-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UYcGldhhKd5Lo3sPpArrV6q1GPt5JHxbmpu3NLmGEZmbI4vxcc6NlhJ/kYkyuwRo 2IfA0JigLDTYoZX+MCciZw== 0000928385-99-001071.txt : 19990402 0000928385-99-001071.hdr.sgml : 19990402 ACCESSION NUMBER: 0000928385-99-001071 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 16 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990331 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SYLVAN LEARNING SYSTEMS INC CENTRAL INDEX KEY: 0000912766 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-EDUCATIONAL SERVICES [8200] IRS NUMBER: 521492296 STATE OF INCORPORATION: MD FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-22844 FILM NUMBER: 99582831 BUSINESS ADDRESS: STREET 1: 1000 LANCASTER ST CITY: BALTIMORE STATE: MD ZIP: 21202 BUSINESS PHONE: 4108438000 MAIL ADDRESS: STREET 1: 1000 LANCASTER ST CITY: BALTIMORE STATE: MD ZIP: 21202 10-K 1 FORM 10-K 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 ----------------- 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 ----------- SYLVAN LEARNING SYSTEMS, INC. ------------------------------------------------------ (Exact name of registrant as specified in its charter) Maryland 52-1492296 - ------------------------------- ------------------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1000 Lancaster Street, Baltimore, Maryland 21202 - -------------------------------------------- ---------- (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (410) 843-8000 -------------- Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered ---------------------------- ------------------------ Common Stock, Par Value $.01 NASDAQ
Securities registered pursuant to the Section 12(g) of the Act: None ---- 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 ----------------------------------- 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. 1 INDEX -----
PART I. Page No. -------- 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
2 PART I. ------ 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 3 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. 4 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. 5 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. 6 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. 7 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 8 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 9 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 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 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.
1997 High Low - --------------- ------ ------ 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
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 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
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) 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
(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 (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 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.
Year Ended December 31, ---------------------------------------- 1996 1997 1998 ------------ ------------ ------------ 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 ======== ======== ========
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 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 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 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 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 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 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 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 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 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 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 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 3. Exhibits (a) Exhibits:
Exhibit Number Description - ----------- ----------- 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)
27
Exhibit Number Description - ----------- ----------- 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.
(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 (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 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 Item 14 (a) (1) INDEX TO FINANCIAL STATEMENTS
The Company: Page ---- 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
31 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 Sylvan Learning Systems, Inc. and Subsidiaries Consolidated Balance Sheets (Amounts in thousands, except per share data)
December 31, December 31, 1997 1998 ------------------- ------------ (Restated - Note 1) 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 ============ ============
33 Sylvan Learning Systems, Inc. and Subsidiaries Consolidated Balance Sheets (Amounts in thousands, except per share data)
December 31, December 31, 1997 1998 ------------------ ------------ (Restated - Note 1) 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 ======= =======
See accompanying notes. 34 Sylvan Learning Systems, Inc. and Subsidiaries Consolidated Statements of Income (Amounts in thousands, except per share data)
Year Ended December 31, ------------------------------------------------------------ 1996 1997 1998 ------------ ------------ ------------ (Restated - Note 1) (Restated - Note 1) 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 ============ ============ ============
See accompanying notes. 35 Sylvan Learning Systems, Inc. and Subsidiaries Consolidated Statements of Stockholders' Equity (Amounts in thousands)
Retained Accumulated Additional Earnings Other Total Common Paid-In (Accumulated Comprehensive Stockholders' Stock Capital Deficit) Income Equity ------ ---------- ------------ ------------- ------------- 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 ======= ========== =========== ========== ===========
See accompanying notes. 36 Sylvan Learning Systems, Inc. and Subsidiaries Consolidated Statements of Cash Flows (Amounts in thousands)
Year Ended December 31, -------------------------------------------------------- 1996 1997 1998 ---------------- ------------------ ------------ (Restated - Note 1) (Restated - Note 1) 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 ================ ================ ============
See accompanying notes. 37 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 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 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 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 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 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 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 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.
Year ended December 31 ---------------------------------- 1997 1998 ---------------------------------- Revenues $336,208 $452,087 Net income 30,581 37,352 Earnings per share diluted 0.67 0.73
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 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:
Sylvan Company Prior Learning to Restatement Aspect Centers Combined ------------------------------------------------------------ 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
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):
Sylvan Aspect Combined -------------------------------------------------- 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
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 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:
Paid Through Balance at Original December 31, December 31, Accrual 1998 1998 -------------------------------------------------- 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 ==================================================
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 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 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):
December 31, --------------- 1997 1998 ------- ------ Municipal securities funds $ 8,200 $ -- Cash reserve fund 38,246 3,366 Municipal bonds 36,505 2,800 ------- ------ $82,951 $6,166 ======= ======
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 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:
1997 1998 ---------- ---------- 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 ========== ==========
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 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 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:
December 31, ---------------------- 1997 1998 -------- -------- 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 ======== ========
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 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):
December 31, ---------------------------------------- 1997 1998 ---------------------------------------- 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 ================= ===================
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:
Years ending December 31: 1999 $16,298 2000 14,620 2001 11,357 2002 9,762 2003 8,452 Thereafter 23,333 ------- $83,822 =======
53 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 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.
1996 1997 1998 -------------------------------------------------------------------------------------------- Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Options Price Options Price Options Price -------------------------------------------------------------------------------------------- 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 =============== =============== ===============
55 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:
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 - ------------------------------------------------------------------------------------------------------ $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 - ------------------------------------------------------------------------------------------------------
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:
1996 1997 1998 --------- --------- ---------- 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
56 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 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:
Year ended December 31, ------------------------- 1996 1997 1998 ------ ------- ------- 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 ====== ======= =======
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:
Year ended December 31, ----------------------- 1997 1998 ------- ------- 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
58 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)
Year ended December 31, -------------------------------- 1997 1998 --------------- --------------- 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) ======= =======
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:
Year ended December 31, -------------------------- 1996 1997 1998 ------ ------- ------- 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 ====== ======= =======
59 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:
Year ended December 31, ------------------------- 1996 1997 1998 ------- ------- ------- 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
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 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 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:
Year Ended December 31, 1996 --------------------------------------------------------- Sylvan Sylvan Contract Learning Centers Educational Services Sylvan Prometric ---------------- -------------------- ---------------- 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
62 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)
Year Ended December 31, 1997 --------------------------------------------------------- Sylvan Sylvan Contract Learning Centers Educational Services Sylvan Prometric ---------------- -------------------- ---------------- 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 Year Ended December 31, 1998 --------------------------------------------------------- Sylvan Sylvan Contract Learning Centers Educational Services Sylvan Prometric ---------------- -------------------- ---------------- 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
63 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:
1996 1997 1998 --------- --------- --------- 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 ======== ======== ========
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 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
Year Ended December 31, 1996 . ---------------------------- Revenues Long-lived Assets --------- ----------------- United States $165,539 $25,679 Foreign countries - total 54,434 7,502 -------- ------- Consolidated total $219,973 $33,181 ======== ======= Year Ended December 31, 1997 . ---------------------------- Revenues Long-lived Assets --------- ----------------- United States $212,336 $40,182 Foreign countries - total 88,675 11,185 -------- ------- Consolidated total $301,011 $51,367 ======== ======= Year Ended December 31, 1998 . ---------------------------- Revenues Long-lived Assets --------- ----------------- United States $313,043 $73,128 Foreign countries - total 127,287 24,753 -------- ------- Consolidated total $440,330 $97,881 ======== =======
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 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)
Quarter ended --------------------------------------------------- March 31, June 30, September 30, December 31, 1997 1997 1997 1997 --------- -------- ------------- ------------ 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 ======= ======== ======= =======
66 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.
Quarter ended --------------------------------------------------- March 31, June 30, September 30, December 31, 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 ======= ======= ======== ========
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 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 EX-10.35 2 EXHIBIT 10.35 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 - -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 -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 -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 -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. -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 -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. -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 -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 -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 -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 -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):
- ---------------------------------------------------------------------------------------------------------- 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 - ---------------------------------------------------------------------------------------------------------- 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 - ----------------------------------------------------------------------------------------------------------
-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 -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. -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; -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 -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. -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, -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 -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. -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 -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. -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 -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 -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. ------------ -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 -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 -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, -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 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. -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. -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 -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 -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 -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. -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. -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 -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 -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 -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. -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 -42- 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 -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; -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 -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 -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. -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. -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 -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. -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 -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 -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. -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 -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 -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. -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 -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 -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. -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 -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 -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 -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. -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. -64- Place:_____________________ Place:_____________________ Date:______________________ Date:______________________ ___________________________ ___________________________ SELLER 1 CORPORATION PURCHASER ___________________________ ___________________________ SELLER 2 PARTNERSHIP PURCHASER ___________________________ SELLER 3 -65- 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 -66- 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 -67- 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 -68- 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 -69- 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 -70- TABLE OF CONTENTS 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
-71- 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
-72- 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
EX-10.36 3 EXHIBIT 10.36 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 _______________________________ ================================================================================ TABLE OF CONTENTS -----------------
Page ---- 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
(i)
Page ---- 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
(ii)
Page ---- 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
(iii)
Page ---- 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
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) 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 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 -------- 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 -2- 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 -------- 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). -3- (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- 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. -5- 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- 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 -------- ------- Interest Period for a Eurodollar Loan would -7- 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 -8- 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 -9- 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 -10- 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 -11- 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 -12- 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 -13- 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 -14- 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 -15- 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 -16- 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 -17- 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 -18- 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. -19- (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. -20- 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. -21- 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 -22- 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. -23- 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 -24- 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). -25- 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. -26- 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 -27- 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 -28- 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 -29- 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 -30- 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. -31- (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- -32- 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- -33- 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 -34- 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- -35- 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 -36- (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 -37- 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 -38- 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. -39- 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., -40- 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; -41- (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; -42- (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: -43- (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 -44- 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; -45- (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 -46- 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 -47- 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; -48- (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 -49- 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) -50- 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 -51- 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. -52- 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 -53- 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 -54- 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- 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 -56- 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 -57- 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 -58- (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 -59- (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. -60- "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 -61- 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. -62- "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 -63- 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. -64- "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). -65- "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. -66- "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. -67- "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. -68- "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. -69- "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. -70- "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, -71- 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. -72- "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. -73- "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. -74- "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. -75- 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 -76- 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 -77- 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 -78- 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. -79- 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 -80- 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 -81- 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 -82- 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- - ---------- -83- 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. -84- 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 -85- 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 -86- 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 -87- 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. -88- 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). * * * -89- 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 NATIONSBANK, N.A., Individually and as Syndication Agent By: /s/ James H. Peterson ----------------------------------- Name: JAMES H. PETERSON Title: SENIOR VICE PRESIDENT 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 CRESTAR BANK By: /s/ Andrew D. waller ----------------------------------- Name: Andrew D. Waller Title: Vice President THE FIRST NATIONAL BANK OF MARYLAND By: /s/ Brooks W. Thropp ----------------------------------- Name: Brooks W. Thropp Title: Vice President FIRST UNION NATIONAL BANK By: /s/ Sean M. Sands ----------------------------------- Name: Sean M. Sands Title: Vice President EX-10.37 4 EXHIBIT 10.37 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 -1- 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 -2- 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 -3- 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 -4- 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- 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 -6- 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- 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 -8- 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) -9- 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 -10- 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- 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 -12- 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 -13- (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 -14- 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 -15- "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). -16- 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. -17- (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; -18- (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. -19- (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. -20- (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. -21- 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 -22- 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. -23- 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 -24- 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 -25- 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: -26- (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. -27- (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 -28- 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. -29- 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. -30- (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- (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- 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- 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- 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- 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- EX-21.0 5 EXHIBIT 21.0 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 EX-23.01 6 EXHIBIT 23.01 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
Registration Number Date Filed - ---------------------------------------------------------------- 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
Registration Statements on Form S-8
Registration Name Number Date Filed - --------------------------------------------------------------------------------------------- 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
/s/ Ernst & Young LLP Baltimore, Maryland March 25, 1999 EX-23.02 7 EXHIBIT 23.02 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
Registration Number Date Filed - ----------------------------------------------------- 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
Registration Statements on Form S-8
Registration Name Number Date Filed - -------------------------------------------------------------------------------------------- 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
/s/ Deloitte & Touche LLP Parsippany, New Jersey March 25, 1999 EX-23.03 8 EXHIBIT 23.03 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
Registration Number Date Filed - ------------------------------------------------------ 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
Registration Statements on Form S-8
Registration Name Number Date Filed - -------------------------------------------------------------------------------- 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
/s/ Deloitte & Touche United Kingdom March 25, 1999 EX-23.04 9 EXHIBIT 23.04 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
Registration Number Date Filed - ---------------------------------------------------------------- 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
Registration Statements on Form S-8
Registration Name Number Date Filed - --------------------------------------------------------------------------------------------- 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
/s/ Smith, Lange & Phillips San Francisco, California March 25, 1999 EX-27.1 10 EXHIBIT 27.1
5 1,000 12-MOS 12-MOS DEC-31-1997 DEC-31-1996 JAN-01-1997 JAN-01-1996 DEC-31-1997 DEC-31-1996 29,818 0 82,951 0 76,294 0 2,509 0 4,999 0 201,876 0 72,899 0 21,532 0 496,779 0 89,002 0 0 0 0 0 0 0 455 0 340,005 0 496,779 0 0 0 301,011 219,973 0 0 287,216 195,868 0 0 0 0 801 1,320 44,324 24,893 16,420 9,139 0 0 0 0 0 0 0 0 27,904 15,754 0.66 0.43 0.62 0.40
EX-27.2 11 EXHIBIT 27.2
5 1,000 12-MOS DEC-31-1998 JAN-01-1998 DEC-31-1998 33,170 6,166 93,357 2,963 9,841 153,338 134,563 36,682 659,796 138,238 0 0 0 510 488,323 659,796 0 440,330 0 383,873 0 0 943 57,291 21,582 0 0 0 0 35,709 0.73 0.70
EX-99.01 12 EXHIBIT 99.01 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 EX-99.02 13 EXHIBIT 99.02 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--------------- EX-99.03 14 EXHIBIT 99.03 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 EX-99.04 15 EXHIBIT 99.04 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 EX-99.05 16 EXHIBIT 99.05 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 -----END PRIVACY-ENHANCED MESSAGE-----