, shall, prior to the consummation thereof, obtain a favorable
opinion as to the fairness of such transaction or series of related transactions
to the Borrower or the relevant Subsidiary, as the case may be, from a financial
point of view, from an Independent Financial Advisor and file the same with the
Administrative Agent.
(b) The restrictions set forth in clause (a) of this Section 9.06
shall not apply to (i) reasonable fees and compensation paid to and indemnity
provided on behalf of, officers, directors, employees or consultants of the
Borrower or any Subsidiary of the Borrower as determined in good faith by the
Borrower's Board of Directors or senior management, (ii) transactions
exclusively between or among the Borrower and any of its Wholly-Owned
Subsidiaries or exclusively between or among such Wholly-Owned Subsidiaries,
provided such transactions are not otherwise prohibited by the Credit
Documents, (iii) any agreement as in effect as of the Effective Date or any
amendment thereto or any transaction contemplated thereby (including pursuant
to any amendment thereto) in any replacement agreement thereto so long as any
such amendment or replacement agreement is not more disadvantageous to the
Banks in any material respect than the original agreement as in effect on the
Effective Date, (iv) advances and loans to employees, officers and directors of
the Borrower and its Subsidiaries permitted by Sections 9.05(v) and (xv), and
(v) Dividends permitted by Section 9.03.
9.07 Capital Expenditures. (a) The Borrower will not, and will not
--------------------
permit any of its Subsidiaries to, make any Capital Expenditures, except that
during any fiscal year of the Borrower, the Borrower and its Subsidiaries may
make Capital Expenditures so long as the aggregate amount does not exceed
$50,000,000. From and after the consummation of any Permitted Acquisition, the
Capital Expenditure amount set forth in the immediately preceding
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sentence shall be increased in each fiscal year of the Borrower by an amount
equal to 35% of the Acquired EBITDA of the respective Acquired Entity or
Business acquired in each such Permitted Acquisition for the most recently ended
12 month period prior to the consummation of such Permitted Acquisition and for
which financial statements are available for such Acquired Entity or Business
(as certified in the respective officer's certificate delivered pursuant to
clause (vi) of Section 9.02(viii)).
(b) In addition to the foregoing, in the event that the amount of
Capital Expenditures permitted to be made by the Borrower and its Subsidiaries
pursuant to clause (a) above in any fiscal year of the Borrower (before giving
effect to any increase in the permitted Capital Expenditure amount pursuant to
this clause (b)) is greater than the amount of such Capital Expenditures
actually made by the Borrower and its Subsidiaries during such fiscal year, the
lesser of (x) such excess and (y) 50% of the applicable scheduled Capital
Expenditure amount as set forth in such clause (a) above may be carried forward
and utilized to make additional Capital Expenditures in the immediately
succeeding fiscal year, provided that no amounts once carried forward pursuant
to this Section 9.07(b) may be carried forward to any fiscal year thereafter and
such amounts may only be utilized after the Borrower and its Subsidiaries have
utilized in full the permitted Capital Expenditure amount for such fiscal year
as set forth in the table in clause (a) above (without giving effect to any
increase in such amount by operation of this clause (b)).
(c) In addition to the foregoing, the Borrower and its Subsidiaries
may make Capital Expenditures with the amount of Net Sale Proceeds received by
the Borrower or any of its Subsidiaries from any Asset Sale so long as such Net
Sale Proceeds are reinvested in replacement assets within 180 days following the
date of such Asset Sale to the extent such Net Sale Proceeds are not otherwise
required to be applied to reduce the Total Revolving Loan Commitment pursuant to
Section 3.03(b).
(d) In addition to the foregoing, the Borrower and its Subsidiaries
may make Capital Expenditures with the amount of Net Insurance Proceeds received
by the Borrower or any of its Subsidiaries from any Recovery Event so long as
such Net Insurance Proceeds are used to replace or restore any properties or
assets in respect of which such Net Insurance Proceeds were paid within 180 days
following the date of receipt of such Net Insurance Proceeds from such Recovery
Event to the extent such Net Insurance Proceeds are not otherwise required to be
applied to reduce the Total Revolving Loan Commitment pursuant to Section
3.03(d).
(e) In addition to the foregoing, the Borrower and its Wholly-Owned
Subsidiaries may consummate Permitted Acquisitions to the extent permitted by
Section 9.02(viii).
9.08 Consolidated Interest Coverage Ratio. The Borrower will not
------------------------------------
permit the Consolidated Interest Coverage Ratio for any Test Period to be less
than 3.00:1.00.
9.09 Maximum Leverage Ratio. The Borrower will not permit the
----------------------
Leverage Ratio at any time to be greater than 3.00:1.00.
9.10 Consolidated Fixed Charge Coverage Ratio. The Borrower will not
----------------------------------------
permit the Consolidated Fixed Charge Coverage Ratio for any Test Period to be
less than 1.50:1.00.
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9.11 Minimum Consolidated Net Worth. The Borrower will not permit
------------------------------
the Consolidated Net Worth at any time to be less than the sum of (I)
$300,000,000 plus (II) 50% of Cumulative Consolidated Net Income (if positive)
plus, (III) 100% of the cash proceeds received by the Borrower from sales or
issuances of its equity after the Effective Date (net of underwriting or
placement discounts and commission and other costs associated therewith).
9.12 Limitation on Modifications of Certificate of Incorporation, By-
---------------------------------------------------------------
Laws, etc and Limitations on Payments and Modifications of Permitted Designated
- -------------------------------------------------------------------------------
Indebtedness. (a) The Borrower will not, and will not permit any of its
- -------------
Subsidiaries to, (i) amend, modify or change its certificate or articles of
incorporation (including, without limitation, by the filing or modification of
any certificate of designation) or by-laws (or the equivalent organizational
documents) unless any such amendment, modification or change could not be
adverse to the interests of the Banks in any material respect, (ii) after the
issuance thereof, make (or give any notice in respect of) any voluntary or
optional payment or prepayment on or redemption or acquisition for value of, or
any prepayment or redemption as a result of any asset sale, change of control or
similar event of (including in each case, without limitation, by way of
depositing with the trustee with respect thereto or any other Person money or
securities before due for the purpose of paying when due), any Permitted
Designated Indebtedness or (iii) after the execution and delivery thereof, amend
or modify, or permit the amendment or modification of, any documentation entered
into in connection with any Permitted Designated Indebtedness.
(b.) Neither the Borrower nor any of its Subsidiaries shall designate
any Indebtedness, other than the Obligations, as "Designated Senior
Indebtedness" for purposes of any Permitted Designated Indebtedness that is
issued as senior subordinated or subordinated notes or debt securities.
9.13 Limitation on Certain Restrictions on Subsidiaries. The
--------------------------------------------------
Borrower will not, and will not permit any of its Subsidiaries to, directly or
indirectly, create or otherwise cause or suffer to exist or become effective any
encumbrance or restriction on the ability of any such Subsidiary to (a) pay
dividends or make any other distributions on its capital stock or any other
interest or participation in its profits owned by the Borrower or any Subsidiary
of the Borrower, or pay any Indebtedness owed to the Borrower or any Subsidiary
of the Borrower, (b) make loans or advances to the Borrower or any Subsidiary of
the Borrower or (c) transfer any of its properties or assets to the Borrower or
any Subsidiary of the Borrower, except for such encumbrances or restrictions
existing under or by reason of (i) applicable law, (ii) this Agreement and the
other Credit Documents, (iii) customary non-assignment, subletting or
restriction on transfer or net worth provisions of any contract, license or
lease governing a leasehold interest of any Subsidiary of the Borrower, (iv) any
instrument governing Indebtedness described in Section 9.04(ix), which
restriction is not applicable to any Person, or the property or assets of any
Person, other than the Person or the properties or assets acquired pursuant to
any such Permitted Acquisition, (v) agreements existing on the Effective Date to
the extent and in the manner such agreements are in effect on the Effective
Date, (vi) any agreement for the sale or disposition of capital stock or assets
of any Subsidiary of the Borrower, provided that such encumbrances and
--------
restrictions are only applicable to such Subsidiary or assets, as applicable,
and any such sale or disposition is made in compliance with Section 9.02, (vii)
restrictions on the transfer of any asset subject to a
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<PAGE>
Lien permitted by Section 9.01 and (viii) after the issuance thereof, the
Permitted Designated Indebtedness.
9.14 Limitation on Issuance of Capital Stock. (a) The Borrower will
---------------------------------------
not, and will not permit any of its Subsidiaries to, issue (i) any preferred
stock (other than Qualified Preferred Stock of the Borrower) or (ii) any
redeemable common stock (other than common stock that is redeemable at the sole
option of the Borrower or such Subsidiary).
(b) The Borrower will not permit any of its Subsidiaries to issue
any capital stock (including by way of sales of treasury stock) or any options
or warrants to purchase, or securities convertible into, capital stock, except
(i) for transfers and replacements of then outstanding shares of capital stock,
(ii) for stock splits, stock dividends and issuances which do not decrease the
percentage ownership of the Borrower or any of its Subsidiaries in any class of
the capital stock of such Subsidiary, (iii) to qualify directors to the extent
required by applicable law, (iv) for issuances to the Borrower or a Wholly-Owned
Subsidiary thereof and (v) for issuances by newly created or acquired
Subsidiaries in accordance with the terms of this Agreement.
9.15 Business. The Borrower and its Subsidiaries will not engage in
--------
any businesses other than the businesses engaged in by the Borrower and its
Subsidiaries as of the Effective Date and reasonable extensions thereof and
other businesses that are complimentary or reasonably related thereto
(including, without limitation, "for profit universities").
9.16 Limitation on Creation of Subsidiaries. Notwithstanding
--------------------------------------
anything to the contrary contained in this Agreement, the Borrower will not, and
will not permit any of its Subsidiaries to, establish, create or acquire after
the Effective Date any Subsidiary, provided that the Borrower and its Wholly-
--------
Owned Subsidiaries shall be permitted to establish, create or, to the extent
permitted by the Agreement, acquire (x) Wholly-Owned Subsidiaries so long as (i)
the capital stock or other equity interests of each such new Wholly-Owned
Subsidiary (to the extent owned by a Credit Party) is pledged pursuant to, and
to the extent required by, the Pledge Agreement, (ii) each such new Wholly-Owned
Subsidiary (other than a Foreign Subsidiary, except to the extent required by
Section 8.10) executes a counterpart of the Subsidiaries Guaranty and the Pledge
Agreement, and (iii) each such new Wholly-Owned Subsidiary (other than a Foreign
Subsidiary, except to the extent required by Section 8.10) executes and
delivers, or causes to be executed and delivered, all other relevant
documentation of the type described in Section 5 as such new Wholly-Owned
Subsidiary would have had to deliver if such new Wholly-Owned Subsidiary were a
Credit Party on the Effective Date and (y) non-Wholly-Owned Subsidiaries so long
as the capital stock or other equity interest of each such new non-Wholly-Owned
Subsidiary (to the extent owned by a Credit Party) is pledged pursuant to, and
to the extent required by, the Pledge Agreement.
SECTION 10. Events of Default. Upon the occurrence of any of the
-----------------
following specified events (each an "Event of Default"):
10.01 Payments. The Borrower shall (i) default in the payment when
--------
due of any principal of any Loan or any Note or (ii) default, and such default
shall continue unremedied for three or more Business Days, in the payment when
due of any interest on any Loan or Note, any
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<PAGE>
Unpaid Drawing (or any interest thereon) or any Fees or any other amounts owing
hereunder or thereunder; or
10.02 Representations, etc. Any representation, warranty or
---------------------
statement made or deemed made by any Credit Party herein or in any other Credit
Document or in any certificate delivered to the Administrative Agent or any Bank
pursuant hereto or thereto shall prove to be untrue in any material respect on
the date as of which made or deemed made; or
10.03 Covenants. Any Credit Party shall (i) default in the due
---------
performance or observance by it of any term, covenant or agreement contained in
Section 8.01(f)(i) or 8.08 or Section 9 or (ii) default in the due performance
or observance by it of any other term, covenant or agreement contained in this
Agreement or any other Credit Document (other than those set forth in Sections
10.01 and 10.02) and such default shall continue unremedied for a period of 30
days after written notice thereof to the defaulting party by the Administrative
Agent or the Required Banks; or
10.04 Default Under Other Agreements. (i) The Borrower or any of
------------------------------
its Subsidiaries shall (x) default in any payment of any Indebtedness (other
than the Notes) beyond the period of grace, if any, provided in the instrument
or agreement under which such Indebtedness was created or (y) default in the
observance or performance of any agreement or condition relating to any
Indebtedness (other than the Obligations) or contained in any instrument or
agreement evidencing, securing or relating thereto, or any other event shall
occur or condition exist, the effect of which default or other event or
condition is to cause, or to permit the holder or holders of such Indebtedness
(or a trustee or agent on behalf of such holder or holders) to cause (determined
without regard to whether any notice is required), any such Indebtedness to
become due prior to its stated maturity, or (ii) any Indebtedness (other than
the Obligations) of the Borrower or any of its Subsidiaries shall be declared to
be (or shall become) due and payable, or required to be prepaid other than by a
regularly scheduled required prepayment, prior to the stated maturity thereof,
provided that it shall not be a Default or an Event of Default under this
- --------
Section 10.04 unless the aggregate principal amount of all Indebtedness as
described in preceding clauses (i) and (ii) is at least $2,000,000; or
10.05 Bankruptcy, etc. The Borrower or any of its Subsidiaries shall
----------------
commence a voluntary case concerning itself under Title 11 of the United States
Code entitled "Bankruptcy," as now or hereafter in effect, or any successor
thereto (the "Bankruptcy Code"); or an involuntary case is commenced against the
Borrower or any of its Subsidiaries, and the petition is not controverted within
10 days, or is not dismissed within 60 days, after commencement of the case; or
a custodian (as defined in the Bankruptcy Code) is appointed for, or takes
charge of, all or substantially all of the property of the Borrower or any of
its Subsidiaries, or the Borrower or any of its Subsidiaries commences any other
proceeding under any reorganization, arrangement, adjustment of debt, relief of
debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the Borrower or any
of its Subsidiaries, or there is commenced against the Borrower or any of its
Subsidiaries any such proceeding which remains undismissed for a period of 60
days, or the Borrower or any of its Subsidiaries is adjudicated insolvent or
bankrupt; or any order of relief or other order approving any such case or
proceeding is entered; or the Borrower or any of its Subsidiaries suffers any
appointment of any custodian or
-55-
<PAGE>
the like for it or any substantial part of its property to continue undischarged
or unstayed for a period of 60 days; or the Borrower or any of its Subsidiaries
makes a general assignment for the benefit of creditors; or any corporate action
is taken by the Borrower or any of its Subsidiaries for the purpose of effecting
any of the foregoing; or
10.06 ERISA. (a) Any Plan shall fail to satisfy the minimum funding
-----
standard required for any plan year or part thereof under Section 412 of the
Code or Section 302 of ERISA or a waiver of such standard or extension of any
amortization period is sought or granted under Section 412 of the Code or
Section 303 or 304 of ERISA, a Reportable Event shall have occurred, a
contributing sponsor (as defined in Section 4001(a)(13) of ERISA) of a Plan
subject to Title IV of ERISA shall be subject to the advance reporting
requirement of PBGC Regulation Section 4043.61 (without regard to subparagraph
(b)(1) thereof) and an event described in subsection .62, .63, .64, .65, .66,
.67 or .68 of PBGC Regulation Section 4043 shall be reasonably expected to occur
with respect to such Plan within the following 30 days, any Plan which is
subject to Title IV of ERISA shall have had or is likely to have a trustee
appointed to administer such Plan, any Plan which is subject to Title IV of
ERISA is, shall have been or is likely to be terminated or to be the subject of
termination proceedings under ERISA, any Plan shall have an Unfunded Current
Liability, a contribution required to be made with respect to a Plan or a
Foreign Pension Plan has not been timely made, the Borrower or any Subsidiary of
the Borrower or any ERISA Affiliate has incurred or is likely to incur any
liability to or on account of a Plan under Section 409, 502(i), 502(l), 515,
4062, 4063, 4064, 4069, 4201, 4204 or 4212 of ERISA or Section 401(a)(29), 4971
or 4975 of the Code or on account of a group health plan (as defined in Section
607(1) of ERISA or Section 4980B(g)(2) of the Code) under Section 4980B of the
Code, or the Borrower or any Subsidiary of the Borrower has incurred or is
likely to incur liabilities pursuant to one or more employee welfare benefit
plans (as defined in Section 3(1) of ERISA) that provide benefits to retired
employees or other former employees (other than as required by Section 601 of
ERISA) or Plans or Foreign Pension Plans a "default," within the meaning of
Section 4219(c)(5) of ERISA, shall occur with respect to any Plan; any
applicable law, rule or regulation is adopted, changed or interpreted, or the
interpretation or administration thereof is changed, in each case after the date
hereof, by any governmental authority or agency or by any court (a "Change in
Law"), or, as a result of a Change in Law, an event occurs following a Change in
Law, with respect to or otherwise affecting any Plan; (b) there shall result
from any such event or events the imposition of a lien, the granting of a
security interest, or a liability or a material risk of incurring a liability;
and (c) such lien, security interest or liability, either individually and/or in
the aggregate, has had, or could reasonably be expected to have, a material
adverse effect on the business, operations, properties, assets, liabilities,
condition (financial or otherwise) or prospects of the Borrower and its
Subsidiaries taken as a whole; or
10.07 Pledge Agreement. The Pledge Agreement shall cease to be in
----------------
full force and effect, or shall cease to give the Collateral Agent for the
benefit of the Secured Creditors the Liens, rights, powers and privileges
purported to be created thereby (including, without limitation, a perfected
first priority security interest in all of the Collateral, in favor of the
Collateral Agent, superior to and prior to the rights of all third Persons); or
10.08 Subsidiaries Guaranty. The Subsidiaries Guaranty or any
---------------------
provision thereof shall cease to be in full force or effect as to any Subsidiary
Guarantor, or any Subsidiary
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<PAGE>
Guarantor or any Person acting by or on behalf of such Subsidiary Guarantor
shall deny or disaffirm such Subsidiary Guarantor's obligations under the
Subsidiaries Guaranty or any Subsidiary Guarantor shall default in the due
performance or observance of any term, covenant or agreement on its part to be
performed or observed pursuant to the Subsidiaries Guaranty; or
10.09 Judgments. One or more judgments or decrees shall be entered
---------
against the Borrower or any Subsidiary of the Borrower involving in the
aggregate for the Borrower and its Subsidiaries a liability (not paid or fully
covered by a reputable and solvent insurance company) and such judgments and
decrees either shall be final and non-appealable or shall not be vacated,
discharged or stayed or bonded pending appeal for any period of 30 consecutive
days, and the aggregate amount of all such judgments equals or exceeds
$2,000,000; or
10.10 Change of Control. A Change of Control shall occur;
-----------------
then, and in any such event, and at any time thereafter, if any Event of Default
shall then be continuing, the Administrative Agent, upon the written request of
the Required Banks, shall by written notice to the Borrower, take any or all of
the following actions, without prejudice to the rights of any Administrative
Agent, any Bank or the holder of any Note to enforce its claims against any
Credit Party (provided, that, if an Event of Default specified in Section 10.05
--------
shall occur with respect to the Borrower, the result which would occur upon the
giving of written notice by the Administrative Agent as specified in clauses (i)
and (ii) below shall occur automatically without the giving of any such notice):
(i) declare the Total Revolving Loan Commitment terminated, whereupon the
Revolving Loan Commitment of each Bank shall forthwith terminate immediately and
any Commitment Commission shall forthwith become due and payable without any
other notice of any kind; (ii) declare the principal of and any accrued interest
in respect of all Loans and the Notes and all Obligations owing hereunder and
thereunder to be, whereupon the same shall become, forthwith due and payable
without presentment, demand, protest or other notice of any kind, all of which
are hereby waived by the Borrower; (iii) terminate any Letter of Credit which
may be terminated in accordance with its terms; (iv) direct the Borrower to pay
(and the Borrower agrees that upon receipt of such notice, or upon the
occurrence of an Event of Default specified in Section 10.05 with respect to the
Borrower, it will pay) to the Collateral Agent at the Payment Office such
additional amount of cash and/or Cash Equivalents, to be held as security by the
Collateral Agent, as is equal to the aggregate Stated Amount of all Letters of
Credit issued for the account of the Borrower and then outstanding; (v) enforce,
as Collateral Agent, all Liens, rights and remedies created pursuant to the
Pledge Agreement; and (vi) apply any cash collateral held by the Administrative
Agent pursuant to Section 4.02 to the repayment of the Obligations.
SECTION 11. Definitions and Accounting Terms.
--------------------------------
11.01 Defined Terms. As used in this Agreement, the following terms
-------------
shall have the following meanings (such meanings to be equally applicable to
both the singular and plural forms of the terms defined):
"Acquired EBITDA" of any Acquired Entity or Business acquired pursuant
to a Permitted Acquisition shall mean the consolidated "EBITDA" of such Acquired
Entity or
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<PAGE>
Business calculated on a basis consistent with the calculation of Consolidated
EBITDA under this Agreement and reasonably approved by the Administrative Agent.
"Acquired Entity or Business" shall have the meaning provided in the
definition of "Consolidated Net Income."
"Administrative Agent" shall mean BTCo, in its capacity as
Administrative Agent for the Banks hereunder, and shall include any successor to
the Administrative Agent appointed pursuant to Section 12.09.
"Affiliate" shall mean, with respect to any Person, any other Person
directly or indirectly controlling (including, but not limited to, all directors
and officers of such Person), controlled by, or under direct or indirect common
control with, such Person. A Person shall be deemed to control another Person
if such Person possesses, directly or indirectly, the power (i) to vote 10% or
more of the securities having ordinary voting power for the election of
directors of such corporation or to direct or cause the direction of the
management and policies of such other Person, whether through the ownership of
voting securities, by contract or otherwise. Notwithstanding the foregoing, it
is understood and agreed that for purposes of Section 9.06, no Bank (nor any
Affiliate of such Bank) shall be deemed to be an Affiliate of the Borrower.
"Affiliate Transaction" shall have the meaning provided in Section
9.06.
"Agreement" shall mean this Credit Agreement, as modified,
supplemented, amended, restated (including any amendment and restatement
hereof), extended, renewed, refinanced or replaced from time to time.
"Alternate Currency" shall mean each of Spanish Pasetas, British
Pounds, Euros and one or more other foreign currencies that are acceptable to
the Issuing Bank.
"Applicable Base Rate Margin" shall mean (i) for the period from the
Effective Date through but not including the first Start Date after the
Effective Date, 0% and (ii) from and after any Start Date to and including the
corresponding End Date, the respective percentage per annum set forth in clause
(A), (B), (C) or (D) below if, but only if, as of the Test Date for such Start
Date the applicable condition set forth in clause (A), (B), (C) or (D) below, as
the case may be, is met:
(A) 1.00% if, but only if, as of the Test Date for such Start Date
the Leverage Ratio for the Test Period ended on such Test Date shall be
greater than or equal to 2.00:1.00;
(B) .50% if, but only if, as of the Test Date for such Start Date the
Leverage Ratio for the Test Period ended on such Test Date shall be less
than 2.00:1.00 and greater than or equal to 1.50:1.00;
(C) .25% if, but only if, as of the Test Date for such Start Date the
Leverage Ratio for the Test Period ended on such Test Date shall be less
than 1.50:1.00 and greater than or equal to 1.00:1.00; and
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<PAGE>
(D) 0% if, but only if, as of the Test Date for such Start Date the
Leverage Ratio for the Test Period ended on such Test Date shall be less
than 1.00:1.00.
Notwithstanding anything to the contrary contained above in this definition, the
Applicable Base Rate Margin shall be 1.00% at all times when a Default or an
Event of Default shall exist.
"Applicable Commitment Commission Percentage" shall mean (i) for the
period from the Effective Date through but not including the first Start Date
after the Effective Date, .250% and (ii) from and after any Start Date to and
including the corresponding End Date, the respective percentage per annum set
forth in clause (A), (B) or (C) below if, but only if, as of the Test Date for
such Start Date the applicable condition set forth in clause (A), (B) or (C)
below, as the case may be, is met:
(A) .50% if, but only if, as of the Test Date for such Start Date the
Leverage Ratio for the Test Period ended on such Test Date shall be greater
than or equal to 2.00:1.00;
(B) .375% if, but only if, as of the Test Date for such Start Date
the Leverage Ratio for the Test Period ended on such Test Date shall be
less than 2.00:1.00 and greater than or equal to 1.00:1.00; and
(C) .250% if, but only if, as of the Test Date for such Start Date
the Leverage Ratio for the Test Period ended on such Test Date shall be
less than to 1.00:1.00.
Notwithstanding anything to the contrary contained above in this definition, the
Applicable Commitment Commission Percentage shall be .50% at all times when a
Default or an Event of Default shall exist.
"Applicable Eurodollar Rate Margin" shall mean (i) for the period from
the Effective Date through but not including the first Start Date after the
Effective Date, 1.00% and (ii) from and after any Start Date to and including
the corresponding End Date, the respective percentage per annum set forth in
clause (A), (B), (C) or (D) below if, but only if, as of the Test Date for such
Start Date the applicable condition set forth in clause (A), (B), (C) or (D)
below, as the case may be, is met:
(A) 2.00% if, but only if, as of the Test Date for such Start Date
the Leverage Ratio for the Test Period ended on such Test Date shall be
greater than or equal to 2.00:1.00;
(B) 1.50% if, but only if, as of the Test Date for such Start Date
the Leverage Ratio for the Test Period ended on such Test Date shall be
less than 2.00:1.00 and greater than or equal to 1.50:1.00;
(C) 1.25% if, but only if, as of the Test Date for such Start Date
the Leverage Ratio for the Test Period ended on such Test Date shall be
less than 1.50:1.00 and greater than or equal to 1.00:1.00; and
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<PAGE>
(D) 1.00% if, but only if, as of the Test Date for such Start Date
the Leverage Ratio for the Test Period ended on such Test Date shall be
less than 1.00:1.00.
Notwithstanding anything to the contrary contained above in this definition, the
Applicable Eurodollar Rate Margin shall be 2.00% at all times when a Default or
an Event of Default shall exist.
"Applicable Margin Period" shall mean each period which shall commence
on the date on which the financial statements are delivered pursuant to Section
8.01(a) or (b), as the case may be, and which shall end on the earlier of (i)
the date of actual delivery of the next financial statements pursuant to Section
8.01(a) or (b) as the case may be, and (ii) the latest date on which the next
financial statements are required to be delivered pursuant to Section 8.01(a) or
(b), as the case may be, with the first Applicable Margin Period commencing with
the delivery of the Borrower's financial statements for its fiscal year ending
December 31, 1998.
"Aspect Acquisition" shall mean the acquisition by the Borrower of
100% of the capital stock of Aspect International Language Schools, B.V. in May
6, 1998.
"Asset Sale" shall mean any sale, transfer or other disposition by the
Borrower or any of its Subsidiaries to any Person (including by-way-of
redemption by such Person) other than to the Borrower or a Wholly-Owned
Subsidiary of the Borrower of any asset (including, without limitation, any
capital stock or other securities of, or equity interests in, another Person)
other than sales of assets pursuant to Sections 9.02(ii), (iii), (iv), (ix),
(xii) and (xiii).
"Assignment and Assumption Agreement" shall mean an Assignment and
Assumption Agreement substantially in the form of Exhibit K (appropriately
completed).
"Bank" shall mean each financial institution listed on Schedule I, as
well as any Person which becomes a "Bank" hereunder pursuant to Section 1.13 or
13.04(b).
"Bank Default" shall mean (i) the refusal (which has not been
retracted) or the failure of a Bank to make available its portion of any
Borrowing required to be made available by it hereunder (including any Mandatory
Borrowing) or to fund its portion of any unreimbursed payment under Section
2.04(c) or (ii) a Bank having notified in writing the Borrower and/or the
Administrative Agent that such Bank does not intend to comply with its
obligations under Section 1.01(a), 1.01(c) or 2, in the case of either clause
(i) or (ii) as a result of any takeover or control (including, without
limitation, as a result of the occurrence of any event of the type described in
Section 10.05 with respect to such Bank) of such Bank by any regulatory
authority or agency.
"Bankruptcy Code" shall have the meaning provided in Section 10.05.
"Base Rate" shall mean, at any time, the higher of (i) the Prime
Lending Rate and (ii) 1/2 of 1% in excess of the Federal Funds Rate.
"Base Rate Loan" shall mean (i) each Swingline Loan and (ii) each
Revolving Loan designated or deemed designated as such by the Borrower at the
time of the incurrence thereof or conversion thereto.
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"Borrower" shall have the meaning provided in the first paragraph of
this Agreement.
"Borrowing" shall mean (i) the borrowing of Swingline Loans from the
Swingline Bank on a given date and (ii) the borrowing of one Type of Revolving
Loan from all the Banks on a given date (or resulting from a conversion or
conversions on such date) having in the case of Eurodollar Loans the same
Interest Period, provided that Base Rate Loans incurred pursuant to Section
--------
1.10(b) shall be considered part of the related Borrowing of Eurodollar Loans.
"BTCo" shall mean Bankers Trust Company, in its individual capacity,
and any successor corporation thereto by merger, consolidation or otherwise.
"Business Day" shall mean (i) for all purposes other than as covered
by clause (ii) below, any day except Saturday, Sunday and any day which shall be
in New York City, New York and, in the case of Swingline Loans, Charlotte, North
Carolina, a legal holiday or a day on which banking institutions are authorized
or required by law or other government action to close and (ii) with respect to
all notices and determinations in connection with, and payments of principal and
interest on, Eurodollar Loans, any day which is a Business Day described in
clause (i) above and which is also a day for trading by and between banks in the
New York interbank Eurodollar market.
"Capital Expenditures" shall mean, with respect to any Person, all
expenditures by such Person which should be capitalized in accordance with
generally accepted accounting principles, and, without duplication, the amount
of all Capitalized Lease Obligations incurred by such Person.
"Capitalized Lease Obligations" shall mean, with respect to any
Person, all rental obligations of such Person which, under generally accepted
accounting principles, are or will be required to be capitalized on the books of
such Person, in each case taken at the amount thereof accounted for as
indebtedness in accordance with such principles.
"Cash Equivalents" shall mean, as to any Person, (i) securities issued
or directly and fully guaranteed or insured by the United States or any agency
or instrumentality thereof (provided that the full faith and credit of the
--------
United States is pledged in support thereof) having maturities of not more than
one year from the date of acquisition, (ii) time deposits, Euro-dollar deposits,
certificates of deposit or bankers' acceptances of any commercial bank organized
under the laws of the United States or any state thereof or the District of
Columbia or any U.S. branch of a foreign bank having at the date of acquisition
thereof combined capital and surplus of not less than $250,000,000, in each case
with maturities of not more than one year from the date of acquisition by such
Person, (iii) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (i) above entered into
with any bank meeting the qualifications specified in clause (ii) above, (iv)
commercial paper issued by any Person incorporated in the United States rated at
least A-1 or the equivalent thereof by Standard & Poor's Ratings Services or at
least P-1 or the equivalent thereof by Moody's Investors Service, Inc. and in
each case maturing not more than one year after the date of acquisition by such
Person, (v) marketable direct obligations issued by the District of Columbia or
any State of the
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United States or any political subdivision of any such State or any public
instrumentality thereof maturing within one year from the date of acquisition
and, at the time of acquisition, having one of the two highest ratings
obtainable from either Standard & Poor's Ratings Services or Moody's Investors
Service, Inc., (vi) investments in money market funds substantially all of whose
assets are comprised of securities of the types described in clauses (i) through
(v) above, and (vii) in the case of any Foreign Subsidiary, (A) direct
obligations of the sovereign nation (or any agency thereof) in which such
Foreign Subsidiary is organized or is conducting business or in obligations
fully and unconditionally guaranteed by such sovereign nation (or any agency
thereof) having maturities of not more than one year from the date of
acquisition or (B) of the type and maturity described in clauses (ii), (iii) or
(iv) above of foreign obligors, which obligations or obligors (or the parents of
such obligors) have ratings described in such clauses or equivalent ratings from
comparable foreign rating agencies.
"Certificated Securities" shall have the meaning provided in the
Pledge Agreement.
"CERCLA" shall mean the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as the same may be amended from time to
time, 42 U.S.C. (S) 9601 et seq.
-- ----
"Change of Control" shall mean (i) any Person or "group" (within the
meaning of Section 13(d) and 14(d) under the Securities Exchange Act, as in
effect on the Effective Date) shall have (A) acquired beneficial ownership of
35% or more on a fully diluted basis of the voting and/or economic interest in
the Borrower's capital stock or (B) obtained the power (whether or not
exercised) to elect a majority of the Borrower's directors or (ii) the Board of
Directors of the Borrower shall cease to consist of a majority of Continuing
Directors or (iii) after the issuance of any issue Permitted Designated
Indebtedness, a "change of control" shall occur under any such issue of
Permitted Designated Indebtedness.
"Code" shall mean the Internal Revenue Code of 1986, as amended from
time to time, and the regulations promulgated and rulings issued thereunder.
Section references to the Code are to the Code, as in effect on the Effective
Date and any subsequent provisions of the Code, amendatory thereof, supplemental
thereto or substituted therefor.
"Collateral" shall mean all "Collateral" as defined in the Pledge
Agreement.
"Collateral Agent" shall mean the Administrative Agent acting as
collateral agent for the Secured Creditors pursuant to the Pledge Agreement.
"Commitment Commission" shall have the meaning set forth in Section
3.01(a).
"Consolidated EBIT" shall mean, for any period, Consolidated Net
Income for such period before Consolidated Interest Expense of the Borrower for
such period and provision for taxes for such period and without giving effect
(x) to any extraordinary gains or losses and (y) to any gains or losses from
sales of assets other than (i) from sales of inventory sold in the ordinary
course of business and (ii) licensing of intellectual property in the ordinary
course of business.
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"Consolidated EBITDA" shall mean, for any period, Consolidated EBIT
for such period, adjusted by adding thereto (i) the amount of all amortization
of intangibles and depreciation that were deducted in arriving at Consolidated
EBIT for such period and (ii) the amount of all non-recurring charges (x)
previously incurred in connection with the Aspect Acquisition and (y) incurred
in connection with a Permitted Acquisition, in each case to the extent that such
non-recurring charges were deducted in arriving at Consolidated EBIT for such
period.
"Consolidated Fixed Charge Coverage Ratio" shall mean, for any period,
the ratio of (x) the sum of (I) Consolidated EBITDA for such period plus (II)
the amount of all rental expense of the Borrower and its Subsidiaries for such
period to (y) Consolidated Fixed Charges for such period.
"Consolidated Fixed Charges" shall mean, for any period, the sum,
without duplication, of (i) Consolidated Interest Expense for such period, (ii)
the amount of all Capital Expenditures made by the Borrower and its Subsidiaries
for such period (other than Capital Expenditures to the extent financed with
equity proceeds, Asset Sale proceeds, insurance proceeds or Indebtedness), (iii)
the amount of all rental expense of the Borrower and its Subsidiaries for such
period and (iv) the scheduled principal amount of all amortization payments on
all Indebtedness (including, without limitation, the principal component of all
Capitalized Lease Obligations but excluding the repayment contemplated by
Section 5.12) of the Borrower and its Subsidiaries for such period (as
determined on the first day of such period and (v) the amount of all cash
payments made by the Borrower and its Subsidiaries in respect of taxes or tax
liabilities for such period.
"Consolidated Indebtedness" shall mean, at any time, without
duplication, the sum of (I) the principal amount of all Indebtedness of the
Borrower and its Subsidiaries at such time as determined on a consolidated basis
and (II) the Borrower's good faith estimate of the aggregate amount of all
accrued "earn-out" and similar payments at such time which were incurred by the
Borrower or a Subsidiary thereof in connection with the acquisition of any asset
(including pursuant to a Permitted Acquisition) less the amount of any such
"earn-out" or similar payments which have been designated by the Borrower to the
Administrative Agent as scheduled to be paid in common stock of the Borrower.
"Consolidated Interest Coverage Ratio" shall mean, for any period, the
ratio of Consolidated EBITDA to Consolidated Interest Expense for such period.
"Consolidated Interest Expense" shall mean, for any period, the total
consolidated cash interest expense of the Borrower and its Subsidiaries for such
period (calculated without regard to any limitations on the payment thereof)
plus, without duplication, that portion of Capitalized Lease Obligations of the
Borrower and its Subsidiaries representing the interest factor for such period;
provided that the amortization of deferred financing costs with respect to this
- --------
Agreement shall be excluded from Consolidated Interest Expense to the extent
same would otherwise have been included therein.
"Consolidated Net Income" shall mean, for any period, the net income
(or loss) of the Borrower and its Subsidiaries for such period, determined on a
consolidated basis (and after
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deductions for minority interests), provided that (i) the net income of any
--------
other Person which is not a Subsidiary of the Borrower or is accounted for by
the Borrower by the equity method of accounting shall be included only to the
extent of the payment of cash dividends or distributions by such other Person to
the Borrower or a Subsidiary thereof during such period, (ii) the net income of
any Subsidiary of the Borrower shall be excluded to the extent that the
declaration or payment of dividends or similar distributions by that Subsidiary
of that income is not at the time permitted by operation of the terms of its
charter or any agreement, instrument or law applicable to such Subsidiary and
(iii) the net income (or loss) of any other Person acquired by such specified
Person or a Subsidiary of such Person in a pooling of interests transaction for
any period prior to the date of such acquisition shall be excluded; and provided
--------
further, that for purposes of calculating the Leverage Ratio, there shall be
- -------
included (to the extent not already included) in determining Consolidated Net
Income for any period the net income (or loss) of any Person, business, property
or asset acquired during such period pursuant to a Permitted Acquisition and not
subsequently sold or otherwise disposed of by the Borrower or one of its
Subsidiaries during such period (each such Person, business, property or asset
acquired and not subsequently disposed of during such period, an "Acquired
Entity or Business"), in each case based on the actual net income (or loss) of
such Acquired Entity or Business for the entire period (including the portion
thereof occurring prior to such acquisition) (but after any deductions for
minority interests).
"Consolidated Net Worth" shall mean, at any date, the consolidated net
worth of the Borrower and its Subsidiaries as same would be shown on a
consolidated balance sheet of the Borrower prepared as of such date in
accordance with generally accepted accounting principles.
"Contingent Obligation" shall mean, as to any Person, any obligation
of such Person as a result of such Person being a general partner of the other
Person, unless the underlying obligation is expressly made non-recourse as to
such general partner, and any obligation of such Person guaranteeing or intended
to guarantee any Indebtedness, leases, dividends or other obligations ("primary
obligations") of any other Person (the "primary obligor") in any manner, whether
directly or indirectly, including, without limitation, any obligation of such
Person, whether or not contingent, (i) to purchase any such primary obligation
or any property constituting direct or indirect security therefor, (ii) to
advance or supply funds (x) for the purchase or payment of any such primary
obligation or (y) to maintain working capital or equity capital of the primary
obligor or otherwise to maintain the net worth or solvency of the primary
obligor, (iii) to purchase property, securities or services primarily for the
purpose of assuring the owner of any such primary obligation of the ability of
the primary obligor to make payment of such primary obligation or (iv) otherwise
to assure or hold harmless the holder of such primary obligation against loss in
respect thereof; provided, however, that the term Contingent Obligation shall
-------- -------
not include endorsements of instruments for deposit or collection in the
ordinary course of business. The amount of any Contingent Obligation shall be
deemed to be an amount equal to the stated or determinable amount of the primary
obligation in respect of which such Contingent Obligation is made or, if not
stated or determinable, the maximum reasonably anticipated liability in respect
thereof (assuming such Person is required to perform thereunder) as determined
by such Person in good faith.
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"Continuing Directors" shall mean the directors of the Borrower on the
Effective Date and each other director if such director's nomination for
election to the Board of Directors of the Borrower is recommended by a majority
of the then Continuing Directors.
"Credit Documents" shall mean this Agreement and, after the execution
and delivery thereof pursuant to the terms of this Agreement, each Note, the
Subsidiaries Guaranty and the Pledge Agreement.
"Credit Event" shall mean the making of any Loan or the issuance of
any Letter of Credit.
"Credit Party" shall mean the Borrower and each Subsidiary Guarantor.
"Cumulative Consolidated Net Income" shall mean, at any time for the
determination thereof, Consolidated Net Income for the period (taken as one
accounting period) commencing on January 1, 1999 and ending on the last day of
the Borrower's fiscal quarter then last ended.
"Default" shall mean any event, act or condition which with notice or
lapse of time, or both, would constitute an Event of Default.
"Defaulting Bank" shall mean any Bank with respect to which a Bank
Default is in effect.
"Dividend" shall mean, with respect to any Person, that such Person
has declared or paid a dividend or returned any equity capital to its
stockholders, partners or members or authorized or made any other distribution,
payment or delivery of property (other than common stock of such Person) or cash
to its stockholders, partners or members as such, or redeemed, retired,
purchased or otherwise acquired, directly or indirectly, for a consideration any
shares of any class of its capital stock or any partnership or membership
interests outstanding on or after the Effective Date (or any options or warrants
issued by such Person with respect to its capital stock or other equity
interests), or set aside any funds for any of the foregoing purposes, or shall
have permitted any of its Subsidiaries to purchase or otherwise acquire for a
consideration any shares of any class of the capital stock or any partnership or
membership interests of such Person outstanding on or after the Effective Date
(or any options or warrants issued by such Person with respect to its capital
stock or other equity interests). Without limiting the foregoing, "Dividends"
with respect to any Person that is a stockholder or other equityholder of such
Person shall also include all payments made or required to be made by such
Person with respect to any stock appreciation rights plans, equity incentive or
achievement plans or any similar plans or setting aside of any funds for the
foregoing purposes.
"Dollar Equivalent" of an amount denominated in a currency other than
Dollars ("the Other Currency") shall mean, at any time for the determination
thereof, the amount of Dollars which could be purchased with the amount of Other
Currency involved in such computation at the spot exchange rate therefor as
determined pursuant to Section 13.07(c).
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"Dollars" and the sign "$" shall each mean freely transferable lawful
money of the United States.
"Domestic Subsidiary" shall mean each Subsidiary of the Borrower that
is incorporated under the laws of the United States or any State or territory
thereof.
"Drawing" shall have the meaning provided in Section 2.05(b).
"Effective Date" shall have the meaning provided in Section 13.10.
"Eligible Transferee" shall mean and include a commercial bank,
financial institution, any fund that invests in loans or any other "accredited
investor" (as defined in Regulation D of the Securities Act).
"End Date" shall mean, for any Applicable Margin Period, the last day
of such Applicable Margin Period.
"Environmental Claims" shall mean any and all administrative,
regulatory or judicial actions, suits, demands, demand letters, directives,
claims, liens, notices of noncompliance or violation, investigations or
proceedings relating in any way to any Environmental Law or any permit issued,
or any approval given, under any such Environmental Law (hereafter, "Claims"),
including, without limitation, (a) any and all Claims by governmental or
regulatory authorities for enforcement, cleanup, removal, response, remedial or
other actions or damages pursuant to any applicable Environmental Law, and (b)
any and all Claims by any third party seeking damages, contribution,
indemnification, cost recovery, compensation or injunctive relief in connection
with alleged injury or threat of injury to health, safety or the environment due
to the presence of Hazardous Materials.
"Environmental Law" shall mean any Federal, state, foreign or local
statute, law, rule, regulation, ordinance, code, guideline, written policy and
rule of common law now or hereafter in effect and in each case as amended, and
any judicial or administrative interpretation thereof, including any judicial or
administrative order, consent decree or judgment, relating to the environment,
employee health and safety or Hazardous Materials, including, without
limitation, CERCLA; RCRA; the Federal Water Pollution Control Act, 33 U.S.C. (S)
1251 et seq.; the Toxic Substances Control Act, 15 U.S.C. (S) 2601 et seq.; the
-- ---- -- ----
Clean Air Act, 42 U.S.C. (S) 7401 et seq.; the Safe Drinking Water Act, 42
-- ----
U.S.C. (S) 3803 et seq.; the Oil Pollution Act of 1990, 33 U.S.C. (S) 2701 et
-- ---- --
seq.; the Emergency Planning and the Community Right-to-Know Act of 1986, 42
- ----
U.S.C. (S) 11001 et seq.; the Hazardous Material Transportation Act, 49 U.S.C.
-- ----
(S) 1801 et seq; the Occupational Safety and Health Act, 29 U.S.C. (S) 651 et
-- ---- --
seq.; and any state and local or foreign counterparts or equivalents, in each
- ----
case as amended from time to time.
"ERISA" shall mean the Employee Retirement Income Security Act of
1974, as amended from time to time, and the regulations promulgated and rulings
issued thereunder. Section references to ERISA are to ERISA, as in effect on
the Effective Date and any subsequent provisions of ERISA, amendatory thereof,
supplemental thereto or substituted therefor.
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"ERISA Affiliate" shall mean each person (as defined in Section 3(9)
of ERISA) which together with the Borrower or a Subsidiary of the Borrower would
be deemed to be a "single employer" (i) within the meaning of Section 414(b),
(c), (m) or (o) of the Code or (ii) as a result of the Borrower or a Subsidiary
of the Borrower being or having been a general partner of such person.
"Eurodollar Loan" shall mean each Revolving Loan designated as such by
the Borrower at the time of the incurrence thereof or conversion thereto.
"Eurodollar Rate" shall mean (a) the offered quotation to first-class
banks in the New York interbank Eurodollar market by BTCo for Dollar deposits of
amounts in immediately available funds comparable to the outstanding principal
amount of the Eurodollar Loan of BTCo with maturities comparable to the Interest
Period applicable to such Eurodollar Loan commencing two Business Days
thereafter as of 11:00 A.M. (New York time) on the date which is two Business
Days prior to the commencement of such Interest Period, divided (and rounded
upward to the nearest 1/16 of 1%) by (b) a percentage equal to 100% minus the
then stated maximum rate of all reserve requirements (including, without
limitation, any marginal, emergency, supplemental, special or other reserves
required by applicable law) applicable to any member bank of the Federal Reserve
System in respect of Eurocurrency funding or liabilities as defined in
Regulation D (or any successor category of liabilities under Regulation D).
"Event of Default" shall have the meaning provided in Section 10.
"Existing Indebtedness" shall have the meaning provided in Section
7.21.
"Facing Fee" shall have the meaning provided in Section 3.01(c).
"Federal Funds Rate" shall mean, for any period, a fluctuating
interest rate equal for each day during such period to the weighted average of
the rates on overnight Federal Funds transactions with members of the Federal
Reserve System arranged by Federal Funds brokers, as published for such day (or,
if such day is not a Business Day, for the next preceding Business Day) by the
Federal Reserve Bank of New York, or, if such rate is not so published for any
day which is a Business Day, the average of the quotations for such day on such
transactions received by the Administrative Agent from three Federal Funds
brokers of recognized standing selected by the Administrative Agent.
"Fees" shall mean all amounts payable pursuant to or referred to in
Section 3.01.
"Final Maturity Date" shall mean December 23, 2003.
"Foreign Pension Plan" shall mean any plan, fund (including, without
limitation, any superannuation fund) or other similar program established or
maintained outside the United States of America by the Borrower or any one or
more of its Subsidiaries primarily for the benefit of employees of the Borrower
or such Subsidiaries residing outside the United States of America, which plan,
fund or other similar program provides, or results in, retirement income, a
deferral of income in contemplation of retirement or payments to be made upon
termination of employment, and which plan is not subject to ERISA or the Code.
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"Foreign Subsidiary" shall mean each Subsidiary of the Borrower which
is not a Domestic Subsidiary.
"Hazardous Materials" shall mean (a) any petroleum or petroleum
products, radioactive materials, asbestos in any form that is friable, urea
formaldehyde foam insulation, transformers or other equipment that contain
dielectric fluid containing levels of polychlorinated biphenyls, and radon gas;
(b) any chemicals, materials or substances defined as or included in the
definition of "hazardous substances," "hazardous waste," "hazardous materials,"
"extremely hazardous substances," "restricted hazardous waste," "toxic
substances," "toxic pollutants," "contaminants," or "pollutants," or words of
similar import, under any applicable Environmental Law; and (c) any other
chemical, material or substance the Release of which is prohibited, limited or
regulated by any governmental authority.
"Indebtedness" shall mean, as to any Person, without duplication, (i)
all indebtedness (including principal, interest, fees and charges) of such
Person for borrowed money or for the deferred purchase price of property or
services, (ii) the maximum amount available to be drawn under all letters of
credit issued for the account of such Person and all unpaid drawings in respect
of such letters of credit, (iii) all Indebtedness of the types described in
clause (i), (ii), (iv), (v), (vi) or (vii) of this definition secured by any
Lien on any property owned by such Person, whether or not such Indebtedness has
been assumed by such Person (provided that, if the Person has not assumed or
--------
otherwise become liable in respect of such Indebtedness, such Indebtedness shall
be deemed to be in an amount equal to the fair market value of the property to
which such Lien relates as determined in good faith by such Person), (iv) the
aggregate amount required to be capitalized under leases under which such Person
is the lessee, (v) all obligations of such Person to pay a specified purchase
price for goods or services, whether or not delivered or accepted, i.e., take-
----
or-pay and similar obligations, (vi) all Contingent Obligations of such Person
and (vii) all obligations under any Interest Rate Protection Agreement, any
Other Hedging Agreement or under any similar type of agreement. Notwithstanding
the foregoing, Indebtedness shall not include trade payables and accrued
expenses incurred by any Person in accordance with customary practices and in
the ordinary course of business of such Person.
"Independent Financial Advisor" shall mean a firm (i) which does not,
and whose directors, officers and employees or Affiliates do not, have a direct
or indirect financial interest in the Borrower and (ii) which, in the judgment
of the Board of Directors of the Borrower, is otherwise independent and
qualified to perform the task for which it is to be engaged.
"Information Systems and Equipment" shall mean all computer hardware,
firmware and software, as well as other information processing systems, or any
equipment containing embedded microchips, whether directly owned, licensed,
leased, operated or otherwise controlled by the Borrower or any of its
Subsidiaries, including through third-party service providers, and which, in
whole or in part, are used, operated, relied upon, or integral to, the
Borrower's or any of its Subsidiaries' conduct of their business.
"Interest Determination Date" shall mean, with respect to any
Eurodollar Loan, the second Business Day prior to the commencement of any
Interest Period relating to such Eurodollar Loan.
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"Interest Period" shall have the meaning provided in Section 1.09.
"Interest Rate Protection Agreement" shall mean any interest rate swap
agreement, interest rate cap agreement, interest collar agreement, interest rate
hedging agreement or other similar agreement or arrangement.
"Investments" shall have the meaning provided in Section 9.05.
"Issuing Bank" shall mean BTCo.
"L/C Supportable Obligations" shall mean (i) obligations of the
Borrower or any of its Subsidiaries with respect to workers compensation, surety
bonds and other similar statutory obligations and (ii) such other obligations of
the Borrower or any of its Subsidiaries as are reasonably acceptable to the
Issuing Bank and otherwise permitted to exist pursuant to the terms of this
Agreement.
"Leaseholds" of any Person shall mean all the right, title and
interest of such Person as lessee or licensee in, to and under leases or
licenses of land, improvements and/or fixtures.
"Letter of Credit" shall have the meaning provided in Section 2.01(a).
"Letter of Credit Fee" shall have the meaning provided in Section
3.01(b).
"Letter of Credit Outstandings" shall mean, at any time, the sum of
(i) the aggregate Stated Amount of all outstanding Letters of Credit at such
time and (ii) the amount of all Unpaid Drawings at such time.
"Letter of Credit Request" shall have the meaning provided in Section
2.03(a).
"Leverage Ratio" shall mean, at any time, the ratio of Consolidated
Indebtedness at such time to Consolidated EBITDA for the Test Period then most
recently ended.
"Lien" shall mean any mortgage, pledge, hypothecation, assignment,
deposit arrangement, encumbrance, lien (statutory or other), preference,
priority or other security agreement of any kind or nature whatsoever
(including, without limitation, any conditional sale or other title retention
agreement, any financing or similar statement or notice filed under the UCC or
any other similar recording or notice statute, and any lease having
substantially the same effect as any of the foregoing).
"Loan" shall mean each Revolving Loan and each Swingline Loan.
"Mandatory Borrowing" shall have the meaning provided in Section
1.01(c).
"Margin Stock" shall have the meaning provided in Regulation U.
"Maximum Swingline Amount" shall mean $10,000,000.
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"Minimum Borrowing Amount" shall mean (i) for Revolving Loans,
$1,000,000 and (ii) for Swingline Loans, $250,000 (or such lesser amount as may
be acceptable to the Swingline Bank).
"NAIC" shall mean the National Association of Insurance Commissioners.
"Net Debt Proceeds" shall mean, with respect to any incurrence of
Indebtedness for borrowed money, the cash proceeds (net of underwriting
discounts and commissions and other reasonable costs associated therewith)
received by the respective Person from the respective incurrence of such
Indebtedness for borrowed money.
"Net Insurance Proceeds" shall mean, with respect to any Recovery
Event, the cash proceeds (net of reasonable costs and taxes incurred in
connection with such Recovery Event) received by the respective Person in
connection with the respective Recovery Event.
"Net Sale Proceeds" shall mean, for any Asset Sale, the gross cash
proceeds (including any cash received by way of deferred payment pursuant to a
promissory note, receivable or otherwise, but only as and when received)
received from such Asset Sale, net of the reasonable costs of such sale
(including fees and commissions, payments of unassummed liabilities relating to
the assets sold and required payments of any Indebtedness which is secured by
the respective assets which were sold), and the incremental taxes paid or
payable as a result of such Asset Sale.
"Non-Defaulting Bank" shall mean and include each Bank other than a
Defaulting Bank.
"Note" shall mean each Revolving Note and the Swingline Note.
"Notice of Borrowing" shall have the meaning provided in Section
1.03(a).
"Notice of Conversion" shall have the meaning provided in Section
1.06.
"Notice Office" shall mean (i) except as provided in clause (ii)
below, the office of the Administrative Agent located at One Bankers Trust
Plaza, 130 Liberty Street, New York, New York 10006, Attention: Gaelle Vaval or
such other office as the Administrative Agent may hereafter designate in writing
as such to the other parties hereto, and (ii) in the case of the incurrence of
any Swingline Loans, the office of the Swingline Bank located at 10 Light
Street: MD4-302-16-01, Baltimore, Maryland 21202 or such other office as the
Swingline Bank may hereafter designate in writing to the Administrative Agent
and the Borrower.
"Obligations" shall mean all amounts owing to the Administrative
Agent, the Collateral Agent, the Issuing Bank or any Bank pursuant to the terms
of this Agreement or any other Credit Document.
"Other Hedging Agreement" shall mean any foreign exchange contracts,
currency swap agreements, commodity agreements or other similar agreements or
arrangements designed to protect against the fluctuations in currency values.
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"Participant" shall have the meaning provided in Section 2.04(a).
"Payment Office" shall mean the office of the Administrative Agent
located at One Bankers Trust Plaza, 130 Liberty Street, New York, New York
10006, or such other office as the Administrative Agent may hereafter designate
in writing as such to the other parties hereto.
"PBGC" shall mean the Pension Benefit Guaranty Corporation established
pursuant to Section 4002 of ERISA, or any successor thereto.
"Permitted Acquisition" shall have the meaning provided in Section
9.02 (viii).
"Permitted Designated Indebtedness" shall mean any issue of unsecured
senior notes, unsecured senior subordinated notes and/or unsecured subordinated
notes (all of which may be convertible into common stock of the Borrower) issued
pursuant to, and satisfying the requirements of, Section 9.04(viii).
"Permitted Liens" shall have the meaning provided in Section 9.01.
"Person" shall mean any individual, partnership, joint venture, firm,
corporation, association, limited liability company, trust or other enterprise
or any government or political subdivision or any agency, department or
instrumentality thereof.
"Plan" shall mean any pension plan as defined in Section 3(2) of
ERISA, which is maintained or contributed to by (or to which there is an
obligation to contribute of) the Borrower or a Subsidiary of the Borrower or an
ERISA Affiliate, and each such plan for the five-year period immediately
following the latest date on which the Borrower, or a Subsidiary of the Borrower
or an ERISA Affiliate, maintained, contributed to or had an obligation to
contribute to such plan.
"Pledge Agreement" shall have the meaning provided in Section 5.08.
"Pledge Agreement Collateral" shall mean all "Collateral" as defined
in the Pledge Agreement.
"Pledgee" shall have the meaning provided in the Pledge Agreement.
"Prime Lending Rate" shall mean the rate which BTCo announces from
time to time as its prime lending rate, the Prime Lending Rate to change when
and as such prime lending rate changes. The Prime Lending Rate is a reference
rate and does not necessarily represent the lowest or best rate actually charged
to any customer. BTCo may make commercial loans or other loans at rates of
interest at, above or below the Prime Lending Rate.
"Projections" shall mean the five year projections of the Borrower and
its Subsidiaries through its fiscal year ending December 31, 2003, which are
dated November, 1998 and were delivered to the Bank prior to the Effective Date.
"Qualified Preferred Stock" shall mean any preferred stock of the
Borrower so long as the terms of any such preferred stock (i) do not contain any
mandatory put, redemption,
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repayment, sinking fund or other similar provision, except upon the occurrence
of a change of control so long as the terms thereof do not require any such
redemption or other action unless all Obligations have been paid in full and the
Total Revolving Loan Commitment has been terminated or the requisite consents
under this Agreement have been obtained to permit such redemption or other
action, (ii) do not require the cash payment of dividends to the extent that the
payment thereof would not be permitted at such time pursuant to this Agreement,
(iii) do not contain any operating or financial maintenance covenants, (iv) do
not grant the holders thereof any voting rights except for (x) voting rights
required to be granted to such holders under applicable law and (y) limited
customary voting rights on fundamental matters such as mergers, consolidations,
sales of all or substantially all of the assets of the Borrower, or liquidations
involving the Borrower, and (v) are otherwise reasonably satisfactory to the
Administrative Agent.
"Quarterly Payment Date" shall mean the last Business Day of each
March, June, September and December occurring after the Effective Date.
"RCRA" shall mean the Resource Conservation and Recovery Act, as the
same may be amended from time to time, 42 U.S.C. (S) 6901 et seq.
-- ----
"Real Property" of any Person shall mean all the right, title and
interest of such Person in and to land, improvements and fixtures, including
Leaseholds.
"Recovery Event" shall mean the receipt by the Borrower or any of its
Subsidiaries of any cash insurance proceeds or condemnation awards payable (i)
by reason of theft, loss, physical destruction, damage, taking or any other
similar event with respect to any property or assets of the Borrower or any of
its Subsidiaries and (ii) under any policy of insurance required to be
maintained under Section 8.03 (in each case other than payments received in
respect of business interruption insurance).
"Register" shall have the meaning provided in Section 13.15.
"Regulation D" shall mean Regulation D of the Board of Governors of
the Federal Reserve System as from time to time in effect and any successor to
all or a portion thereof establishing reserve requirements.
"Regulation T" shall mean Regulation T of the Board of Governors of
the Federal Reserve System as from time to time in effect and any successor to
all or a portion thereof.
"Regulation U" shall mean Regulation U of the Board of Governors of
the Federal Reserve System as from time to time in effect and any successor to
all or a portion thereof.
"Regulation X" shall mean Regulation X of the Board of Governors of
the Federal Reserve System as from time to time in effect and any successor to
all or a portion thereof.
"Release" shall mean the disposing, discharging, injecting, spilling,
pumping, leaking, leaching, dumping, emitting, escaping, emptying, pouring or
migrating, into or upon any land or water or air, or otherwise entering into the
environment.
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"Replaced Bank" shall have the meaning provided in Section 1.13.
"Replacement Bank" shall have the meaning provided in Section 1.13.
"Reportable Event" shall mean an event described in Section 4043(c) of
ERISA with respect to a Plan that is subject to Title IV of ERISA other than
those events as to which the 30-day notice period is waived under subsection
.22, .23, .25, .27 or .28 of PBGC Regulation Section 4043.
"Required Banks" shall mean Non-Defaulting Banks the sum of whose
Revolving Loan Commitments (or after the termination thereof, outstanding
Revolving Loans and RL Percentages of outstanding Swingline Loans and Letter of
Credit Outstandings) represent an amount greater than 50% of the sum of the
Total Revolving Loan Commitment less the Revolving Loan Commitments of all
Defaulting Banks (or after the termination thereof, the sum of the then total
outstanding Revolving Loans of Non-Defaulting Banks and the aggregate RL
Percentages of Non-Defaulting Banks of the total outstanding Swingline Loans and
Letter of Credit Outstandings at such time).
"Revolving Loan" shall have the meaning provided in Section 1.01(a).
"Revolving Loan Commitment" shall mean, for each Bank, the amount set
forth opposite such Bank's name in Schedule I directly below the column entitled
"Revolving Loan Commitment," as same may be (x) reduced from time to time
pursuant to Sections 3.02, 3.03 and/or 10 or (y) adjusted from time to time as a
result of assignments to or from such Bank pursuant to Section 1.13 or 13.04(b).
"Revolving Note" shall have the meaning provided in Section 1.05(a).
"RL Percentage" of any Bank at any time shall mean a fraction
(expressed as a percentage) the numerator of which is the Revolving Loan
Commitment of such Bank at such time and the denominator of which is the Total
Revolving Loan Commitment at such time, provided that if the RL Percentage of
--------
any Bank is to be determined after the Total Revolving Loan Commitment has been
terminated, then the RL Percentages of the Banks shall be determined immediately
prior (and without giving effect) to such termination.
"SEC" shall have the meaning provided in Section 8.01(g).
"Section 4.04(b)(ii) Certificate" shall have the meaning provided in
Section 4.04(b)(ii).
"Secured Creditors" shall have the meaning assigned that term in the
Security Documents.
"Securities Act" shall mean the Securities Act of 1933, as amended,
and the rules and regulations promulgated thereunder.
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"Securities Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, and the rules and regulations promulgated thereunder.
"Start Date" shall mean, with respect to any Applicable Margin Period,
the first day of such Applicable Margin Period.
"Stated Amount" of each Letter of Credit shall mean, at any time, the
maximum amount available to be drawn thereunder (regardless of whether any
conditions for drawing could then be met), provided the "Stated Amount" of each
---------
Letter of Credit denominated in an Alternate Currency shall be, on any date of
calculation, the Dollar Equivalent of the maximum amount available to be drawn
in such Alternate Currency thereunder (determined without regard to whether any
conditions to drawing could then be met).
"Subsidiaries Guaranty" shall have the meaning provided in Section
5.09.
"Subsidiary" shall mean, as to any Person, (i) any corporation more
than 50% of whose stock of any class or classes having by the terms thereof
ordinary voting power to elect a majority of the directors of such corporation
(irrespective of whether or not at the time stock of any class or classes of
such corporation shall have or might have voting power by reason of the
happening of any contingency) is at the time owned by such Person and/or one or
more Subsidiaries of such Person and (ii) any partnership, limited liability
company, association, joint venture or other entity in which such Person and/or
one or more Subsidiaries of such Person has more than a 50% equity interest at
the time.
"Subsidiary Guarantor" shall mean each Wholly-Owned Domestic
Subsidiary of the Borrower and, to the extent required by Section 8.10, each
Wholly-Owned Foreign Subsidiary of the Borrower.
"Swingline Bank" shall mean NationsBank, N.A. and its successors and
assigns.
"Swingline Expiry Date" shall mean that date which is five Business
Days prior to the Final Maturity Date.
"Swingline Loan" shall have the meaning provided in Section 1.01(b).
"Swingline Note" shall have the meaning provided in Section 1.05(a).
"Taxes" shall have the meaning provided in Section 4.04(a).
"Test Date" shall mean, with respect to any Start Date, the last day
of the most recent fiscal quarter of the Borrower ended immediately prior to
such Start Date.
"Test Period" shall mean the four consecutive fiscal quarters of the
Borrower then last ended (in each case taken as one accounting period).
"Total Revolving Loan Commitment" shall mean, at any time, the sum of
the Revolving Loan Commitments of each of the Banks.
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"Total Unutilized Revolving Loan Commitment" shall mean, at any time,
an amount equal to the remainder of (x) the Total Revolving Loan Commitment then
in effect less (y) the sum of the aggregate principal amount of all Revolving
Loans and Swingline Loans then outstanding plus the then aggregate amount of all
Letter of Credit Outstandings at such time.
"Type" shall mean the type of Loan determined with regard to the
interest option applicable thereto, i.e., whether a Base Rate Loan or a
----
Eurodollar Loan.
"UCC" shall mean the Uniform Commercial Code as from time to time in
effect in the relevant jurisdiction.
"Unfunded Current Liability" of any Plan shall mean the amount, if
any, by which the actuarial present value of the accumulated plan benefits under
the Plan as of the close of its most recent plan year, determined in accordance
with actuarial assumptions at such time consistent with Statement of Financial
Accounting Standards No. 87, exceeds the market value of the assets allocable
thereto.
"United States" and "U.S." shall each mean the United States of
America.
"Unpaid Drawing" shall have the meaning provided for in Section
2.05(a).
"Unutilized Revolving Loan Commitment" shall mean, with respect to any
Bank at any time, such Bank's Revolving Loan Commitment at such time less the
sum of (i) the aggregate outstanding principal amount of all Revolving Loans
made by such Bank at such time and (ii) such Bank's RL Percentage of the Letter
of Credit Outstandings at such time.
"Wholly-Owned Domestic Subsidiary" shall mean each Domestic Subsidiary
of the Borrower that is also a Wholly-Owned Subsidiary of the Borrower.
"Wholly-Owned Foreign Subsidiary" shall mean each Foreign Subsidiary
of the Borrower that is also a Wholly-Owned Subsidiary of the Borrower.
"Wholly-Owned Subsidiary" shall mean, as to any Person, (i) any
corporation 100% of whose capital stock (other than director's qualifying
shares) is at the time owned by such Person and/or one or more Wholly-Owned
Subsidiaries of such Person and (ii) any partnership, limited liability company,
association, joint venture or other entity in which such Person and/or one or
more Wholly-Owned Subsidiaries of such Person has a 100% equity interest at such
time.
"Year 2000 Compliant" shall mean that all Information Systems and
Equipment accurately process date data (including, but not limited to,
calculating, comparing and sequencing), before, during and after the year 2000,
as well as same and multi-century dates, or between the years 1999 and 2000,
taking into account all leap years, including the fact that the year 2000 is a
leap year, and further, that when used in combination with, or interfacing with,
other Information Systems and Equipment, shall accurately accept, release and
exchange date data, and shall in all material respects continue to function in
the same manner as it performs on the Effective Date and shall not otherwise
impair the accuracy or functionality of Information Systems and Equipment.
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SECTION 12. The Administrative Agent.
------------------------
12.01 Appointment. The Banks hereby irrevocably designate BTCo as
-----------
Administrative Agent (for purposes of this Section 12, the term "Administrative
Agent" also shall include BTCo in its capacity as Collateral Agent pursuant to
the Pledge Agreement) to act as specified herein and in the other Credit
Documents. Each Bank hereby irrevocably authorizes, and each holder of any Note
by the acceptance of such Note shall be deemed irrevocably to authorize, the
Administrative Agent to take such action on their behalf under the provisions of
this Agreement, the other Credit Documents and any other instruments and
agreements referred to herein or therein and to exercise such powers and to
perform such duties hereunder and thereunder as are specifically delegated to or
required of the Administrative Agent by the terms hereof and thereof and such
other powers as are reasonably incidental thereto. The Administrative Agent may
perform any of its duties hereunder by or through its officers, directors,
agents, employees or affiliates.
12.02 Nature of Duties. The Administrative Agent shall not have any
----------------
duties or responsibilities except those expressly set forth in this Agreement
and in the other Credit Documents. Neither the Administrative Agent nor any of
its officers, directors, agents, employees or affiliates shall be liable for any
action taken or omitted by them hereunder or under any other Credit Document or
in connection herewith or therewith, unless caused by its or their gross
negligence or willful misconduct (as finally determined by a court of competent
jurisdiction). The duties of the Administrative Agent shall be mechanical and
administrative in nature; the Administrative Agent shall not have by reason of
this Agreement or any other Credit Document a fiduciary relationship in respect
of any Bank or the holder of any Note; and nothing in this Agreement or any
other Credit Document, expressed or implied, is intended to or shall be so
construed as to impose upon the Administrative Agent any obligations in respect
of this Agreement or any other Credit Document except as expressly set forth
herein or therein.
12.03 Lack of Reliance on the Administrative Agent. Independently
--------------------------------------------
and without reliance upon the Administrative Agent, each Bank and the holder of
each Note, to the extent it deemed or deems appropriate, has made and shall
continue to make (i) its own independent investigation of the financial
condition and affairs of the Borrower and its Subsidiaries in connection with
the making and the continuance of the Loans and the taking or not taking of any
action in connection herewith and (ii) its own appraisal of the creditworthiness
of the Borrower and its Subsidiaries and, except as expressly provided in this
Agreement, the Administrative Agent shall not have any duty or responsibility,
either initially or on a continuing basis, to provide any Bank or the holder of
any Note with any credit or other information with respect thereto, whether
coming into its possession before the making of the Loans or at any time or
times thereafter. The Administrative Agent shall not be responsible to any Bank
or the holder of any Note for any recitals, statements, information,
representations or warranties herein or in any document, certificate or other
writing delivered in connection herewith or for the execution, effectiveness,
genuineness, validity, enforceability, perfection, collectability, priority or
sufficiency of this Agreement or any other Credit Document or the financial
condition of the Borrower or any of its Subsidiaries or be required to make any
inquiry concerning either the performance or observance of any of the terms,
provisions or conditions of this Agreement or any other Credit Document, or
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the financial condition of the Borrower or any of its Subsidiaries or the
existence or possible existence of any Default or Event of Default.
12.04 Certain Rights of the Administrative Agent. If the
------------------------------------------
Administrative Agent shall request instructions from the Required Banks or all
of the Banks, as applicable, with respect to any act or action (including
failure to act) in connection with this Agreement or any other Credit Document,
the Administrative Agent shall be entitled to refrain from such act or taking
such action unless and until the Administrative Agent shall have received
instructions from the Required Banks or all of the Banks, as applicable; and the
Administrative Agent shall not incur liability to any Bank by reason of so
refraining. Without limiting the foregoing, no Bank or the holder of any Note
shall have any right of action whatsoever against the Administrative Agent as a
result of the Administrative Agent acting or refraining from acting hereunder or
under any other Credit Document in accordance with the instructions of the
Required Banks or all of the Banks, as applicable.
12.05 Reliance. The Administrative Agent shall be entitled to rely,
--------
and shall be fully protected in relying, upon any note, writing, resolution,
notice, statement, certificate, telex, teletype or telecopier message,
cablegram, radiogram, order or other document or telephone message signed, sent
or made by any Person that the Administrative Agent believed to be the proper
Person, and, with respect to all legal matters pertaining to this Agreement and
any other Credit Document and its duties hereunder and thereunder, upon advice
of counsel selected by the Administrative Agent.
12.06 Indemnification. To the extent the Administrative Agent is not
---------------
reimbursed and indemnified by the Borrower or any of its Subsidiaries, the Banks
will reimburse and indemnify the Administrative Agent in proportion to their
respective "percentage" as used in determining the Required Banks for and
against any and all liabilities, obligations, losses, damages, penalties,
claims, actions, judgments, costs, expenses or disbursements of whatsoever kind
or nature which may be imposed on, asserted against or incurred by the
Administrative Agent in performing its duties hereunder or under any other
Credit Document or in any way relating to or arising out of this Agreement or
any other Credit Document; provided that no Bank shall be liable for any portion
--------
of such liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements resulting from the
Administrative Agent's gross negligence or willful misconduct (as finally
determined by a court of competent jurisdiction).
12.07 The Administrative Agent in its Individual Capacity. With
---------------------------------------------------
respect to its obligation to make Loans, or issue or participate in Letters of
Credit, under this Agreement, the Administrative Agent shall have the rights and
powers specified herein for a "Bank" and may exercise the same rights and powers
as though it were not performing the duties specified herein; and the term
"Banks," "Required Banks," "holders of Notes" or any similar terms shall, unless
the context clearly otherwise indicates, include the Administrative Agent in its
individual capacity. The Administrative Agent and its affiliates may accept
deposits from, lend money to, and generally engage in any kind of banking,
investment banking, trust or other business with, or provide debt financing,
equity capital or other services (including financial advisory services) to, any
Credit Party or any Affiliate of any Credit Party (or any Person engaged in a
similar business
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with any Credit Party or any Affiliate thereof) as if they were not performing
the duties specified herein, and may accept fees and other consideration from
any Credit Party or any Affiliate of any Credit Party for services in connection
with this Agreement and otherwise without having to account for the same to the
Banks.
12.08 Holders. The Administrative Agent may deem and treat the payee
-------
of any Note as the owner thereof for all purposes hereof unless and until a
written notice of the assignment, transfer or endorsement thereof, as the case
may be, shall have been filed with the Administrative Agent. Any request,
authority or consent of any Person who, at the time of making such request or
giving such authority or consent, is the holder of any Note shall be conclusive
and binding on any subsequent holder, transferee, assignee or indorsee, as the
case may be, of such Note or of any Note or Notes issued in exchange therefor.
12.09 Resignation by the Administrative Agent. (a) The
---------------------------------------
Administrative Agent may resign from the performance of all its respective
functions and duties hereunder and/or under the other Credit Documents at any
time by giving 15 Business Days' prior written notice to the Banks. Such
resignation shall take effect upon the appointment of a successor Administrative
Agent pursuant to clauses (b) and (c) below or as otherwise provided below.
(b) Upon any such notice of resignation by the Administrative
Agent, the Required Banks shall appoint a successor Administrative Agent
hereunder or thereunder who shall be a commercial bank or trust company
reasonably acceptable to the Borrower, which acceptance shall not be
unreasonably withheld or delayed (provided that the Borrower's approval shall
not be required if an Event of Default then exists).
(c) If a successor Administrative Agent shall not have been so
appointed within such 15 Business Day period, the Administrative Agent with the
consent of the Borrower (which consent shall not be unreasonably withheld or
delayed), shall then appoint a successor Administrative Agent who shall serve as
Administrative Agent hereunder or thereunder until such time, if any, as the
Required Banks appoint a successor Administrative Agent as provided above.
(d) If no successor Administrative Agent has been appointed
pursuant to clause (b) or (c) above by the 20th Business Day after the date such
notice of resignation was given by the Administrative Agent, the Administrative
Agent's resignation shall become effective and the Required Banks shall
thereafter perform all the duties of the Administrative Agent hereunder and/or
under any other Credit Document until such time, if any, as the Required Banks
appoint a successor Administrative Agent as provided above.
SECTION 13. Miscellaneous.
-------------
13.01 Payment of Expenses, etc. The Borrower shall: (i) whether or
-------------------------
not the transactions herein contemplated are consummated, pay all reasonable
out-of-pocket costs and expenses of the Administrative Agent (including, without
limitation, the reasonable fees and disbursements of White & Case LLP) in
connection with the preparation, execution and delivery of this Agreement and
the other Credit Documents and the documents and instruments referred to herein
and therein and any amendment, waiver or consent relating hereto or thereto, of
the
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Administrative Agent in connection with its syndication efforts with respect to
this Agreement and of the Administrative Agent and, after the occurrence of an
Event of Default, each of the Banks in connection with the enforcement of this
Agreement and the other Credit Documents and the documents and instruments
referred to herein and therein or in connection with any refinancing or
restructuring of the credit arrangements provided under this Agreement in the
nature of a "work-out" or pursuant to any insolvency or bankruptcy proceedings
(including, without limitation, in each case the reasonable fees and
disbursements of counsel for the Administrative Agent and, after the occurrence
of an Event of Default, for each of the Banks); (ii) pay and hold each of the
Banks harmless from and against any and all present and future stamp, excise and
other similar documentary taxes with respect to the foregoing matters and save
each of the Banks harmless from and against any and all liabilities with respect
to or resulting from any delay or omission (other than to the extent
attributable to such Bank) to pay such taxes; and (iii) indemnify the
Administrative Agent and each Bank, and each of their respective officers,
directors, employees, representatives and agents from and hold each of them
harmless against any and all liabilities, obligations (including removal or
remedial actions), losses, damages, penalties, claims, actions, judgments,
suits, costs, expenses and disbursements (including reasonable attorneys' and
consultants' fees and disbursements) incurred by, imposed on or assessed against
any of them as a result of, or arising out of, or in any way related to, or by
reason of, (a) any investigation, litigation or other proceeding (whether or not
the Administrative Agent or any Bank is a party thereto and whether or not such
investigation, litigation or other proceeding is brought by or on behalf of any
Credit Party) related to the entering into and/or performance of this Agreement
or any other Credit Document or the use of any Letter of Credit or the proceeds
of any Loans hereunder or the consummation of any of the transactions
contemplated herein or in any other Credit Document or the exercise of any of
their rights or remedies provided herein or in the other Credit Documents, or
(b) the actual or alleged presence of Hazardous Materials in the air, surface
water or groundwater or on the surface or subsurface of any Real Property owned,
leased or at any time operated by the Borrower or any of its Subsidiaries, the
generation, storage, transportation, handling or disposal of Hazardous Materials
by the Borrower or any of its Subsidiaries at any location, whether or not
owned, leased or operated by the Borrower or any of its Subsidiaries, the non-
compliance of any Real Property owned, leased or at any time operated by the
Borrower or any of its Subsidiaries with foreign, federal, state and local laws,
regulations, and ordinances (including applicable permits thereunder) applicable
to any Real Property, or any Environmental Claim asserted against the Borrower,
any of its Subsidiaries or any Real Property owned, leased or at any time
operated by the Borrower or any of its Subsidiaries, including, in each case,
without limitation, the reasonable fees and disbursements of counsel and other
consultants incurred in connection with any such investigation, litigation or
other proceeding (but excluding any losses, liabilities, claims, damages or
expenses to the extent incurred by reason of the gross negligence, bad faith or
willful misconduct of the Person to be indemnified (as finally determined by a
court of competent jurisdiction)). To the extent that the undertaking to
indemnify, pay or hold harmless the Administrative Agent or any Bank set forth
in the preceding sentence may be unenforceable because it is violative of any
law or public policy, the Borrower shall make the maximum contribution to the
payment and satisfaction of each of the indemnified liabilities which is
permissible under applicable law.
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13.02 Right of Setoff. In addition to any rights now or hereafter
---------------
granted under applicable law or otherwise, and not by way of limitation of any
such rights, upon the occurrence and during the continuance of an Event of
Default, each Bank is hereby authorized at any time or from time to time,
without presentment, demand, protest or other notice of any kind to any Credit
Party or to any other Person, any such notice being hereby expressly waived, to
set off and to appropriate and apply any and all deposits (general or special)
and any other Indebtedness at any time held or owing by such Bank (including,
without limitation, by branches and agencies of such Bank wherever located) to
or for the credit or the account of any Credit Party against and on account of
the Obligations and liabilities of the Credit Parties to such Bank under this
Agreement or under any of the other Credit Documents, including, without
limitation, all interests in Obligations purchased by such Bank pursuant to
Section 13.06(b), and all other claims of any nature or description arising out
of or connected with this Agreement or any other Credit Document, irrespective
of whether or not such Bank shall have made any demand hereunder and although
said Obligations, liabilities or claims, or any of them, shall be contingent or
unmatured.
13.03 Notices. Except as otherwise expressly provided herein, all
-------
notices and other communications provided for hereunder shall be in writing
(including telegraphic, telex, telecopier or cable communication) and mailed,
telegraphed, telexed, telecopied, cabled or delivered: if to any Credit Party,
at the address specified opposite its signature below or in the other relevant
Credit Documents; if to the Bank, at its address specified on Schedule II; and
if to the Administrative Agent, at the Notice Office; or, as to any Credit Party
or the Administrative Agent, at such other address as shall be designated by
such party in a written notice to the other parties hereto and, as to each Bank,
at such other address as shall be designated by such Bank in a written notice to
the Borrower and the Administrative Agent. All such notices and communications
shall, when mailed, telegraphed, telexed, telecopied, or cabled or sent by
overnight courier, be effective when deposited in the mails, delivered to the
telegraph company, cable company or overnight courier, as the case may be, or
sent by telex or telecopier, except that notices and communications to the
Administrative Agent and the Borrower shall not be effective until received by
the Administrative Agent or the Borrower, as the case may be.
13.04 Benefit of Agreement; Assignments; Participations. (a) This
-------------------------------------------------
Agreement shall be binding upon and inure to the benefit of and be enforceable
by the respective successors and assigns of the parties hereto; provided,
--------
however, the Borrower may not assign or transfer any of its rights, obligations
- -------
or interest hereunder without the prior written consent of each of the Banks
and, provided further, that, although any Bank may transfer, assign or grant
----------------
participations in its rights hereunder, such Bank shall remain a "Bank" for all
purposes hereunder (and may not transfer or assign all or any portion of its
Commitments hereunder except as provided in Sections 1.13 and 13.04(b)) and the
transferee, assignee or participant, as the case may be, shall not constitute a
"Bank" hereunder and, provided further, that no Bank shall transfer or grant any
----------------
participation under which the participant shall have rights to approve any
amendment to or waiver of this Agreement or any other Credit Document except to
the extent such amendment or waiver would (i) extend the final scheduled
maturity of any Revolving Loan, Note or Letter of Credit (unless such Letter of
Credit is not extended beyond the Final Maturity Date) in which such participant
is participating, or reduce the rate or extend the time of payment of interest
or Fees thereon (except in connection with a waiver of applicability of any
post-default increase in interest rates) or reduce the principal amount thereof
(it being understood that any amendment or
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modification to the financial definitions in this Agreement or to Section
13.07(a) shall not constitute a reduction in the rate of interest or Fees
payable hereunder), or increase the amount of the participant's participation
over the amount thereof then in effect (it being understood that a waiver of any
Default or Event of Default or of a mandatory reduction in the Total Revolving
Loan Commitment, shall not constitute a change in the terms of such
participation, and that an increase in any Revolving Loan Commitment or
Revolving Loan shall be permitted without the consent of any participant if the
participant's participation is not increased as a result thereof), (ii) consent
to the assignment or transfer by the Borrower of any of its rights and
obligations under this Agreement or (iii) release all or substantially all of
the Collateral (except as expressly provided in the Credit Documents) supporting
the Revolving Loans hereunder in which such participant is participating. In the
case of any such participation, the participant shall not have any rights under
this Agreement or any of the other Credit Documents (the participant's rights
against such Bank in respect of such participation to be those set forth in the
agreement executed by such Bank in favor of the participant relating thereto)
and all amounts payable by the Borrower hereunder shall be determined as if such
Bank had not sold such participation.
(b) Notwithstanding the foregoing, any Bank (or any Bank together
with one or more other Banks) may (x) assign all or a portion of its Revolving
Loan Commitment and related outstanding Obligations hereunder to (i) its parent
company and/or any affiliate of such Bank which is at least 50% owned by such
Bank or its parent company or to one or more Banks or (ii) in the case of any
Bank that is a fund that invests in loans, any other fund that invests in loans
and is managed or advised by the same investment advisor of such Bank or by an
Affiliate of such investment advisor or (y) assign all, or if less than all, a
portion equal to at least $5,000,000 in the aggregate for the assigning Bank or
assigning Banks, of such Revolving Loan Commitment and related outstanding
Obligations hereunder to one or more Eligible Transferees (treating any fund
that invests in loans and any other fund that invests in bank loans and is
managed or advised by the same investment advisor of such fund or by an
Affiliate of such investment advisor as a single Eligible Transferee), each of
which assignees shall become a party to this Agreement as a Bank by execution of
an Assignment and Assumption Agreement, provided that, (i) at such time Schedule
--------
I shall be deemed modified to reflect the Revolving Loan Commitments of such new
Bank and of the existing Banks, (ii) upon the surrender of the relevant
Revolving Note by the assigning Bank (or, upon such assigning Bank's
indemnifying the Borrower for any lost Revolving Note pursuant to a customary
indemnification agreement) a new Revolving Note will be issued, at the
Borrower's expense, to such new Bank and to the assigning Bank upon the request
of such new Bank or assigning Bank, such new Revolving Note to be in conformity
with the requirements of Section 1.05 (with appropriate modifications) to the
extent needed to reflect the revised Revolving Loan Commitments and/or
outstanding Revolving Loans, as the case may be, (iii) the consent of the
Administrative Agent and, so long as no Default or an Event of Default then
exists, the consent of the Borrower, shall be required in connection with any
assignment to an Eligible Transferee pursuant to clause (y) above (each of which
consents shall not be unreasonably withheld or delayed), (iv) the Administrative
Agent shall receive at the time of each such assignment, from the assigning or
assignee Bank, the payment of a non-refundable assignment fee of $3,500 and (v)
no such transfer or assignment will be effective until recorded by the
Administrative Agent on the Register pursuant to Section 13.15. To the extent
of any assignment pursuant to this Section 13.04(b), the assigning Bank shall be
relieved of its obligations hereunder
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with respect to its assigned Revolving Loan Commitment and outstanding Revolving
Loans. At the time of each assignment pursuant to this Section 13.04(b) to a
Person which is not already a Bank hereunder and which is not a United States
person (as such term is defined in Section 7701(a)(30) of the Code) for Federal
income tax purposes, the respective assignee Bank shall, to the extent legally
entitled to do so, provide to the Borrower the appropriate Internal Revenue
Service Forms (and, if applicable, a Section 4.04(b)(ii) Certificate) described
in Section 4.04(b). To the extent that an assignment of all or any portion of a
Bank's Revolving Loan Commitment and related outstanding Obligations pursuant to
Section 1.13 or this Section 13.04(b) would, at the time of such assignment,
result in increased costs under Section 1.10, 2.06 or 4.04 from those being
charged by the respective assigning Bank prior to such assignment, then the
Borrower shall not be obligated to pay such increased costs (although the
Borrower, in accordance with and pursuant to the other provisions of this
Agreement, shall be obligated to pay any other increased costs of the type
described above resulting from changes after the date of the respective
assignment).
(c) Nothing in this Agreement shall prevent or prohibit any Bank
from pledging its Revolving Loans and Revolving Note hereunder to a Federal
Reserve Bank in support of borrowings made by such Bank from such Federal
Reserve Bank and, with the consent of the Administrative Agent, any Bank which
is a fund may pledge all or any portion of its Revolving Loans and Revolving
Note to its trustee in support of its obligations to its trustee. No pledge
pursuant to this clause (c) shall release the transferor Bank from any of its
obligations hereunder.
13.05 No Waiver; Remedies Cumulative. No failure or delay on the
------------------------------
part of the Administrative Agent, the Collateral Agent, the Issuing Bank or any
Bank in exercising any right, power or privilege hereunder or under any other
Credit Document and no course of dealing between the Borrower or any other
Credit Party and the Administrative Agent, the Collateral Agent, Issuing Bank or
any Bank shall operate as a waiver thereof; nor shall any single or partial
exercise of any right, power or privilege hereunder or under any other Credit
Document preclude any other or further exercise thereof or the exercise of any
other right, power or privilege hereunder or thereunder. The rights, powers and
remedies herein or in any other Credit Document expressly provided are
cumulative and not exclusive of any rights, powers or remedies which the
Administrative Agent, the Collateral Agent, the Issuing Bank or any Bank would
otherwise have. No notice to or demand on any Credit Party in any case shall
entitle any Credit Party to any other or further notice or demand in similar or
other circumstances or constitute a waiver of the rights of the Administrative
Agent, the Collateral Agent, the Issuing Bank or any Bank to any other or
further action in any circumstances without notice or demand.
13.06 Payments Pro Rata. (a) Except as otherwise provided in this
-----------------
Agreement, the Administrative Agent agrees that promptly after its receipt of
each payment from or on behalf of the Borrower in respect of any Obligations
hereunder, it shall distribute such payment to the Banks (other than any Bank
that has consented in writing to waive its pro rata share of any such payment)
--- ----
pro rata based upon their respective shares, if any, of the Obligations with
- --- ----
respect to which such payment was received.
(b) Each of the Banks agrees that, if it should receive any amount
hereunder (whether by voluntary payment, by realization upon security, by the
exercise of the right of setoff
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or banker's lien, by counterclaim or cross action, by the enforcement of any
right under the Credit Documents, or otherwise), which is applicable to the
payment of the principal of, or interest on, the Revolving Loans, Unpaid
Drawings, Commitment Commission or Letter of Credit Fees, of a sum which with
respect to the related sum or sums received by other Banks is in a greater
proportion than the total of such Obligation then owed and due to such Bank
bears to the total of such Obligation then owed and due to all of the Banks
immediately prior to such receipt, then such Bank receiving such excess payment
shall purchase for cash without recourse or warranty from the other Banks an
interest in the Obligations of the respective Credit Party to such Banks in such
amount as shall result in a proportional participation by all the Banks in such
amount; provided that if all or any portion of such excess amount is thereafter
--------
recovered from such Bank, such purchase shall be rescinded and the purchase
price restored to the extent of such recovery, but without interest.
(c) Notwithstanding anything to the contrary contained herein, the
provisions of the preceding Sections 13.06(a) and (b) shall be subject to the
express provisions of this Agreement which require, or permit, differing
payments to be made to Non-Defaulting Banks as opposed to Defaulting Banks.
13.07 Calculations; Computations; Accounting Terms. (a) The
--------------------------------------------
financial statements to be furnished to the Banks pursuant hereto shall be made
and prepared in accordance with generally accepted accounting principles in the
United States consistently applied throughout the periods involved (except as
set forth in the notes thereto or as otherwise disclosed in writing by the
Borrower to the Banks); provided that, except as otherwise specifically provided
herein, all computations and all definitions used in determining compliance with
Sections 9.07 through 9.11, inclusive, shall utilize accounting principles and
policies in conformity with those used to prepare the historical financial
statements of the Borrower referred to in Section 7.05(a).
(b) All computations of interest, Commitment Commission and other
Fees hereunder shall be made on the basis of a year of 360 days for the actual
number of days (including (in each case) the first day but excluding the last
day; except that in the case of Letter of Credit Fees, the last day shall be
included) occurring in the period for which such interest, Commitment Commission
or Fees are payable.
(c) For purposes of this Agreement, the Dollar Equivalent of each
Letter of Credit denominated in an Alternate Currency shall be calculated (A) on
the date when such Letter of Credit is issued or any disbursements thereunder
made (calculated using the spot selling rate quoted by the Administrative
Agent's foreign exchange traders on such date), (B) on the second Business Day
of each month (calculated using the spot selling rate quoted in the Wall Street
Journal on the first business day of such month) and (C) at such other times as
designated by the Administrative Agent. Such Dollar Equivalent shall remain in
effect until the same is recalculated by the Administrative Agent as provided
above and notice of such recalculation is received by the Borrower, it being
understood that until such notice is received, the Dollar Equivalent shall be
that Dollar Equivalent as last reported to the Borrower by the Administrative
Agent.
13.08 GOVERNING LAW; SUBMISSION TO JURISDICTION; VENUE; WAIVER OF
-----------------------------------------------------------
JURY TRIAL. (a) THIS AGREEMENT AND THE OTHER CREDIT DOCU-
- ----------
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<PAGE>
MENTS AND THE RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER
SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF
NEW YORK. ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY
OTHER CREDIT DOCUMENT MAY BE BROUGHT IN THE COURTS OF THE STATE OF NEW YORK OR
OF THE UNITED STATES FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY EXECUTION
AND DELIVERY OF THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT, THE BORROWER HEREBY
IRREVOCABLY ACCEPTS FOR ITSELF AND IN RESPECT OF ITS PROPERTY, GENERALLY AND
UNCONDITIONALLY, THE JURISDICTION OF THE AFORESAID COURTS. THE BORROWER HEREBY
FURTHER IRREVOCABLY WAIVES ANY CLAIM THAT ANY SUCH COURTS LACK PERSONAL
JURISDICTION OVER IT, AND AGREES NOT TO PLEAD OR CLAIM, IN ANY LEGAL ACTION
PROCEEDING WITH RESPECT TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENTS BROUGHT
IN ANY OF THE AFOREMENTIONED COURTS, THAT SUCH COURTS LACK PERSONAL JURISDICTION
OVER IT. THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS OUT
OF ANY OF THE AFOREMENTIONED COURTS IN ANY SUCH ACTION OR PROCEEDING BY THE
MAILING OF COPIES THEREOF BY REGISTERED OR CERTIFIED MAIL, POSTAGE PREPAID, TO
IT AT ITS ADDRESS SET FORTH OPPOSITE ITS SIGNATURE BELOW, SUCH SERVICE TO BECOME
EFFECTIVE 30 DAYS AFTER SUCH MAILING. THE BORROWER HEREBY IRREVOCABLY WAIVES ANY
OBJECTION TO SUCH SERVICE OF PROCESS AND FURTHER IRREVOCABLY WAIVES AND AGREES
NOT TO PLEAD OR CLAIM IN ANY ACTION OR PROCEEDING COMMENCED HEREUNDER OR UNDER
ANY OTHER CREDIT DOCUMENT THAT SERVICE OF PROCESS WAS IN ANY WAY INVALID OR
INEFFECTIVE. NOTHING HEREIN SHALL AFFECT THE RIGHT OF THE AGENT, ANY BANK OR THE
HOLDER OF ANY NOTE TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR TO
COMMENCE LEGAL PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE BORROWER IN ANY
OTHER JURISDICTION.
(b) THE BORROWER HEREBY IRREVOCABLY WAIVES ANY OBJECTION WHICH IT
MAY NOW OR HEREAFTER HAVE TO THE LAYING OF VENUE OF ANY OF THE AFORESAID ACTIONS
OR PROCEEDINGS ARISING OUT OF OR IN CONNECTION WITH THIS AGREEMENT OR ANY OTHER
CREDIT DOCUMENT BROUGHT IN THE COURTS REFERRED TO IN CLAUSE (a) ABOVE AND HEREBY
FURTHER IRREVOCABLY, TO THE EXTENT PERMITTED BY APPLICABLE LAW, WAIVES AND
AGREES NOT TO PLEAD OR CLAIM IN ANY SUCH COURT THAT ANY SUCH ACTION OR
PROCEEDING BROUGHT IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
(c) EACH OF THE PARTIES TO THIS AGREEMENT HEREBY IRREVOCABLY WAIVES
ALL RIGHT TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING
OUT OF OR RELATING TO THIS AGREEMENT, THE OTHER CREDIT DOCUMENTS OR THE
TRANSACTIONS CONTEMPLATED HEREBY OR THEREBY.
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<PAGE>
13.09 Counterparts. This Agreement may be executed in any number of
------------
counterparts and by the different parties hereto on separate counterparts, each
of which when so executed and delivered shall be an original, but all of which
shall together constitute one and the same instrument. A set of counterparts
executed by all the parties hereto shall be lodged with the Borrower and the
Administrative Agent.
13.10 Effectiveness. This Agreement shall become effective on the
-------------
date (the "Effective Date") on which (i) the Borrower, the Administrative Agent
and the Banks shall have signed a counterpart hereof (whether the same or
different counterparts) and shall have delivered the same to the Administrative
Agent at the Notice Office or, in the case of the Banks, shall have given to the
Administrative Agent telephonic (confirmed in writing), written or telex notice
(actually received) at such office that the same has been signed and mailed to
it and (ii) the conditions set forth in Section 5 are met to the satisfaction of
the Administrative Agent and the Required Banks. Unless the Administrative
Agent has received actual notice from any Bank that the conditions contained in
Section 5 have not been met to its satisfaction, upon the satisfaction of the
condition described in clause (i) of the immediately preceding sentence and upon
the Administrative Agent's good faith determination that the conditions
described in clause (ii) of the immediately preceding sentence have been met,
then the Effective Date shall have been deemed to have occurred, regardless of
any subsequent determination that one or more of the conditions thereto had not
been met (although the occurrence of the Effective Date shall not release the
Borrower from any liability for failure to satisfy one or more of the applicable
conditions contained in Section 5). The Administrative Agent will give the
Borrower and each Bank prompt written notice of the occurrence of the Effective
Date.
13.11 Headings Descriptive. The headings of the several sections and
--------------------
subsections of this Agreement are inserted for convenience only and shall not in
any way affect the meaning or construction of any provision of this Agreement.
13.12 Amendment or Waiver; etc. (a) Neither this Agreement nor any
-------------------------
other Credit Document nor any terms hereof or thereof may be changed, waived,
discharged or terminated unless such change, waiver, discharge or termination is
in writing signed by the respective Credit Parties party thereto and the
Required Banks, provided that no such change, waiver, discharge or termination
--------
shall, without the consent of each Bank (other than a Defaulting Bank), (i)
extend the final scheduled maturity of any Loan or Note or extend the stated
expiration date of any Letter of Credit beyond the Final Maturity Date, or
reduce the rate or extend the time of payment of interest or Fees thereon, or
reduce the principal amount thereof (except in connection with a waiver of
applicability of any post-default increase in interest rates) (it being
understood that any amendment or modification to the financial definitions in
this Agreement or to Section 13.07(a) shall not constitute a reduction in the
rate of interest or Fees for the purposes of this clause (i)), (ii) release all
or substantially all of the Collateral (except as expressly provided in the
Credit Documents), (iii) amend, modify or waive any provision of this Section
13.12, (except for technical amendments with respect to such additional
extensions of credit pursuant to this Agreement which afford the protections to
such additional extensions of credit of the type provided to the Revolving Loan
Commitments on the Effective Date) (iv) reduce the percentage specified in the
definition of Required Banks (it being understood that, with the consent of the
Required Banks, additional extensions of credit pursuant to this Agreement may
be included in the
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<PAGE>
determination of the Required Banks on substantially the same basis as the
Revolving Loan Commitments are included on the Effective Date) or (v) consent to
the assignment or transfer by the Borrower of any of its rights and obligations
under this Agreement; provided further, that no such change, waiver, discharge
----------------
or termination shall (A) increase the Revolving Loan Commitment of any Bank over
the amount thereof then in effect without the consent of such Bank (it being
understood that waivers or modifications of conditions precedent, covenants,
Defaults or Events of Default or of a mandatory reduction in the Total Revolving
Loan Commitment shall not constitute an increase of the Revolving Loan
Commitment of any Bank, and that an increase in the available portion of any
Revolving Loan Commitment of any Bank shall not constitute an increase of the
Revolving Loan Commitment of such Bank), (B) without the consent of the Issuing
Bank, amend, modify or waive any provision of Section 2 or alter its rights or
obligations with respect to Letters of Credit, (C) without the consent of the
Swingline Bank, alter the Swingline Bank's rights or obligations with respect to
Swingline Loans, (D) without the consent of the Administrative Agent, amend,
modify or waive any provision of Section 12 or any other provision as same
relates to the rights or obligations of the Administrative Agent, or (E) without
the consent of the Collateral Agent, amend, modify or waive any provision
relating to the rights or obligations of the Collateral Agent.
(b) If, in connection with any proposed change, waiver, discharge
or termination to any of the provisions of this Agreement as contemplated by
clauses (i) through (v), inclusive, of the first proviso to Section 13.12(a),
the consent of the Required Banks is obtained but the consent of one or more of
such other Banks whose consent is required is not obtained, then the Borrower
shall have the right, so long as all non-consenting Banks whose individual
consent is required are treated as described in either clauses (A) or (B) below,
to either (A) replace each such non-consenting Bank or Banks with one or more
Replacement Banks pursuant to Section 1.13 so long as at the time of such
replacement, each such Replacement Bank consents to the proposed change, waiver,
discharge or termination or (B) terminate such non-consenting Bank's Revolving
Loan Commitment and/or repay the outstanding Revolving Loans of such Bank and
cash collateralize its applicable RL Percentage of the Letter of Credit
Outstandings in accordance with Sections 3.02(b) and 4.01(b), provided that,
--------
unless the Revolving Loan Commitment that is terminated, and Revolving Loans
repaid, pursuant to preceding clause (B) are immediately replaced in full at
such time through the addition of new Banks or the increase of the Revolving
Loan Commitments and/or outstanding Revolving Loans of existing Banks (who in
each case must specifically consent thereto), then in the case of any action
pursuant to preceding clause (B) the Required Banks (determined after giving
effect to the proposed action) shall specifically consent thereto, provided
--------
further, that in any event the Borrower shall not have the right to replace a
- -------
Bank, terminate its Revolving Loan Commitment or repay its Revolving Loans
solely as a result of the exercise of such Bank's rights (and the withholding of
any required consent by such Bank) pursuant to the second proviso to Section
13.12(a).
13.13 Survival. All indemnities set forth herein including, without
--------
limitation, in Sections 1.10, 1.11, 2.06, 4.04, 12.06 and 13.01 shall survive
the execution, delivery and termination of this Agreement and the Notes and the
making and repayment of the Obligations.
13.14 Domicile of Loans. Each Bank may transfer and carry its Loans
-----------------
at, to or for the account of any office, Subsidiary or Affiliate of such Bank.
Notwithstanding anything to
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the contrary contained herein, to the extent that a transfer of Loans pursuant
to this Section 13.14 would, at the time of such transfer, result in increased
costs under Section 1.10, 1.11, 2.06 or 4.04 from those being charged by the
respective Bank prior to such transfer, then the Borrower shall not be obligated
to pay such increased costs (although the Borrower shall be obligated to pay any
other increased costs of the type described above resulting from changes after
the date of the respective transfer).
13.15 Register. The Borrower hereby designates the Administrative
--------
Agent to serve as the Borrower's agent, solely for purposes of this Section
13.15, to maintain a register (the "Register") on which it will record the
Revolving Loan Commitments from time to time of each of the Banks, the Revolving
Loans and Swingline Loans made by each of the Banks and each repayment in
respect of the principal amount of the Revolving Loans and Swingline Loans of
each Bank. Failure to make any such recordation, or any error in such
recordation shall not affect the Borrower's obligations in respect of such
Revolving Loans and Swingline Loans. With respect to any Bank, the transfer of
the Revolving Loan Commitment of such Bank and the rights to the principal of,
and interest on, any Revolving Loan made pursuant to such Revolving Loan
Commitment shall not be effective until such transfer is recorded on the
Register maintained by the Administrative Agent with respect to ownership of
such Revolving Loan Commitment and Revolving Loans and prior to such
recordation all amounts owing to the transferor with respect to such Revolving
Loan Commitment and Revolving Loans shall remain owing to the transferor. The
registration of assignment or transfer of all or part of any Revolving Loan
Commitments and Revolving Loans shall be recorded by the Administrative Agent on
the Register only upon the acceptance by the Administrative Agent of a properly
executed and delivered Assignment and Assumption Agreement pursuant to Section
13.04(b). Coincident with the delivery of such an Assignment and Assumption
Agreement to the Administrative Agent for acceptance and registration of
assignment or transfer of all or part of a Revolving Loan, or as soon thereafter
as practicable, the assigning or transferor Bank shall surrender the Revolving
Note evidencing such Revolving Loan, and thereupon one or more new Revolving
Notes in the same aggregate principal amount shall be issued to the assigning or
transferor Bank and/or the new Bank. The Borrower agrees to indemnify the
Administrative Agent from and against any and all losses, claims, damages and
liabilities of whatsoever nature which may be imposed on, asserted against or
incurred by the Administrative Agent in performing its duties under this Section
13.15.
13.16 Confidentiality. (a) Subject to the provisions of clause (b)
---------------
of this Section 13.16, each Bank agrees that it will use its reasonable efforts
not to disclose without the prior consent of the Borrower (other than to its
employees, auditors, advisors or counsel or to another Bank if the Bank or such
Bank's holding or parent company in its sole discretion determines that any such
party should have access to such information, provided such Persons shall be
subject to the provisions of this Section 13.16 to the same extent as such Bank)
any information with respect to the Borrower or any of its Subsidiaries which is
now or in the future furnished pursuant to this Agreement or any other Credit
Document and which is designated by the Borrower to the Banks in writing as
confidential, provided that any Bank may disclose any such information (i) as
--------
has become generally available to the public other than by virtue of a breach of
this Section 13.16(a) by the respective Bank, (ii) as may be required or
appropriate in any report, statement or testimony submitted to any municipal,
state or Federal regulatory body having or claiming to have jurisdiction over
such Bank or to the Federal Reserve Board or the Federal Deposit Insurance
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<PAGE>
Corporation or similar organizations (whether in the United States or elsewhere)
or their successors, (iii) as may be required or appropriate in respect to any
summons or subpoena or in connection with any litigation, (iv) in order to
comply with any law, order, regulation or ruling applicable to such Bank, (v) to
the Administrative Agent or the Collateral Agent and (vi) to any prospective or
actual transferee or participant in connection with any contemplated transfer or
participation of any of the Revolving Notes or Revolving Loan Commitments or any
interest therein by such Bank, provided that such prospective transferee or
--------
participant agrees to be bound by the confidentiality provisions contained in
this Section 13.16.
(b) The Borrower hereby acknowledges and agrees that each Bank may
share with any of its affiliates any information related to the Borrower or any
of its Subsidiaries (including, without limitation, any nonpublic customer
information regarding the creditworthiness of the Borrower and its
Subsidiaries), provided such Persons shall be subject to the provisions of this
Section 13.16 to the same extent as such Bank.
13.17 Increases of Revolving Loan Commitments. So long as no Default
---------------------------------------
or Event of Default then exists or would result therefrom, the Borrower shall
have the right at any time and from time to time through and including December
1, 2000, and upon at least 30 days prior notice to the Administrative Agent to
request one or more Banks to increase their respective Revolving Loan
Commitments, it being understood and agreed, however, that (i) no Bank shall be
obligated to increase its Revolving Loan Commitment as a result of any request
by the Borrower, (ii) any Bank may so increase its Revolving Loan Commitment
without the consent of any other Bank, but with the prior consent or the
Administrative Agent, (iii) any increase in the Total Revolving Loan Commitment
pursuant to this Section 13.17 shall be in a minimum amount of at least
$10,000,000, (iv) the Total Revolving Loan Commitment may not be increased by
more than $50,000,000 in the aggregate pursuant to this Section 13.17, (v) any
increase in the Revolving Loan Commitment of any Bank pursuant to this Section
13.17 shall be done in coordination with the Administrative Agent, (vi) any such
increase must be effective prior to December 31, 2000 and (vii) the fees payable
to any Bank for increasing its Revolving Loan Commitment pursuant to this
section 13.17 shall not exceed the average up-front fees paid to the Banks on
the Effective Date in respect of their Revolving Loan Commitments. At the time
of any increase in the Total Revolving Loan Commitment pursuant to this Section
13.17, (i) the Borrower shall, in coordination with the Administrative Agent,
repay outstanding Revolving Loans of certain Banks and, if necessary, incur
additional Revolving Loans from other Banks in each case so that the Banks
continue to participate in each Borrowing of Revolving Loans pro rata on the
--- ----
basis of their respective Revolving Loan Commitments (after giving effect to any
such increase in the Total Revolving Loan Commitment pursuant to this Section
13.17) and with the Borrower being obligated to pay to the respective Banks the
costs of the type referred to in Section 1.11 in connection with any such
repayment and/or Borrowing, (ii) Schedule I shall be deemed modified to reflect
the revised Revolving Loan Commitments of the affected Banks, and (iii) upon
surrender of any old Revolving Notes by those Lenders that have increased their
Revolving Loan Commitments pursuant to this Section 13.17, to the extent
requested by such Banks, new Revolving Notes will be issued, at the Borrower's
expense, to such Banks to be in conformity with the requirements of Section 1.05
(with appropriate modifications) to the extent needed to reflect the revised
Revolving Loan Commitments.
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13.18 Judgment Currency. (a) The Borrower's obligation hereunder
-----------------
and under the other Credit Documents to make payments in Dollars or, in the case
of Letters of Credit denominated in an Alternate Currency, the Dollar Equivalent
thereof (in either case, the "Obligation Currency") shall not be discharged or
satisfied by any tender or recovery pursuant to any judgment expressed in or
converted into any currency other than the Obligation Currency, except to the
extent that such tender or recovery results in the effective receipt by the
Administrative Agent, the Issuing Bank or the respective Bank of the full amount
of the Obligation Currency expressed to be payable to the Administrative Agent,
the Issuing Bank or such Bank under this Agreement or the other Credit
Documents. If for the purpose of obtaining or enforcing judgment against the
Borrower in any court of in any jurisdiction, it becomes necessary to convert
into or from any currency other than the Obligation Currency (such other
currency being hereinafter referred to as the "Judgment Currency") an amount due
in the Obligation Currency, the conversion shall be made, at the Dollar
Equivalent thereof, in the case of conversions into Dollars or, in the case of
conversions into a currency other than Dollars, at the rate of exchange quoted
by the Administrative Agent, determined, in each case, as of the date
immediately preceding the day on which the judgment is given (such Business Day
being hereinafter referred to as the "Judgment Currency Conversion Date".)
(b) If there is a change in the rate of exchange prevailing between
the Judgment Currency Conversion Date and the date of actual payment of the
amount due, the Borrower convenants and agrees to pay, or cause to be paid, such
additional amounts, if any (but in any event not a lesser amount) as may be
necessary to ensure that the amount paid in the Judgment Currency, when
converted at the rate of exchange prevailing on the date of payment, will
produce the amount of the Obligation Currency which could have been purchased
with the amount of Judgment Currency stipulated in the judgment or judicial
award at the rate of exchange prevailing on the Judgment Currency Conversion
Date.
(c) For purposes of determining the Dollar Equivalent or any other
rate of exchange under this Section 13.18, such amounts shall include any
premium and costs payable in connection with the purchase of the Obligation
Currency.
13.19 Euro. If, while at any time any Letter of Credit denominated
----
in an Alternate Currency (an "Alternate Currency Letter of Credit") is
outstanding, the relevant Alternate Currency is fully replaced as the lawful
currency of the country that issued such Alternate Currency (the "Issuing
Country") by the Euro so that all payments are to be made in the Issuing Country
in Euros and not in the Alternate Currency previously the lawful currency of
such Issuing Country, then such Alternate Currency Letter of Credit shall be
automatically converted into a Letter of Credit denominated in Euros in a Stated
Amount equal to the amount of Euros into which the Stated Amount of such
Alternate Currency Letter of Credit would be converted pursuant to the EMU
Legislation (and thereafter no further Letters of Credit will be available in
such Alternate Currency).
* * *
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Agreement as of the date first
above written.
Address:
- -------
SYLVAN LEARNING SYSTEMS, INC.
1000 Lancaster Street
Baltimore, MD 21202
Telephone: (410) 843-8000
Telecopier: (410) 843-8060 By: /s/ B. Lee McGee
-----------------------------------
Attention: B. Lee McGee Name: B. Lee McGee
Title: C.F.O.
BANKERS TRUST COMPANY,
Individually, as Administrative
Agent and as Lead Arranger
By: /s/ Mary Kay Coyle
-----------------------------------
Name: MARY KAY COYLE
Title: Managing Director
<PAGE>
NATIONSBANK, N.A., Individually and as
Syndication Agent
By: /s/ James H. Peterson
-----------------------------------
Name: JAMES H. PETERSON
Title: SENIOR VICE PRESIDENT
<PAGE>
ABN AMRO BANK N.V., NEW YORK BRANCH
By: /s/ Stephen Van Besien
-----------------------------------
Name: STEPHEN VAN BESIEN
Title: GROUP VICE PRESIDENT
By: /s/ Michael A. Kowalczuk
-----------------------------------
Name: MICHAEL A. KOWALCZUK
Title: ASSISTANT VICE PRESIDENT
<PAGE>
CRESTAR BANK
By: /s/ Andrew D. waller
-----------------------------------
Name: Andrew D. Waller
Title: Vice President
<PAGE>
THE FIRST NATIONAL BANK OF MARYLAND
By: /s/ Brooks W. Thropp
-----------------------------------
Name: Brooks W. Thropp
Title: Vice President
<PAGE>
FIRST UNION NATIONAL BANK
By: /s/ Sean M. Sands
-----------------------------------
Name: Sean M. Sands
Title: Vice President
<PAGE>
EXHIBIT 10.37
STOCK PURCHASE AGREEMENT
STOCK PURCHASE AGREEMENT (this "Agreement"), effective as of January 1,
1998, by and among SYLVAN LEARNING SYSTEMS, INC., a Maryland corporation (the
"Purchaser"), MARLENE CANTER (the "Stockholder"), the sole stockholder of CANTER
& ASSOCIATES, INC., a California corporation ("Canter"), and CANTER EDUCATIONAL
PRODUCTIONS, INC., a California corporation ("Canter Productions" and, together
with Canter, the "Companies"), each of which Companies has elected to be treated
as an S Corporation pursuant to Subchapter S of the Internal Revenue Code of
1986, as amended (the "Code"), and joined in by MR. LEE CANTER ("Mr. Canter").
W I T N E S S E T H:
- - - - - - - - - -
The Stockholder owns all of the issued and outstanding capital stock of
each of the Companies. The Purchaser and the Stockholder wish to enter into an
agreement for the acquisition of all of the outstanding stock of the Companies
by the Purchaser (the "Stock Purchases"), either directly or through a wholly-
owned subsidiary. The Purchaser, the Stockholder and Mr. Canter wish to enter
into a definitive agreement setting forth the terms and conditions of the Stock
Purchases.
Accordingly, in consideration of the foregoing and of the covenants,
agreements, representations and warranties hereinafter contained, the Purchaser,
the Companies, the Stockholder and Mr. Canter hereby agree as follows:
1. REPRESENTATIONS AND WARRANTIES OF THE PURCHASER. The Purchaser hereby
represents and warrants to the Stockholder that the statements contained in this
Section 1 are true and correct, except to the extent otherwise indicated in any
periodic reports, statements and other documents including, without limitation,
all exhibits thereto (collectively the "Purchaser SEC Reports"), filed by the
Purchaser with the U.S. Securities and Exchange Commission (the "Commission")
under the Securities Exchange Act of 1934, as amended (the "Exchange Act") or as
set forth in the disclosure schedule delivered by the Purchaser to the Companies
on or before the date of this Agreement (the "Purchaser Disclosure Schedule").
The Purchaser Disclosure Schedule shall be arranged in sections corresponding to
the number and lettered sections contained in this Section 1. The disclosure in
any section of the Purchaser Disclosure Schedule or in any Purchaser SEC
Reports, however, shall be deemed to constitute disclosure for all sections in
this Article 1.
1.1 Organization and Standing; Subsidiaries.
---------------------------------------
(a) Each of the Purchaser and its subsidiaries whose business or
assets are material to Purchaser, either individually or on a consolidated basis
(collectively, the "Purchaser Subsidiaries," and, together with the Purchaser,
collectively "Purchaser"), is a corporation duly organized, validly existing and
in good standing under the laws of the jurisdiction of its incorporation and has
all requisite corporate power and authority to own, lease
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<PAGE>
and operate its properties and to carry on its businesses as now being
conducted, except where the failure to be so organized, existing and in good
standing or to have such power and authority would not, and reasonably could not
be expected to, individually or in the aggregate, have a material adverse effect
on the business, assets (whether tangible or intangible), financial condition,
results of operations or business prospects ("Material Adverse Effect") of
Purchaser or the transactions contemplated hereby.
(b) Each of the Purchaser and the Purchaser Subsidiaries is duly
qualified or licensed and in good standing to do business in each jurisdiction
in which the property owned, leased or operated by it or the nature of the
business conducted by it makes such qualification or licensing necessary, except
in such jurisdictions where the failure to be so duly qualified or licensed and
in good standing would not, individually or in the aggregate, have a Material
Adverse Effect on Purchaser.
(c) All issued and outstanding shares of capital stock of the
Purchaser and of the Purchaser Subsidiaries have been duly and validly issued
and are fully paid and non-assessable, free of any preemptive rights.
1.2 Financial Statements; Exchange Act Filings.
------------------------------------------
(a) The Purchaser has heretofore delivered to the Stockholder
copies of the Purchaser's: (i) 1996 Annual Report to Stockholders which contains
Purchaser's consolidated financial statements as of and for the years ended
December 31, 1994, 1995 and 1996, which have been audited by Ernst & Young LLP,
independent auditors (the "Purchaser Financial Statements") and, (ii) Quarterly
Report on Form 10-Q as of and for the quarter and nine months ended September
30, 1997, which contains Purchaser's unaudited consolidated financial statements
for such quarter and nine months' period ("Purchaser Interim Financial
Statements"). The Purchaser Financial Statements and the Purchaser Interim
Financial Statements fairly present, in conformity with generally accepted
accounting principles ("GAAP") applied on a consistent basis (except as may be
indicated in the notes thereto) and in conformity with the Commission's
Regulation S-X, the consolidated financial position of the Purchaser and its
consolidated subsidiaries as of the dates thereof and their consolidated result
of operations and cash flows for the periods then ended (subject in the case of
the unaudited financial statements to normal recurring year-end audit
adjustments, which are not expected to be material in amount). Since January 1,
1996, the Purchaser has not made any material changes in the accounting policies
applied to the Purchaser Financial Statements, and no such changes are
contemplated nor, to the best of the Purchaser's knowledge, required under GAAP
or the Commission's Regulation S-X.
(b) All Purchaser SEC Reports filed during the twenty-four months
preceding the date of this Agreement were filed in a timely manner and complied
in all material respects with the applicable requirements of the Exchange Act
and the rules and regulations promulgated thereunder. At the time filed with
the SEC by the Purchaser and, as of the date of this Agreement, no Purchaser SEC
Report contained any untrue statement of a material fact or
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<PAGE>
omitted to state any material fact required to be stated therein or necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not misleading.
1.3 No Undisclosed Liabilities. Except as and to the extent
--------------------------
reflected or reserved against in the consolidated balance sheets included within
the Purchaser Financial Statements or the Purchaser Interim Financial
Statements, at the date of such statements, Purchaser had no material
liabilities or obligations (whether accrued, absolute or contingent), of the
character which, under GAAP, should be accrued, shown, disclosed or indicated in
a consolidated balance sheet of the Purchaser or explanatory notes or
information supplementary thereto.
1.4 No Conflict With Other Documents. Neither the execution and
--------------------------------
delivery of this Agreement nor the carrying out of the transactions contemplated
hereby will result in any violation, termination or modification of, or be in
conflict with, the Purchaser's Articles of Incorporation or By-Laws, or, any
terms of any contract or other instrument to which the Purchaser is a party, or
any judgment, decree or order applicable to the Purchaser, or result in the
creation of any lien, charge or encumbrance upon any of its properties or
assets, except where such event or occurrence would not, singly or in the
aggregate, have a Material Adverse Effect on the Purchaser.
1.5 Authority; Validity of Stock; Consents.
--------------------------------------
(a) The Purchaser has all necessary corporate power and authority
to execute and deliver this Agreement and to consummate the transactions
contemplated hereby.
(b) The execution and delivery of the Letter of Intent, dated
November 3, 1997, between Purchaser and Stockholder, this Agreement and the
consummation of the transactions contemplated hereby have been duly and validly
authorized by the Purchaser's Board of Directors and no other corporate
proceedings on the part of the Purchaser or any of the Purchaser Subsidiaries
are necessary to authorize this Agreement or to consummate the transactions
contemplated hereby. This Agreement has been duly and validly executed and
delivered by the Purchaser and constitutes a valid, legal and binding agreement
of the Purchaser, enforceable against the Purchaser in accordance with its
terms.
(c) The shares of Common Stock, $.01 par value per share, of the
Purchaser ("Purchaser Common Stock") issuable by the Purchaser as Additional
Consideration for the Stock Purchases (the "Earnout Shares") have been duly
authorized for issuance and will, when issued and delivered as provided in this
Agreement, be duly and validly issued, fully paid and non-assessable. The offer
and sale of the Earnout Shares is exempt from registration under the Securities
Act of 1933, as amended (the "Securities Act").
(d) No consent, approval, order or authorization of, or
registration, declaration or filing with (i) any governmental entity or (ii) any
individual, corporation or other entity (including, without limitation, any
holder of any securities issued by Purchaser) is required
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<PAGE>
by or with respect to the Purchaser in connection with the execution and
delivery of this Agreement or the consummation of the transactions contemplated
hereby, except for (A) such consents, approvals, orders, authorizations,
registrations, declaration and filings as may be required under applicable state
"blue sky" or securities laws and the securities laws of any foreign country,
(B) those set forth in the Purchaser Disclosure Schedule, and (D) such other
consents, authorizations, filings, approvals and registrations which, if not
obtained or made, would not (1) have a Material Adverse Effect on Purchaser, or
(2) adversely effect the consummation of the transactions contemplated hereby in
accordance with the terms hereof.
1.6 Disclosure. No representation or warranty made by the
----------
Purchaser in this Agreement and no statement contained in a certificate,
schedule, list or other instrument or document specified in or delivered
pursuant to this Agreement, whether heretofore furnished to the Purchaser or
hereafter required to be furnished to the Purchaser, contains or will contain
any untrue statement of a material fact or omits or will omit to state any
material fact necessary to make the statements contained herein or therein not
misleading.
1.7 Availability of Initial Purchase Price. Purchaser has, and
--------------------------------------
at the Closing will have, sufficient immediately available funds to pay the
Initial Purchase Price.
2. REPRESENTATIONS AND WARRANTIES OF THE STOCKHOLDER. The Stockholder
hereby represents and warrants to the Purchaser that the statements contained in
this Section 2 are true and correct, except as set forth in the disclosure
schedules delivered by the Stockholder on or before the date of this Agreement
(the "Stockholder's Disclosure Schedule). The Stockholder's Disclosure Schedule
shall be arranged in sections corresponding to the numbered and lettered
sections contained in this Section 2. The disclosure in any section, however,
shall be deemed to constitute disclosure for all sections in this Article 2.
2.1 Authorized and Issued Shares. The entire authorized capital
----------------------------
stock of Canter consists of seventy-five thousand (75,000) shares of Common
Stock, par value $0 per share (the "Canter Common Stock"), of which twenty-five
thousand five hundred (25,500) shares are issued and outstanding. The entire
authorized capital stock of Canter Productions consists of one million
(1,000,000) shares of Common Stock, par value $0 per share (the "Canter
Productions Common Stock"), of which twenty-five thousand (25,000) shares are
issued and outstanding. The Canter Common Stock and the Canter Productions
Common Stock are sometimes hereinafter referred to collectively as "Company
Common Stock." No shares of Company Common Stock are held as treasury shares
and no shares are reserved for issuance. All outstanding shares of Company
Common Stock have been duly authorized and are validly issued and are fully paid
and non-assessable and are owned of record and beneficially by the Stockholder.
The Stockholder has good and marketable title to the number of issued and
outstanding shares of Canter Common Stock and Canter Productions Common Stock
set forth opposite her name in Section 2.1 of the Stockholder's Disclosure
Schedule, and, except as set forth in Section 2.1 of the Stockholder's
Disclosure Schedule, each of such shares are owned by her free and clear of any
pledges, liens, restrictions, security interests, options, claims, encumbrances
or rights of any third party ("Liens"). Except as set forth on Section 2.1 of
the
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<PAGE>
Stockholder's Disclosure Schedule, neither of the Companies nor the Stockholder
is a party to or bound by any options, warrants, calls, contracts, preemptive
rights or commitments of any character relating to any issued or unissued
capital stock, or any other equity security issued or to be issued by either of
the Companies.
2.2 Organization. Each of the Companies is a corporation duly
------------
organized, validly existing and in good standing under the laws of the State of
California, and has full corporate power and authority to carry on its business
as it is now being conducted and to own or hold under lease the properties or
assets it now owns or holds under lease and to perform the actions contemplated
hereby, except where the failure to be in good standing or to have such power
and authority would not have a Material Adverse Effect on the Companies.
Complete and accurate copies of the current Articles of Incorporation, By-Laws,
minute books and stock transfer books of each of the Companies have been
provided to the Purchaser, and such copies are complete and correct and in full
force and effect. Neither of the Companies owns or has any direct or indirect
interest in any other corporation, firm, partnership, joint venture or other
business entity. Each of the Companies has duly and effectively elected to be
treated as an S Corporation under and has at all times since its respective
election to be so treated, operated in accordance with the provisions of
Subchapter S of the Internal Revenue Code of 1954, except where the failure to
so operate would not have a Material Adverse Effect on the Companies.
2.3 Transactions with Affiliates. Except as set forth in Section 2.3
----------------------------
of the Stockholder's Disclosure Schedule or in any of the Financial Statements
(as hereinafter defined), neither of the Companies is a party to any contract,
agreement or other arrangement with any current or former officer, director or
stockholder or any affiliate of any such persons. Except to the extent set
forth in Section 2.3 of the Stockholder's Disclosure Schedule, each transaction
required to be listed therein and as to which either the Companies or the
Purchaser, as successor-in-interest thereto, have or will have after the Stock
Purchases, any obligations, is on terms no less favorable than terms available
from unrelated parties.
2.4 Financial Statements.
--------------------
(a) The Stockholder has provided to the Purchaser financial
statements as of and for each of the three years ended December 31, 1996 for
each of the Companies, which have been reviewed by Altschuler, Melvoin and
Glasser LLP (the "Companies' Accountants"), independent auditors (collectively,
the "Reviewed Financial Statements").
(b) The Stockholder has provided to the Purchaser unaudited
financial statements as of and for the nine months ended September 30, 1997 for
each of the Companies (collectively, the "Unaudited Financial Statements" and,
together with the Reviewed Financial Statements, the "Financial Statements").
(c) The Financial Statements are complete and correct in all
material respects, present fairly and accurately the financial position and
results of operations of each of the Companies as of and for the periods
indicated, to the best actual knowledge of the Companies
-5-
<PAGE>
and the Stockholder, and were prepared in accordance with GAAP, applied on a
consistent basis (except as may be indicated in the notes thereto and except in
the case of the Unaudited Financial Statement for year-end audit adjustments
which will not be material in amount). There are no material liabilities or
obligations of either of the Companies, whether contingent or absolute, as of
the dates of the Financial Statements, including any liability for taxes of any
type, which should have been shown or provided for in the Financial Statements
and which are not so shown or provided for or shown as reserved against. Except
as set forth in Section 2.4(c) of the Stockholder's Disclosure Schedule, since
September 30, 1997, there has been no material adverse change in the condition
(financial or otherwise), assets, liabilities, earnings, net worth, financial
position, business, results of operations, properties or business prospects of
either of the Companies. All of the accounts receivable shown on the Financial
Statements arose, and all accounts receivable that will be outstanding as of the
Closing Date will have arisen, from bona fide transactions in the ordinary
---- ----
course of the Companies' business. Subject to accrued reserves shown on the
Financial Statements and except to the extent it would not have a Material
Adverse Effect, all of the inventory of products held for sale as shown on the
Financial Statements is saleable by one of the Companies in the ordinary course
of business within a reasonable period of time, and none of such inventory is
obsolete.
2.5 Taxes. Each of the Companies and the Stockholder has properly
-----
prepared and filed all federal, state and other tax returns required to be filed
by it or her in connection with the business and operations of each of the
Companies. True and complete copies of all federal and state income tax returns
for each of the Companies for each of the years 1992 through 1996 have been
delivered to the Purchaser and copies of all other tax returns filed by the
Companies will be made available upon request. Except as set forth on Section
2.5 of the Stockholder's Disclosure Schedule, neither of the Companies nor the
Stockholder has any liability for any federal, state, county, local or other
taxes whatsoever that arose or otherwise was incurred in connection with the
business and operations of either of the Companies on or before December 31,
1996, except for those liabilities which alone or in the aggregate would not
have a Material Adverse Effect on the Companies. No proposed taxes, additions
to tax, interest or penalties have been asserted or are pending against either
of the Companies or the Stockholder in connection with the business and
operations of either of the Companies with respect to periods ending on or
before the Closing Date, and no such matters are under discussion with the
applicable authorities. There are no agreements, waivers or other arrangements
providing for extensions of time with respect to the assessment or collection of
any unpaid tax against either of the Companies or the Stockholder in connection
with the business and operations of either of the Companies except to the extent
any such assessment or collection would not have a Material Adverse Effect on
the Companies. Except as set forth in Section 2.5 of the Stockholder's
Disclosure Schedule, each of the Companies and the Stockholder has withheld or
otherwise collected all taxes or amounts it or she was required to withhold or
collect under any applicable federal, state or local law in connection with the
business and operations of either of the Companies, including, without
limitation, any amounts required to be withheld or collected with respect to
employee state and federal income tax withholding, social security, unemployment
compensation, sales or use taxes
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<PAGE>
or workmen's compensation, and all such amounts have been timely remitted to the
proper authorities.
2.6 Agreements. Section 2.6 of the Stockholder's Disclosure Schedule
----------
identifies each of the following agreements, contracts, documents and other
items (whether written or oral) as to which either of the Companies is a party
or otherwise is bound (and all such contracts, or summaries thereof, have been
made available to the Purchaser) as of the date of the execution of this
Agreement: (i) all contracts to provide teacher training courses or materials
to universities, schools or other entities (collectively, the "Course
Contracts"); (ii) all agreements relating to licensing and royalty payments for
computer software and programs utilized by either of the Companies to provide
teacher training courses or materials, including any enhancements of the
licensed material owned and/or developed by either of the Companies
(collectively, the "Licensing Agreements"); (iii) all documents relating to
indebtedness for money borrowed, including guarantees; (iv) all agreements or
plans relating to employment, compensation of or benefits for officers,
employees or consultants of either of the Companies, including without
limitation, any collective bargaining arrangements; (v) all contracts for the
purchase of materials, supplies, services, merchandise or equipment involving
consideration of more than $50,000 or involving purchases in excess of normal
operating requirements; (vi) any contract, agreement or instrument not entered
into in the ordinary course of the business of either of the Companies; (vii)
any contract containing material restrictions on the operations of either of the
Companies or any restrictions on either of their right to compete in any
geographic region or in any line of business; (viii) any lease of real property
or personal property calling for annual lease payments in excess of $50,000; and
(ix) each and every other contract which is material to the financial condition,
earnings, operation or business of either of the Companies. Each of the
contracts and agreements so listed, including the Course Contracts and the
Licensing Agreements (collectively, the "Contracts"), is a valid and existing
contract or agreement in full force and effect and there exists no material
default thereunder by any party thereto. Except as set forth in Section 2.6 of
the Stockholder's Disclosure Schedule, none of the Contracts will be violated or
breached and no default or right of termination or modification shall arise
thereunder as a result of the consummation of the transactions contemplated by
this Agreement, except for such violations, breaches and defaults which would
not alone or in the aggregate have a Material Adverse Effect on either of the
Companies.
2.7 Course Contracts and Licensing Agreements. Except as set forth
-----------------------------------------
in Section 2.7 of the Stockholder's Disclosure Schedule:
(a) Neither of the Companies is in breach or default under or in
violation of, nor alleged to have breached, defaulted or violated any of the
Course Contracts or Licensing Agreements except for such violations, breaches
and defaults which would not alone or in the aggregate have a Material Adverse
Effect on the Companies;
(b) Except for accrued reserves shown on the Financial
Statements, neither of the Companies is under any liability or obligation to
refund any material amount previously paid to either of the Companies under any
of the Course Contracts or Licensing
-7-
<PAGE>
Agreements, and each of the Companies has paid or has made adequate provision to
pay when due all accounts payable, payroll, payroll taxes and other amounts due
prior to Closing on account of the Course Contracts and Licensing Agreements;
(c) To the best of the Stockholder's knowledge, neither of the
Companies has secured any of the Course Contracts or Licensing Agreements other
than in compliance with all applicable laws, rules and regulations; and the
terms of payment and/or compensation for each of the Course Contracts and
Licensing Agreements complies with all applicable laws, rules and regulations
relating to competitive bidding; to the best of the Stockholder's knowledge,
each of the Course Contracts or Licensing Agreements not obtained through
competitive bidding was secured in an arms' length transaction.
(d) Each of the Course Contracts and Licensing Agreements is valid and
in full force and effect; each of the Companies has, in all material respects,
performed all obligations required to be performed by it under, and is not in
material default in any respect under, in material conflict in any respect with,
or in material violation in any respect of, any of the Course Contracts or
Licensing Agreements; and neither of the Companies nor the Stockholder has
received notice of non-compliance or alleged non-compliance with any of the
Course Contracts or Licensing Agreements; and, except as set forth in Section
2.7 of the Stockholder's Disclosure Schedule, neither of the Companies nor the
Stockholder has knowledge of any facts or circumstances relating to the Course
Contracts or Licensing Agreements which reasonably could be expected to have a
Material Adverse Effect on the Companies' revenues or operating profit from the
Course Contracts.
(e) Except as set forth in Section 2.7(e) of the Stockholder's
Disclosure Schedule, neither of the Companies nor the Stockholder has knowledge:
(i) of any current intention on the part of any of the other parties to the
Course Contracts or Licensing Agreements to cancel the same or not to renew the
same with each of the Companies at the end of the current term thereof, or (ii)
that any of the other parties to the Course Contracts or Licensing Agreements
does not have the financial capacity to continue the same, where the failure to
so continue would have a Material Adverse Effect on the Companies.
(f) Neither of the Companies nor the Stockholder has received any
claim of material overpayment or alleged material overpayment by any other party
to any of the Course Contracts or Licensing Agreements, and except as described
in Section 2.7 of the Stockholder's Disclosure Schedule, there have been no
audits or other reviews of the costs, billing methods or performance of either
of the Companies under any of the Course Contracts or Licensing Agreements, and
to the best of the Stockholder's actual knowledge, no such audits or other
reviews are in progress or contemplated.
(g) Except as set forth in Section 2.7 of the Stockholder's Disclosure
Schedule, no consent, approval or authorization of, notice to or declaration,
filing or registration with, any third party to any of the Course Contracts or
Licensing Agreements is required in connection with the Stock Purchases or the
execution, delivery and performance of this
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<PAGE>
Agreement and the Closing Documents and the consummation of the transactions
contemplated thereby.
(h) Section 2.7(h) of the Stockholder's Disclosure Schedule identifies
all of the territories granted in writing or orally by either of the Companies
under any of the Course Contracts. Neither of the Companies has granted any one
exclusive territory to more than one educational institution.
2.8 Intellectual Property.
---------------------
(a) Except as provided for in the Consulting Agreement between the
Companies, the Stockholder and Mr. Canter, dated _______, 1997 (the ("Canter
Consulting Agreement"), which is attached hereto as Exhibit 2.8, or as set forth
elsewhere in this Agreement, each of the Companies owns, or is licensed or
otherwise possesses legally enforceable rights to use, all patents, trademarks,
trade names, service marks, copyrights, and any applications for such patents,
trademarks, trade names, service marks and copyrights, processes, formulae,
methods, schematics, technology, know-how, computer software programs or
applications and tangible or intangible proprietary information or material that
are necessary to conduct the business of the Companies as currently conducted,
or proposed to be conducted, the absence of which would be reasonably likely to
have a Material Adverse Effect on the Companies taken as a whole (the
"Companies' Intellectual Property Rights"). Section 2.8 of the Stockholder's
Disclosure Schedule lists each item of the Companies' Intellectual Property
Rights.
(b) Neither of the Companies is, nor will either of them be as a
result of the execution and delivery of this Agreement or the performance of the
Stockholder's obligations under this Agreement, in breach of any license,
sublicense or other agreement relating to the Companies' Intellectual Property
Rights, the breach of which could have a Material Adverse Effect on the
Companies, taken as a whole.
(c) To the Stockholder's knowledge, all patents, registered
trademarks, service marks and copyrights held by the Companies are valid and
subsisting. Neither of the Companies has been sued (or threatened with suit) in
any suit, action or proceeding which involves a claim of infringement of any
patents, trademarks, service marks, copyrights or violation of any trade secret
or other propriety right of any third party. The Stockholder has no reason to
believe that the manufacturing, marketing, licensing or sale of its products or
services infringes any patent, trademark, service mark, copyright, trade secret
or other proprietary right of any third party, which such infringement is
reasonably likely to have a Material Adverse Effect on the Companies, taken as a
whole.
2.9 Legal Proceedings, Etc. Except as set forth in Section 2.9 of
-----------------------
the Stockholder's Disclosure Schedule, there are no legal, administrative,
arbitration, or other proceedings or governmental investigations pending or, to
the best of the Companies' and the Stockholder's knowledge, threatened against
or involving (i) the shares of Company Common Stock owned by the Stockholder,
(ii) the transactions contemplated by this Agreement or (iii)
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<PAGE>
either of the Companies or the Stockholder or their respective properties or
assets, except (with respect to clause (iii) only) for such actions which are
not reasonably likely to have a Material Adverse Effect on the Companies.
2.10 Compliance; Licenses. Each of the Companies has at all times in
--------------------
the past operated its business and used its assets in material compliance with,
and currently is not in material violation of, and has obtained all material
licenses and permits required by, any law, rule or regulation. Each of the
Companies is duly qualified to do business as a foreign corporation in good
standing in those jurisdictions in which the ownership and operation of its
business requires such qualification, except where the failure to be so
qualified would not be reasonably likely to have a Material Adverse Effect on
the Companies. Section 2.10 of the Stockholder's Disclosure Schedule contains a
true and complete list of all material licenses, permits, approvals, franchises
and other authorizations as are necessary in order to enable each of the
Companies to own and conduct its business.
2.11 Bank Accounts, etc. Section 2.11 of the Stockholder's
-------------------
Disclosure Schedule sets forth a true and complete list of all bank accounts,
safe deposit boxes and lock boxes of each of the Companies, including
identification of all authorized signatories.
2.12 Insurance. Section 2.12 of the Stockholder's Disclosure
---------
Schedule sets forth a summary of all policies of general liability, product
liability, fire, casualty, motor vehicle health, workers' compensation and other
insurance or bonding currently maintained by or on behalf of the Companies or
any of their respective employees. All requirements and provisions of such
policies and bonds are being complied with except for those failures to comply
which would not be reasonably likely, alone or in the aggregate, to have a
Material Adverse Effect on the Companies. True and correct copies of all
insurance policies and bonds relating to such coverage have been provided by the
Stockholder to the Purchaser. No notice of cancellation has been given to or
received by either of the Companies with respect to any of its insurance
policies or bonds. To the best knowledge of the Companies and the Stockholder,
no such policies or bonds are or will become subject to an assessment due to any
retroactive rate or audit adjustments or coinsurance or similar arrangements.
2.13 Employee Matters. Except as set forth in Section 2.13 of the
----------------
Stockholder's Disclosure Schedule, neither of the Companies maintains, sponsors
or contributes to any plans for pension, profit-sharing, deferred compensation,
severance pay, bonuses, stock options, stock purchases, or any other retirement
or deferred benefit, or for any health, accident or other welfare plan, or any
other employee or retired employee benefits or incentive plan, program,
contract, understanding or arrangement in which any of either Companies'
employees, former employees, retired employees or consultants (or beneficiaries
of any of the foregoing) is entitled to participate. The plans, programs,
contracts, understandings and arrangements listed on the Stockholder's
Disclosure Schedule pursuant to this Section 2.13 are hereinafter referred to as
the "Employee Plans." Each of the Companies has supplied the Purchaser with
complete and accurate copies of each such Employee Plan. Each Employee Plan has
been operated according to its terms and, to the best of the Stockholder's and
the Companies' knowledge, in material
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<PAGE>
compliance with all applicable laws. There are no material past due tax
liabilities of either of the Companies with respect to any of the Employee
Plans. Each of the Employee Plans required to be qualified under the Employee
Retirement Income Security Act ("ERISA") has been so qualified and, to the best
of the Stockholder's and the Companies' knowledge, has at all times been
operated in compliance with ERISA and the regulations thereunder. Except as set
forth in Section 2.13 of the Stockholder's Disclosure Schedule, there is no
underfunding liability nor any anticipated underfunding liability with respect
to any of the Employee Plans.
2.14 Recent Operations. Since September 30,1997, (i) each of the
-----------------
Companies has operated its business substantially as it was operated immediately
prior thereto and only in the ordinary course; (ii) each of the Companies and
the Stockholder has used its or her commercially reasonable efforts to preserve
intact each of the Companies' business relationships; (iii) there have been no
bonuses paid to or increases in the compensation of officers, employees or
consultants, of either of the Companies, except as set forth in Section 2.14 of
the Stockholder's Disclosure Schedule, and (iv) except as set forth in Section
2.14 of the Stockholder's Disclosure Schedule, neither of the Companies has
declared or paid any dividend or made any other distribution with respect to its
capital stock. Section 2.14 of the Stockholder's Disclosure Schedule sets forth
the name and job title of each individual who has left the employ of either of
the Companies since September 30, 1997 and the loss of whose services had a
Material Adverse Effect on either of the Companies.
2.15 Working Capital and Financial Condition of the Companies. As of
--------------------------------------------------------
the date hereof have, the Companies have on a combined basis (after reductions
for intercompany transactions): (i) adequate working capital (after payment of,
or accrual for, all distributions of cash or property to be made to the
Stockholder as of and through the date hereof) to operate the business in
accordance with past practice after taking into account seasonality factors and
other appropriate adjustments; ("Combined Working Capital") and (ii) no long-
term debt.
2.16 Environmental Matters. To the best knowledge of the Companies
---------------------
and the Stockholder, no storage tanks, underground or otherwise, are now located
on any properties occupied by either of the Companies. To the best knowledge of
the Companies and the Stockholder, each of the Companies has complied in all
material respects with all environmental laws relating to its operations or
properties occupied by it. To the best knowledge of the Companies and the
Stockholder without any duty of investigation or inquiry, there are no asbestos
containing materials located on properties occupied by either of the Companies.
Neither of the Companies has received any notice, demand, suit or information
request pursuant to the Comprehensive Environmental Response, Compensation and
Liability Act or any comparable state law, nor does it have knowledge of any
other party's receipt of the same relative to any properties occupied by either
of the Companies.
2.17 Disclosure. All agreements, schedules, exhibits, documents,
----------
certificates, reports or statements furnished or to be furnished to the
Purchaser by or on behalf of either of the Companies in connection with this
Agreement or the transactions contemplated hereby are true and accurate in all
material respects, and no such items contain any untrue statement of a material
-11-
<PAGE>
fact or omit to state any material fact necessary to make the statements
contained herein or therein not misleading; provided, however, that the
-------- -------
foregoing representation and warranty shall not apply to the Confidential
Descriptive Memorandum, furnished by Genesis Merchant Group, relative to the
Companies and provided to Purchaser on or about November 11, 1997, and any
projections of the Companies' future results of operation provided to the
Purchaser by or on behalf of the Companies or the Stockholder.
2.18 No Conflict With Other Documents. Except as disclosed in
--------------------------------
Section 2.18 of the Stockholder's Disclosure Schedule, neither the execution and
delivery of this Agreement, nor the carrying out of any of the transactions
contemplated hereby: (i) will result in any material violation, termination or
modification of, or be in conflict with, the Articles of Incorporation or By-
Laws of either of the Companies, any material terms of any contract, instrument
or other agreement to which either of the Companies or the Stockholder is a
party or by which it or she or any of its or her properties is bound or
affected, or any law, rule, regulation, license, permit, judgment, decree or
order applicable to either of the Companies or the Stockholder or by which any
of its or her properties or assets are bound or affected (other than State
securities laws and antitrust laws, as to which no representation and warranty
is made), or (ii) result in any material breach of or constitute a material
default (or with notice or lapse of time or both would become a material
default) under, or give to others any rights of termination, amendment,
acceleration or cancellation, or result in the creation of any material Lien
upon any of the properties or assets of either of the Companies or the
Stockholder pursuant to any contract, instrument or other agreement to which
either of the Companies or the Stockholder is a party or by which it or she or
any of its or her properties or assets is bound or affected.
2.19 Conduct of Business. Except as disclosed in Section 2.19 of the
-------------------
Stockholder's Disclosure Schedule, since September 30, 1997, and through the
date hereof: (a) the business of each of the Companies has been conducted only
in the ordinary course; (b) neither of the Companies has entered into, adopted,
amended or terminated any employee benefit plan, agreement or arrangement,
entered into or amended any employment contracts, or increased the salaries of
or compensation of its officers or employees, other than ordinary increases in
salaries of employees (other than the Stockholder) in accordance with past
practices; (c) the Stockholder has used her commercially reasonable efforts to
preserve the business organization of each of the Companies intact, to keep
available the service of the officers, employees and consultants of each of the
Companies and to preserve the goodwill of suppliers, customers and others doing
business with either of the Companies; (d) neither of the Companies nor the
Stockholder has entered into any agreement for the purchase, sale or other
disposition of any equipment, supplies, inventory, investments or other assets
(other than sales of inventory and purchases of materials and supplies in the
ordinary course of business and in accordance with past practices) of either of
the Companies; (e) no change has been made in the Articles of Incorporation or
By-Laws of either of the Companies; (f) no change has been made in the number of
shares or terms of the authorized, issued or outstanding capital stock of either
of the Companies, nor has either of the Companies entered into or granted any
options, calls, contracts or commitments of any character relating to any issued
or unissued capital stock; and (g) no
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<PAGE>
dividend or other distribution or payment has been declared or paid in respect
of the capital stock of either of the Companies.
2.20 Other Property. Section 2.20 of the Stockholder's Disclosure
--------------
Schedule sets forth a schedule of (i) all real property owned or leased by
either of the Companies and (ii) all individual items of tangible personal
property of material value (other than inventory) of either of the Companies.
Except as set forth in Section 2.20 of the Stockholder's Disclosure Schedule,
each of the Companies has good and marketable title to all of such property
owned by it, free of any material Lien. The machinery and equipment of the
Companies which are material to its operations are in good operating condition
and repair, ordinary wear and tear excepted.
2.21 Brokers and Advisors. Neither of the Companies nor the
--------------------
Stockholder has taken any action which could give rise to a valid claim against
the Purchaser for a brokerage commission, finder's fee, counseling or advisory
fee, investment banking fee or like payment.
2.22. Binding Effect. This Agreement is a valid and legally binding
--------------
obligation of the Stockholder, enforceable against the Stockholder in accordance
with its terms.
2.23. Investment Intent. It is understood that the Earnout Shares
-----------------
are not being registered for purposes of the transactions hereunder under the
Securities Act or any state securities laws, and such shares are being delivered
without registration in reliance upon an exemption from the registration
requirements of the Securities Act and applicable state securities laws. The
Stockholder will acquire the Earnout Shares, if any, only for her own account
for investment and not with any intention of making, or with a view to, or for
sale in connection with, any distribution thereof within the meaning of the
Securities Act unless such shares first are registered under the Securities Act;
provided, however, that the Stockholder may transfer Earnout Shares to the Named
Officers and/or Mr. Canter so long as she first receives from them a written
acknowledgment of the restrictions on further transfer of the Earnout Shares and
of their investment intent, in form and substance reasonably satisfactory to
Purchaser.
In connection with the foregoing, the Stockholder hereby represents
and warrants that:
(a) she has reviewed, discussed and evaluated the information
delivered under Section 1.2 and has had the opportunity to ask questions of, and
receive answers from, executive officers of the Purchaser concerning the terms
and conditions of this Agreement and to obtain any additional information which
she considered necessary to verify the accuracy of the information delivered
under Section 1.2;
(b) she understands that she must bear the economic risks of the
investment in the Earnout Shares for an indefinite period of time because such
shares will not be registered under the Securities Act and, therefore, may not
be sold until subsequently registered under the Securities Act or an exemption
from registration is available; and
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<PAGE>
(c) she has sufficient knowledge and experience in financial
and business matters to enable her to be capable of evaluating the merits and
the risks of an investment in the Earnout Shares.
2.24. Legends. It is understood and agreed that, to implement the
-------
requirements of the Securities Act and state securities laws and evidence the
restrictions upon transfer contained in this Agreement, the Purchaser will cause
a legend to be conspicuously noted on the certificates representing any Earnout
Shares deliverable hereunder, and that the Purchaser will issue stop transfer
instructions to its transfer agent, to the effect that such stock, if issued,
will not have been registered under the Securities Act and that no transfer may
take place except after delivery of an opinion of counsel reasonably
satisfactory to the Purchaser to the effect that registration thereof for the
purpose of transfer is not required under the Securities Act or that the stock
proposed to be transferred has been effectively registered for that purpose
under the Securities Act. The foregoing restrictions are in addition to the
restrictions described in Section 7.3(b)(6) hereof.
3. REPRESENTATIONS AND WARRANTIES OF MR. CANTER. Mr. Canter hereby
represents and warrants to the Purchaser that the statements contained in this
Section 3 are true and correct, except as set forth in the disclosure schedules
delivered by Mr. Canter on or before the date of this Agreement (the "Canter
Disclosure Schedule). The Canter Disclosure Schedule shall be arranged in
sections corresponding to the numbered and lettered sections contained in this
Section 3. The disclosure in any section, however, shall be deemed to
constitute disclosure for all sections in this Article 3.
3.1 Legal Proceedings, Etc. Except as set forth in Section 3.1 of
-----------------------
the Canter Disclosure Schedule, to Mr. Canter's actual knowledge, there are no
legal, arbitration, or other proceedings pending or threatened involving or
arising out of Mr. Canter's execution of and performance under this Agreement,
the Stock Redemption Agreement or the Canter Consulting Agreement.
3.2. No Conflicts. Neither the execution and delivery by Canter of
------------
this Agreement nor the Canter Consulting Agreement nor the carrying out of the
transactions contemplated hereby or thereby as they relate to Mr. Canter, will
result in any material breach of or constitute a default (or with notice or
lapse of time or both would become a material default), or give to others any
rights, under the terms of any material contract, instrument or other agreement
to which Mr. Canter is a party.
3.3 Ownership of Certain Assets. Mr. Canter does not own any
---------------------------
intellectual property or other assets which are necessary to the operation of
the Companies' business. The Companies have the ongoing right to use Mr.
Canter's name in accordance with the applicable provisions of the Canter
Consulting Agreement. To the actual knowledge of Mr. Canter, the Intellectual
Property Rights developed by Mr. Canter and transferred to and now owned by the
Companies' did not, at the time of transfer, infringe upon any copyright,
franchise right, trade
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<PAGE>
secret or other proprietary right of any third party. Section 3.3 of the Canter
Disclosure Schedule is a true and complete description of all of Mr. Canter's
current business activities.
3.4. No Interest in the Companies or the Aggregate Purchase Price.
------------------------------------------------------------
Other than as set forth in the Canter Consulting Agreement or in the Redemption
Agreement by and between Mr. Canter, the Companies and the Stockholder, dated
______________, 1997 and attached hereto as Exhibit 3.5 (the "Canter Redemption
-----------
Agreement"), Mr. Canter has no interest, option or other rights with respect to
the Company Common Stock, any of the assets of either of the Companies or the
Aggregate Purchase Price (as defined in Section 7.3 hereof). Assuming full
performance of same by the Stockholder and the Companies, the Canter Consulting
Agreement and the Canter Redemption Agreement together represent a full and
final settlement of Mr. Canter's ownership rights in the Companies.
3.5. Binding Effect. The Canter Consulting Agreement and the
--------------
Redemption Agreement are each valid and legally binding obligations of Mr.
Canter, enforceable against Mr. Canter in accordance with their respective
terms.
4. COVENANTS OF THE PURCHASER. The Purchaser covenants to the Stockholder
that, except as otherwise consented to in writing by the Stockholder after the
date of this Agreement until the Closing hereunder:
4.1 Cause Conditions to be Satisfied. The Purchaser will use its
--------------------------------
best efforts to cause all of the conditions described in Sections 8 and 9 of
this Agreement to be satisfied (to the extent reasonably are within its
control).
4.2 Consents. Purchaser agrees to take all necessary corporate or
--------
other action and use its best efforts to obtain all consents and approvals
required, or deemed advisable in the Stockholder' reasonable opinion, for
consummation of the transactions contemplated by this Agreement.
5. COVENANTS OF THE STOCKHOLDER. The Stockholder covenants to the
Purchaser that, except as otherwise consented to in writing by the Purchaser
after the date of this Agreement until the Closing hereunder:
5.1 Consents. The Stockholder agrees to cause each of the Companies
--------
to take all necessary corporate or other action (including using her best
efforts to obtain consents from the other parties to those of the Course
Contracts and Licensing Agreements the terms of which require prior consent to
the indirect transfer of the Course Contracts and Licensing Agreements in
transactions such as the Stock Purchases) and to use her best efforts to cause
the Companies to obtain all consents and approvals required, or deemed advisable
in Purchaser's reasonable opinion, for consummation of the transactions
contemplated by this Agreement.
5.2 Estimated Balance Sheets. At least one day before the date of
------------------------
Closing, the Stockholder shall deliver to the Purchaser an estimated balance
sheet for each of the Companies as of the close of business on the day
immediately preceding the Closing Date (collectively, the
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<PAGE>
"Estimated Balance Sheets"), prepared in accordance with GAAP and on a basis
consistent with normal past practice (except as may be indicated in the notes
thereto) and the Financial Statements. The Estimated Balance Sheet shall (i) not
contain any amount owed to the Companies by the Stockholder or any officer of
either of the Companies and (ii) contain all accruals required by GAAP,
including, without limitation, an accrual for cancellations or forfeitures
payable by the Companies to schools, colleges or universities.
5.3 No Solicitation. The Stockholder shall, and shall cause the
---------------
Companies and their respective officers, directors, employees, representatives
and agents to, (i) immediately cease any existing discussions or negotiations,
if any, with any parties with respect to any acquisition (other than the
transactions contemplated by this Agreement) of all or any material portion of
the assets of, or any equity interest in, either of the Companies or any
business combination with either of the Companies, (ii) not solicit, initiate,
encourage, or furnish information in response to any inquiries or proposals that
constitute, or could reasonably be expected to lead to, a proposal or offer for
a merger, consolidation, business combination, sale of substantial assets, sale
of shares of capital stock (including without limitation by way of a tender
offer or similar transactions involving either of the Companies, other than the
transactions contemplated by this Agreement) (any of the foregoing transactions
being referred to in this Agreement as an "Acquisition Transaction") (iii) not
engage in negotiations or discussions concerning, or provide any non-public
information to any person or entity relating to, any Acquisition Transaction,
and (iv) not agree to, approve or recommend any Acquisition Transaction. If
either of the Companies or the Stockholder shall nevertheless receive any
indication of interests or proposal with respect to any Acquisition
Transactions, which indications or proposals the Stockholder reasonably believes
to represent a serious inquiry, the Stockholder shall provide a copy of any such
written inquiry or proposal to the Purchaser immediately after receipt thereof
by the Stockholder, Canter and/or Canter Productions or any of their
representatives or agents. The Stockholder agrees that the Purchaser's remedy
at law for breach of the covenants contained in this Section 5.3 would be
inadequate and, accordingly agrees that the Purchaser shall be entitled to
equitable relief, including injunction and specific performance, to prevent
breach of the covenants contained in this Section 5.3; provided, however, that
Purchaser shall have delivered the Initial Purchase Price into an escrow account
with a commercial bank with five (5) days of seeking such equitable relief.
5.4 Employment Agreements. The Stockholder shall use her best
---------------------
efforts to cause each of Toby Bernstein, Kathy Winberry and Rob Fiance (the
"Named Officers") to, at or prior to the Closing, enter into an employment and
non-competition agreement with one of the Companies, in substantially the form
of Exhibit 5.4 attached hereto.
-----------
5.5 Cause Conditions to Be Satisfied. The Stockholder will use her
--------------------------------
best efforts to cause all of the conditions described in Sections 8 and 9 of
this Agreement to be satisfied (to the extent such matters reasonably are within
her control).
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<PAGE>
6. COVENANTS OF MR. CANTER. Mr. Canter covenants to the Purchaser that,
except as otherwise agreed to by the Purchaser in writing:
6.1 Addendum to Canter Consulting Agreement. At the Closing,
---------------------------------------
assuming performance by the Companies, Stockholder and Purchaser under (as
applicable) the Canter Consulting Agreement, the Stock Redemption Agreement, and
this Agreement, Mr. Canter shall enter into an addendum to the Canter Consulting
Agreement (the "Canter Addendum"), substantially in the form of Exhibit 6.2
-----------
attached hereto.
6.2 Transition of Business; Employees. After the Closing, Mr. Canter
----------------------------------
agrees to cooperate with Purchaser's efforts to continue and expand
relationships with the customers and clients of the Companies that are parties
to the Course Contracts and Licensing Agreements.
7. PURCHASE AND SALE OF THE COMPANY COMMON STOCK. Subject to the terms
and conditions of this Agreement, the Purchaser and the Stockholder agree to
effect the following transactions at the Closing:
7.1 Conditions. The Purchaser and the Stockholder will deliver to
----------
the other appropriate evidence of the satisfaction of the conditions to their
respective obligations hereunder.
7.2 Stock Purchases. The Stockholder shall sell the Company Common
---------------
Stock to the Purchaser and the Purchaser shall purchase the Company Common Stock
from the Stockholder. The Company Common Stock shall be transferred to the
Purchaser pursuant to the terms and conditions of this Agreement, free and clear
of all Liens, except as set forth on Schedule 2.1 of the Stockholder's
Disclosure Schedule. At the Closing, the Stockholder will deliver to the
Purchaser certificates in due and proper form representing all of the issued and
outstanding shares of Common Stock of each of the Companies, duly endorsed or
accompanied by duly executed stock powers.
7.3 Purchase Price. In full payment for the sale and delivery of the
---------------
Company Common Stock, the Purchaser shall pay to the Stockholder the Initial
Purchase Price and, if earned, the Earnout Consideration, in the manner set
forth below:
(a) Initial Purchase Price. At the Closing, the Purchaser shall
----------------------
pay to the Stockholder $25,000,000 (the "Initial Purchase Price"), to be paid by
wire transfer in immediately available funds to an account designated by the
Stockholder prior to the Closing Date.
(b) Earnout Consideration. In addition to the Initial Purchase
----------------------
Price to be paid at Closing, the Purchaser shall pay to the Stockholder the
amounts set forth in clauses (1), (2) and (3) below (together, the "Earnout
Consideration," and, collectively with the Initial Purchase Price, the
"Aggregate Purchase Price"), subject to the terms and conditions of those
clauses.
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<PAGE>
(1) The Purchaser agrees to pay the Stockholder as additional consideration
for the purchase of the Company Common Stock, $12.5 million in cash and that
number of shares of the Purchaser Common Stock having a then Market Value (as
defined below) equal to $12.5 million (together, the "Additional Consideration")
upon the earlier of the Companies' achieving (x) EBITDA (as hereinafter defined)
of $5.0 million or more in 1998, (y) cumulative EBITDA of $10.0 million or more
during 1998 and 1999 or (z) cumulative EBITDA of $15.0 million or more during
1998, 1999 and 2000. If earned, the Purchaser will pay Seller the Additional
Consideration by March 31 of the year following the year in which the Additional
Consideration was earned.
(2) In addition to the Additional Consideration, the Purchaser agrees to
pay the Stockholder additional consideration for the purchase of the Company
Common Stock (the "APP") as follows: (a) if the Companies achieve EBITDA of
$6.0 million or more in 1998 (the "1998 Threshold"), Purchaser will pay the
Stockholder $1.5 million in cash and that number of shares of Purchaser Common
Stock having a then Market Value equal to $1.5 million; (b) if the Companies
achieve EBITDA of $8.0 million or more in 1999 (the "1999 Threshold"), the
Purchaser will pay the Stockholders $4.5 million in cash and that number of
shares of Purchaser Common Stock having a then Market Value equal to $4.5
million; and (c) if the Companies achieve EBITDA of $10.0 million or more in
2000 (the "2000 Threshold"), the Purchaser will pay the Stockholder $6.5 million
in cash and that number of shares of the Purchaser's Common Stock having a then
Market Value equal to $6.5 million. If in any of these three years, the
Companies exceed the EBITDA amount for that year set forth above, the Purchaser
will pay the Stockholder further consideration of one dollar of cash and the
number of shares of the Purchaser's Common Stock having a then Market Value of
one dollar for each one dollar of EBITDA in excess of the EBITDA amount for that
year (the cash and shares, collectively payable pursuant to this sentence, the
"AEO"). Notwithstanding the prior sentence and provided the APP which was not
achieved in a given year is achieved in a subsequent year pursuant to Section
7.3(b)(3) below: (i) if the Companies fail to achieve EBITDA of $6.0 million in
1998, the amount of such shortfall shall be added to $8.0 million (the "Revised
1999 Threshold"), and such sum shall become the amount of EBITDA the Companies
must achieve in 1999 in order for the Stockholder to become entitled to the AEO,
and (ii) if the Companies fail to achieve EBITDA of $8.0 million in 1999 or the
Revised 1999 Threshold, if applicable, the amount of such shortfall shall be
added to $10.0 million, and such sum shall become the amount of EBITDA the
Companies must achieve in 2000 in order for the Stockholder to become entitled
to the AEO.
(3) If the Companies fail to achieve the relevant EBITDA Threshold set
forth in paragraph (2) in any year, the Stockholder nevertheless may earn the
APP for that year as follows:
(i) If the Companies' EBITDA for 1998 is less than the 1998 Threshold
but the sum of the Companies' EBITDA for 1998 and 1999 is $14 million or more,
then the Purchaser will pay the Stockholder the APP for both 1998 and 1999;
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<PAGE>
(ii) If the Companies' EBITDA for 1998 is less than the 1998
Threshold and the sum of the Companies EBITDA for 1998 and 1999 is less than $14
million, but the sum of the Companies' EBITDA for 1998, 1999 and 2000 is $24
million or more, then the Purchaser will pay the Stockholder the APP for all
three years but only if the Companies' EBITDA for 1999 is greater than their
EBITDA for 1998 and their EBITDA for 2000 is greater than their EBITDA for 1999;
(iii) If the Companies' EBITDA for 1999 is less than the 1999
Threshold but the sum of the Companies' EBITDA for 1998 and 1999 is $14 million
or more, then the Purchaser will pay the Stockholder the APP for 1998 and 1999
but only if the Companies' EBITDA for 1999 is greater than their EBITDA for
1998;
(iv) If the Companies' EBITDA for 1999 is less than the 1999
Threshold but the sum of the Companies' EBITDA for 1999 and 2000 is $18 million
or more, then the Purchaser will pay the Stockholder the APP for 1999 and 2000;
(v) If the Companies' EBITDA for 1998 and 1999 are both less than
the 1998 and 1999 Thresholds but the sum of the Companies' EBITDA for all three
years is $24 million or more, then the Purchaser will pay the Stockholder the
APP for all three years but only if the Companies EBITDA for 1999 is greater
than their EBITDA for 1998;
(vi) If the Companies' EBITDA for 2000 is less than the 2000
Threshold, but the sum of the Companies' EBITDA for all three years is $24
million or more, then the Purchaser will pay the Stockholder the APP for 2000
but only if the Companies' EBITDA for 2000 is greater than 1999;
(vii) If the Companies' EBITDA for 2000 is less than the 2000
Threshold, but the sum of the Companies' EBITDA for 1999 and 2000 is $18 million
or more, then the Purchaser will pay the Stockholder the APP for 2000 but only
if the Companies' EBITDA for 2000 is greater than their EBITDA for 1999; and
(viii) If the Companies' EBITDA for 1999 and 2000 are less than the
1999 and 2000 Thresholds but the sum of the Companies EBITDA for all three years
is $24 million or more, then the Purchaser will pay the Stockholder the APP for
all three years but only if the Companies' EBITDA for 1999 is greater than their
EBITDA for 1998 and the Companies' EBITDA for 2000 is greater than their EBITDA
for 1999.
(4) For purposes of this Section 7.3, the Market Value of a share of
Purchaser Common Stock shall equal the average of the closing per share sales
prices reported in the Wall Street Journal, Eastern Edition, for each of the 20
trading days immediately prior to issuance. Any payments earned by the
Stockholder pursuant to paragraphs (2) and (3) will be paid by March 31 of the
following year.
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<PAGE>
(5) The Stockholder agrees that she will not sell, transfer (other than to
the Named Officers and/or Mr. Canter in compliance with the requirements of
Section 2.13 hereof), pledge, hypothecate or otherwise dispose of any Earnout
Shares, (i) until after December 31, 2001 in the case of any shares issued to
her as Additional Consideration, and (ii) for three years from the applicable
year end in the case of any shares issued to her as APP or AEO. In furtherance
of the foregoing restrictions, the Purchaser may place a restrictive legend on
any certificate representing the Earnout Shares and may deliver stop transfer
instructions to its stock transfer agent. If on the date that any of the
foregoing restrictions lapse, the Market Value of the affected Earnout Shares is
less than three-quarters of the Market Value of such Earnout Shares at the time
of their issuance (the "Three-quarters Value"), the Purchaser shall issue to the
Stockholder (or her permitted transferee or transferees) that number of
additional shares of its Common Stock having a Market Value equal to the amount
by which such Earnout Shares' Market Value is less than the Three-quarters
Value. The Purchaser agrees to file a Registration Statement with the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
within 30 days of issuance of such additional shares so as to permit the
Stockholder to immediately resell any such additional shares.
(6) EBITDA means the combined revenues, on a calendar year basis, of the
Companies or their successors (excluding revenues attributable to transactions
outside the Companies' normal course of business and any material one-time, non-
recurring contracts not of a type similar to contracts that the Companies have
entered into in the ordinary course of business in the past (the "Non-Recurring
Revenues")), reduced by the Companies' combined recurring operating expenses
(excluding those incurred in generating the Non-Recurring Revenues), but not
reduced by the charges incurred or allocated by Purchaser or its affiliates,
non-recurring expenses (such as professional fees associated with one-time
events and compensation to key employees and Named Officers that will not be
recurring after Closing), interest, taxes, depreciation and amortization.
EBITDA shall be calculated by Ernst & Young LLP, independent auditors, in
accordance with GAAP which shall be consistently applied in accordance with the
past practices of the Companies within 60 days of the applicable calendar year-
end, and copies of such calculation shall promptly thereafter be provided to
Purchaser and Stockholder. For purposes of calculating EBITDA, the following
rules shall apply: (i) there shall be ignored any reduction after 1998 in the
aggregate compensation (by way of salary, bonus or otherwise) or benefits paid
or payable to the Companies' employees below the amounts thereof for the prior
year; (ii) if the Stockholder or any of the Named Officers resigns from the
Companies and is not replaced by the Companies within 90 days provided Purchaser
specifies in writing that a replacement is required, the compensation (by way of
salary, bonus or otherwise) or benefits paid or payable to the Stockholder or
such Named Officer who resigned for services rendered by her or him to the
Companies for the twelve months preceding such resignation shall be included in
the calculation of EBITDA for the twelve months' period beginning on the date of
such resignation; and (iii) the method by which the Companies accounted for
deferred marketing costs, deferred product development and deferred revenues on
the Financial Statements shall be used, regardless of the method by which the
Purchaser accounts for any such item following the Closing.
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<PAGE>
(7) Any cash payment due from Purchaser to Stockholder under this Section
7.3 which is not paid within fifteen (15) days of when due shall bear interest
at the rate of fifteen percent (15%) per annum until paid in full.
(8) Purchaser covenants to Stockholder that it will, at all times, reserve
a sufficient number of shares of Purchaser Common Stock to enable it to pay the
Earnout Consideration in full.
(9) The Stockholder shall have 30 days from receipt of a calculation of
EBITDA by Ernst & Young LLP to object thereto. If Stockholder does object, she
shall so notify Purchaser in writing, whereupon Purchaser and Stockholder shall
reasonably attempt to resolve the objection. If Purchaser and Stockholder have
been unable to resolve Stockholder's objection within 10 days, Stockholder shall
engage a nationally recognized firm of independent certified public accountants
(the "CPA's") to recalculate the EBITDA in question, and the CPA's shall be
directed to complete such recalculation within 30 days. The recalculation of the
EBITDA in question by the CPA's shall be final and binding on all parties to
this Agreement.
7.4 Management of Companies After Closing. (a) Purchaser agrees that
-------------------------------------
Stockholder and Toby Bernstein will continue as Co-Chief Executive Officers of
the Companies (the "Co-CEO's") following the Closing, in accordance with the
terms and provisions of their Employment Agreements to be entered into by them
at Closing. The Co-CEO's shall be the sole persons responsible for managing the
operations (including decisions relating to revenue and expenses) of the
Companies' businesses, and, in furtherance thereof, shall prepare and submit
annual budgets for approval by a Management Committee of Purchaser (consisting
of Messrs. Becker, Hoehn-Saric and McGee), whose approval shall not be
unreasonably withheld or delayed. The Co-CEO's, in managing the operation of the
Companies' businesses, may not vary any item of expense shown on an approved
budget by an annual cumulative amount of more than $500,000 without the approval
of the Management Committee, whose approval shall not be unreasonably withheld
or delayed.
(b) From the Closing through December 31, 2000, Purchaser agrees that
it will maintain the Companies as separate corporations and will not require the
companies to operate any other business or acquire any assets other than as
approved by the Co-CEO's.
7.5 Closing. The closing (the "Closing") of the transactions
-------
contemplated by this Agreement shall take place at the offices of Piper &
Marbury L.L.P., 36 South Charles Street, Baltimore, Maryland 21201 beginning at
10:00 a.m. on the second business day after all conditions set forth in Section
8 and Section 9 hereof have been fulfilled or waived but in no event subsequent
to January 30, 1998 (the "Termination Date"), or at such other time and place as
may be agreed upon in writing by the Purchaser and the Stockholder. If the
Closing shall not have occurred on or before the Termination Date, either the
Purchaser or the Stockholder may terminate this Agreement so long as the party
seeking such termination is not then in default hereunder and has not failed to
satisfy any condition to closing hereunder within its or her control.
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7.6 Accounting for Stock Purchases. Each of the Parties hereby
------------------------------
agrees that the Stock Purchases, for Purchaser's financial reporting purposes,
will be deemed to have occurred on January 1, 1998. Each party agrees to take
no action which would be inconsistent with the foregoing sentence.
8. CONDITIONS TO THE PURCHASER'S OBLIGATIONS. Unless waived by the
Purchaser in writing in its sole discretion, all obligations of the Purchaser
under this Agreement are subject to the fulfillment, prior to or at the Closing,
of each of the following conditions:
8.1 Covenants and Representations of the Stockholder and Mr. Canter.
---------------------------------------------------------------
The Stockholder, the Companies and Mr. Canter shall have executed all agreements
contemplated by this Agreement and the Closing Documents to be executed on or
prior to Closing and shall have performed and complied in all material respects
with all agreements, covenants, obligations and conditions required thereby to
be performed or complied with by them on or prior to Closing. All
representations and warranties of the Stockholder and Mr. Canter shall be true
and correct as if made for the first time on the Closing Date.
8.2 Opinion of Counsel. The Stockholder shall have delivered to the
------------------
Purchaser a favorable opinion of the Companies' counsel dated the date of
Closing, in form and substance satisfactory to the Purchaser and its counsel, to
the effect that: (a) each of the Companies is a corporation duly organized,
validly existing and in good standing under the laws of the State of California
and has full corporate power to carry on its business as it is now being
conducted, to own or hold under lease the properties and assets it now owns or
holds under lease and to enter into and perform its obligations under this
Agreement; (b) the authorized, issued and outstanding capital stock of each of
the Companies is as set forth in Section 2.1 of this Agreement, and each of the
issued and outstanding shares of such stock has been duly authorized and issued
and is fully paid and non-assessable and is reflected on the stock ledger of
each of the Companies as being issued to and solely owned by the Stockholder;
(c) to the knowledge of such counsel, the Stockholder has good and marketable
title to the Company Common Stock, free and clear of any Liens; (d) the
execution, delivery and performance of this Agreement and all other documents to
be executed by the Stockholder or Mr. Canter in connection with this Agreement
(collectively, the "Canter Documents") have been duly executed and delivered by
the Stockholder and Mr. Canter, and constitute valid and legally binding
obligations of the Stockholder and Mr. Canter, as applicable, subject to
applicable bankruptcy, insolvency, moratorium and other similar laws of general
application and such general principles of equity as a court having jurisdiction
may apply; (e) the execution and delivery of this Agreement and the other Canter
Documents by the Stockholder and Mr. Canter, as applicable, did not, and the
consummation of the transactions contemplated hereby and thereby will not,
violate any provision of the Articles of Incorporation or By-Laws of either of
the Companies or any provision of any agreement, instrument, order, judgment or
decree, of which such counsel has knowledge, to which the Stockholder, either of
the Companies or Mr. Canter may be a party or by which any of them is bound; (f)
except as may be specified by such counsel, such counsel does not know of any
suit or proceeding pending or threatened against or affecting the
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Stockholder, either of the Companies or Mr. Canter, their respective businesses
or properties or the consummation of the transactions contemplated hereunder, or
which seeks to restrain or prohibit the transactions contemplated by this
Agreement; and (g) to the best actual knowledge of such counsel, all regulatory
and governmental approvals, consents and filings required of the Stockholder,
either of the Companies or Mr. Canter for the consummation of the transactions
contemplated by this Agreement or any of the other Canter Documents have been
obtained or made.
8.3 Approvals of Governmental Authorities. All governmental
-------------------------------------
approvals necessary or advisable in the opinion of the Purchaser's counsel to
consummate the transactions contemplated by this Agreement, including expiration
of the waiting period under the HSR Act, shall have been received, and the
Purchaser shall not have received any request or requirement for additional
information or condition to consummation of the Stock Purchases from the Federal
Trade Commission or the Department of Justice which contains any provision
which, in the reasonable judgment of the Purchaser, is unduly burdensome.
8.4 No Adverse Proceedings or Events. Except for those matters
--------------------------------
disclosed in Section 8.4 of the Stockholder Disclosure Schedule, no suit, action
or other proceeding against either of the Companies, the Purchaser, or their
respective officers, directors or employees, or against the Stockholder or Mr.
Canter, which, if decided adversely to any of them could reasonably be expected
to have a Material Adverse Effect on the Companies, shall be threatened or
pending before any court or governmental agency, including any proceeding
(regardless of the materiality or lack thereof to the Companies) in which it
will be, or it is, sought to restrain or prohibit any of the transactions
contemplated by this Agreement or any in which it is sought to obtain material
monetary damage in connection with this Agreement or the transactions
contemplated hereby.
8.5 Consents and Actions; Contracts. All requisite consents of any
-------------------------------
third parties and other actions which the Stockholder has covenanted to use her
best efforts to obtain and take under Section 5.1 hereof shall have been
obtained and completed or have been waived by Purchaser. All material contracts
and agreements of each of the Companies, including, without limitation, those
listed on Section 2.6 or 2.7 of the Stockholder Disclosure Schedule, shall be in
full force and effect and shall not be affected by the consummation of the
transactions contemplated hereby.
8.6 Employment, Non-Compete and Other Matters. (a) Each of the
-----------------------------------------
Stockholder and the Named Officers shall have executed and delivered an
employment and non-competition agreement in substantially the form attached
hereto as Exhibit 5.4; (b) Mr. Canter shall have executed and delivered to the
-----------
Purchaser the Canter Addendum; and (d) other than as set forth in Section
2.6(iv) of the Stockholder's Disclosure Schedule, there shall be no employment
agreements between either of the Companies and any of the Companies' employees.
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8.7 Other Evidence. The Purchaser shall have received from Mr.
--------------
Canter and the Stockholder such further certificates and documents evidencing
due action in accordance with this Agreement as the Purchaser reasonably shall
request.
8.8 Estimated Balance Sheets; Post-Closing Adjustments. (a) The
--------------------------------------------------
Stockholder shall have provided to the Purchaser the Estimated Balance Sheet
which shall not reflect any materially adverse differences from the Unaudited
Financial Statements delivered to the Purchaser pursuant to Section 2.4 hereof.
(b) If at any time during the six months' period beginning on the
Closing date, Purchaser is required to provide cash working capital to the
Companies (each a "Working Capital Infusion") Stockholder shall reimburse
Purchaser for each Working Capital Infusion, which reimbursement shall be paid
by Stockholder within 10 days after Purchaser notifies Stockholder in writing of
any Working Capital Infusion.
8.9 Section 338(h)(10) Election. At closing, the Stockholder and the
---------------------------
Companies shall sign the documents necessary, in Purchaser's reasonable
judgment, to effect an election under Section 338(h)(10) of the Internal Revenue
Code of 1954, as amended, in connection with the transactions hereunder.
9. CONDITIONS TO THE STOCKHOLDER'S OBLIGATIONS. Unless waived in writing
by the Stockholder in her sole discretion, all obligations of the Stockholder
under this Agreement are subject to the fulfillment, prior to or at the Closing,
of each of the following conditions:
9.1 Covenants and Representations of the Purchaser. The Purchaser
----------------------------------------------
shall have executed all agreements contemplated by this Agreement and the
Closing Documents to be executed on or prior to Closing and shall have performed
and complied in all material respects with all agreements, covenants,
obligations and conditions required thereby to be performed or complied with by
them on or prior to Closing. All representations and warranties of the
Purchaser shall be true and correct as if made for the first time on the Closing
Date
9.2 Opinion of Counsel to the Purchaser. The Purchaser shall have
-----------------------------------
delivered to each of the Companies a favorable opinion of the Purchaser's
counsel, Piper & Marbury L.L.P., dated the date of Closing, in form and
substance satisfactory to the Stockholder and her counsel, to the effect that
(a) the Purchaser is a corporation duly organized, validly existing and in good
standing under the laws of the State of Maryland; (b) the Purchaser has the
corporate power to carry on its business as it is now being conducted and to own
or hold under lease the properties and assets it now owns or holds under lease;
(c) the Purchaser has the corporate power to enter into the transactions
contemplated by this Agreement; (d) the execution, delivery and performance of
this Agreement and all other documents to be executed by the Purchaser in
connection with this Agreement (the "Purchaser Documents" and, together with the
Canter Documents, the "Closing Documents") have been duly authorized and
approved by all requisite action of the Board of Directors and stockholders of
the Purchaser, and this Agreement and all
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other Purchaser Documents have been duly executed and delivered by the Purchaser
and constitute valid and legally binding obligations of the Purchaser, subject
to applicable bankruptcy, insolvency, moratorium and other similar laws of
general application and such general principles of equity as a court having
jurisdiction may apply; (e) the execution and delivery of this Agreement and the
other the Purchaser Documents did not, and the consummation of the transactions
contemplated hereby or thereby will not, violate or conflict with any provision
of the Articles of Incorporation or By-Laws of the Purchaser; (f) the execution
and delivery of this Agreement and the other the Purchaser Documents did not,
and the consummation of the transactions contemplated hereby or thereby will
not, violate any provision of any agreement, instrument, order, judgment or
decree, of which such counsel has knowledge, to which the Purchaser may be a
party or by which it is bound; (g) except as may be specified by such counsel,
such counsel does not know of any material suit or proceeding pending or
threatened against the Purchaser which seeks to restrain or prohibit the
consummation of the transactions contemplated by this Agreement; (h) the shares
of Purchaser Common Stock issuable as Earnout Shares have been duly authorized
and reserved for issuance and, if and when issued and delivered in accordance
with this Agreement, will be duly and validly issued and outstanding shares of
Purchaser Common Stock, fully paid and non assessable under the laws of the
State of Maryland; (i) to the knowledge of such counsel, all regulatory and
governmental approvals, consents and filings required of the Purchaser for the
consummation of the transactions contemplated by this Agreement or any of the
other the Purchaser Documents have been obtained or made, and to the knowledge
of such counsel, all such approvals, consents or filings remain in full effect
as of the date of such opinion; and (j) to such further effect regarding the
validity and sufficiency of legal proceedings and matters relative to the
transactions contemplated by this Agreement as the Stockholder may reasonably
request.
9.3 No Adverse Proceedings or Events. No suit, action or other
--------------------------------
proceeding against either of the Companies or the Purchaser, or their respective
officers, directors or employees, or against the Stockholder, shall be
threatened or pending before any court or governmental agency in which it will
be, or it is, sought to restrain or prohibit any transactions contemplated by
this Agreement or to obtain damages or other relief in connection with this
Agreement or the transactions contemplated hereby.
9.4 Employment, Non-Competition and Other Matters. (a) the Companies
---------------------------------------------
shall have executed and delivered to each of the Stockholder and the Named
Officers an employment and non-competition agreement in substantially the form
attached hereto as Exhibit A; and (b) the Companies shall have executed and
---------
delivered to Mr. Canter a consulting and non-compete agreement in substantially
the form attached hereto as Exhibit B.
---------
9.5 Approvals of Governmental Authorities. All governmental
-------------------------------------
approvals necessary or advisable in the opinion of the Stockholder's counsel to
consummate the transactions contemplated by this Agreement, including expiration
of the waiting period under the HSR Act, shall have been received, and neither
the Stockholder nor the Companies shall have received any request or requirement
for additional information or condition to consummation of the Stock Purchases
from the Federal Trade Commission or the Department of Justice which
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contains any provision which, in the reasonable judgment of the Stockholder, is
unduly burdensome.
9.6 Other Evidence. The Stockholder shall have received from the
--------------
Purchaser such further certificates and documents evidencing due action in
accordance with this Agreement, as the Stockholder reasonably shall request.
9.7 Consents and Actions. All requisite consents of any third
--------------------
parties and other actions which the Purchaser has covenanted to use its best
efforts to obtain and take under Article 4 hereof shall have been obtained and
completed.
10. INDEMNIFICATION.
10.1 Indemnification by the Stockholder. Subject to Section 10.4
----------------------------------
hereof, the Stockholder hereby covenants and agrees to indemnify and hold
harmless the Purchaser and its successors and assigns, at all times from and
after the Closing Date against and in respect of the following:
(a) any liability, loss, damage, expense or other cost resulting
from any misrepresentation, breach of representation or warranty or breach or
non-fulfillment of any agreement or covenant on the part of either of the
Companies, the Stockholder or Mr. Canter under this Agreement, or from any
inaccuracy or misrepresentation in or omission from the Company Disclosure
Schedule, any certificate or other instrument or document furnished or to be
furnished by either of the Companies, the Stockholder or Mr. Canter hereunder;
(b) any loss, damage, expense or other cost which arises out of
any liabilities or obligations of either of the Companies, the Stockholder or
Mr. Canter (including, without limitation, federal, state or local income and
other taxes) incurred prior to the Closing (but only to the extent that such
liabilities and obligations were not shown, provided for or reserved against in
the Financial Statements, the Estimated Balance Sheet or on the Stockholder's
Disclosure Schedule).
(c) all claims, actions, suits, proceedings, demands,
assessments, judgments, costs and expenses, including without limitation
reasonable attorneys' fees and expenses, of any nature incident to any of the
matters indemnified against pursuant to this Section 10.1, including, without
limitation, all such costs and expenses incurred in the defense thereof or in
the enforcement of any rights of the Purchaser hereunder against the Stockholder
or the Companies.
Any amounts covered by paragraphs (a), (b) or (c) of this
Section 10.1 or Section 10.3 are hereinafter referred to as a "Loss."
10.2 Indemnification Procedure. The procedure for indemnification
-------------------------
under Section 10.1 shall be as follows:
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<PAGE>
(a) If at any time the Purchaser is entitled to indemnification
hereunder (the "Indemnitee"), it shall receive notice of any state of facts that
have resulted or may result in a Loss, the Indemnitee shall promptly give
written notice (a "Notice of Claim") to the Stockholder (the "Indemnitor") of
the discovery of such potential or actual Loss. A Notice of Claim shall set
forth (x) a brief description of the nature of the potential or actual Loss, and
(y) the total amount of Loss anticipated (including any costs or expenses which
have been or may be incurred in connection therewith). Upon receipt of a Notice
of Claim, the Indemnitor may elect to cure the event of Loss within 90 days
after the date of receipt of the Notice of Claim. Except for a failure to
deliver a Notice of Claim within the applicable survival period as provided
under Section 11 (which failure shall constitute a complete defense), the
Indemnitee's failure to give prompt notice or to provide copies of documents or
to furnish relevant data shall not constitute a defense (in whole or in part) to
any claim by the Indemnitee against the Indemnitor for indemnification, unless
and then only to the extent that such failure shall have caused or increased
such liability or adversely affected the ability of the Indemnitor to defend
against or reduce her liability.
(b) The Indemnitor shall accept or reject any Loss as to which
a Notice of Claim is sent by the Indemnitee by giving written notice of such
acceptance or rejection to the Indemnitee within 30 days after the date of
receipt of the Notice of Claim. Failure of the Indemnitor to reject a Loss
within 30 days of receipt of the Notice of Claim shall be conclusive evidence of
the Indemnitor's acceptance of her responsibility to indemnify the Indemnitee
against such Loss. Even if the Indemnitor assumes the defense thereof, the
Indemnitee shall have the right to settle any matter for which a claim for
indemnification is made hereunder upon notice to the Indemnitor and by waiving
any right against the Indemnitor with respect to such matter.
(c) If any Notice of Claim relates to any claim made against
the Indemnitee by any third person, the Notice of Claim shall state the nature,
basis and amount of such claim. The Indemnitor shall have the right, at its
election, by written notice given to the Indemnitee, to assume the defense of
the claim as to which such notice has been given with counsel reasonably
acceptable to the Indemnitee. Except as provided in the next sentence, if the
Indemnitor so elects to assume such defense, it shall diligently and in good
faith defend such claim and shall keep the Indemnitee reasonably informed of the
status of such defense, and the Indemnitee shall cooperate with the Indemnitor
in the defense of such claim, provided that in the case of any settlement
providing for remedies other than monetary damages for which indemnification is
provided, the Indemnitee shall have the right to approve the settlement, which
approval shall not be unreasonably withheld or delayed. If the Indemnitor does
not so elect to defend any claim as aforesaid or shall fail to defend any claim
diligently and in good faith (after having so elected), the Indemnitee may, at
the Indemnitor's expense, assume the defense of such claim and take such other
action as it may elect to defend or settle such claim as it may determine in its
reasonable discretion and seek reimbursement therefor from Indemnitor.
(d) In the event there arises a dispute between the parties as
to whether a Loss is required to be indemnified pursuant to this Section 10.1,
the parties agree to resolve such dispute in accordance with the arbitration
provisions of Section 12.4 hereof.
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<PAGE>
(e) The Indemnitor expressly agrees that if the Indemnitee
incurs any Loss hereunder as to which it is entitled to indemnity pursuant to
this Section 10.1, Indemnitee may set-off the same against any amount then or
thereafter due and owing by Purchaser to the Indemnitor, including, without
limitation, any Earnout Consideration payable pursuant to Section 7.3 hereof. In
addition, any amount required to be paid by Indemnitor to Indemnitee hereunder
may be paid, at Indemnitor's option, either in cash or by delivery of shares of
Purchaser Common Stock having a then Market Value equal to such amount required
to be paid.
10.3 Indemnification by the Purchaser. The Purchaser hereby
--------------------------------
covenants and agrees to indemnify and hold harmless the Stockholder, her
successors and assigns, at all times from and after the Closing Date, against
and in respect of the following:
(a) any liability, loss, damage, expense or other cost resulting
from any misrepresentation, breach of representation or warranty or breach or
non-fulfillment of any agreement or covenant on the part of the Purchaser under
this Agreement, or from any inaccuracy or misrepresentation in or omission from
the Purchaser Disclosure Schedule, any certificate or other instrument or
document furnished or to be furnished by the Purchaser hereunder; and
(b) all claims, actions, suits, proceedings, demands,
assessments, judgments, costs and expenses, including without limitation,
reasonable attorneys' fees and expenses, of any nature incident to any of the
matters indemnified against pursuant to this Section 10.3, including without
limitation, all such costs and expenses incurred in the defense thereof or in
the enforcement of any rights of the Stockholder hereunder.
The Stockholder shall promptly notify the Purchaser of any asserted
liability, damage, loss or expense claimed to give rise to indemnification
hereunder and thereafter the Purchaser shall have the right to defend,
compromise and settle such matter, provided that the Purchaser takes all such
actions as are necessary to cause the Stockholder not to be required to pay any
cost or expense in connection therewith. Any dispute with respect to indemnity
pursuant to this Section 10.3 shall be resolved in accordance with the
arbitration provisions of Section 10.4 hereof.
The Stockholder's failure to give prompt notice shall not constitute a
defense (in whole or in part) to any claim by the Stockholder against the
Purchaser for indemnification, unless and then only to the extent that such
failure shall have caused or increased such liability or adversely affected the
ability of the Purchaser to defend against or reduce its liability.
The Purchaser shall accept or reject any Loss as to which a notice is
sent by the Stockholder by giving written notice of such acceptance or rejection
to the Stockholder within 30 days after the date of receipt of the notice.
Failure of the Purchaser to reject a Loss within 30 days of receipt of the
notice shall be conclusive evidence of the Purchaser's acceptance of its
responsibility to indemnify the Stockholder against such Loss. Even if the
Purchaser assumes the defense thereof, the Stockholder shall have the right to
settle any matter for which a claim for
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indemnification is made hereunder upon notice to the Purchaser and by waiving
any right against the Purchaser with respect to such matter.
10.4 Limitations on Indemnity. Neither the Purchaser nor the
------------------------
Stockholder shall be required to make any indemnity payment under this Article
10 to the extent such payment, together with all other payments previously made
by such party under Article 10 would exceed 20% of the Aggregate Purchase Price
previously paid to the Stockholder (with any Earnout Shares issued to the
Stockholder prior to such payment valued at their Market Value as of the date of
the indemnity payment if then held by the Stockholder or at the net sales price
if such shares had previously been sold); provided, however, if any indemnity
payment is not made on account of the limit set forth earlier in this sentence
and subsequently any additional Aggregate Purchase Price is paid, the
indemnifying party shall immediately pay to the indemnified party the amount not
previously paid as a result of such limitation, which payment shall not exceed
twenty percent (20%) of the amount of such additional payment of the Aggregate
Purchase Price. The Purchaser shall make no claim for indemnity under Section
10.1, and the Stockholder shall make no claim for indemnity under Section 10.3,
unless the amount of liability as to which such claim relates exceeds $175,000.
Notwithstanding the prior sentence, if a party making a claim for indemnity as
to any liability which equals or exceeds $175,000, previously had the right to
indemnity in one or more instances involving a claim or claims relating to
liability which was less than $175,000, such party shall then be entitled to
aggregate such prior claim or claims with the claim relating to liability equal
to or exceeding $175,000. The limitations on indemnity in the prior two
sentences shall not apply after a party entitled to indemnity has made a claim
relating to liability equal to or exceeding $175,000.
11. SURVIVAL. The representations, warranties, covenants and agreements
made by the parties in this Agreement (including, without limitation, Section
12.1) and in any other certificates and documents delivered in connection
herewith, including the indemnification obligations of the Stockholder and the
Purchaser set forth in Article 10 hereof, shall survive the Closing under this
Agreement regardless of any investigation made by the party making claim
hereunder, except that, subject to the provisions of the next sentence, neither
the Purchaser, on the one hand, nor the Stockholder, on the other, shall have
any liability with respect to any matter if notice of a claim has not been
provided on or prior to the end of the thirtieth month following the Closing
Date. Notwithstanding the foregoing, (i) any indemnification obligations of the
Stockholder relating to federal, state or local income tax matters of any sort
shall continue in full force and effect without limitation until expiration of
the statute of limitations applicable to such tax matters, (ii) the
representations and warranties contained in Sections 1.5(a), 2.1, 2.23 and 3.4
and any indemnification obligations in connection therewith shall continue in
full force and effect without any limitation, and (iii) any claims, actions or
suits based upon fraud, willful misconduct or intentional misrepresentation by
any party hereto or any representative of such party shall continue in full
force and effect without limitation until expiration of the statute of
limitations applicable thereto.
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<PAGE>
12. OTHER AGREEMENTS.
12.1 Access. The Stockholder and the Companies will, and will cause
------
their respective affiliates, directors, officers, employees and agents to,
afford to the Purchaser and its advisors, officers, employees, agents and
attorneys reasonable access at all reasonable times to the Companies' officers,
employees, agents, consultants, properties, books, records and contracts and
will furnish to the Purchaser and its advisors all financial, operating and
other data and information relating to the Companies as the Purchaser or its
advisors may reasonably request. The Purchaser will, and will cause its
affiliates, directors, officers, employees and agents to, afford to the
Stockholder and their respective advisors, officers, employees, agents and
attorneys reasonable access at all reasonable time to the Purchaser's officers,
employees, agents, consultants, properties, books, records and contracts and
will furnish to the Companies and their respective advisors all financial,
operating and other data and information relating to the Purchaser as the
Companies, the Stockholder or their respective advisors may reasonably request.
Except as otherwise required by law, the party receiving any information
hereunder (i) will use any such information solely for the purpose of due
diligence review and for no other purpose, (ii) will maintain such information
confidential, (iii) will not at any time or in any manner, directly or
indirectly, disclose to any person any or all of such information (other than
for the purpose of due diligence review on a need to know basis), (iv) will not
use for its benefit or the benefit of any third party any such information
(other than benefits resulting from the consummation of the Stock Purchases),
and (v) upon the termination of this Agreement without consummation of the Stock
Purchases will either (A) deliver to the party that originally provided it all
such information, including originals or copies thereof, that are in its
possession or in the possession of its officers, employees, agents and advisors
or (B) certify to the other party that such information has been destroyed.
12.2 Public Statements. Neither the Companies nor the Stockholder
-----------------
nor the Purchaser, from and after the date of this Agreement until the Closing,
shall make any public announcement or other disclosure concerning this Agreement
or the Stock Purchases without the prior consent of the other (the "Reviewing
Party") as to form, content and timing; provided, however, that the consent of
the Reviewing Party shall not be unreasonably withheld and, if upon advice of
legal counsel, the Purchaser determines that public announcement or disclosure
is required by law or any securities exchange on which the Purchaser's stock is
listed and the Reviewing Party fails to give its consent in a timely manner
(considering the circumstances), the Purchaser shall not be prohibited from
disseminating and/or filing the public announcement or disclosure without
obtaining such consent.
12.3 S Corporation Earnings; 1997 Income Tax Returns.
-----------------------------------------------
(a) The Companies' S Corporation estimated earnings for the
period from January 1, 1998 to but not including the date of Closing (the
"Estimated Earnings"), to the extent not previously distributed, shall be
distributed by the Companies to the Stockholder immediately prior to the
Closing.
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(b) In order to apportion the Companies' 1998 earnings between
the Stockholder and the Purchaser, the Actual Earnings (as defined below) shall
be allocated to the Stockholder and the Companies' earnings for the period
beginning on the Closing Date and ending on December 31, 1998 shall be allocated
to the Purchaser. For tax and accounting purposes, such apportionment of
earnings shall be determined under the closing of the books method consistent
with Code Sections 1362(e)(3) and 1362(e)(6)(D) and the Regulations thereunder.
The Stockholder, the Companies and the Purchaser shall take all action necessary
to make the election to have the closing of the books method apply and shall
timely file such elections and reports, including the election required under
Regulation Section 1.1362-6(a)(5), to effectuate the use of the closing of the
books method. Notwithstanding the foregoing, the Companies' EBITDA for all of
1998 shall be used for purposes of the calculations pursuant to Section 7.3(b)
hereof.
(c) No later than 45 days after the Closing Date, the Purchaser
shall deliver to the Stockholder a written calculation (the "Calculation") of
the actual earnings for each of the Companies to but not including the Closing
Date (the "Actual Earnings"). In the event the Stockholder does not accept the
Calculation as accurate, the Stockholder shall notify the Purchaser of the non-
acceptance of the Calculation in writing within 20 days after receipt of the
Calculation (the failure of which notice within such 20 days shall be deemed
acceptance of the Calculation), and the Stockholder and the Purchaser shall
promptly attempt to reach agreement on the correct amount of the Calculation. In
the event the Stockholder and the Purchaser cannot reach agreement either Ernst
& Young, LLP or the CPA's (at Purchaser's option) shall determine the correct
amount of the Calculation, which determination shall be binding on the
Stockholder and the Purchaser. Thereafter, any amounts required to be under this
Section 12.3 shall be paid and the releases signed as provided in Section
12.3(d) and (e), as the case may be.
(d) To the extent the Actual Earnings exceed the Estimated
Earnings, the Purchaser shall pay such excess amount to the Stockholder within
three days after the later of acceptance of the Calculation by the Stockholder
or determination thereof by Ernst & Young, L.L.P.; provided, however, any
payment required to be made by the Purchaser hereunder shall not be due and
payable unless and until the Stockholder shall have executed and delivered to
the Purchaser a release relating to the Purchaser's obligations under this
Section 12.3, in form and substance reasonably acceptable to the Purchaser.
(e) To the extent the Estimated Earnings exceed the Actual
Earnings, the Stockholder agrees to pay to the Purchaser, by certified check,
within three business days after the later of acceptance of the Calculation or
the determination by Ernst & Young, LLP, the amount by which the Estimated
Earnings exceeded the Actual Earnings; provided, however, any payment required
to be made by the Stockholder hereunder shall not be due and payable unless and
until the Purchaser shall have executed and delivered to the Stockholder a
release relating to the Stockholder' obligations under this Section 12.3, in
form and substance reasonably acceptable to the Stockholder.
-31-
<PAGE>
(f) The Companies' Accountants shall be responsible for
preparing and filing the Companies' 1997 federal and state income tax returns.
12.4. Dispute Resolution. Except as provided in Section 7.3, Section
------------------
12.3 and in the last sentence of this Section 12.4, Stockholder and the
Purchaser agree that any controversy or claim arising out of or relating to this
Agreement or breach thereof shall be settled exclusively by arbitration in Los
Angeles, California in accordance with the National Rules of the American
Arbitration Association. The decision of the arbitration or arbitrators shall be
binding on all parties hereto, and judgment upon the award rendered by the
arbitrator may be entered by any court having jurisdiction thereover. In
reaching its decision, the arbitrator shall have no authority to change or
modify any provision of this Agreement. Notwithstanding the foregoing, any party
hereto may seek specific performance, injunctive relief or other equitable
relief before a court of competent jurisdiction (i) prior to the Closing for the
purpose of compelling any other party hereto to perform its obligations
hereunder, or (ii) subsequent to Closing for the purpose of compelling any other
party to arbitrate any controversy or claim in the manner provided for above.
The failure of a court to grant the equitable relief sought by a party hereto
pursuant to clause (i) shall not bar such party from seeking to arbitrate the
same claim, and such failure shall be taken into account by the arbitrators in
any arbitration.
13. CONFIDENTIALITY. After the date hereof, each party hereto will hold
in confidence and not reveal to any third parties any knowledge or information
of a confidential nature with respect to the business, products, know-how and
methods of operation of each of the other parties hereto, and will not disclose,
publish or make use of the same, provided, however, that the foregoing shall not
be applicable to any disclosure or use of confidential information or knowledge
that can be demonstrated to have (i) been publicly known prior to the date of
this Agreement, (ii) become known by publication or otherwise not due to the
unauthorized act or omission on the part of the recipient, or (iii) been
supplied to the recipient by a third party without violation of the rights of
any of the parties to this Agreement or any other party's rights. The parties
agree that the remedy at law for any breach of this Section 13 may be inadequate
and that the aggrieved party shall be entitled to injunctive relief in addition
to any other remedy available to it in law or equity.
14. EXPENSES. Each party to this Agreement shall pay all of its expenses
relating hereto, including fees and disbursements of its counsel, accountants
and financial advisors, whether or not the transactions hereunder are
consummated. It is expressly understood, however, that (i) Purchaser shall bear
all costs and expenses relating to any post-closing audits and any filings with
governmental entities in connection with the transactions contemplated by this
Agreement, and (ii) the Stockholder may require the Companies (but only to the
extent such expenses are accounted for or reserved against in the Estimated
Balance Sheets) to bear the fees and other expenses of counsel and financial
advisors to the Companies and/or the Stockholder or other types of fees and
expenses incurred in connection with the transactions contemplated by this
Agreement. In addition, if the Closing has not occurred by January 30, 1998,
Sylvan shall immediately pay the Companies $250,000 unless the Closing has not
occurred because of the failure or inability of the Companies, the Stockholders
or Mrs. Canter to abide by the covenants
-32-
<PAGE>
contained herein or to satisfy the conditions to Closing contained herein or
because of their breach of this Agreement.
15. NOTICES. Except as otherwise provided herein, all notices, requests,
demands and other communications under or in connection with this Agreement
shall be in writing, and:
(a) if to the Purchaser, shall be addressed to:
B. Lee McGee
Sylvan Learning Systems, Inc.
1000 Lancaster Street
Baltimore, Maryland 21202
with a copy to:
Richard C. Tilghman, Jr., Esquire
Piper & Marbury L.L.P.
36 South Charles Street
Baltimore, Maryland 21201
(b) if to the Companies or the Stockholder, shall be addressed to the
Stockholder:
Marlene Canter
Canter & Associates, Inc.
Canter Educational Productions, Inc.
1307 Colorado Boulevard
Santa Monica, California 90404
with a copy to:
Barry G. Edwards, Esquire
Hamburg, Hanover, Edwards & Martin
2029 Century Park East, Suite 1640
Los Angeles, California 90067
(b) if to Mr. Canter:
515 Ocean, #705N
Santa Monica, California 90412
with a copy to:
Katz, Golden & Fishman, LLP
10850 Wilshire Boulevard, #600
Los Angeles, California 90024
-33-
<PAGE>
All such notices, requests, demands or communications shall be mailed
postage prepaid, certified mail, return receipt requested, or by overnight
delivery or delivered personally, and shall be sufficient and effective when
delivered to or received at the address so specified. Any party may change the
address at which it is to receive notice by like written notice to the other.
16. TERMINATION; EXTENSION; WAIVER
16.1 Termination. This Agreement may be terminated at any time prior
-----------
to the Closing by written notice by the terminating party to the other party):
(a) by mutual written consent of the Purchaser and the
Stockholder; or
(b) by either the Purchaser or the Companies and the Stockholder
if the Canter Stock Purchase and the Canter Productions Stock Purchase shall not
have been consummated by January 30, 1998, subject to the provisions of Section
7.5 hereof; or
(c) by either the Purchaser or the Companies and the Stockholder,
if a court of competent jurisdiction or other governmental entity shall have
issued a nonappealable final order, decree or ruling or taken any other action,
in each case having the effect of permanently restraining, enjoining or
otherwise prohibiting either of the Stock Purchases; or
(d) by the Purchaser on the one hand or the Companies and the
Stockholder on the other hand, if there has been a material breach of any
representation, warranty, covenant or agreement on the part of the other parties
set forth in this Agreement, which breach shall not have been cured prior to the
Closing Date;
16.2 Effect of Termination. In the event of termination of this
---------------------
Agreement as provided in Section 7.5 or Section 16.1, this Agreement shall
immediately become void and there shall be no liability or obligation on the
part of the Stockholder or the Purchaser or the Companies or their respective
officers, directors, stockholders or affiliates, except as set forth in Sections
13, 14 and 16.3 and further except to the extent that such termination results
from the willful breach by a party of any of its representations, warranties or
covenants set forth in this Agreement, as to which all legal and equitable
remedies of the party adversely affected shall survive and be enforceable.
16.3 Extension; Waiver. At any time prior to the Closing, each party
-----------------
hereto may but shall not be required to (i) extend the time for the performance
of any of the obligations or other acts of the other party, (ii) waive any
inaccuracies in the representations and warranties of the other party contained
herein or in any document, certificate or writing delivered pursuant hereto, or
(iii) waive compliance by the other party with any of the agreements or
conditions contained herein. Any agreement on the part of either party hereto
to any such extension or waiver shall be valid only if set forth in an
instrument in writing signed on behalf of such party, and the failure of either
party hereto to assert any of its rights hereunder shall not constitute a waiver
of such rights absent such instrument in writing.
-34-
<PAGE>
17. ENTIRE AGREEMENT. This Agreement (including the exhibits hereto and
the lists, schedules and documents delivered hereunder, which are a part hereof)
is intended by the parties to and does constitute the entire agreement of the
parties with respect to the transactions contemplated by this Agreement. This
Agreement supersedes any and all prior understandings, written or oral, between
the parties, and this Agreement may be amended, modified, waived, discharged or
terminated only by an instrument in writing signed by the party against which
enforcement of the amendment, modification, waiver, discharge or termination is
sought. This Agreement may not be amended except by an instrument in writing
signed by each of the parties hereto.
18. GENERAL. The paragraph headings contained in this Agreement are for
reference purposes only and shall not affect in any way the meaning or
interpretation of this Agreement. This Agreement may be executed simultaneously
in two or more counterparts, each of which shall be deemed an original, but all
of which together shall constitute one and the same instrument. This Agreement
shall inure to the benefit of and be binding upon the parties hereto and their
respective successors and permitted assigns, but nothing herein, express or
implied, is intended to or shall confer any rights, remedies or benefits upon
any person other than the parties hereto. This Agreement may not be assigned by
any party hereto. This Agreement shall be construed in accordance with and
governed by the laws of the State of California, without giving effect to the
principles of conflicts of law.
-35-
<PAGE>
IN WITNESS WHEREOF, the Purchaser, each of the Companies and the
Stockholder have caused this Agreement to be duly executed and their respective
seals to be hereunto affixed as of the date first above written.
WITNESS: SYLVAN LEARNING SYSTEMS, INC.
__________________________ By:____________________________________
WITNESS: CANTER & ASSOCIATES, INC.
__________________________ By:____________________________________
WITNESS: CANTER EDUCATIONAL PRODUCTIONS,
INC.
__________________________ By:____________________________________
WITNESS: STOCKHOLDER:
___________________________ _________________________________(Seal)
Marlene Canter
WITNESS: MR. CANTER:
___________________________ _________________________________(Seal)
Lee Canter
-36-
<PAGE>
Exhibit 21.0
Subsidiaries of Sylvan Learning Systems. Inc.
COUNTRY/
COMPANY STATE OF INCORP.
- -------------- ----------------
SYLVAN LEARNING SYSTEMS, INC. MARYLAND
Tuition Finance, Inc. Maryland
Office Overload, Inc. Delaware
ITS General, Inc. Delaware
WSI, Miami, Inc. Florida
Jefferson Educational Enterprises, Inc. Texas
National Assessments, Inc. Florida
Block Testing Services, Inc. Maryland
Pacific Language Associates, Inc. Oregon
RESS USA, Inc. Delaware
Educational Products, Inc. Maryland
Caliber Learning Network, Inc. Maryland
Jostens Learning Corporation California
Sylvan Learning Corporation Maryland
Its Subsidiary:
-----------------
Canter & Associates, Inc. California
Sylvan Learning Systems International. Ltd. Delaware
Its Subsidiary:
---------------
Sylvan Learning Systems I, B.V. Netherlands
Its Subsidiaries:
-----------------
Sylvan Learning Systems B.V. Netherlands
Its Subsidiaries:
-----------------
Sylvan Learning Systems Pty, Ltd Australia
Sylvan Learning Systems (Pty), Ltd South Africa
Sylvan Testing Services Pvte, Ltd India
Sylvan Prometric KK Japan
Sylvan LLC Egypt
Computer Certification Services, Ltd U.K.
Sylvan Learning Systems II, B.V. Netherlands
Its Subsidiaries:
----------------
Sylvan Learning Systems Ltd New Zealand
Sylvan Pte, Ltd Singapore
Sylvan Learning Systems II GmbH Austria
Sylvan Learning Systems Ltd. Israel
WSI Sylvan Learning Systems S.L. Spain
Dorana 41 GmbH Germany
Sylvan Learning Systems GmbH Germany
Dorana 50th GmbH Germany
Schulerhilfe GmbH Germany
WSI Kft Hungary
Sylvan Prometric Ltd U.K.
Aspect International Language Schools B.V. Netherlands
Aspect Education, Inc. California
AW Education (UK), Ltd U.K.
The Lemaire English College Pty Ltd Australia
Aspect International Language Schools, Ltd Canada
Aspect International Language Schools, Ltd Ireland
Aspect Language Schools, Ltd Switzerland
<PAGE>
Exhibit 23.01
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements of our report dated February 25, 1999, with respect to the
consolidated financial statements of Sylvan Learning Systems, Inc. included in
the Annual Report (Form 10-K) for the year ended December 31, 1998.
Registration Statements on Form S-3
<TABLE>
<CAPTION>
Registration Number Date Filed
- ----------------------------------------------------------------
<C> <S>
33-92014 May 8, 1995
33-92852 May 30, 1995
333-1674 February 26, 1996
333-16111 November 14, 1996
333-21261 February 6, 1997
333-26633 May 7, 1997
333-31273 July 15, 1997
333-39535 November 5, 1997
333-43355 December 29, 1997
333-46747 February 23, 1998
333-48997 March 31, 1998
333-50993 April 24, 1998
333-61083 August 25, 1998
333-65197 October 1, 1998
333-67727 December 4, 1998
</TABLE>
Registration Statements on Form S-8
<TABLE>
<CAPTION>
Registration
Name Number Date Filed
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
1987-1991 Employee Stock Option Plan 33-77384 April 6, 1994
1993 Director Stock Option Plan 33-77386 April 6, 1994
1993 Employee Stock Option Plan 33-77390 April 6, 1994
1993 Management Stock Option Plan 33-77388 April 6, 1994
1997 Employee Stock Purchase Plan 333-21963 February 18, 1997
1998 Stock Incentive Plan 333-62011 August 21, 1998
1993 Employee Stock Option Plan and Employee
Stock Purchase Plan 33-77390 September 14, 1998
</TABLE>
/s/ Ernst & Young LLP
Baltimore, Maryland
March 25, 1999
<PAGE>
Exhibit 23.02
CONSENT OF DELOITTE & TOUCHE LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements of our reports dated March 14, 1997, with respect to the financial
statements of Independent Child Study Teams, Inc. and I-R, Inc. included in the
Annual Report (Form 10-K) of Sylvan Learning Systems, Inc. for the year ended
December 31, 1998.
Registration Statements on Form S-3
<TABLE>
<CAPTION>
Registration Number Date Filed
- -----------------------------------------------------
<C> <S>
33-92014 May 8, 1995
33-92852 May 30, 1995
333-1674 February 26, 1996
333-16111 November 14, 1996
333-21261 February 6, 1997
333-26633 May 7, 1997
333-31273 July 15, 1997
333-39535 November 5, 1997
333-43355 December 29, 1997
333-46747 February 23, 1998
333-48997 March 31, 1998
333-50993 April 24, 1998
333-61083 August 25, 1998
333-65197 October 1, 1998
333-67727 December 4, 1998
</TABLE>
Registration Statements on Form S-8
<TABLE>
<CAPTION>
Registration
Name Number Date Filed
- --------------------------------------------------------------------------------------------
<S> <C> <C>
1987-1991 Employee Stock Option Plan 33-77384 April 6, 1994
1993 Director Stock Option Plan 33-77386 April 6, 1994
1993 Employee Stock Option Plan 33-77390 April 6, 1994
1993 Management Stock Option Plan 33-77388 April 6, 1994
1997 Employee Stock Purchase Plan 333-21963 February 18, 1997
1998 Stock Incentive Plan 333-62011 August 21, 1998
1993 Employee Stock Option Plan and Employee
Stock Purchase Plan 33-77390 September 14, 1998
</TABLE>
/s/ Deloitte & Touche LLP
Parsippany, New Jersey
March 25, 1999
<PAGE>
Exhibit 23.03
CONSENT OF DELOITTE & TOUCHE, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements of our report dated July 27, 1998, with respect to the consolidated
financial statements of Anglo-World Education (UK) Limited and Subsidiaries
included in the Annual Report (Form 10-K) of Sylvan Learning Systems, Inc. for
the year ended December 31, 1998.
Registration Statements on Form S-3
<TABLE>
<CAPTION>
Registration Number Date Filed
- ------------------------------------------------------
<S> <C>
33-92014 May 8, 1995
33-92852 May 30, 1995
333-1674 February 26, 1996
333-16111 November 14, 1996
333-21261 February 6, 1997
333-26633 May 7, 1997
333-31273 July 15, 1997
333-39535 November 5, 1997
333-43355 December 29, 1997
333-46747 February 23, 1998
333-48997 March 31, 1998
333-50993 April 24, 1998
333-61083 August 25, 1998
333-65197 October 1, 1998
333-67727 December 4, 1998
</TABLE>
Registration Statements on Form S-8
<TABLE>
<CAPTION>
Registration
Name Number Date Filed
- --------------------------------------------------------------------------------
<S> <C> <C>
1987-1991 Employee Stock Option Plan 33-77384 April 6, 1994
1993 Director Stock Option Plan 33-77386 April 6, 1994
1993 Employee Stock Option Plan 33-77390 April 6, 1994
1993 Management Stock Option Plan 33-77388 April 6, 1994
1997 Employee Stock Purchase Plan 333-21963 February 18, 1997
1998 Stock Incentive Plan 333-62011 August 21, 1998
1993 Employee Stock Option Plan and
Employee Stock Purchase Plan 33-77390 September 14, 1998
</TABLE>
/s/ Deloitte & Touche
United Kingdom
March 25, 1999
<PAGE>
Exhibit 23.04
CONSENT OF SMITH, LANGE & PHILLIPS LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the following Registration
Statements of (1) our report dated December 10, 1996, with respect to the
consolidated financial statements of American Study Program for Educational and
Cultural Training, Inc. for the year ended September 30, 1996; and (2) our
report dated December 7, 1997, with respect to the consolidated financial
statements of American Study Program for Educational and Cultural Training, Inc.
for the year ended September 30, 1997, both included in the Annual Report (Form
10-K) of Sylvan Learning Systems, Inc. for the year ended December 31, 1998.
Registration Statements on Form S-3
<TABLE>
<CAPTION>
Registration Number Date Filed
- ----------------------------------------------------------------
<C> <S>
33-92014 May 8, 1995
33-92852 May 30, 1995
333-1674 February 26, 1996
333-16111 November 14, 1996
333-21261 February 6, 1997
333-26633 May 7, 1997
333-31273 July 15, 1997
333-39535 November 5, 1997
333-43355 December 29, 1997
333-46747 February 23, 1998
333-48997 March 31, 1998
333-50993 April 24, 1998
333-61083 August 25, 1998
333-65197 October 1, 1998
333-67727 December 4, 1998
</TABLE>
Registration Statements on Form S-8
<TABLE>
<CAPTION>
Registration
Name Number Date Filed
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
1987-1991 Employee Stock Option Plan 33-77384 April 6, 1994
1993 Director Stock Option Plan 33-77386 April 6, 1994
1993 Employee Stock Option Plan 33-77390 April 6, 1994
1993 Management Stock Option Plan 33-77388 April 6, 1994
1997 Employee Stock Purchase Plan 333-21963 February 18, 1997
1998 Stock Incentive Plan 333-62011 August 21, 1998
1993 Employee Stock Option Plan and Employee
Stock Purchase Plan 33-77390 September 14, 1998
</TABLE>
/s/ Smith, Lange & Phillips
San Francisco, California
March 25, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<RESTATED>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 12-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 29,818 0
<SECURITIES> 82,951 0
<RECEIVABLES> 76,294 0
<ALLOWANCES> 2,509 0
<INVENTORY> 4,999 0
<CURRENT-ASSETS> 201,876 0
<PP&E> 72,899 0
<DEPRECIATION> 21,532 0
<TOTAL-ASSETS> 496,779 0
<CURRENT-LIABILITIES> 89,002 0
<BONDS> 0 0
0 0
0 0
<COMMON> 455 0
<OTHER-SE> 340,005 0
<TOTAL-LIABILITY-AND-EQUITY> 496,779 0
<SALES> 0 0
<TOTAL-REVENUES> 301,011 219,973
<CGS> 0 0
<TOTAL-COSTS> 287,216 195,868
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 801 1,320
<INCOME-PRETAX> 44,324 24,893
<INCOME-TAX> 16,420 9,139
<INCOME-CONTINUING> 0 0
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 27,904 15,754
<EPS-PRIMARY> 0.66 0.43
<EPS-DILUTED> 0.62 0.40
</TABLE>
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 33,170
<SECURITIES> 6,166
<RECEIVABLES> 93,357
<ALLOWANCES> 2,963
<INVENTORY> 9,841
<CURRENT-ASSETS> 153,338
<PP&E> 134,563
<DEPRECIATION> 36,682
<TOTAL-ASSETS> 659,796
<CURRENT-LIABILITIES> 138,238
<BONDS> 0
0
0
<COMMON> 510
<OTHER-SE> 488,323
<TOTAL-LIABILITY-AND-EQUITY> 659,796
<SALES> 0
<TOTAL-REVENUES> 440,330
<CGS> 0
<TOTAL-COSTS> 383,873
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 943
<INCOME-PRETAX> 57,291
<INCOME-TAX> 21,582
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 35,709
<EPS-PRIMARY> 0.73
<EPS-DILUTED> 0.70
</TABLE>
<PAGE>
Exhibit 99.01
[LETTERHEAD OF DELOITTE & TOUCHE LLP APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of Independent Child Study Teams, Inc.
We have audited the balance sheet of Independent Child Study Teams, Inc. as of
December 31, 1996, and the related statements of income and retained earnings
and cash flows for each of the two years in the period then ended (not presented
separately herein). These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Independent Child Study Teams,
Inc. at December 31, 1996, and the results of its operations and its cash flows
for each of the two years in the period then ended in conformity with generally
accepted accounting principles.
/s/ Deloitte & Touche LLP
March 14, 1997
<PAGE>
Exhibit 99.02
[LETTERHEAD OF DELOITTE & TOUCHE LLP APPEARS HERE]
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of I-R, Inc.
We have audited the balance sheet of I-R, Inc. as of December 31, 1996, and the
related statements of income and retained earnings and cash flows for each of
the two years in the period then ended (not presented separately herein). These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of I-R Inc. at December 31, 1996,
and the results of its operations and its cash flows for each of the two years
in the period then ended in conformity with generally accepted accounting
principles.
/s/ Deloitte & Touche LLP
March 14, 1997
- --------------- Deloitte Touche Tohmatsu International---------------
<PAGE>
EXHIBIT 99.3
ANGLO-WORLD EDUCATION (UK) LIMITED AUDITOR'S REPORT TO THE MEMBERS
We have audited the financial statements of Anglo-World Education (UK) Limited
on pages 5 to 18 which have been prepared under the accounting policies set out
on page 9 and 10.
RESPECTIVE RESPONSIBILITIES OF DIRECTORS AND AUDITORS
As described on page 3 the company's directors are responsible for the
preparation of financial statements. It is our responsibility to form an
independent opinion, based on our audit, on those statements and to report our
opinion to you.
BASIS OF OPINION
We conducted our audit in accordance with Auditing Standards issued by the
Auditing Practices Board which are substantially the same as United States
Generally Accepted Auditing Standards. An audit includes examination, on a test
basis, of evidence relevant to the amounts and disclosures in the financial
statements. It also includes an assessment of the significant estimates and
judgements made by the directors in the preparation of the financial statements,
and of whether the accounting policies are appropriate to the company's
circumstances, consistently applied and adequately disclosed. We planned and
performed our audit so as to obtain all the information and explanations which
we considered necessary in order to provide us with sufficient evidence to give
reasonable assurance that the financial statements are free from material
misstatements, whether caused by fraud or other irregularity or error. In
forming our opinion we also evaluated the overall adequacy of the presentation
of information in the financial statements.
OPINIONS
In our opinion the financial statements give a true and fair view of the state
of the company's affairs as at 31 December 1995, 1996 and 1997 and of its profit
for each of the three years then ended.
DELOITTE & TOUCHE
Chartered Accountants
Date: 27 July 1998
<PAGE>
EXHIBIT 99.4
SMITH, LANGE & PHILLIPS LLP
CERTIFIED PUBLIC ACCOUNTANTS
33 NEW MONTGOMERY STREET, SUITE 1530
SAN FRANCISCO, CA 94105-4510
Tel. (415) 243-8833 Fax (415) 243-8840
December 10, 1996
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors of American Study Program for Educational and Cultural
Training, Inc. (ASPECT)
We have audited the accompanying balance sheet of American Study Program for
Educational and Cultural Training, Inc. (ASPECT) as of September 30, 1996, and
the related statements of income and retained earnings, cash flows and
supplementary schedules for the year then ended. The financial statements are
the responsibility of ASPECT.
Our responsibility is to express an opinion on the financial statements taken as
a whole. We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles use and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of ASPECT as of September 30,
1996, and the results of its operations and its cash flows for the year then
ended in conformity with generally accepted accounting principles.
/s/ Smith, Lange & Phillips
<PAGE>
EXHIBIT 99.5
SMITH, LANGE & PHILLIPS LLP
CERTIFIED PUBLIC ACCOUNTANTS
33 NEW MONTGOMERY STREET, SUITE 1530
SAN FRANCISCO, CA 94105-4510
Tel. (415) 243-8833 Fax (415) 243-8840
December 7, 1997
INDEPENDENT AUDITOR'S REPORT
- --------------------------------------------------------------------------------
To the Board of Directors of American Study Program for Educational and Cultural
Training, Inc. (ASPECT)
We have audited the accompanying consolidated balance sheet of American Study
Program for Educational and Cultural Training, Inc. (ASPECT) and subsidiary as
of September 30, 1997, and the related consolidated statements of income and
retained deficit, cash flows and supplementary schedules for the year then
ended. The financial statements are the responsibility of ASPECT. Our
responsibility is to express an opinion on the financial statements taken as a
whole.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of ASPECT as of
September 30, 1997, and the results of its operations and its cash flows for the
year then ended in conformity with generally accepted accounting principles.
/s/ SMITH, LANGE & PHILLIPS
