EXHIBIT 10.16
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SECURITIES PURCHASE AGREEMENT
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Series C Redeemable Preferred Stock
($5,000,000)
and
Warrants to Purchase Common Stock
(Exercisable for 25,285 Aggregate Shares,
$.01 per share Exercise Price)
Dated as of July 31, 1995
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TABLE OF CONTENTS
(Not Part of the Agreement)
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1. AUTHORIZATION OF FINANCING 2
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2. PURCHASE AND SALE OF SECURITIES 2
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3. CLOSING OF SALE OF SECURITIES 3
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4. CONDITIONS OF CLOSING 3
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4.1 CLOSINGS UNDER THE PURCHASE AGREEMENT 3
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4.2 CLOSINGS UNDER THE SENIOR LOAN DOCUMENTS 4
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4.3 OPINION OF COUNSEL 4
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4.4 REPRESENTATIONS AND WARRANTIES; NO PREFERRED STOCK
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FAILURE EVENT 4
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4.5 PURCHASE PERMITTED BY APPLICABLE LAWS 4
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4.6 NO ADVERSE LEGISLATION, ACTION OR DECISION 4
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4.7 APPROVALS AND CONSENTS 5
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4.8 PROCEEDINGS 5
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4.9 FINANCING FEE 5
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4.10 LEGAL FEES 5
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4.11 NO MATERIAL ADVERSE CHANGE 6
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4.12 SERIES C PREFERRED STOCK AND WARRANT CERTIFICATES 6
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4.13 STOCKHOLDERS AGREEMENT 6
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4.14 REGISTRATION RIGHTS AGREEMENT 6
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4.15 GUARANTY AGREEMENT 6
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4.16 CERTIFICATE OF DESIGNATIONS 6
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4.17 FINANCIAL INFORMATION 6
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4.18 BOARD OF DIRECTORS APPROVAL 6
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4.19 DUE DILIGENCE INVESTIGATION 7
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TABLE OF CONTENTS
(Not Part of the Agreement)
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4.20 COMPLIANCE CERTIFICATE 7
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4.21 SECRETARY'S CERTIFICATES; GOOD STANDING 7
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4.22 PROCESS AGENT CONSENT LETTER 7
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4.23 ADDITIONAL INFORMATION 8
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5. AFFIRMATIVE COVENANTS 8
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5.1 FINANCIAL STATEMENTS AND OTHER REPORTS 8
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5.2 INSPECTION OF PROPERTY 13
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5.3 MAINTENANCE OF PROPERTIES; INSURANCE 13
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5.4 EXISTENCE, ETC 14
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5.5 PAYMENT OF TAXES AND CLAIMS 14
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5.6 COMPLIANCE WITH LAWS, ETC. 14
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5.7 ADDITIONAL FEES 15
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5.8 USE OF PROCEEDS 15
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5.9 ACCOUNTANTS 15
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5.10 FURTHER ASSURANCES 16
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5.11 ACCOUNTS AND RECORDS 16
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5.12 RESERVATION OF SHARES 16
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6. NEGATIVE COVENANTS 16
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6.1 LIMITATION ON DEBT 16
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6.2 LIMITATION ON RESTRICTED PAYMENTS 16
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6.3 LIMITATION ON INVESTMENTS 16
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6.4 TRANSACTIONS WITH AFFILIATES 17
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6.5 MERGER, CONSOLIDATION, SALE OR TRANSFER OF ASSETS 17
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6.6 SALES OF ASSETS 18
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6.7 ANNUAL BUDGET 18
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6.8 CERTAIN CONTRACTS 19
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TABLE OF CONTENTS
(Not Part of the Agreement)
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6.9 NO NEW SUBSIDIARIES; NO AMENDMENT OF CERTAIN
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DOCUMENTS 20
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6.10 CHANGE IN BUSINESS 20
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6.11 EXECUTIVE OFFICERS 21
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6.12 WITHHOLDING TAXES 21
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6.13 NO PLEDGE OF SHARES 22
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6.14 CHANGE IN CONTROL 22
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6.15 SALE OF EQUITY SECURITIES 22
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6.16 FISCAL YEAR; CHANGE IN ACCOUNTING PRACTICES 23
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7. PREFERRED STOCK FAILURE EVENTS 23
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7.1 PREFERRED STOCK FAILURE EVENTS 23
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7.2 OTHER REMEDIES 27
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8. REPRESENTATIONS, COVENANTS AND WARRANTIES 28
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8.1 ORGANIZATION; AUTHORITY 28
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8.2 AUTHORIZATION 28
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8.3 CAPITAL STOCK AND RELATED MATTERS 29
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8.4 LITIGATION 31
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8.5 COMPLIANCE 31
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8.6 OFFERING 32
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8.7 ERISA AND LABOR RELATIONS 32
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8.8 FINANCIAL STATEMENTS; MATERIAL FACTS 37
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8.9 OUTSTANDING DEBT 38
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8.10 TAXES 38
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8.11 CONFLICTING AGREEMENTS 39
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8.12 POLLUTION AND OTHER REGULATIONS 39
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TABLE OF CONTENTS
(Not Part of the Agreement)
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8.13 CERTAIN ACTS 40
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8.14 GOVERNMENTAL PERMITS, CONSENTS, ETC 40
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8.15 FEES AND COMMISSIONS 41
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8.16 INTELLECTUAL PROPERTY 41
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8.17 ABSENCE OF CERTAIN CHANGES 42
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8.18 LEASES 42
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8.19 PURCHASE AGREEMENT 42
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8.20 INSURANCE 43
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8.21 RESERVATION OF SHARES 43
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8.22 TITLE TO PROPERTIES 43
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8.23 CONTRACTS AND AGREEMENTS 44
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8.24 RECRUITMENT; ADMISSIONS PROCEDURES; ATTENDANCE;
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REPORTS 45
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8.25 COHORT DEFAULT RATE 46
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8.26 RECEIVABLES 46
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8.27 WORKING CAPITAL AT THE DATE OF THIS AGREEMENT 46
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9. REPRESENTATIONS OF ELECTRA 47
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9.1 PURCHASE OF SECURITIES 47
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9.2 INCORPORATION; AUTHORIZATION 47
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9.3 NO CONFLICTS 47
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TABLE OF CONTENTS
(Not Part of the Agreement)
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9.4 NO BROKERS' FEES 48
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10. DEFINITIONS 48
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11. MISCELLANEOUS 64
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11.1 PAYMENTS 64
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11.2 EXPENSES; INDEMNITY 65
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11.3 CONSENT TO AMENDMENTS; SUBORDINATION 66
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11.4 PERSONS DEEMED OWNERS 67
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11.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE
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AGREEMENT 67
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11.6 SUCCESSORS AND ASSIGNS 68
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11.7 NOTICES 68
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11.8 DESCRIPTIVE HEADINGS, ETC. 68
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11.9 GOVERNING LAW; CHOICE OF FORUM 68
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11.10 WAIVER OF JURY TRIAL 69
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v
SCHEDULES:
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Schedule 1 Investors
Schedule 4.11 Material Adverse Change
Schedule 6.1 Existing Debt
Schedule 6.4 Transactions with Affiliates
Schedule 8.1 Jurisdictions Where Qualified; Subsidiaries
Schedule 8.2 Authorization
Schedule 8.3 Capitalization
Schedule 8.4 Litigation
Schedule 8.5 Compliance
Schedule 8.7 ERISA and Labor Relations
Schedule 8.11 Conflicting Agreements
Schedule 8.12 Pollution and Other Regulations
Schedule 8.14 Governmental Permits
Schedule 8.16 Licenses and Options
Schedule 8.18 Leases
Schedule 8.19 Amendments to the Purchase Agreement
Schedule 8.20 Insurance
Schedule 8.22 Real Property
Schedule 8.23 Contracts
Schedule 8.24 Recruitment; Admissions Procedures; Attendance; Reports
Schedule 8.25 Cohort Default Rate
Schedule 10.1 Existing Liens
EXHIBITS:
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Exhibit 1A Form of Certificate of Designations
Exhibit 1B Form of Warrant Certificate
Exhibit 4.1 Purchase Agreement
Exhibit 4.3 Form of Opinion of the Company's Counsel
Exhibit 4.13 Form of Stockholders Agreement
Exhibit 4.14 Form of Registration Rights Agreement
Exhibit 4.15 Form of Guaranty Agreement
Exhibit 7.1 Form of Penalty Warrant Certificate
vi
SECURITIES PURCHASE AGREEMENT
THIS SECURITIES PURCHASE AGREEMENT, dated as of July 31, 1995, by and
among CAREER EDUCATION CORPORATION, a Delaware corporation (the "Company"),
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ELECTRA INVESTMENT TRUST P.L.C. ("EIT"), ELECTRA ASSOCIATES, INC. ("EAI", and
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together with EIT, "Electra").
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W I T N E S S E T H:
- - - - - - - - - -
WHEREAS, the Company has entered into an Asset Purchase Agreement,
dated as of April 14, 1994, as amended on April 24, 1995, May 5, 1995, May 12,
1995, May 26, 1995, June 15, 1995, June 27, 1995, July 12, 1995 and July 28,
1995 (the "Purchase Agreement"), with National Education Centers, Inc., a
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California corporation ("NEC, Inc."), and National Education Corporation, a
Delaware corporation and sole stockholder of NEC, Inc. ("NEC"), pursuant to
which, among other things, the Company will be acquiring substantially all of
the assets of NEC, Inc. relating to ▇▇▇▇▇ Institute and Allentown Business
School (collectively, the "NEC Schools"), and the Company will assume from NEC,
Inc. certain of NEC, Inc.'s liabilities pertaining to the NEC Schools (the
"Acquisition"); and
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WHEREAS, the Company has requested that Electra extend certain
financial accommodations to the Company in connection with the financing of the
Acquisition and certain of the working capital needs of the Company; and
WHEREAS, the Company desires, upon the terms and conditions
hereinafter provided, to sell the Series C Preferred Stock and the Warrants (as
each is hereinafter defined, and collectively, the "Securities") to Electra; and
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WHEREAS, Electra desires, upon the terms and conditions hereinafter
provided, to purchase from the Company the Series C Preferred Stock and the
Warrants;
1
NOW, THEREFORE, in consideration of the mutual promises and covenants
herein contained and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties, intending to be
bound, hereby agree as follows:
Certain terms used in this Agreement are defined in Section 10 hereof.
Unless otherwise indicated, references to statutes are to statutes of the United
States of America. Accounting terms used herein shall be construed in accordance
with GAAP. In addition, unless the contrary intention appears, terms and
expressions having a defined or generally accepted meaning under the securities
laws of the United States shall have the same meaning in this Agreement.
1. AUTHORIZATION OF FINANCING.
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In order to provide funds for, among other things, the Acquisition, the
Company has authorized the issuance, sale and delivery of (i) 500 shares of its
Series C Redeemable Preferred Stock, par value $.01 per share, with a stated
value of $10,000 per share (the "Series C Preferred Stock"), which series has
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the rights, restrictions, privileges and preferences as set forth in the
Certificate of Designations for the Series C Preferred Stock of the Company,
substantially in the form of Exhibit 1A attached hereto (the "Certificate of
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Designations"), and (ii) the warrants (together with any such Penalty Warrants
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(as hereinafter defined) that may be issued to the holders of the Series C
Preferred Stock from time to time pursuant to Section 7.1 hereof, collectively,
the "Warrants" and each individually, a "Warrant") to purchase a maximum
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aggregate, without giving effect to the issuance of any Penalty Warrants which
may be issued from time to time, of 23.0%, subject to certain adjustments, of
the outstanding shares of Common Stock of the Company, on a fully diluted basis,
at an exercise price of $.01 per share, evidenced by one or more warrant
certificates (the "Warrant Certificates") to be substantially in the form of
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Exhibit 1B attached hereto.
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2. PURCHASE AND SALE OF SECURITIES.
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2
The Company hereby agrees to issue and sell to each Electra entity and each
Electra entity, severally and not jointly, agrees, subject to the terms and
conditions herein set forth and in reliance upon the representations, warranties
and agreements of the Company herein contained, to purchase at the Closing from
the Company (i) the aggregate number of shares of Series C Preferred Stock set
forth opposite the Electra entity's name in Schedule 1 attached hereto for the
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purchase price set forth opposite the Electra entity's name and registered in
the Electra entity's name or that of the Electra entity's nominee, as the
Electra entity shall request, and (ii) the aggregate number of Warrants, set
forth opposite the Electra entity's name in Schedule 1 attached hereto, in the
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form of one or more Warrant Certificates, registered in the Electra entity's
name or that of the Electra entity's nominee, as the Electra entity shall
request.
3. CLOSING OF SALE OF SECURITIES.
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The purchase and delivery of the Securities shall take place at the offices
of Pryor, Cashman, ▇▇▇▇▇▇▇ & ▇▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇
(the "Closing") to be held simultaneously with the execution and delivery of
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this Agreement, or at such other place or on such other date as Electra and the
Company may agree upon, but in no event later than August 31, 1995 (the "Closing
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Date"). At the Closing, the Company will deliver one or more certificates
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evidencing the Series C Preferred Stock and one or more certificates evidencing
the Warrants to each of the appropriate Electra entities, against payment of the
purchase price therefor by transfer of immediately available funds to such bank
or other financial institution as the Company may direct in writing, for credit
to the Company's account, and the Company shall pay a non-refundable financing
fee to EI of $100,000 (the "Financing Fee"). If at the Closing, the Company
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shall fail to tender to Electra any of the Securities or to EI the Financing Fee
provided for above in this Section 3, or any of the conditions specified in
Section 4 hereof shall not have been satisfied or waived by Electra, Electra
shall, at its election, be relieved of all further obligations under this
Agreement, without thereby waiving any other rights its may have by reason of
such failure or such non-fulfillment.
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4. CONDITIONS OF CLOSING.
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Electra's obligation to purchase and pay for the Securities is subject to
the satisfaction prior to or at the Closing of each of the following conditions:
4.1 CLOSINGS UNDER THE PURCHASE AGREEMENT. The transactions
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contemplated under the Purchase Agreement, in the form of Exhibit 4.1 hereto,
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shall close simultaneously with the transactions contemplated herein, without
any material terms or conditions therein being waived by the Company, unless the
Company has the prior written consent to such waiver by Electra. The Company
shall have provided to Electra an Officer's Certificate setting forth the status
of all consents, approvals and authorizations from the DOE or any Accrediting
Body required in connection with the consummation of the transactions
contemplated under the Purchase Agreement, stating that all such consents,
approvals and authorizations which have not been obtained prior to the Closing
shall be obtained within 180 days following the Closing, and shall contain a
certification that the Company has no reason to believe that any such consents,
approvals or authorizations will not be obtained within such time period.
4.2 CLOSINGS UNDER THE SENIOR LOAN DOCUMENTS. The Senior Loan
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Documents shall have been entered into simultaneously with the transactions
contemplated herein and in the Purchase Agreement and the Company shall have
satisfied all of the conditions in the Senior Loan Document to allow it to
borrow at the Closing of up to $6,500,000 from the reducing revolving credit
facility. In addition, the Company shall have a minimum unused availability
under the reducing revolving credit facility of $1,500,000.
4.3 OPINION OF COUNSEL. Electra shall have received from ▇▇▇▇▇▇▇▇,
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Kohn, Bell, Black, ▇▇▇▇▇▇▇▇▇▇ & Moritz, Ltd., special counsel to the Company, an
opinion substantially in the form set forth in Exhibit 4.3, addressed to
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Electra, dated the Closing Date and otherwise reasonably satisfactory in form
and substance to Electra.
4
4.4 REPRESENTATIONS AND WARRANTIES; NO PREFERRED STOCK FAILURE EVENT.
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The representations and warranties of the Company contained in this Agreement,
the other Transaction Documents and those otherwise made in any writing by the
Company, furnished in connection with or pursuant to this Agreement and the
other Transaction Documents or in connection with the transactions contemplated
hereby or thereby, shall be true and correct when made and at the time of the
Closing as though made at such time, and the Company shall have performed or
complied with the covenants, conditions and agreements contained in this
Agreement and the other Transaction Documents required to be performed and
complied with by the Company at or prior to the Closing, other than covenants,
conditions and agreements contained in the Third Party Documents which have been
waived by the parties thereto and disclosed to Electra on or prior to the
Closing; and there shall exist at the time of the Closing and after giving
effect to such transactions no Preferred Stock Failure Event or Preferred Stock
Failure.
4.5 PURCHASE PERMITTED BY APPLICABLE LAWS. The purchase of and
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payment for the Securities shall not violate any applicable law or governmental
regulation (including, without limitation, Section 5 of the Securities Act) and
shall not subject Electra to any tax, penalty, liability or other onerous
condition under or pursuant to any applicable law or governmental regulation or
order. Electra shall have received such certificates or other evidence as they
may reasonably request to establish compliance with the conditions set forth in
this Section 4.5.
4.6 NO ADVERSE LEGISLATION, ACTION OR DECISION. After the date
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hereof, no legislation, order, rule, ruling or regulation shall have been
enacted or made by or on behalf of any governmental body, department or agency,
nor shall have any legislation been introduced and favorably reported for
passage to either House of Congress by any committee of either such House to
which such legislation has been referred for consideration or any state
legislature in any jurisdiction in which the Schools operate or by any committee
of such legislature to which such legislation has been referred for
consideration, nor shall any
5
decision of any court of competent jurisdiction within the United States have
been rendered which, in Electra's judgment, would have a Material Adverse
Effect. There shall be no action, suit, investigation, or proceeding pending, or
to the Company's knowledge, threatened, against or affecting the Company or any
of its Subsidiaries, the Company's or such Subsidiaries' properties or rights,
or any of the Company's or such Subsidiaries' Affiliates, officers or directors,
before any court, arbitrator or administrative or governmental body which (i)
seeks to restrain, enjoin, prevent the consummation of or otherwise affect the
transactions contemplated by this Agreement or the other Transaction Documents
or (ii) questions the validity or legality of any such transactions or seeks to
recover damages or to obtain other relief in connection with any such
transactions, and, to the Company's knowledge, there shall be no valid basis for
any such action, proceeding or investigation.
4.7 APPROVALS AND CONSENTS. The Company shall have duly received all
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authorizations, waivers, consents, approvals, licenses, franchises, permits and
certificates (collectively, "Consents") by or of all federal, state and local
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governmental authorities and all material Consents by or of all other Persons
necessary or advisable for the issuance of the Securities, and all thereof shall
be in full force and effect at the time of Closing.
4.8 PROCEEDINGS. All proceedings taken or to be taken in connection
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with the transactions contemplated hereby and in the other Transaction
Documents, and all documents incident thereto, shall be reasonably satisfactory
in form and substance to Electra, and Electra shall have received all such
counterpart originals or certified or other copies of such documents as it may
request.
4.9 FINANCING FEE. EI shall have received payment in full of the
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Financing Fee set forth in Section 3 hereof.
4.10 LEGAL FEES. Pryor, Cashman, ▇▇▇▇▇▇▇ & ▇▇▇▇▇, special counsel to
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Electra, shall have received payment of its fees and expenses referred to in
Section 11.2 hereof.
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4.11 NO MATERIAL ADVERSE CHANGE. Except as specifically set forth on
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Schedule 4.11, since December 31, 1994, there shall have been no Material
Adverse Change in the Company or any of the Schools.
4.12 SERIES C PREFERRED STOCK AND WARRANT CERTIFICATES. The Company
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shall have delivered to Electra one or more Series C Preferred Stock and Warrant
certificates, each representing the number of shares of Series C Preferred Stock
or Warrants being purchased from the Company by each Electra entity as set forth
on Schedule 1 hereto.
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4.13 STOCKHOLDERS AGREEMENT. The Stockholders Agreement, in the
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form of Exhibit 4.13 hereto (the "Stockholders Agreement"), shall be executed
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and delivered to Electra contemporaneously with the transactions contemplated
herein.
4.14 REGISTRATION RIGHTS AGREEMENT. The Registration Rights
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Agreement, in the form of Exhibit 4.14 hereto (the "Registration Rights
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Agreement"), shall be executed and delivered to Electra contemporaneously with
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the transactions contemplated herein.
4.15 GUARANTY AGREEMENT. The Guaranty Agreement, in the form of
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Exhibit 4.15 hereto (the "Guaranty Agreement"), shall be executed and delivered
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to Electra contemporaneously with the transactions contemplated herein.
4.16 CERTIFICATE OF DESIGNATIONS. The Certificate of Designations
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for the Series C Preferred Stock shall be executed and duly filed with the
Delaware Secretary of State.
4.17 FINANCIAL INFORMATION. The Company shall have delivered to
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Electra, to the extent available, the monthly consolidated profit and loss
statements and balance sheets for the Company and its Subsidiaries and for the
NEC Schools since December 31, 1994 for all monthly periods ending prior to the
Closing Date, which financial information shall not represent a Material Adverse
Change in the Company. The Company shall have delivered to Electra its best
reasonable estimate of a consolidated pro forma opening balance sheet of the
Company and
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its Subsidiaries, as of the Closing Date, giving effect to the Acquisition and
the transactions contemplated by this Agreement and the other Transaction
Documents, in form and substance satisfactory to Electra. The Company shall have
delivered to Electra copies of the audited financial statements for each of the
NEC Schools for the years ended December 31, 1993 and 1994.
4.18 BOARD OF DIRECTORS APPROVAL. The approval of the Board of
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Directors of each Electra entity approving the terms and conditions of this
Agreement and the other Transaction Documents to which they are a party and all
of the transactions contemplated hereby and thereby shall have been obtained.
4.19 DUE DILIGENCE INVESTIGATION. Electra and its special counsel
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shall have completed their business and legal due diligence investigation to
their satisfaction. Electra shall not have discovered any fact which in its
reasonable determination would make the consummation of the transactions
contemplated by this Agreement or the other Transaction Documents not in its
best interest.
4.20 COMPLIANCE CERTIFICATE. Electra shall have received an
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Officers' Certificate, dated the Closing Date, certifying that the conditions
specified in Article 4 required to be fulfilled on the Closing Date (other than
actions required to be taken by Electra) have been fulfilled.
4.21 SECRETARY'S CERTIFICATES; GOOD STANDING. The Company shall
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have delivered to Electra (i) a certificate of its corporate secretary or
assistant secretary as to (I) resolutions of its Board of Directors or
shareholders action, as required, approving and authorizing the execution,
delivery and performance of each of the Transaction Documents to which it is a
party and authorizing the issuance and delivery of Series C Preferred Stock and
the Warrants, as being in full force and effect without modification,
supplementation or amendment and (II) as to its Certificate of Incorporation
(including, without limitation, the Certificate of
8
Designations) and the By-laws and all amendments to date as being in full force
and effect, with true, correct and complete copies of such resolutions,
Certificates of Incorporation (including, without limitation, the Certificate of
Designations) and By-laws attached thereto, (ii) an incumbency certificate of
its officers executing this Agreement and the other Transaction Documents to
which it is a party and (iii) a certificate of subsistence and/or good standing
of the Company and each Subsidiary, dated as of a recent date prior to the
Closing, issued by the Secretary of State of Delaware and of each other state in
which the Company and such Subsidiary is qualified to do business.
4.22 PROCESS AGENT CONSENT LETTER. On or prior to the Closing Date,
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Electra shall have received a letter from CT Corporation System located at ▇▇▇▇
▇▇▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇, indicating its consent to its appointment by
the Company as its agent to receive service of process as specified in Section
11.9 hereof.
4.23 ADDITIONAL INFORMATION. The Company shall have executed and/or
----------------------
delivered such other information and documentation as Electra and its special
counsel shall request. Electra shall have received such other documents and
opinions, in form and substance satisfactory to Electra, and its special
counsel, relating to matters incident to the Acquisition and the transactions
contemplated by the Transaction Documents.
5. AFFIRMATIVE COVENANTS.
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The Company hereby covenants that from and after the date of this Agreement
through the Closing and thereafter so long as any Securities remain outstanding,
as follows; provided, however, that upon the redemption in full of all of the
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shares of Series C Preferred Stock, Sections 5.7 through 5.9 shall no longer be
applicable:
5.1 FINANCIAL STATEMENTS AND OTHER REPORTS. The Company covenants
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that it will deliver, or cause to be delivered, to each of the Significant
Holders:
(i) as soon as practicable and in any event at least 30 days
prior to the commencement of each fiscal year of the Company, the Company's
preliminary annual operating budget and the capital budget, including
consolidated and
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consolidating statements of budgeted cash flow and income of the Company
and its Subsidiaries for each month in such fiscal year, all in reasonable
detail, and as soon as practicable and in any event no later than 30 days
following the commencement of each fiscal year of the Company, the
Company's final annual operating budget and the capital budget;
(ii) as soon as practicable and in any event within 30 days
after the end of each fiscal month of the Company (other than the last
month of each fiscal quarter), consolidated and consolidating statements of
income and cash flow of the Company and its Subsidiaries for such month and
for the period from the beginning of the current fiscal year to the end of
such month and consolidated and consolidating balance sheets of the Company
and its Subsidiaries as at the end of such month, and (a) setting forth in
each case, in comparative form, figures relating to figures for the
corresponding months in the annual budget (including, without limitation,
the initial annual budget prepared on or prior to the Closing on a pro
forma basis giving effect to the consummation of the Acquisition), all in
reasonable detail, and (b) in comparative form, figures for the
corresponding months in the preceding fiscal year, all in reasonable
detail;
(iii) as soon as practicable and in any event within 45 days
after the end of each fiscal quarter of the Company, consolidated and
consolidating statements of income and cash flow of the Company and its
Subsidiaries for such quarter and for the period from the current fiscal
year to the end of such quarter and consolidated and consolidating balance
sheets of the Company and its Subsidiaries as at the end of such quarter,
and (a) setting forth, in comparative form, figures for the corresponding
quarter in the annual budget (including, without limitation, the initial
annual budget prepared on or prior to the Closing on a pro forma basis
giving effect to the consummation of the Acquisition), all in reasonable
detail, and (b) setting forth, in comparative form, figures for the
corresponding quarter in the preceding fiscal year, all in reasonable
detail, and (I) if
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requested by the Significant Holders in connection with the determination
of the Earned Amount (as defined in the Warrant), reviewed by ▇▇▇▇▇▇
▇▇▇▇▇▇▇▇ or another independent accounting firm of nationally recognized
standing and (II) certified by the chief financial officer of the Company
as being a true and correct reflection in all material respects of the
financial condition and results of operation of the Company and its
Subsidiaries on a consolidated and consolidating basis (determined in
accordance with GAAP), subject to changes resulting from year-end
adjustments and except as otherwise noted therein;
(iv) as soon as practicable and in any event within 120 days
after the end of each fiscal year, audited consolidated and consolidating
statements of income and cash flow of the Company and its Subsidiaries for
such year, and audited consolidated and consolidating balance sheets of the
Company and its Subsidiaries as at the end of such year, and setting forth,
in each case, in comparative form, corresponding figures from the
preceding fiscal year, and corresponding figures for such year from the
annual budget ( including, without limitation, the initial annual budget
prepared on or prior to the Closing on a pro forma basis giving effect to
the consummation of the Acquisition) (which comparisons to the annual
budget need not be audited), all in reasonable detail, and, as to the
consolidated statements, reported upon by ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ or another
independent accounting firm of nationally recognized standing whose
certification shall be without qualification as to the scope of the audit
or as to GAAP, and, as to the consolidating statements, certified by the
chief financial officer of the Company;
(v) promptly upon transmission thereof, copies of all such
financial statements, proxy statements, notices and reports as it or any of
its Subsidiaries shall send to its security holders, copies of all reports
which it or any of its officers or directors send to, and all registration
statements (without exhibits) which it files, with the Commission or any
securities exchange (should the Company or any of its Subsidiaries be or
become public companies), copies of all press releases and other statements
made
11
generally available by the Company or any Subsidiary to the public
concerning material developments in the business of the Company and its
Subsidiaries, as the case may be, copies of communications sent to or
received from stockholders of the Company (in their capacity as
stockholders) and copies of all material communications sent to or received
from the Senior Lenders or any other lender to the Company;
(vi) promptly upon receipt thereof, a copy of each other report
(including, without limitation, each management and/or controller letter)
submitted to the Company or any of its Subsidiaries by independent
accountants in connection with any annual, interim or special audit of the
books of the Company or any of its Subsidiaries made by such accountants;
(vii) together with each delivery of financial statements
required by clauses (iii) and (iv) above, an Officers' Certificate of the
Company (a) stating that the signers have reviewed the terms of this
Agreement and the Securities and have made, or caused to be made under
their supervision, a review in reasonable detail of the transactions and
condition of the Company and its Subsidiaries during the fiscal period
covered by such financial statements and that such review has not
disclosed the existence during or at the end of such fiscal period, and
that the signers do not have knowledge of the existence, as at the date of
the Officers' Certificate, of any condition or event which constitutes a
Preferred Stock Failure Event or Preferred Stock Failure or, if any such
condition or event existed or exists, specifying the nature and period of
existence thereof and what action, if any, the Company has taken or is
taking or proposes to take with respect thereto, and (b) demonstrating
(with computations in reasonable detail) compliance by the Company and its
Subsidiaries with, to the extent each remains applicable at such time, (I)
the provisions of Sections 6.1 and 6.7 and (II) in the event of the sale,
lease, transfer or other disposition of material assets of the Company or
any of its Subsidiaries, either directly or through the sale of stock or
other equity of any such Subsidiary, during such fiscal period, Sections
6.5,
12
6.6, 6.14 or 6.15, as the case may be;
(viii) together with each delivery of consolidated financial
statements required by clause (iv) above, a certificate of the independent
public accountants giving the report thereon stating that in conducting the
audit of such financial statements, they have obtained no knowledge of any
Preferred Stock Failure Event or Preferred Stock Failure or, if they have
obtained knowledge of any Preferred Stock Failure Event or Preferred Stock
Failure, specifying the nature and period of existence thereof;
(ix) immediately upon any executive officer of the Company or
any of its Subsidiaries obtaining knowledge (a) of any condition or event
which constitutes a Preferred Stock Failure Event or Preferred Stock
Failure, (b) that the holder of any Preferred Shares has given any notice
or taken any other action with respect to a claimed Preferred Stock Failure
Event or Preferred Stock Failure under this Agreement, (c) of any
condition or event which, in the opinion of management of the Company,
could have a Material Adverse Effect, (d) that any Person has given any
notice to the Company or any of its Subsidiaries or taken any other action
with respect to a claimed default or event or condition of the type
referred to in clause (ii) of Section 7.1 hereof, or (e) of the institution
of any litigation involving claims against the Company or any of its
Subsidiaries equal to or greater than $100,000 with respect to any single
cause of action or $250,000 with respect to the aggregate of all causes of
action, or any adverse determination in any litigation involving a
potential liability to the Company or any of its Subsidiaries equal to or
greater than $100,000 with respect to any single cause of action or
$250,000 with respect to the aggregate of all causes of action, an
Officers' Certificate specifying the nature and period of existence of any
such condition or event, or specifying the notice given or action taken by
such holder or Person and the nature of such claimed Preferred Stock
Failure Event, Preferred Stock Failure, event or condition, and what
action, if any, the Company has taken, is taking or proposes to take with
respect thereto;
13
(x) immediately upon any officer of the Company or any of its
Subsidiaries becoming aware of the occurrence of (i) any "reportable
event", as such term is defined in Section 4043 of ERISA, in connection
with any Plan or trust created thereunder, (ii) an event requiring the
Company or any Subsidiary to provide security to a Plan under Section
401(a)(29) of the Code, (iii) any "prohibited transaction" incurred by the
Company, any of its Subsidiaries or any "Disqualified Person" (as defined
in Section 4975 of the Code) (other than an exempt "prohibited
transaction"), as such term is defined in section 4975 of the Code or in
section 406 of ERISA in connection with any Plan or any trust created
thereunder, (iv) the institution of proceedings or the taking or expected
taking of action by the PBGC or the Company or any of its Subsidiaries to
terminate or withdraw or partially withdraw from a Multiemployer Plan
within the meaning of Section 4203 or 4205 of ERISA or under Section 4062,
4063 or 4064 of ERISA (in connection with any Plan or any trust created
thereunder), (v) any "accumulated funding deficiency" within the meaning of
Section 412 of the Code or Section 302 of ERISA or any delinquency as to
contributions or payments to or in respect of any Plans, (vi) any employee
benefit Plan and trust which is intended to be qualified within the meaning
of Section 401(a) and tax exempt within the meaning of 501(a) of the Code,
no longer being qualified or tax exempt, (vii) any transaction or any
failure to take any action or make any required contributions or any act or
omission which would give rise to liability for any excise tax under
Section 4971 through 4980B of the Code inclusive, (viii) any action or
event which would materially increase the cost of any employee benefit
Plan, or (ix) any other action taken by the Internal Revenue Service, the
PBGC or the Department of Labor in connection with any employee benefit
Plan and trust of the Company or its Subsidiaries, a written notice
specifying the nature thereof, what action, if any, the Company or any such
Subsidiary has taken, is taking or proposes to take with respect thereto,
and, when known, any action taken or threatened by the Internal Revenue
Service or the PBGC with respect thereto;
14
(xi) immediately upon any revision to any of the financial
statements referred to in clauses (i), (ii), (iii) or (iv) above, such
financial statements, as revised;
(xii) with reasonable promptness, such other information and
data with respect to the Company or any of its Subsidiaries as such
Significant Holder may reasonably request;
(xiii) (a) within 30 days after Closing, an audited opening
balance sheet of the NEC Schools on a stand-alone basis as of the Closing
Date, with an opinion of ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇, and (b) within 60 days after
Closing, an opening certified consolidated balance sheet of the Company,
with a review opinion of ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ or another independent accounting
firm of nationally recognized standing;
(xiv) together with each delivery of financial statements
required by clauses (iii) and (iv) above, and, to the extent prepared by
the Company, clause (ii) above, an Officers' Certificate of the Company
containing an analysis of the variance between the results of operations
and the budget for such period and a management commentary as to such
results of operation; and
(xv) promptly upon transmission thereof, copies of all
applications, notices and other reports as it or any of its Subsidiaries
shall send to DOE or any Accrediting Body.
5.2 INSPECTION OF PROPERTY. The Company covenants that it, and
----------------------
each of its Subsidiaries, will permit any Person designated by a majority of the
holders of the Securities in writing, at such holders' expense, to visit and
inspect any of the properties of the Company and any of its Subsidiaries, to
examine the books and financial records of the Company and any of its
Subsidiaries and make copies thereof or extracts therefrom and to discuss its
affairs, finances and accounts with its officers and its independent public
accountants, all at such reasonable times during normal business hours, upon
reasonable prior notice and as often as such holders may reasonably request.
15
5.3 MAINTENANCE OF PROPERTIES; INSURANCE. The Company and its
------------------------------------
Subsidiaries will maintain or cause to be maintained in good repair, working
order and condition (ordinary wear and tear excepted) all material properties
used in the business of the Company and its Subsidiaries and from time to time
will make or cause to be made all appropriate repairs, renewals and replacements
thereof. The Company and its Subsidiaries shall not permit any lease or
agreement pursuant to which the Company or any Subsidiary leases, uses or
occupies any of its respective real or personal property to be canceled or
terminated by the other party to such lease or agreement prior to the expiration
of its stated term which individually or in the aggregate would have a Material
Adverse Effect. The Company and its Subsidiaries will maintain or cause to be
maintained, with financially sound and reputable insurers who are rated by A. M.
Best Company's Rating Service as "A" or higher or, as to workers' compensation
or similar insurance, in an insurance fund or by self-insurance authorized by
the laws of the jurisdiction in question, insurance with respect to their
respective properties and businesses against loss or damage of the kinds
customarily insured against by corporations of established reputation engaged in
the same or similar businesses and similarly situated, of such type and in such
amounts including appropriate deductible levels as are customarily carried under
similar circumstances by such other corporations. All policies under this
Section 5.3 shall provide that 30 days prior written notice shall be given to
the holders of the Securities by the insurer prior to a termination of such
policy. The Company, in its discretion, will use the proceeds of all such
casualty insurance policies to either (i) repay the Senior Debt, (ii) redeem the
Series C Preferred Stock, subject to the rights of the Senior Lenders under the
Senior Loan Documents, (iii) repair or replace the damaged property or (iv)
reinvest such proceeds in the Company's business in accordance with the Senior
Loan Documents. The Company will use every reasonable effort to provide
Directors and Officers insurance to all of its directors and officers on
commercially reasonable terms within sixty (60) days after the Closing Date.
5.4 EXISTENCE, ETC. Subject to the sales of assets permitted in
--------------
accordance with Section 6.6, the Company will, and
16
will cause each of its Subsidiaries to, at all times preserve and keep in full
force and effect its corporate existence, and Permits, rights, licenses,
franchises, trademarks, trade names, patents and other proprietary information
material to its business, and will qualify and cause each of its Subsidiaries to
qualify to do business in any jurisdiction where the ownership of such property
or Permits or the operation of its business makes such qualification necessary
except where the failure to so qualify does not have a Material Adverse Effect.
5.5 PAYMENT OF TAXES AND CLAIMS. The Company will, and will cause
---------------------------
each of its Subsidiaries to, pay all taxes, assessments and other governmental
charges imposed upon it or any of its properties or assets or in respect of any
of its franchises, business income or properties before any penalty or interest
accrues thereon, and all claims (including, without limitation, claims for
labor, services, materials and supplies) for sums which have become due and
payable and which by law have or may become a Lien upon any of their properties
or assets; provided, however, that no such charge or claim need be paid if being
-------- -------
contested in Good Faith and if adequate reserves shall have been made therefor
in accordance with GAAP.
5.6 COMPLIANCE WITH LAWS, ETC. The Company will, and will cause
-------------------------
each of its Subsidiaries to, comply with the requirements of all applicable
laws, rules, regulations and orders of any court, Accrediting Body or other
governmental authority, including, without limitation, 34 C.F.R. Section 600 and
Section 668, except where the failure to so comply will not have, and is not
likely to result in, a Material Adverse Effect. The Company will, and will cause
each of its Subsidiaries to, timely make all filings required to be made by it
with all relevant Federal, state and/or local regulatory bodies, except where
the failure to so file will not have, and is not likely to result in, a Material
Adverse Effect.
5.7 ADDITIONAL FEES. The Company hereby agrees to pay an annual
---------------
non- refundable portfolio administration fee to EI of $75,000, payable in equal
quarterly installments commencing on September 30, 1995 for the pro rata period
from the Closing Date and, thereafter, every March 31, June 30, September 30 and
17
December 31, for so long as any Preferred Shares are outstanding, and for the
pro-rata period from the payment of the last quarterly installment to the date
on which the Preferred Shares are no longer outstanding. Such payments shall be
made by either a check drawn on a U.S. bank and delivered to EI at ▇▇ ▇▇▇▇ ▇▇▇▇
▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇ or a wire transfer of immediately available
funds to EI at NatWest Bank, N.A., ▇▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇ ▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇
▇▇▇▇ ▇▇▇▇▇, Account Name: Electra, Inc., ABA Number: ▇▇▇▇▇▇▇▇▇, Account Number:
2753103667 or at such other bank or other financial institution and account
therein as shall be designated by Electra or EI, as appropriate. The parties
hereby agree that the portfolio administration fee is intended solely as, and
represents, reasonable compensation to EI for its time and expenses in
administering Electra's investment in the Securities and is not and shall not be
regarded as a consulting or financial advisory or other similar fee.
5.8 USE OF PROCEEDS. The Company shall use all of the proceeds
---------------
received from the sale of the Securities pursuant to this Agreement to fund (i)
the Acquisition, (ii) the closing costs associated with the closing under this
Agreement and the transactions contemplated herein and/or (iii) working capital
in the ordinary course of business.
5.9 ACCOUNTANTS. The Company has retained ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ to audit
-----------
the Company's and its Subsidiaries' financial statements. In the event the
services of ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇ or any firm of independent public accountants
hereafter so employed by the Company are terminated, the Company will promptly
thereafter notify the Significant Holders and will request the firm of
independent public accountants whose services were terminated to deliver to the
Significant Holders a letter of such firm setting forth the reasons for the
termination of their services. In its notice, the Company shall state whether
the change of accountants was recommended or approved by the Board of Directors
or any committee thereof. In the event of any such termination, the Company will
promptly thereafter engage a firm of independent public accountants of
recognized national standing or other firm of independent public accountants
approved by the Significant Holders.
18
5.10 FURTHER ASSURANCES. From time to time the Company will, and
------------------
will cause each of its Subsidiaries to, execute and deliver to the Significant
Holders, such other instruments, certificates agreements and documents and
take such other action and do all other things as may be requested by any of the
Significant Holders in order to implement or effectuate the terms and provisions
of this Agreement and the other Transaction Documents (other than the Third
Party Documents).
5.11 ACCOUNTS AND RECORDS. The Company and all of its Subsidiaries
--------------------
will keep true records and books of account in which full, true and correct
entries will be made of all dealings or transactions in relation to its business
and affairs.
5.12 RESERVATION OF SHARES. The Company shall at all times keep
---------------------
reserved and available for issuance the number of shares of Common Stock for
issuance upon exercise of all of the Warrants (as such number may be adjusted
from time to time pursuant to the terms of the Warrants), and, upon issuance
of any Penalty Warrants, will reserve and keep available for issuance the number
of shares of Common Stock issuable upon exercise of the Penalty Warrants (as
such number may be adjusted from time to time pursuant to the terms of the
Penalty Warrants).
6. NEGATIVE COVENANTS.
------------------
The Company hereby covenants from and after the date of this Agreement
through the Closing and thereafter so long as any Securities remain outstanding
as follows; provided, however, that upon the redemption in full of all of the
-------- -------
shares of Series C Preferred Stock, (i) Sections 6.1 through 6.3, 6.9, 6.13,
6.14 and 6.16 shall no longer be applicable and (ii) Sections 6.5, 6.6 and 6.15
shall be amended as provided therein:
6.1 LIMITATION ON DEBT. The Company covenants that it will not,
------------------
and will not permit any of its Subsidiaries to, create, incur, assume, suffer to
exist or otherwise become or be liable with respect to any Debt except for
Permitted Indebtedness.
6.2 LIMITATION ON RESTRICTED PAYMENTS. The Company
---------------------------------
19
covenants that it will not, and will not permit any of its Subsidiaries to,
directly or indirectly, pay or declare or set apart for payment any Restricted
Payment.
6.3 LIMITATION ON INVESTMENTS. The Company covenants that it will
-------------------------
not, and will not permit any of its Subsidiaries to, make or obligate itself to
make, directly or indirectly, any Investment, other than Permitted Investments.
6.4 TRANSACTIONS WITH AFFILIATES. The Company covenants that it
----------------------------
will not, and will not permit any of its Subsidiaries to, directly or
indirectly, purchase, acquire or lease any property to, or otherwise deal with,
in the ordinary course of business or otherwise, any Affiliate of the Company or
its Subsidiaries except (i) as set forth on Schedule 6.4 hereto, (ii) on an
------------
arm's length basis in transactions which are on no less favorable terms to the
Company or such Subsidiary than would be the case with a similar transaction
with an unaffiliated Person; provided, however, that if the transaction or
-------- -------
series of related transactions is over $50,000 then the transaction shall be
approved by a majority of the independent directors of the Company, (iii) the
Company may pay the fees provided for in Section 5.7 hereof, (iv) reasonable,
customary and regular fees to the non-management directors of the Company or any
of its Subsidiaries, (v) any Restricted Payment that is not otherwise prohibited
by Section 6.2 hereof, (vi) any transaction among the Company and its Wholly-
Owned Subsidiaries or among such Sub sidiaries in the ordinary course of their
respective businesses, or (vii) any transaction related to compensation or
benefit arrangements in the ordinary course of business, with an employee
benefit plan or trust for the benefit of employees of the Company or its
Subsidiaries. Notwithstanding the foregoing, the Company covenants that it will
not, and will not permit any of its Subsidiaries to, without the consent of the
Significant Holders, make any payments to ▇▇▇▇▇▇ of fees and/or reimbursement of
expenses (other than reasonable third-party expenses and, to the extent that
during any fiscal year ▇▇▇▇▇▇ shall not otherwise have received or be entitled
to receive a fee as provided below, direct out of pocket expenses incurred by
▇▇▇▇▇▇) relating to (a) the consummation of the acquisition of certain
subsidiaries and operations of the Company and/or (b) consulting, advisory or
20
other services provided by ▇▇▇▇▇▇; provided, however, that the Company shall be
-------- -------
permitted to pay ▇▇▇▇▇▇ fees in respect of such services not to exceed $100,000
during any fiscal year so long as no Preferred Stock Failure Event or Preferred
Stock Failure, or Event of Default or Default (each as defined in the Senior
Loan Agreement), shall be in existence at the time of such payment or would
result from the payment of such fees.
6.5 MERGER, CONSOLIDATION, SALE OR TRANSFER OF ASSETS. The Company
-------------------------------------------------
covenants that it shall not, and will not permit any of its Subsidiaries to, be
a party to any merger or consolidation with any Person or sell, lease or
transfer or otherwise dispose of all or substantially all of its assets or the
assets acquired in the Acquisition, to any Person, except that (i) any Wholly-
Owned Subsidiary of the Company may merge into the Company or another Wholly-
Owned Subsidiary of the Company if the Company or such other Wholly-Owned
Subsidiary, as the case may be, shall be the surviving corporation, and if,
immediately after giving effect to such transaction, no condition or event shall
exist which constitutes a Preferred Stock Failure Event or Preferred Stock
Failure, and (ii) any Subsidiary of the Company may sell, lease, transfer or
otherwise dispose of any of its assets to the Company or to any other Wholly-
Owned Subsidiary of the Company, whether by dissolution, liquidation or
otherwise; provided, however, that from and after the date on which the shares
-------- -------
of Series C Preferred Stock shall have been redeemed in full, none of the
foregoing transactions shall be prohibited if as a result of such transaction
there shall be a general distribution to stockholders of the Company whereby
Electra shall realize its IRR Threshold Amount (as defined in the Stockholder
Agreement).
6.6 SALES OF ASSETS. Except for (i) the pledge of and security
---------------
interest in assets under the terms of the Senior Loan Documents, (ii) Permitted
Liens incurred in connection with Permitted Indebtedness, and (iii) any
Subsidiary of the Company selling or leasing its assets in the manner described
in Section 6.5(ii) hereof, the Company covenants that it will not, and will not
permit any of its Subsidiaries to, sell, lease, transfer or otherwise dispose
of, in a single transaction or a series of related transactions, any asset,
directly or through the sale of Capital Stock or other equity of a Subsidiary of
the Company to
21
any Person in excess of $100,000 in any fiscal year, other than sales of
obsolete equipment and equipment to be replaced in accordance with the capital
budget and the proposed sale of the building located at ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇,
▇▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇▇. Notwithstanding the foregoing, from and after the date
on which the shares of Series C Preferred Stock shall have been redeemed in
full, none the foregoing transactions shall be prohibited (i) if as a result of
such transaction there shall be a general distribution to stockholders whereby
Electra shall realize its IRR Threshold Amount or (ii) if such sale or series of
related sales of assets, when aggregated with all sales of assets during the
twelve (12) months preceding such sale, does not involve a Substantial Part.
6.7 ANNUAL BUDGET. The Company covenants that it will submit the
-------------
preliminary annual budget of the Company and its Subsidiaries, setting forth, on
a consolidated basis, the aggregate expenditures for capital assets and lease
expenses expected to be made by the Company and its Subsidiaries during the
fiscal year to which such budget relates, and any subsequent material
modifications thereto, to the Significant Holders prior to the submission of
such preliminary annual budget (and such material modifications thereto) to the
Board of Directors for its approval.
6.8 CERTAIN CONTRACTS. The Company covenants that it will not, and
-----------------
will not permit any of its Subsidiaries to, without the prior written consent of
the Significant Holders, enter into or be a party to, or amend, modify,
supplement or waive any provisions under, the following types of agreements:
(i) except as permitted by Section 6.3, any contract or agreement
providing for the making of loans, advances or capital contributions to any
Person or for the purchase of any property from any Person, in each case in
order to enable such Person to maintain working capital, net worth or any
other balance sheet condition or to pay debts, dividends or expenses;
(ii) any contract or agreement for the purchase of materials,
supplies or other property or services if such
22
contract (or any related document) requires that payment by the Company or
a Subsidiary for such materials, supplies or other property or services
shall be made regardless of whether or not delivery of such materials,
supplies or other property or services is ever made or tendered;
(iii) any contract or agreement to rent or lease (as lessee) any real
or personal property if such contract (or any related document) provides
that such obligation to make payments thereunder is absolute and
unconditional under conditions not customarily found in commercial leases
then in general use or requires that the lessee purchase or otherwise
acquire securities or obligations of the lessor;
(iv) any contract or agreement for the sale or use of materials,
supplies or other property, or the rendering of services, if such contract
(or any related document) requires that payment for such materials,
supplies or other property, or the use thereof, or payment for such
services, shall be expressly subordinated to any indebtedness of the
purchaser or user of such materials, supplies or other property or the
Person entitled to the benefit of such services owed or to be owed to any
Person; or
(v) except as permitted by Section 6.3, any other contract or
agreement which, in economic effect, is substantially equivalent to a
guarantee (other than as permitted in accordance with Section 6.1), except
by the endorsement of negotiable instruments for deposit or collection or
similar transactions in the ordinary course of business.
6.9 NO NEW SUBSIDIARIES; NO AMENDMENT OF CERTAIN DOCUMENTS. The
------------------------------------------------------
Company covenants that, without the prior written consent of the Significant
Holders, it will not (i) except in connection with a Permitted Acquisition,
create any new Subsidiaries or enter into any joint ventures or partnerships;
provided, that any new Subsidiaries created in connection with a Permitted
--------
Acquisition shall be incorporated in the State of Delaware, the Certificate of
Incorporation and Bylaws of such newly-formed Subsidiary shall be substantially
similar to the
23
Certificates of Incorporation and Bylaws of the Company's Subsidiaries in
existence on the date hereof, and such newly-formed Subsidiary shall have agreed
to become a party to the Guaranty Agreement by the execution of a counterpart
signature page thereto, (ii) permit any amendment of, or modification or
supplement to, its or any of its Subsidiaries' Certificates of Incorporation or
By-laws, (iii) enter into, or permit any Subsidiary to enter into, any
management or similar agreement for the management of any school unless such
management or similar agreement contains an option for the purchase of such
school, or (iv) permit any amendment of, or modification or supplement to, the
Transaction Documents or the Senior Loan Documents; provided, however, that,
-------- -------
without the prior written consent of the Significant Holders, (x) the School
Management Agreement may be amended in any manner that does not increase the
exercise price for the purchase of Arizona Automotive Institute or make more
onerous the covenants and obligations of the Company under the School Management
Agreement and any other management or similar agreement entered into by the
Company from time to time may be amended in a similar fashion, and (y) the
Senior Loan Documents may be amended provided that such amendment does not (1)
increase the amount of such indebtedness, (2) result in any earlier scheduled
maturity date or payment date of any amount under the Senior Loan Agreement, (3)
result in any increase in the interest rate by more than 150 basis points,
prepayment charges, fees or other amounts payable pursuant to the Senior Loan
Agreement, (4) increase the amount of collateral securing such Senior Debt, (5)
result in the Senior Debt having a Weighted Average Life to Maturity less than
the Weighted Average Life to Maturity of such Senior Debt prior to such
amendment, or (6) in the judgment of the Company's Board of Directors contain
terms, provisions and conditions that taken as a whole are more burdensome or
onerous to the Company than those in effect prior to such contemplated
amendment.
6.10 CHANGE IN BUSINESS. Neither the Company nor any of its
------------------
Subsidiaries will enter into or engage in any business other than that currently
engaged in or as currently anticipated, and previously disclosed in writing to
the Significant Holders, as a result of the consummation of the Acquisition and
the Transaction Documents.
24
6.11 EXECUTIVE OFFICERS. The Company covenants that (i) if at any one
------------------
time ▇▇▇▇ ▇. ▇▇▇▇▇▇ shall cease to serve as the chief executive officer of the
Company, the Company will, within 180 days of such individual's ceasing to serve
as the chief executive officer, fill such individual's position or have such
individual's responsibilities assumed by an individual, who has been approved by
the Significant Holders, with comparable stature, reputation and experience in
the industry as the individual ceasing to serve and (ii) the Company shall
employ a chief financial officer, which individual shall be approved by the
Significant Holders, and if at any time such individual shall cease to serve as
the chief financial officer of the Company, the Company will, within 180 days of
such individual's ceasing to serve as the chief financial officer, fill such
individual's position or have such individual's responsibilities assumed by an
individual, who has been approved by the Significant Holders, with comparable
stature, reputation and experience in the industry as the individual ceasing to
serve.
6.12 WITHHOLDING TAXES. (a) The Company covenants that it will not
-----------------
withhold United States withholding taxes from payments to be made to holders of
the Securities if such holders (i) are corporations organized under the laws of
a jurisdiction out side the United States or are otherwise persons not resident
in the United States for United States federal income tax purposes, and (ii)
provide the Company, upon the Company's reasonable request, with one or more of
Internal Revenue Service Form W-8, Form 4224 or other applicable forms,
certificates or documents certifying as to entitlement to an exemption from any
such withholding requirements.
(b) The Company covenants that it will not withhold United
States withholding taxes from payments to be made to holders of the Securities
in excess of an applicable treaty rate if such holders (i) are corporations
organized under the laws of a jurisdiction outside the United States or are
otherwise persons not resident in the United States for United States federal
income tax purposes, and (ii) provide the Company, upon the Company's reasonable
request, with one or more of certifications of their residence address, Internal
Revenue
25
Service Form 1001 or other applicable forms, certificates or documents
certifying as to entitlement to a reduced rate of withholding under any such
withholding requirements.
(c) Neither Section 6.12(a) nor Section 6.12(b) hereof shall
require the Company to apply an exemption or reduced rate of withholding during
any period when it shall have received notice or has knowledge (i) that the
residence information previously provided on any applicable form, certificate or
document is incorrect and no corrected form, certificate or document as
applicable has been provided to the Company, or (ii) of any other information
which would render such exemption or reduced rate inapplicable.
6.13 NO PLEDGE OF SHARES. The Company covenants that it will not
-------------------
mortgage, pledge, hypothecate or create or permit to exist any security interest
in, or Lien on, any shares of the Capital Stock of its Subsidiaries, other than
as may be con templated by the Senior Loan Documents.
6.14 CHANGE IN CONTROL. Prior to the effective date of an Initial
-----------------
Public Offering, (i) there shall not occur a Disposition and (ii) ▇▇▇▇▇▇ shall
at no time own less than 40% of the outstanding shares of Common Stock of the
Company on a fully diluted basis.
6.15 SALE OF EQUITY SECURITIES. The Company covenants that it will
-------------------------
not, and will not permit any of its Subsidiaries to, sell or otherwise dispose
of, or part with control of, any shares of Capital Stock of the Company or any
of its Subsidiaries; provided, however, that the Company shall be permitted
-------- -------
to sell (i) any of its shares of Capital Stock in a public offering of
securities registered pursuant to Section 5 of the Securities Act if, and only
if, (a) such offering shall meet the thresholds set forth in the definition of
"Initial Public Offering" herein and (b) the net proceeds of such offering
(after making any and all payments required under the Senior Loan Documents) are
sufficient to allow the Company to make the mandatory redemption payments
required under Section 5 of the Certificate of Designations, (ii) any of its
shares of Capital Stock in a private offering of securities which is exempt from
the registration requirements of
26
Section 5 of the Securities Act in conjunction with the Permitted Acquisitions,
(iii) shares of Common Stock under and pursuant to the stock option plan to be
instituted for the benefit of the management employees of the Company and which
plan shall provide for the issuance of up to 12,215 shares of Common Stock (as
such number may be adjusted in accordance with such plan) and (iv) any
Subsidiary of the Company may issue additional shares of its Capital Stock to
the Company. In no event will the Company at any time, directly or indirectly,
own less than 100% of the Capital Stock of each of its Subsidiaries.
Notwithstanding anything herein to the contrary, from and after the redemption
in full of all of the shares of Series C Preferred Stock, the only limitation of
this Section 6.15(i) which shall continue shall be the requirement that a public
offering of securities by the Company must meet the thresholds set forth in the
definition of "Initial Public Offering" herein.
6.16 FISCAL YEAR; CHANGE IN ACCOUNTING PRACTICES. Neither the Company
-------------------------------------------
nor any of its Subsidiaries shall change its fiscal year for accounting or tax
purposes from a period consisting of the 12-month period ending on December 31
of each calendar year. The Company covenants that it will not, and will not
permit any of its Subsidiaries to, change the accounting practices which have
been consistently applied, other than in compliance with required changes in
GAAP.
7. PREFERRED STOCK FAILURE EVENTS.
------------------------------
7.1 PREFERRED STOCK FAILURE EVENTS. If any of the following events
------------------------------
shall occur and be continuing for any reason whatsoever (and whether such
occurrence shall be voluntary or involuntary or come about or be effected by
operation of law or otherwise):
(i) the Company defaults in the payment of any dividends payable on
the Series C Preferred Stock on the scheduled dividend payment date or
breaches any other material terms of the Certificate of Designations, which
default is not cured within five (5) days of such date; or
(ii) any representation or warranty made in
27
writing by the Company in this Agreement, in any other Transaction Document
(other than the Third Party Documents) or in any writing furnished to
Electra in connection with or pursuant to this Agreement, the Transaction
Documents (other than the Third Party Documents) or in connection with the
transactions contemplated by this Agreement, shall be false or misleading
in any material respect on the date as of which made; or
(iii) the Company fails to perform or observe any agreement, term or
condition contained in this Agreement or in any other Transaction Document
(other than the Certificate of Designations as provided in clause (i)
above or the Third Party Documents), and, if such failure is capable of
being remedied, such failure shall not have been remedied within 60 days
after such failure shall first have become known to any officer of the
Company or written notice shall have been received by the Company
(regardless of the source of such notice); or
(iv) Any Plan (or any employee benefit Plan of any entity which is
in the same controlled group of corporations as the Company or any
Subsidiary (the "Related Plans")) which is subject to ERISA or the Code
shall have incurred an "accumulated funding deficiency" within the meaning
of Section 412 of the Code or Section 302 of ERISA, or any lien shall arise
with respect to any such Plan or any such Related Plan under Section 412(n)
of the Code, which in either case results in the imposition of liability on
the Company or any Subsidiary in an amount in excess of $250,000.
(v) the Company or any Subsidiary makes an assignment for the
benefit of creditors or is generally not paying its debts as such debts
become due; or any order or decree for relief in respect of the Company or
any Subsidiary is entered under any bankruptcy, reorganization, compromise,
arrangement, insolvency, readjustment of debt, dissolution or liquidation
or similar law, whether now or hereafter in effect (herein called the
"Bankruptcy Law"), of any jurisdiction; or the Company or any of its
--------------
Subsidiaries petitions or applies to any tribunal for, or consents to,
28
the appointment of, or taking possession by, a trustee, receiver,
custodian, liquidator or similar official of the Company or any of its
Subsidiaries, or of any Substantial Part of the assets of the Company or
any of its Subsidiaries, or commences a voluntary case under the Bankruptcy
Law of the United States or any proceedings relating to the Company or any
of its Subsidiaries under the Bankruptcy Law of any other jurisdiction; or
(vi) any such petition or application is filed, or any such
proceedings are commenced, against the Company or any of its Subsidiaries
and such petition, application or proceeding is unstayed or undismissed
within 60 days, or any such petition or application is filed, or any such
proceedings are commenced against the Company or any of its Subsidiaries
and the Company or such Subsidiary by any act indicates its approval
thereof, consent thereto or acquiescence therein, or an order, judgment or
decree is entered appointing any such trustee, receiver, custodian,
liquidator or similar official, or approving the petition in any such
proceedings, and such order, judgment or decree remains unstayed and in
effect for more than 60 days; or
(vii) any order, judgment or decree is entered in any proceedings
against the Company or any of its Subsidiaries decreeing the dissolution
of the Company or such Subsidiary, a split-up of the Company or such
Subsidiary which requires the divestiture of a Substantial Part, or the
divestiture of the stock of the Company or its Subsidiary, as the case may
be, the assets of which constitute a Substantial Part, of the assets of the
Company and its Subsidiaries, and such order, judgment or decree remains
unstayed and in effect for more than 60 days; or
(viii) a judgment in an amount in excess of $250,000 is rendered
against the Company or any of its Subsidiaries and, within 60 days after
entry thereof, such judgment is not discharged or execution thereof stayed
pending appeal, or within 60 days after the expiration of any such stay,
such judgment is not discharged; or
29
(ix) The Company fails to pay when due two or more interest payments
or principal payments (whether scheduled or upon a mandatory prepayment
date) during any rolling six (6) month period on the Senior Debt or any
other Debt in excess of $250,000, whether or not such Senior Debt or other
Debt is accelerated, or the Senior Debt or any other Debt in excess of
$250,000 shall have been accelerated for any reason; or
(x) (a) there shall occur a cessation of a substantial part of the
business of the Company and/or any of its Subsidiaries for a period which
significantly affects the Company's and/or any of its Subsidiaries'
capacity to continue their businesses, or (b) Title IV funding is
terminated or suspended for any School, or any School subsequently
acquired, constituting a Substantial Part, or the continuation of Title IV
funding is qualified with operational restrictions which would have a
Material Adverse Effect compared to the restrictions previously imposed (I)
on the operation of the NEC Schools as conducted by NEC and NEC, Inc., or
(II) on the operation of the other Schools as conducted by the Company and
its Subsidiaries prior to the date of this Agreement or, with respect to
Schools subsequently acquired on the operation of such Schools as conducted
immediately prior to such acquisition, or (c) the Company or any Subsidiary
shall suffer the loss or revocation of any material license or Permit now
held or hereafter acquired by the Company or any Subsidiary which is
necessary to the continued or lawful operation of a substantial part of
their businesses; or (d) the Company or any Subsidiary shall be enjoined,
restrained or in any way prevented by court, governmental or administrative
order from conducting all or any material part of their business affairs
for a period of thirty days (other than (I) the suspension of Title IV
funding under 34 C.F.R. Section 600.31 in connection with the acquisition
of any school permitted hereunder, or (II) a change in ownership resulting
in a change of control under 34 C.F.R. Section 600.31 which occurs as a
result of the exercise of the Warrants and the conversion of Class D Non-
voting Common Stock held by Electra into voting stock, when there is not
otherwise a
30
Preferred Stock Failure Event then in existence); provided, that with
respect to clause (b) above, no Preferred Stock Failure Event shall be
deemed to occur as the result of (X) the granting of a provisional approval
pursuant to 34 C.F.R. Section 600.10 in connection with the acquisition of
the NEC Schools or any other schools subsequently acquired by the Company
or its Subsidiaries or (Y) the implementation of new or revised rules or
regulations by the DOE which are generally applicable to all private post-
secondary schools unless such rules or regulations result in a termination
or suspension of Title IV funding in accordance with (b) above or otherwise
have a Material Adverse Effect; or
(xi) there shall occur an event or circumstance as specified in
Section 11 of the Purchase Agreement giving rise to a right and option of
rescission on the part of the Company pursuant to Section 11 of the
Purchase Agreement, whether or not such right and option is exercised by
the Company;
then the holders of a majority of the Preferred Shares then outstanding may, at
any time and from time to time, by written demand to the Company,
(a) (i) cause the Company to increase the size of its Board of
Directors and (ii) allow the holders of the Series C Preferred Stock to elect a
majority of directors to the Board of Directors in the manner set forth in
paragraph 6(c) of the Certificate of Designations until such time as the
Preferred Shares are redeemed in full; provided, however, that the remedies set
-------- -------
forth in this clause (a) shall not be available if (1) the Preferred Stock
Failure Event is an event described in Section 7.1(i) by reason of nonpayment of
dividends unless the failure to pay such dividends occurs on two or more
required dividend payments during any rolling four quarter periods; (2) the
Preferred Stock Failure Event is an event described in Section 7.1(iii) and (A)
arises solely out of the failure of the Company to observe the agreements, terms
and conditions set forth in Sections 5.7 through 5.11, 6.7, 6.11(ii), 6.12 or
6.16 of this Agreement, or (B) arises solely out of the failure of the Company
to observe the agreements, terms and conditions set forth in
31
Section 5.5, unless such failure would have, or would be likely to have, a
Material Adverse Effect, in which case the remedies set forth in this clause (a)
shall be available, or (C) arises solely out of the failure of the Company to
observe the agreements, terms and conditions set forth in Section 6.4, unless
either (x) ▇▇▇▇▇▇ shall have knowledge of the existence of such transaction or
(y) such failure by the Company would have, or would be likely to have, a
Material Adverse Effect, in either case the remedies set forth in this clause
(a) shall be available, or (3) the Preferred Stock Failure Event is an event
described in Section 7.1(xi) and the shares of Series C Preferred Stock are
redeemed in full within ninety (90) days of receipt by the Company of the
written demand from the holders of the Series C Preferred Stock as provided
below, and/or
(b) in conjunction with clause (a) or otherwise, require the Company
to purchase in full the Preferred Shares in the manner set forth in paragraph 5
of the Certificate of Designations.
In addition, if (x) such event is the failure of the Company to pay a dividend
payable on the Series C Preferred Stock on the scheduled dividend payment date
and (y) at such time the holders of the Series C Preferred Stock shall not have
exercised their right to elect a majority of the directors to the Board of
Directors, then for each fiscal quarter or portion thereof that such Preferred
Stock Failure Event remains uncured, the holders of the shares of Series C
Preferred Stock shall receive additional penalty warrants (together with any
such warrants which may be issued hereunder in substitution or exchange
therefor, collectively, the "Penalty Warrants" and each individually, a "Penalty
---------------- -------
Warrant") to purchase an aggregate of 0.5%, subject to certain adjustments, of
-------
the then outstanding shares of Class A Voting Common Stock, par value $.01 per
share, of the Company, on a fully diluted basis, at an exercise price of $.01
per share, evidenced by one or more warrant certificates (the "Penalty Warrant
---------------
Certificates") to be substantially in the form of Exhibit 7.1 attached hereto.
------------ -----------
If such Preferred Stock Failure Event is an event or circumstance specified in
Section 7.1(xi) above and the holders of the Series C Preferred Stock have given
the written demand to the Company under clause (b)
32
above, subject to the immediately following proviso, the Company shall have the
right, exercisable within ninety (90) days of the occurrence of such Preferred
Stock Failure Event, to repurchase the Warrants for an aggregate consideration
of $1.00; provided, however, that the Company shall not be permitted to
-------- -------
repurchase the Warrants unless it shall have paid, or concurrently therewith is
paying, to the holders of the Series C Preferred Stock all amounts required to
redeem all of the Series C Preferred Stock then outstanding.
7.2 OTHER REMEDIES. No remedy conferred in this Agreement upon the
--------------
holder of any Preferred Shares is intended to be exclusive of any other remedy
available to such holder, and each and every such remedy shall be cumulative and
shall be in addition to every other remedy conferred herein or now or hereafter
existing at law or in equity or by statute or otherwise.
8. REPRESENTATIONS, COVENANTS AND WARRANTIES.
-----------------------------------------
The Company hereby represents, covenants and warrants for the benefit of
each holder from time to time of the Securities and Electra, as of the Closing
and after giving effect to the transactions contemplated by this Agreement and
the other Transaction Documents, as follows:
8.1 ORGANIZATION; AUTHORITY. Each of the Company and its
-----------------------
Subsidiaries is a corporation duly organized, validly existing and in good
standing under the laws of its jurisdiction of incorporation and has all
requisite corporate power and authority to own or lease and operate its
properties and to carry on its business as presently conducted and as proposed
to be conducted after the Closing. Each of the Company and its Subsidiaries is
duly qualified and in good standing as a foreign corporation duly authorized to
do business in each jurisdiction where it owns or leases property or in which
the conduct of its existing business or its business as of the Closing Date
requires it so to qualify or be licensed, except in those jurisdictions in which
the failure to qualify will not individually or in the aggregate have a Material
Adverse Effect. Schedule 8.1 hereto sets forth each jurisdiction where the
------------
Company and each of its Subsidiaries is qualified or licensed to do business.
Other than
33
as listed on Schedule 8.1 hereto, the Company has no Subsidiaries and does not
------------
own of record or beneficially any Capital Stock or equity interest or investment
in any corporation, association, partnership, joint venture or other entity. The
Company and each of its Subsidiaries have furnished Electra with true, correct
and complete copies of its Certificate of Incorporation (including, without
limitation, the Certificate of Designations) and By-laws, each as amended to
date.
8.2 AUTHORIZATION. All corporate action on the part of the Company
-------------
and its directors and stockholders necessary for the authorization, execution,
delivery and performance by (i) the Company of this Agreement, the Series C
Preferred Stock certificates, the Warrants, the Penalty Warrants and the other
Transaction Documents, and (ii) the consummation of the transactions
contemplated herein and therein shall have been taken or will be taken prior to
the Closing. Each of the Transaction Documents to which the Company is a party
is the legal, valid and binding obligation of the Company enforceable against it
in accordance with its terms. The execution, delivery and performance by the
Company of each Transaction Document to which it is a party and compliance
therewith and the issuance and sale of the shares of Series C Preferred Stock,
the Warrants and the Penalty Warrants will not result in any violation of and
will not (i) conflict with, or result in a breach of, any of the terms of, or
constitute a default under, (a) any provision of state or Federal law to which
the Company is subject, (b) the Company's Certificate of Incorporation
(including, without limitation, the Certificate of Designations) or By-laws, or
(c) any mortgage, indenture, agreement, instrument, judgment, decree, order,
rule or regulation, or other restriction to which the Company is a party or by
which it is bound, or (ii) result in the creation of any Lien (except as
contemplated by the Transaction Documents) upon any of the properties or assets
of the Company (including, without limitation, any assets acquired in the
Acquisition) pursuant to any such term, or (iii) except as set forth on Schedule
--------
8.2, result in the suspension, revocation, impairment, forfeiture or non-renewal
---
of any Permit, license, authorization or approval applicable to the Company's
operations or any of its assets (including, without limitation, any assets
acquired in the Acquisition) or properties. No stockholder has any preemptive
34
rights or rights of first refusal by reason of the issuance of the Warrants or
the shares of Series C Preferred Stock. The shares of Series C Preferred Stock
have been duly and validly issued and are fully paid and non-assessable. The
shares of Common Stock issuable upon exercise of the Warrants, have, in each
case, been duly and validly reserved and are not subject to any preemptive
rights or rights of first refusal and, upon issuance, will be validly issued,
fully paid and non-assessable. The shares of Common Stock issuable upon exercise
of the Penalty Warrants, if issued, will be duly and validly reserved and will
not be subject to any preemptive rights or rights of first refusal and, upon
issuance, will be validly issued, fully paid and non-assessable.
8.3 CAPITAL STOCK AND RELATED MATTERS. At the time of the Closing
---------------------------------
and after giving effect to the Acquisition and the transactions contemplated by
this Agreement, (i) the authorized capital stock of the Company will consist of
(a) 500,000 shares of Class A Voting Common Stock, par value $.01 per share, of
which 5,250 shares will be issued and outstanding, (b) 100,000 shares of Class B
Voting Common Stock, par value $.01 per share, of which 5,100 shares will be
issued and outstanding, (c) 100,000 shares of Class C Non-voting Common Stock,
par value $.01 per share, of which 69,900 shares will be issued and outstanding,
(d) 100,000 shares of Class D Non-voting Common Stock, par value $.01 per share,
of which no shares will be issued and outstanding and 25,295 shares will be
reserved for issuance upon the exercise of the Warrants, (e) 100,000 shares of
Class E Non-voting Common Stock, par value $.01 per share, of which no shares
will be issued and outstanding, (f) 50,000 shares of Series A Preferred Stock,
par value $.01 per share, of which 7,850 shares will be issued and outstanding,
(g) 1,000 shares of Series B Preferred Stock, par value $.01 per share, none of
which shares will be issued and outstanding, (h) 500 shares of Series C
Preferred Stock, par value $.01 per share, of which 500 shares of Series C
Preferred Stock will be issued to Electra and outstanding, and (i) 10,000 shares
of Undesignated Preferred Stock, par value $.01 per share, of which no shares
will be issued and outstanding; (ii) no shares of Common Stock will be owned or
held by or for the account of the Company; (iii) all of the outstanding shares
of Common Stock and Preferred Stock (including without limitation
35
the Series C Preferred Stock) will be validly issued and outstanding, fully paid
and non-assessable and will be owned of record and, to the best knowledge of the
Company, beneficially, free and clear of any Liens (except as may be
contemplated by the Senior Loan Documents) by the individuals and entities and
in the amounts set forth on Schedule 1 and Schedule 8.3 hereto; (iv) except
---------- ------------
for the Class A Voting Common Stock, the Class B Voting Common Stock, the Class
C Non-voting Common Stock, the Class D Non-voting Common Stock, the Class E Non-
voting Common Stock, the Series A Preferred Stock, the Series C Preferred Stock,
and the Warrants, and except as set forth on Schedule 8.3 hereto, the Company
------------
has no, and at the time of the Closing will not have, outstanding stock or
securities convertible into or exchangeable for any shares of its Capital Stock,
or any outstanding rights (either preemptive or other) to subscribe for or to
purchase, or any outstanding options for the purchase of, or any agreements
providing for the issuance (contingent or otherwise) of, or any outstanding
calls, commitments or claims of any character relating to, any Capital Stock or
any stock or securities convertible into or exchangeable for any Capital Stock
of the Company, or any outstanding demand or piggyback registration rights to
register any Capital Stock or any stock or securities convertible into or
exchangeable for the Capital Stock of the Company; (v) except with respect to
the Warrants, the Series C Preferred Stock and the Series A Preferred Stock, the
Company will not be subject to any obligation (contingent or other) to
repurchase, otherwise acquire or retire any shares of Capital Stock; and (vi)
the Company has no knowledge of any agreement (except as set forth in this
Agreement or the Stockholders Agreement) restricting the transfer of any shares
of the Company's Capital Stock, except as set forth on Schedule 8.3. Schedule
------------ --------
8.3 sets forth the number of shares of Capital Stock, the holders thereof, and
---
the percentage held by each holder of the issued and outstanding Capital Stock
of the Company and each Subsidiary at the time of the Closing and after giving
effect to the Acquisition and the transactions contemplated by this Agreement.
8.4 LITIGATION. Except as disclosed on Schedule 8.4 hereto, there is
---------- ------------
no action, suit, investigation or proceeding pending, or, to the Company's
knowledge threatened, or any basis
36
therefor or threat thereof, in, nor is there any existing judgment, order or
decree of, any court, governmental authority, arbitration board or tribunal,
foreign or domestic to which the Company or any of its Subsidiaries is or may be
named as a party or its property is or may be subject or which challenges this
Agreement or any of the transactions contemplated hereby, or to the Company's
knowledge, to which any officer, employee or stockholder of the Company or any
of its Subsidiaries is subject, and the Company has no knowledge of any
unasserted claim, the assertion of which is likely and which, if asserted, will
seek damages, an injunction or other legal, equitable, monetary or nonmonetary
relief which claim individually or collectively with other such unasserted
claims, if granted, or actions, suits, investigations or proceedings would have
a Material Adverse Effect or which challenges this Agreement or any of the other
Transaction Documents or any of the transactions contemplated hereby or thereby.
No legislation, order, rule, ruling or regulation has been enacted or made by or
on behalf of any governmental body, department or agency, nor to the Company's
knowledge has there been any legislation introduced and favorably reported for
passage to either House of Congress by any committee of either such House to
which such legislation has been referred for consideration or any state
legislature in any jurisdiction in which the Schools operate or by any committee
of such legislature to which such legislation has been referred for
consideration, nor to the Company's knowledge has any decision of any court of
competent jurisdiction within the United States been rendered which, in the
Company's judgment, would have a Material Adverse Effect.
8.5 COMPLIANCE. (a) Neither the Company nor any Subsidiary is in
----------
violation of any statute, law, ordinance, governmental rule or regulation
(including environmental laws) or any judgment, order or decree (federal, state,
local or foreign) to which it is subject, except where such violation would not
have, and is not likely to result in, a Material Adverse Effect, nor has it
failed to obtain any, and it possesses all, licenses, Permits, franchises or
other governmental authorizations necessary for the ownership or operation of
its properties or the conduct of its business as presently conducted and as
proposed to be conducted, except where the failure to so obtain or to so
37
possess would not have, and is not likely to result in, a Material Adverse
Effect.
(b) Neither the Company nor any Subsidiary is in violation of any
term of its Certificate of Incorporation, as amended (including, without
limitation, the Certificate of Designations in the case of the Company), or By-
laws, as amended.
(c) Neither the Company nor any Subsidiary is in violation of any
term of any Contract, judgment, decree, order, statute, rule or regulation to
which either the Company or any Subsidiary is subject or which would permit any
party to any Contract to terminate, amend or modify such Contract, except for
any violations which do not cause, and are not likely to result in, a Material
Adverse Effect. To the Company's knowledge, neither the Company nor any
Subsidiary has waived any right or default by any party under any Contract. All
Contracts are in full force and effect, and the Company and its Subsidiaries
each have no knowledge that any party to any Contract, or any parties to any
Contract is or is seeking or presently intends to seek to (i) terminate, amend
or modify such Contract or (ii) upon the expiration of such Contract, not renew
such Contract on terms substantially similar to those terms currently in such
Contract, except where the termination, amendment, modification or failure to
renew does not have, and is not likely to result in, a Material Adverse Effect.
8.6 OFFERING. Based upon the representations and warranties of
--------
Electra set forth in Section 9 hereof, the offer, sale and issuance of the
shares of Series C Preferred Stock, the Warrants, the Penalty Warrants and the
shares of Common Stock issuable upon the exercise of the Warrants and the
Penalty Warrants are all exempt from the registration requirements of the
Securities Act and from the registration or qualification requirements of the
laws of any applicable state or other jurisdiction, and neither the Company nor
anyone acting on its behalf will take any action hereafter that would cause the
loss of such exemption.
8.7 ERISA AND LABOR RELATIONS. (a) Schedule 8.7 hereto contains a
------------------------- ------------
true and complete list of each written (or, to
38
the knowledge of the Company and its Subsidiaries, oral), employee bonus,
retirement, pension, profit sharing, savings, stock option, stock appreciation,
stock purchase, incentive, deferred compensation, hospitalization, medical,
dental, vision, life or other health or disability (whether provided by
insurance or otherwise), severance, termination or other similar plan, policy or
program of the Company and each Subsidiary, including, without limitation, any
collective bargaining agreement involving direct or indirect compensation (the
"Employee Benefit Plans"), including, without limitation, each "employee pension
----------------------
benefit plan" within the meaning of Section 3(2) of ERISA (without regard to any
applicable exception from ERISA), each employee welfare benefit plan as defined
in Section 3(1) of ERISA (without regard to any applicable exception from
ERISA). Schedule 8.7 sets forth the expense charged for financial accounting
------------
purposes (whether through insurance premiums or otherwise) attributable to each
plan determined on an annual basis for the past fiscal year.
(b) To the Company's knowledge, neither the Company nor any
Subsidiary nor any "disqualified person" (as defined in Section 4975 of the
Code) nor any Employee Benefit Plan has engaged in any non-exempt prohibited
transaction within the meaning of Section 4975 of the Code or Section 406 of
ERISA which would result in any liability to the Company or any Subsidiary which
has had or would have a Material Adverse Effect. To the Company's knowledge, all
contributions required to have been made by same to each Employee Benefit Plan
have been timely made. No premium payments have been or are required to be made
to the PBGC.
(c) Each Employee Benefit Plan has been maintained substantially in
compliance with its terms, and with the requirements prescribed by any and all
statutes, orders, rules and regulations, including, without limitation, ERISA
and the Code, which are applicable to such Employee Benefit Plan, except those
which could not, individually or in the aggregate, have a Material Adverse
Effect.
(d) Except as set forth in the Purchase Agreement or this Agreement,
neither the execution and delivery of this Agreement or the other Transaction
Documents nor the consummation
39
of the Acquisition and the transactions contemplated thereby will (i) result in
any payment to be made by the Company or any Subsidiary (including, without
limitation, severance, unemployment compensation, golden parachute, or
otherwise) becoming due to any employee under any Employee Benefit Plan or
otherwise or (ii) increase any benefits otherwise payable under any Employee
Benefit Plan.
(e) No benefit payable or which may become payable by the Company or
any Subsidiary pursuant to any Employee Benefit Plan shall constitute an "excess
parachute payment" (as defined in Section 280G(b)(1) of the Code) which is
subject to the imposition of an excise tax under Section 4999 of the Code or
which would not be deductible by reason of Section 280G of the Code.
(f) The execution and delivery of this Agreement or the other
Transaction Documents, the issue and sale of the Securities and the consummation
of the Acquisition and the transactions contemplated by the Transaction
Documents will not involve any transaction which is subject to the prohibitions
of section 406 of ERISA or in connection with which a tax could be imposed
pursuant to Section 4975 of the Code.
(g) Except as set forth on Schedule 8.7, since December 31, 1994 and
------------
other than with respect to the acquisition of the NEC Schools, there has been no
amendment to, interpretation or announcement (whether or not written) by the
Company or any Subsidiary relating to, or change in, employee participation or
coverage under, any Employee Benefit Plan which would increase the level of the
expense incurred in respect thereof for the current fiscal year or any prior
year. The Company and its Subsidiaries do not maintain and have not maintained
any Plans.
(h) To the Company's knowledge, the Company and each Subsidiary has
provided, or will have provided, to individuals entitled thereto all required
notices within the applicable time period and coverage pursuant to Section 4980B
of the Code with respect to any "qualifying event" (as defined in Section
4980B(f)(3) of the Code), and no tax payable on account
40
of Section 4980B of the Code has been incurred with respect to any employees of
the Company or any Subsidiary.
(i) No lawsuits, claims (other than routine claims for benefits) or
complaints to, or by, any Person or governmental entity have been filed, are
pending or, to the best of the Company's knowledge, have been threatened, and,
to the Company's knowledge, no facts or contemplated events exist that could be
expected to give rise to any such lawsuit, claim (other than a routine claim for
benefits) or complaint, with respect to any Employee Benefit Plan where the
Company or any Subsidiary may be either (i) liable directly on such lawsuit,
claim or complaint, or (ii) obligated to indemnify any Person, group of Persons,
or entity with respect to such lawsuit, claim or complaint.
(j) To the Company's knowledge, neither the Company nor any
Subsidiary has engaged in any transaction, failed to make required
contributions, committed any act or omission, or otherwise incurred any
liability for any excise tax under Section 4971 through 4980B of the Code.
(k) Neither the Company nor any Subsidiary maintains nor has each
ever maintained a foreign Employee Benefit Plan.
(l) Each Employee Benefit Plan and, if any, the applicable, related
trust agreement, which are intended to be qualified within the meaning of
Section 401(a) of the Code and tax exempt within the meaning of Section 501(a)
of the Code, has received a favorable determination letter from the IRS and to
the Company's knowledge nothing has occurred since the date of such letter which
would prevent any such Employee Benefit Plan from remaining qualified. The
Company has furnished to Electra the most recent IRS determination letter with
respect to any such Employee Benefit Plan.
(m) To the Company's knowledge, except as disclosed on Schedule 8.7,
------------
the Company and each Subsidiary have no obligation to provide any employee
welfare benefits to retirees, including, without limitation, any medical and
life
41
insurance benefits. With respect to former employees or retirees of the Company
and each Subsidiary, Schedule 8.7 separately indicates the life insurance,
------------
medical, severance, pension benefits, and similar benefits provided to former
employees and retirees and shall include true and complete copies of any
calculations prepared by a third party at the Company's request with respect to
the estimated present value of the liabilities and, which calculations shall,
where appropriate, specify the underlying actuarial assumptions used by such
third party in calculating such liabilities.
(n) Current copies of all Employee Benefit Plans of the Company and
each Subsidiary (and, if applicable, related trust or other funding
arrangements, including but not limited to insurance contracts), and all
amendments thereto and written interpretations thereof (including summary plan
descriptions and summaries of material modifications) have been furnished to
Electra, other than the three (3) (or such smaller number, if applicable) most
recent annual reports (Form 5500, including, if applicable, Schedule B thereto)
prepared in connection with any such Employee Benefit Plan, which will be
delivered to Electra as soon as available following the Closing, but including
with respect to any Employee Benefit Plan providing post-retirement medical or
other welfare benefits, a calculation of the actual liability accrued (or which
would have been accrued had the employer elected to comply) under such Employee
Benefit Plan under Financial Accounting Standard 106 as of the date hereof.
(o) No Employee Benefit Plan constitutes, or within the past 6 years,
has constituted, a Multiemployer Plan within the meaning of Section 4001(a)(3)
of ERISA.
(p) Except as otherwise disclosed in Schedule 8.7, the Company and
------------
any Subsidiary have furnished to Electra true and complete copies of all Summary
Plan Descriptions and Summary of Material Modifications and other written
employee benefit communications provided to employees with respect to any
employee welfare plan. The Company believes that it has legally reserved the
right to increase the level of employee contributions to any employee welfare
plan.
42
(q) (i) There are no discrimination charges (relating to sex, age,
race, national origin, handicap or veteran status or otherwise) pending or, to
the Company's knowledge, threatened, against, or involving the Company or any
Subsidiary; (ii) except as disclosed on Schedule 8.4, to the Company's
------------
knowledge, there are no grievances or disputes between the Company or any
Subsidiary and any such Employee; (iii) neither the Company nor any Subsidiary
is delinquent in payments to any of such Employees for any wages, salaries,
commissions, bonuses, benefits or other direct or indirect compensation for any
services performed by them; (iv) the Company and each Subsidiary is in
compliance with all Federal, state, local and foreign laws and regulations
respecting labor, employment, wages, hours and benefits, except where the
failure to so comply does not cause, and is not likely to result in, a Material
Adverse Effect; (v) there is no unfair labor practice with respect to the
Company or any Subsidiary pending before the National Labor Relations Board or
any comparable state, local or foreign agency; (vi) there is no labor strike,
dispute, slowdown or stoppage actually pending or, to the Company's knowledge,
threatened, against or involving the Company or any Subsidiary; (vii) to the
best of the Company's knowledge, no labor organization activities have occurred
with respect to employees of any School during the past three (3) years, and
there are no collective bargaining agreements binding on the Company relating
the operation of any School.
(r) Set forth on Schedule 8.7 hereto is a true, correct and complete
------------
list (including the term, expiration date and amount of annual compensation) of
all employment, consulting and non-competition agreements to which the Company
and the Subsidiaries is a party or by which the Company and the Subsidiaries is
bound, and all union and non-union employees of the Company and its Subsidiaries
(true, correct and complete copies of which have previously been delivered to
Electra) and which, in the case of employees of the Company or its Subsidiaries,
involve annual compensation in excess of $50,000. To the Company's knowledge,
except as set forth on Schedule 8.7, no current or former employee of the
------------
Company or any Subsidiary is in violation of any term of any employment contract
with the Company or any Subsidiary or any non-compete or confidentiality
agreement entered into for the benefit of the Company or any Subsidiary, nor is
any employee of the Company or any of its Subsidiaries in violation of any
employment contract, or any other contract or agreement with or any restrictive
covenant or any other common law obligation to a former employer relating to the
right of any such employee to be employed by the Company or any
43
Subsidiary because of the nature of the business conducted or to be conducted by
the Company and any Subsidiary or to the use of trade secrets or proprietary
information of others, and, except as set forth in Schedule 8.7, to the
Company's knowledge, the employment of the Company's or its Subsidiaries'
employees does not subject the Company or its Subsidiaries to liability in
connection with such covenants or agreements. There is neither pending nor, to
the Company's knowledge threatened any actions, suits, proceedings or claims
with respect to any contract, agreement, covenant or obligation referred to
above.
8.8 FINANCIAL STATEMENTS; MATERIAL FACTS. The Company has furnished
------------------------------------
Electra with true, correct and complete copies of (i) the audited consolidated
financial statements of the Company for the year ended December 31, 1994, (ii)
the audited financial statements of NEC, Inc. for the NEC Schools for the years
ended December 31, 1994 and 1993, (iii) to the extent available, the unaudited
financial statements of each of the Company and NEC, Inc. for the Schools for
each of the months prior to the Closing since December 31, 1994, (iv) the pro
forma consolidated balance sheet of the Company and its Subsidiaries as of the
Closing Date after giving effect to the Acquisition and the transactions
contemplated hereby and under the Transaction Documents, (v) the proposed annual
operating and capital budget for the Company and its Subsidiaries for the fiscal
year ending December 31, 1995 (collectively, known as the "Financials") and (vi)
----------
the financial projections contained in the Memorandum (the "Projections"). The
-----------
Financials and the Projections, are herein collectively called the "Financial
---------
Disclosure Documents." The Financials (i) have been prepared in conformity in
--------------------
all material respects with GAAP (and with respect to historical interim periods
subject only to normal year-end adjustments consistent with past practices),
(ii) disclose all liabilities, direct and contingent, required to be shown in
accordance with such principles and (iii) accurately reflect the financial
position of the respective companies at the dates indicated and results of
operations for the periods
44
indicated. In the opinion of the Company, the Projections reflect the reasonable
estimates of the Company on the date made and on the date hereof of the results
of operations and other information projected therein, and were prepared in Good
Faith in accordance with substantially the same accounting principles, standards
and assumptions with respect to which the Financials have been prepared, and on
estimates, information and assumptions which are reasonable in light of current
conditions on the date made and on the date hereof. The Financial Disclosure
Documents, this Agreement and the other Electra Documents do not contain an
untrue statement of a material fact or omit to state a material fact necessary
in order to make the statements therein and herein, in light of the
circumstances under which they were made, not misleading.
8.9 OUTSTANDING DEBT. Except as set forth on Schedule 6.1, the
---------------- ------------
Company and its Subsidiaries do not have any outstanding secured or unsecured
Debt or commitments for any such Debt, other than with respect to the Senior
Loan Agreement.
8.10 TAXES. The Company and its Subsidiaries have each timely
-----
filed such federal, state and other tax returns required by law to be filed by
it, and all taxes, assessments and other governmental charges which are due and
payable, other than those presently payable without penalty or interest, have
been timely paid. All taxes, assessments and other governmental charges which
are presently payable without penalty or interest have been adequately reserved
for in accordance with GAAP. There are no tax liens upon any properties or
assets of the Company or any Subsidiary.
All such tax reports or returns fairly reflect the taxes of the
Company and its Subsidiaries for the periods covered thereby. Neither the
Company nor any Subsidiary is delinquent in the payment of any taxes,
assessments or governmental charges, there are no tax deficiencies or
delinquencies asserted against the Company and its Subsidiaries, and, except as
provided above, there are no unpaid assessments, proposals for additional taxes,
deficiencies or delinquencies in the payment of any of the taxes of the Company
and its Subsidiaries or any violations of any federal, state, local or foreign
tax laws that could be asserted
45
by any taxing authority. No Internal Revenue Service audit of the Company and
its Subsidiaries is pending or, to the knowledge of the Company and its
Subsidiaries, threatened, and the results of any completed audits are properly
reflected in the financial statements. Other than an extension for filing of
corporate tax returns, federal and state, for the Company and its Subsidiaries
for the fiscal year ended December 31, 1994, neither the Company nor its
Subsidiaries have granted any extension to any taxing authority of the
limitation period during which any tax liability may be asserted. Neither the
Company nor its Subsidiaries have committed any violation of any federal, state,
local or foreign tax laws, except for any violations which do not have, and are
not likely to have, a Material Adverse Effect. All monies required to be
withheld by the Company or its Subsidiaries from employees or collected from
customers for income taxes, social security and unemployment insurance taxes and
sales, excise and use taxes, and the portion of any such taxes to be paid by the
Company or its Subsidiaries to governmental agencies or set aside in accounts
for such purpose have been so paid or set aside, or such monies have been
approved, reserved against and entered upon the books and financial statements
of the Company and its Subsidiaries, except where the failure to do any of the
foregoing does not have, and is not likely to have, a Material Adverse Effect.
8.11 CONFLICTING AGREEMENTS. Neither the Company nor any of its
----------------------
Subsidiaries is a party to any contract or agreement or subject to any
restriction which would have, or would be likely to have, a Material Adverse
Effect. Except as set forth on Schedule 8.11 hereto, neither the Company nor
-------------
any of its Subsidiaries is a party to or otherwise subject to any contract or
agreement which limits the amounts of, or otherwise imposes restrictions on, the
issuance of the Warrants, the Series C Preferred Stock or the Common Stock (upon
the exercise of the Warrants).
8.12 POLLUTION AND OTHER REGULATIONS. Except as set forth in
-------------------------------
Schedule 8.12, (i) the operations of the Company and its Subsidiaries are in
full compliance with Environmental Laws, except where the failure to so comply
does not have and is not likely to have a Material Adverse Effect; (ii) the
Company and
46
its Subsidiaries have obtained all necessary permits or authorizations required
under Environmental Laws, except where the failure to so obtain does not have,
and is not likely to have, a Material Adverse Effect; (iii) to the knowledge of
the Company and its Subsidiaries, there has been no Release at any of the
properties owned or operated by the Company and its Subsidiaries or a
Predecessor, or at any disposal or treatment facility which received Hazardous
Materials generated by the Company, any of its Subsidiaries or any Predecessor;
(iv) no Environmental Claims relating to (A) any assets, properties or
businesses of the Company, any Subsidiary or any Predecessor; (B) properties
adjoining properties or businesses owned or operated by the Company, any
Subsidiary or any Predecessor; or (C) any facilities which received Hazardous
Materials generated by the Company, any Subsidiary or any Predecessor, have been
asserted against the Company or any of its Subsidiaries or, to the knowledge of
the Company and its Subsidiaries, any Predecessor, nor does the Company or any
of its Subsidiaries have knowledge or notice that any such Environmental Claim
is threatened or pending; and (v) to the knowledge of the Company and its
Subsidiaries, no Environmental Claim has been asserted against any facilities
that may have received Hazardous Materials generated by the Company or any of
its Subsidiaries or any Predecessor; provided, that for the purposes of clauses
--------
(iii) and (v) of this Section 8.12, knowledge of the Company and its
Subsidiaries with respect to offsite facilities shall mean actual knowledge
without inquiry other than the review by the Company and its Subsidiaries of
certain environmental database search results of offsite facilities, copies of
which have been previously provided to Electra and which are described on
Schedule 8.12. The Company does not believe that any of the items listed on
-------------
Schedule 8.12 pertaining to clauses (iii), (iv) and (v) above are likely to have
-------------
a Material Adverse Effect.
8.13 CERTAIN ACTS. Neither the Company 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,
nor will it become such by virtue of the transactions contemplated hereby or by
the Transaction Documents. Neither the Company nor any of its Subsidiaries is a
"holding company," or a "subsidiary company" of
47
a "holding company," or an "affiliate" of a "holding company" or of a
"subsidiary company" of a "holding company," as such terms are defined in the
Public Utility Holding Company Act of 1935, as amended, nor will it become such
by virtue of the transactions contemplated hereby or by the Transaction
Documents. None of the transactions contemplated by this Agreement (including,
without limitation, the use of the proceeds from the sale of the Securities)
will violate or result in a violation Section 7 of the Exchange Act or any
regulation issued pursuant thereto, including, without limitation, Regulations
G, T, U, and X of the Board of Governors of the Federal Reserve System.
8.14 GOVERNMENTAL PERMITS, CONSENTS, ETC. Except as set forth on
-----------------------------------
Schedule 8.14, no consent, approval, authorization, exemption or other action
-------------
by, or notice to or filing with, any court or administrative or governmental
body which has not been obtained, taken or made is required in connection with
the execution and delivery of this Agreement or the Transaction Documents, the
consummation of the transactions contemplated hereby or thereby or fulfillment
of or compliance with the terms and provisions hereof. Schedule 8.14 hereto sets
-------------
forth all material permits, licenses and use authorizations (the "Permits")
-------
issued or anticipated to be issued to the Company and its Subsidiaries by the
appropriate Federal, state, local and foreign regulatory bodies. The Permits
constitute all material permits necessary to own and operate the Company's
and/or its Subsidiaries' businesses as presently being conducted and as
contemplated to be conducted after the Closing. Except as set forth on Schedule
8.14, all Permits are valid and subsisting and in full force and effect. There
are no proceedings pending, or to the Company's knowledge, threatened, that seek
the revocation, cancellation, suspension or any adverse modification of any
Permit. The Company and each of its Subsidiaries are in compliance in all
material respects with the terms of such Permits obtained as of the date hereof.
The Company has received no notice that any of the Permits will not be renewed
and to the best of the Company's knowledge, there is no basis for nonrenewal.
Except as set forth on Schedule 8.14, each School is accredited by the
-------------
Accrediting Body or Accrediting Bodies set forth opposite such School's name on
Schedule 8.14 hereto and, except as set forth on Schedule 8.14, is certified by
------------- -------------
the DOE as
48
a qualified institution under Title IV, and is a party to, and in compliance
with, valid program participation agreements with the DOE with respect to the
operations of such School. The Company has not received any notice, not
previously complied with, and the Company does not have any knowledge of any
such notice, with respect to any alleged violation of the rules or regulations
of the DOE or any applicable Accrediting Body in respect of any School,
including sales and marketing activities, or the terms of any program
participation agreement to which it is or was a party. If any such notices have
been received and complied with, the Company has disclosed their receipt and
disposition to Electra prior to the execution of this Agreement in writing.
Except as set forth on Schedule 8.14 hereto, the Company is not aware of any
-------------
investigation or review of the student financial aid programs of any School or
any review of the accreditation of any School by any Person.
8.15 FEES AND COMMISSIONS. No broker's or finder's fee or
--------------------
commission will be payable by the Company with respect to the issuance and sale
of the Securities or the transactions con templated hereby, other than an
investment banking fee payable to ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇ & Co.
8.16 INTELLECTUAL PROPERTY. Each of the Company and its Subsidiaries
---------------------
possesses all Intellectual Property, including, without limitation, all patents,
patent rights, trademarks, trademark rights, trade names, trade name rights,
service marks, patents, copyrights, trade secrets, know-how, manufacturing
processes, formulas, information, proprietary rights and processes and options,
licenses and agreements relating to the above, necessary to conduct its business
as contemplated herein and in the Transaction Documents after the Closing, (i)
to the knowledge of the Company, without conflict with or infringement upon any
valid rights of others, (ii) which are owned by the Company or its Subsidiaries
free and clear of any and all liabilities, obligations, Liens or claims, other
than in favor of the Senior Lenders, if any, and (iii) the lack of which could
have a Material Adverse Effect, and have not received any notice of infringement
upon or conflict with the asserted rights of others. Except as set forth on
Schedule 8.16 hereto and other than licenses for software purchased by the
-------------
Company in retail
49
transactions, there are no outstanding options, licenses, or agreements of any
kind relating to the foregoing, nor is the Company or any Subsidiary bound by or
a party to any option, license or agreement of any kind with respect to the
patents, patent rights, copyrights, trade secrets, information, proprietary
rights and processes of any other person or entity. No stockholder, director,
officer or employee of the Company or any Subsidiary has any interest in any
such patents, patent rights, trademarks, trademark rights, trade names, trade
name rights, copyrights, trade secrets, information, proprietary rights and
processes.
8.17 ABSENCE OF CERTAIN CHANGES. Except as set forth on Schedule
--------------------------
4.11 hereto, since December 31, 1994, and as of the date hereof, there has not
been any event or change of any character which has or would reasonably be
expected to have a Material Adverse Effect, including, but not limited to (i)
any damage, destruction or loss of any of the properties or assets of the
Company and/or any its Subsidiaries (whether or not covered by insurance), (ii)
any waiver by the Company and/or any of its Subsidiaries of a valuable right
(including without limitation, in the case of the Company, any rights under the
Purchase Agreement) or of a material debt owed to it, (iii) any material change
or amendment to a Contract or arrangement by which the Company, any of its
Subsidiaries or any of their respective assets or properties is bound or
subject, (iv) any declaration, setting aside for payment or other distribution
in respect of any of the Company's or any of its Subsidiaries' capital stock, or
any direct or indirect redemption, purchase or other acquisition of any of such
stock by the Company or any of its Subsidiaries, or (v) any labor trouble,
problem, grievance, dispute or controversy with any union or other organization
of the Company's or any of its Subsidiaries' employees, or threats of strikes,
work stoppages or any asserted pending demands for collective bargaining by any
union or organization.
8.18 LEASES. Set forth on Schedule 8.18 hereto is a complete and
------ -------------
correct list (including the amount of rents called for and a description of the
leased property) of all leases of real property under which the Company or any
of its Subsidiaries is a lessee. The Company and its Subsidiaries enjoy
peaceful and
50
undisturbed possession under all such leases, all of such leases are valid and
subsisting and none of them is in default in any material respect, nor has the
Company or any of its Subsidiaries received any written notice of its default
under any such lease.
8.19 PURCHASE AGREEMENT. (a) The Purchase Agreement has not been
------------------
amended, modified or supplemented, nor have any conditions precedent to closing
or defaults under such Purchase Agreement been waived by the Company or NEC or
NEC, Inc. without
the prior written consent of Electra. Assuming the accuracy of the
representations and warranties of NEC and NEC, Inc. contained in the Purchase
Agreement, the obligations of each of the parties to the Purchase Agreement are
the legal, valid and binding obligations of each such party. Except as set
forth on Schedule 8.19, the Company has not waived any right or default by any
party under the Purchase Agreement.
(b) The Company is not in violation of any term of the Purchase
Agreement, judgment, decree, order, statute, rule or regulation to which the
Company is subject or which would permit any party to the Purchase Agreement to
terminate, amend or modify such agreement. The Purchase Agreement is in full
force and effect, and the Company and its Subsidiaries each have no knowledge
that any party to such agreement is or is seeking or presently intends to seek
to terminate, amend or modify such agreement.
8.20 INSURANCE. Schedule 8.20 attached hereto sets forth all
--------- -------------
insurance policies maintained by the Company and each of its Subsidiaries. The
insurance maintained by the Company and each of its Subsidiaries is in amounts
and of a nature as is customarily maintained by Persons conducting operations
similar to that of the Company and its Subsidiaries and, except as otherwise
indicated on Schedule 8.20, is with insurance carriers who are rated by A. M.
-------------
Best Company's Rating Service as "A" or better. Since December 31, 1994,
neither the business, proper ties nor assets (including, without limitation,
the assets acquired in the Acquisition) of the Company or any of its
Subsidiaries has suffered a loss which would have, or would be likely to have, a
Material Adverse Effect (whether or not covered by insurance) as a result of
fire, flood, act of God or any other
51
casualty or similar event.
8.21 RESERVATION OF SHARES. The Company has reserved for issuance
---------------------
the number of its authorized but unissued shares of Common Stock necessary to
permit the exercise in full of all the outstanding Warrants.
8.22 TITLE TO PROPERTIES. (a) Subject to the right of rescission
-------------------
set forth in Section 11 of the Purchase Agreement, the Company and its
Subsidiaries have, and on the Closing Date will have, (i) good and marketable
title to all of their assets and properties, real, personal and mixed,
including, without limitation, the assets acquired in the Acquisition and all of
the other assets and properties reflected on their respective balance sheets, in
each case free and clear of any Liens or claims affecting any such assets or
properties referred to above (other than as contemplated under the Senior Loan
Documents).
(b) Schedule 8.22 hereto sets forth all of the real property
-------------
owned or leased by the Company and its Subsidiaries. All required certificates
of occupancy, certificates relating to electrical work, zoning, building,
housing, safety, fire and health approvals, and other permits, franchises and
licenses necessary to enable the Company and each Subsidiary to use or operate
its facilities in the manner currently used or operated, or as is currently
anticipated to be used or operated by it, have been issued and are in full force
and effect, except where the failure to obtain such approvals, permits,
franchises or licenses would not have, or would not be likely to have, a
Material Adverse Effect. There are no proceedings pending for the reduction of
the assessed valuation of any real property owned by the Company and each
Subsidiary. No default or breach now exists and no event has occurred or is
continuing which, with notice or the passage of time or both, would constitute a
default under any of the covenants, restrictions, rights of way, easements or
other agreements affecting any of the facilities of the Company or its
Subsidiaries. Under existing easements, rights at law, certificates, deeds,
leases and other applicable agreements and instruments, the Company and each
Subsidiary after the Closing Date shall have access to and the same rights to
utilize all access roads, utilities, and other facilities not
52
belonging to it which have been used in the operation of its facilities at full
capacity prior to the Closing Date, on the same terms and conditions as have
been previously available. No state of facts exists which would or could prevent
the Company and each Subsidiary after the Closing Date from carrying on, or
impair or restrict its ability to carry on, the business of operating such
facilities in the same manner as they have been previously operated at full
capacity prior to the Closing Date, or as they are anticipated to be operated by
the Company and each Subsidiary after the Closing Date. The Company does not
have any knowledge of any condemnation or eminent domain proceedings now pending
nor has the Company or any Subsidiary received notice or has any knowledge of
any such proceeding being contemplated with respect to its facilities.
(c) The facilities, machinery, equipment, furniture, fixtures,
vehicles, any related capitalized items and other tangible property material to
the business of the Company or its Subsidiaries are, and on the Closing Date
will be in operating condition suitable for their intended use, except for (i)
maintenance in the ordinary course and (ii) normal wear and tear.
8.23 CONTRACTS AND AGREEMENTS. Schedule 8.23 hereto sets forth a
------------------------ -------------
list of all of the Contracts relating to the Schools or the assets acquired in
the Acquisition or to which the Company or any of its Subsidiaries is a party or
has any present or future liabilities, obligations or rights to, or in, pursuant
to the Purchase Agreement.
8.24 RECRUITMENT; ADMISSIONS PROCEDURES; ATTENDANCE; REPORTS.
-------------------------------------------------------
Schedule 8.24 hereto sets forth a complete list of all policy manuals and other
-------------
statements of procedures or instruction relating to recruitment of students for
each School (other than the NEC Schools), including (a) procedures for assisting
in the application by prospective students for direct or indirect state or
federal financial assistance; (b) admissions procedures, including any
descriptions of procedures for insuring compliance with state or federal or
other appropriate standards or tests of eligibility; and (c) procedures for
encouraging and verifying attendance, minimum required attendance policies, and
other relevant criteria relating to course completion and certification
53
(collectively, the "Policy Guidelines"). The Company has delivered to Electra
true, correct and complete copies of all Policy Guidelines for the Schools
(other than the NEC Schools) and true and complete copies of the Policy
Guidelines received with respect to the NEC Schools. To the best of the
Company's knowledge, and except as disclosed on Schedule 8.24 or Schedule 4.6 to
------------- ------------
the Purchase Agreement, the operations of each School have, in all material
respects, been conducted in accordance and all relevant standards imposed by
applicable Accrediting Bodies, agencies administering state or federal
governmental programs in which the Company or such School participates, and
other applicable laws or regulations. All reports, audits, and other
information, whether periodic in nature or pursuant to specific requests, for
each School (other than the NEC Schools) ("Compliance Reports") have been
submitted to all agencies or other entities with which such filings are required
relating to such School's compliance with (i) applicable accreditation standards
governing its activities or (ii) laws or regulations governing programs pursuant
to which the School or its students receive funding, and (iii) all articulation
agreements, if any, with degree-granting colleges and universities in effect as
of the date of this Agreement. Complete and accurate records in all material
respects for all present and past students attending each School (other than the
NEC Schools) have been maintained consistent with the operations of a school
business. To the best of the Company's knowledge, all forms and records with
respect to each School have been prepared, completed, maintained and filed in
all material respects in accordance with all applicable federal and state laws
and regulations, and are true and correct in all material respects. All
financial aid grants and loans, disbursements and record keeping relating
thereto with respect to the Schools (other than the NEC Schools) have been
completed in substantial compliance with all federal and state requirements, and
there are no material deficiencies in respect thereto. To the best of the
Company's knowledge and except as previously disclosed in prior audits by DOE,
no student at any School has been funded prior to the date for which such
student was eligible for funding, and such student's records conform in form and
substance to all relevant regulatory requirements. To the knowledge of the
Company, the representations of NEC and NEC, Inc. set forth in Section 4.6 of
the Purchase Agreement are true,
54
complete and correct.
8.25 COHORT DEFAULT RATE. Schedule 8.25 hereto sets forth the
------------------- -------------
published cohort default rate for each School, calculated in the manner
prescribed by the DOE, of all students attending such school receiving
assistance pursuant to Title IV programs for the years ended December 31, 1989
through 1992. Except as set forth in the appeals described on Schedule 8.25, to
-------------
the best of the Company's knowledge, such schedule is materially accurate in all
respects. To the best of the Company's knowledge, except as set forth on
Schedule 8.25, no notice has been received as to the calculation or amount of
-------------
the cohort default rates for any School for the years ended December 31, 1993
and 1994.
8.26 RECEIVABLES. The tuition receivable and accounts receivable
-----------
of each School (other than the NEC Schools), except to the extent of the
allowance for cancellations and doubtful accounts set forth in the Financial
Statements, are bona fide receivables, arose out of arms' length transactions in
the normal and usual practices of the Company and such School, are recorded
correctly on the applicable books and records of the Company and such School,
and to the best of the Company's knowledge, are collectable in full in the
ordinary course of business, within the ordinary time frame for such
receivables, subject in the case of certain receivables to reserves established
for such receivables in the Financial Statements. Such receivables are not
subject to any defense, counterclaim or setoff or trade discounts or credits not
reflected in the Financial Statements (other than tuition refund policies
administered in accordance with all applicable legal requirements and the
applicable Policy Guidelines), and the Company has no knowledge of any facts or
circumstances which would cause any of such receivables to have to be written
down or written off. To the knowledge of the Company, the representations and
warranties of NEC and NEC, Inc. set forth in Section 4.12 of the Purchase
Agreement are true, complete and correct.
8.27 WORKING CAPITAL AT THE DATE OF THIS AGREEMENT. All items
---------------------------------------------
comprising the net working capital for each School (other than the NEC Schools)
at the date of this Agreement,
55
including cash, accounts receivable, tuition deposits and tuition receivable,
less accounts payable and accrued expenses, are at normal amounts for the
current level of operations at such School and consistent with normal practices,
and tuition receivable and the reserve for cancellation relating thereto, are
consistent with the experience during the past twelve (12) months. To the
knowledge of the Company, the representations and warranties of NEC and NEC,
Inc. set forth in Section 4.25 of the Purchase Agreement are true, complete and
correct.
9. REPRESENTATIONS OF ELECTRA. Each Electra entity represents, severally
--------------------------
and not jointly, and in making its purchase hereunder it is specifically
understood and agreed, that:
9.1 PURCHASE OF SECURITIES. Such Electra entity is purchasing the
----------------------
Securities set forth opposite its name on Schedule 1 hereto for its own account,
----------
for investment purposes and not with a view to or for sale in connection with
any distribution thereof; and (ii) it is an "accredited investor" within the
meaning of Regulation D promulgated under the Securities Act. Such Electra
entity agrees that it will not, directly or indirectly, offer, transfer, sell,
assign, pledge, hypothecate or otherwise dispose of any of the Securities
purchased by it hereunder (or solicit any offers to buy, purchase, or otherwise
acquire or take a pledge of any of such Securities), except in compliance with
the Securities Act, the Exchange Act, any applicable state securities or blue
sky laws and the Stockholders Agreement.
9.2 INCORPORATION; AUTHORIZATION. Such Electra entity is a
----------------------------
corporation duly organized, validly existing and in good standing under the laws
of its jurisdiction of incorporation and such Electra entity has the full legal
right, power and authority to enter into this Agreement and to perform its
obligations hereunder without the need for the consent of any other person; and
this Agreement has been duly authorized, executed and delivered and constitutes
the legal, valid and binding obligation of such Electra entity enforceable
against such Electra entity in accordance with the terms hereof.
9.3 NO CONFLICTS. The execution, delivery and
------------
56
performance by such Electra entity of each Transaction Document to which it is a
party and compliance therewith and the purchase of the Securities will not
result in any violation of and will not conflict with, or result in a breach of,
any of the terms of, or constitute a default under, (a) any provision of state,
Federal or foreign law to which it is subject, (b) its Certificate of
Incorporation or By-laws, or (c) any mortgage, indenture, agreement, instrument,
judgment, decree, order, rule or regulation, or other restriction to which it is
a party or by which it is bound.
9.4 NO BROKERS' FEES. Such Electra entity has not agreed or
----------------
committed to pay any broker's or finder's fee or commission with respect to the
purchase of the Securities or the transactions contemplated hereby.
10. DEFINITIONS.
-----------
For the purpose of this Agreement, the following terms shall have the
meanings specified with respect thereto below:
"Accrediting Body" shall mean, with respect to any School, any entity or
----------------
organization, whether governmental, government-chartered, inter-governmental,
private or quasi-private, which engages in granting or withholding licensing,
accreditation or similar approval for such School, in accordance with standards
relating to the performance, operation, financial condition and/or academic
standing of private post-secondary schools, including, without limitation, the
instrumentality or instrumentalities of the relevant state in which such School
is situated, and, as applicable, the Accrediting Commission of Career Schools
and Colleges of Technology, the Accrediting Council for Independent Colleges and
Schools, the Commission of Colleges of the Western Association of Colleges and
Schools, and the other entities listed on Exhibit I to the Purchase Agreement.
"Acquisition" has the meaning set forth in the recitals hereof.
-----------
"Affiliate" means, with respect to any Person, any other Person directly or
---------
indirectly controlling, controlled by, or
57
under direct or indirect common control with, such Person, but shall exclude,
with respect to the Company, Electra and any transferee that might be deemed to
be an Affiliate of the Company solely by reason of its ownership of Securities
purchased by Electra under this Agreement or securities issued in exchange for
any such Securities, or by reason of its benefiting from any agreements or
covenants of the Company contained in this Agreement. A Person shall be deemed
to control another Person if such Person possesses, directly or indirectly, the
power 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.
"Agreement" means this Securities Purchase Agreement, as this Agreement may
---------
be amended from time to time, together with all Exhibits and Schedules hereto.
"Bankruptcy Law" has the meaning specified in clause (vi) of Section 7.1
--------------
hereof.
"Business Day" means any day other than a Saturday, a Sunday or a day on
------------
which commercial banks in New York City are required or authorized to be closed.
"By-laws" means for any Person all By-laws, Codes of Regulation or other
-------
equivalent charter documents in the jurisdiction of incorporation of such
Person.
"Capital Expenditures" means as to any Person for any period, the aggregate
--------------------
amount of all capital expenditures which would be classified as capital
expenditures in a statement of income or operations of such Person for such
period prepared in accordance with GAAP.
"Capital Lease" means, at the time any determination thereof is to be made,
-------------
any lease of property, real or personal, in respect of which the present value
of the minimum rental commitment would be capitalized on a balance sheet of
the lessee in accordance with GAAP.
"Capital Lease Obligation" means, at the time any determina-
------------------------
58
tion thereof is to be made, the amount of the liability in respect of a Capital
Lease which would at such time be so required to be capitalized on a balance
sheet of the lessee in accordance with GAAP.
"Capital Stock" means any and all shares, interests, rights to purchase,
-------------
warrants, options, participations or other equivalents of, rights to acquire,
or interests in (however designated) corporate stock, including, without
limitation, any security which is convertible into or exercisable for such
corporate stock.
"Certificate of Designations" has the meaning set forth in Section 1
---------------------------
hereof.
"Certificate of Incorporation" means for any Person all Certificates of
----------------------------
Incorporation, Articles of Incorporation or other equivalent charter documents
in the jurisdiction of incorporation of such Person.
"Closing" has the meaning specified in Section 3 hereof.
-------
"Closing Date" has the meaning specified in Section 3 hereof.
------------
"Code" means the Internal Revenue Code of 1986, as amended
----
from time to time.
"Commission" means the United States Securities and Exchange Commission or
----------
any governmental body or agency succeeding to the functions thereof.
"Common Stock" means the Company's common stock, par value $.01 per share.
------------
"Company" means Career Education Corporation, a Delaware corporation, and
-------
its successors and assigns.
"Consents" has the meaning specified in Section 4E hereof.
--------
"Consolidated Net Earnings" means consolidated gross revenues of the
-------------------------
Company and its Subsidiaries less all operating and non-operating expenses of
the Company and its Subsidiaries,
59
including all charges of a proper character (including current and deferred
Taxes on income, provisions for Taxes on income, provisions for Taxes on
unremitted foreign earnings which are included in gross revenues, and current
additions to reserves), all determined in accordance with GAAP, but not
including (to the extent otherwise included) in gross revenues (i) any gains
(net of expenses and taxes applicable thereto) in excess of losses resulting
from the sale, conversion or other disposition of capital assets (i.e., assets
---
other than Current Assets), (ii) any gains resulting from the write-up of
assets, (iii) any gains resulting from an acquisition by the Company or any of
its Subsidiaries at a discount of any Debt of the Company or any of its
Subsidiaries, (iv) any equity of the Company or any of its Subsidiaries in the
unremitted earnings of any corporation which is not a Subsidiary of the Company,
(v) any earnings of any Person acquired by the Company or any of its
Subsidiaries through purchase, merger or consolidation or otherwise for any time
prior to the date of acquisition, or (vi) any deferred credit representing the
excess of equity in any Subsidiary of the Company at the date of acquisition
over the cost of the investment in such Subsidiary.
"Contracts" means any written or oral contract, agreement, commitment,
---------
note, bond, pledge, lease, sublease, deed, mortgage, guaranty, indenture,
license, option, consulting agreement, supply contract, repair contract,
distribution agreement, purchase order, joint venture agreement, franchise,
technology and know-how agreement, employment agreement, instrument or any other
contractual commitment that is binding on any Person or its property, which
provide for payments from or to such Person of $50,000 or more after the date
hereof.
"Current Assets" means current assets of the Company and its
--------------
Subsidiaries, as computed under GAAP.
"Current Liabilities" means the liabilities of the Company and its
-------------------
Subsidiaries which in accordance with GAAP are classified as "current";
provided, however, that the current portion of Debt permitted under Section 6.1
-------- -------
hereof shall be considered "current liabilities".
"Debt" means, as to any Person, any indebtedness, whether or
----
60
not contingent, in respect of borrowed money or evidenced by bonds, notes,
debentures or similar instrument or letters of credit (or reimbursement
agreements in respect thereof) or representing the balance deferred and unpaid
of the purchase price of any property (including pursuant to Capital Leases), if
and to the extent any of the foregoing indebtedness would appear as a liability
upon a balance sheet of such Person prepared on a consolidated basis in
accordance with GAAP, and shall also include, to the extent not otherwise
included, (a) the guarantee of items which would be included within this
definition and any joint obligation of such Person in respect of items which
would be included in this definition, and (b) any indebtedness of a third person
of the type that would be included in this definition which is secured by a Lien
on the property or assets of such Person.
"Disposition" means any transaction or series of related transactions
-----------
(other than a Non-Surviving Combination) if, after giving effect to such
transaction, any one or more Unrelated Persons beneficially own, directly or
indirectly, in the aggregate 50% or more of the Common Stock on a fully diluted
basis (without giving effect to any shares purchased or purchasable upon
exercise of the Warrants), outstanding as of the date of computation.
"DOE" means the United States Department of Education and any successor
---
agency administering federal student financial assistance under Title IV.
"EAI" means Electra Associates, Inc., a Delaware corporation, and its
---
successors and assigns.
"EI" means Electra Inc., a Delaware corporation, and its successors and
--
assigns.
"EIT" means Electra Investment Trust P.L.C., a corporation organized under
---
the laws of England and Wales, and its successors and assigns.
"Electra" means EIT and EAI.
-------
61
"Electra Documents" means the Transaction Documents other than the Third
-----------------
Party Documents.
"Employee Benefit Plan" has the meaning specified in Section 8.7 hereof.
---------------------
"Environmental Claim" means any complaint, summons, citation, notice,
-------------------
directive, order, claim, litigation, investigation, judicial or administrative
proceeding, judgment, letter or other communication from any Governmental
Authority, or any third party involving violations of Environmental Laws or
Releases.
"Environmental Laws" means any and all laws, statutes, ordinances, rules,
------------------
regulations, orders, or determinations of any governmental authority pertaining
to health or the environment in effect in any and all jurisdictions in which the
Company and its Subsidiaries are conducting or at any time have conducted
business, including, without limitation, the Clean Air Act, as amended, the
Comprehensive Environmental Response, Compensation, and Liability Act of 1980
("CERCLA"), as amended, the Federal Water Pollution Control Act, as amended, the
-------
Occupational Safety and Health Act of 1970, as amended, the Resource
Conservation and Recovery Act of 1976 ("RCRA"), as amended, the Safe Drinking
----
Water Act, as amended, the Toxic Substances Control Act, as amended, the
Superfund Amendments and Reauthorization Act of 1986, as amended, and other
environmental conservation or protection laws.
"Environmental Liabilities" means any monetary obligations, losses,
-------------------------
damages, punitive damages, consequential damages, treble damages, costs and
expenses (including all reasonable out-of-pocket fees, disbursements and
expenses of counsel, out-of-pocket expert and consulting fees and out-of-pocket
costs for environmental site assessments, remedial investigation and feasibility
studies), fines, penalties, sanctions and interest incurred as a result of any
Environmental Claim filed by any Governmental Authority or any third party which
relate to any environmental condition, remedial action, Release or threatened
Release from or onto (i) any presently or formerly owned by the Borrower or any
of its Subsidiaries or a Predecessor, or (ii) any
62
facility which received Hazardous Materials generated by the Borrower or any of
its Subsidiaries or a Predecessor.
"Environmental Permit" means any permit, license, notice, order, approval
--------------------
or other authorization under any applicable law, rule, regulation or other
requirement of the United States or Canada or of any state, municipality or
other subdivision thereof required by any Environmental Law.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
-----
amended from time to time.
"Exchange Act" means the Securities Exchange Act of 1934, as amended, from
------------
time to time, and any successor statute or law thereto.
"Existing Indebtedness" means, as to the Company and its Subsidiaries, the
---------------------
Debt of the Company and its Subsidiaries outstanding as of the Closing Date,
reflected in Schedule 6.1 hereto, other than the Senior Debt.
------------
"Financial Disclosure Documents" has the meaning specified in Section 8.8
------------------------------
hereof.
"Financials" has the meaning set forth in Section 8.8 hereof.
----------
"Financing Fee" has the meaning set forth in Section 3 hereof.
-------------
"GAAP" means generally accepted accounting principles in the United States
----
of America as in effect at the time any determina tion is made or financial
statement is required hereunder as promulgated by the American Institute of
Certified Public Accountants, the Accounting Principles Board, the Financial
Accounting Standards Board or any other body existing from time to time which is
authorized to establish or interpret such principles, applied on a consistent
basis throughout any applicable period, subject to any change required by a
change in GAAP; provided, however, that if any change in generally accepted
-------- -------
accounting principles during the term of this Agreement affects
63
the calculation of any financial covenant or determination of value contained
herein, the parties hereto hereby agree to amend this Agreement to the effect
that each such financial covenant or determination of value is not more or less
restrictive than such covenant as in effect on the date hereof.
"Good Faith" means honesty in fact in the conduct or transaction
----------
concerned, without regard to whether standards which might be deemed reasonable
by another Person have been observed; but which does not include intentionally
unreasonable conduct.
"Governmental Authority" means any action of government, any state, local
----------------------
or other political subdivision thereof and any other entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to such government.
"Hazardous Materials" means (a) any element, compound, or chemical that is
-------------------
defined, listed or otherwise classified by a Governmental Authority as a
contaminant, pollutant, toxic pollutant, toxic or hazardous substances,
extremely hazardous substance or chemical, hazardous waste, medical waste,
biohazardous or infectious waste, special waste, or solid waste under
Environmental Laws; (b) petroleum and its refined products; (c) polychlorinated
biphenyls; (d) any substance exhibiting a hazardous waste characteristic as
defined in 40 C.F.R. 261.21-.24; and (e) any raw materials, building components,
including but not limited to asbestos-containing materials and manufactured
products, containing Hazardous Materials.
"▇▇▇▇▇▇" shall mean, collectively, ▇▇▇▇▇▇ Equity Capital Corporation, a
------
Delaware corporation, and any entity controlling or under common control with
▇▇▇▇▇▇ Equity Capital Corporation.
"Initial Public Offering" shall mean an initial underwritten public
-----------------------
offering and sale for cash by the Corporation of the Common Stock of the
Corporation to an underwriter or underwriters pursuant to a "firm commitment"
underwriting agreement and a registration statement declared effective by the
Securities and Exchange Commission under the Securities Act of 1933, as amended,
in which (i) the minimum equity valuation of the Corporation is
64
$45,000,000 before December 31, 1999 and $55,000,000 thereafter and (ii) the
Corporation receives gross proceeds of at least $20,000,000. The valuation of
the Corporation will be determined by dividing the dollar amount raised in such
public offering on a gross basis by the percentage of equity in the Corporation
sold in such public offering on a fully-diluted basis, taking into account all
shares outstanding, and all warrants, options and convertible securities or
other rights to acquire equity of the Corporation. An Initial Public Offering
shall be deemed consummated upon the first sale of Common Stock under the
related registration statement. An Initial Public Offering shall not include the
registration of an offer and sale of the Common Stock (i) to the employees of or
other persons providing services to the Corporation pursuant to an employee
benefit or similar benefit plan registered on Form S-8 or a successor form or
(ii) relating to a merger, acquisition or other transaction of the type
described in Rule 145 or a successor rule registered on Form S-4 or a successor
form.
"Intellectual Property" means, as to any Person, that Person's Patents and
---------------------
Patent Applications, Trademarks, licenses and brand names, and including without
limitation all logos and designs, trade secrets, technical information,
engineering procedures, designs, know-how and processes, software, copyrights,
and other intellectual property.
"Investment" in any Person includes all investments by stock purchase,
----------
capital contribution, loan, advance, guarantee of any indebtedness or creation
or assumption of any other liability in respect of any indebtedness of such
Person, or otherwise.
"knowledge" means, with respect to any Person, such Person's best knowledge
---------
after due inquiry; provided, that with respect to the NEC Schools no knowledge
--------
of any managerial personnel of the NEC Schools, who were not managerial
personnel of the Company immediately prior to the Acquisition, shall be imputed
to the Company.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
----
charge of any kind (including any agreement to give any of the foregoing, any
conditional sale or other title
65
retention agreement, any lease in the nature thereof and the filing of or
agreement to give any financing statement under the Uniform Commercial Code of
any jurisdiction).
"Material Adverse Change" of such Person means a material adverse change in
-----------------------
the business, condition (financial or otherwise), assets, properties or
operations or prospects of such Person.
"Material Adverse Effect" means a material adverse effect on the business,
-----------------------
condition (financial or other), assets, properties or operations or prospects of
the Company and its Subsidiaries, taken as a whole.
"Memorandum" means that certain Financing Memorandum dated April 1995
----------
prepared by ▇▇▇▇▇▇ ▇▇▇▇▇▇▇▇▇ ▇▇▇▇▇▇ & Co., a copy of which was provided to
Electra by the Company.
"Multiemployer Plan" means any "multiemployer plan" (as such term is
------------------
defined in Section 3(37) of ERISA and Section 414(f) of the Code) to which
contributions are or have been made by the Company or any of its Subsidiaries.
"NEC Schools" shall have the meaning assigned to such term in the
-----------
preambles.
"Net Cash Flow" means the amount shown as the "Cash from Operations" on the
-------------
cash flow statements prepared by the Company and delivered to the Significant
Holders in accordance with Section 5.1 hereof, determined in accordance with
GAAP.
"Non-Surviving Combination" means any merger, consolidation or other
-------------------------
business combination of the Company with or into one or more Persons in which
the Person other than the Company is the survivor, or a sale of all or a
substantial part of the assets of the Company (whether held directly by the
Company or through a subsidiary of the Company) to one or more such other
Persons (including but not limited to a voluntary or involuntary dissolution,
liquidation or winding up of the affairs of the Company); provided that if any
such merger, consolidation or other business combination or sale of assets, in
which the holders of Common Stock receive cash or non-cash consideration,
66
is structured in the form of a reverse subsidiary merger so that the Company is
the surviving entity, such transaction shall nevertheless be deemed to be a Non-
Surviving Combination.
"Officers' Certificate" means a certificate signed in the name of the
---------------------
Company, as applicable, by its chief executive officer, president or one of its
vice presidents and by its chief financial officer, treasurer or controller.
"Patents and Patent Applications" means, as to any Person, all of such
-------------------------------
Person's right, title and interest in and to all of its now owned or existing
and filed and hereinafter acquired or arising and filed patents and patent
applications, inventions and improvements thereto, and (a) the reissues,
divisions, continua tions, renewals, extensions, and continuations-in-part
thereof, (b) all income, royalties, damages and payments now or hereafter due
and/or payable under or with respect thereto, including without limitation
damages and payments for past or future infringements thereof, (c) the right to
▇▇▇ for past, present and future infringements thereof, (d) all rights
corresponding thereto throughout the world, and (e) all right as licensor or
licensee with respect to any of the foregoing.
"PBGC" means the Pension Benefit Guaranty Corporation or any corporation or
----
governmental body or agency succeeding to the functions thereof.
"Penalty Warrant Certificates" shall have the meaning set forth in Section
----------------------------
7.1 hereof.
"Penalty Warrants" shall have the meaning set forth in Section 7.1 hereof.
----------------
"Permitted Acquisitions" shall mean acquisitions by the Company or its
----------------------
Subsidiaries (including newly-formed Subsidiaries to the extent permitted
hereunder) of vocational or similar schools meeting the requirements set forth
in Section 4.2(e)(iii), (iv), (v) and (vi) of the Senior Loan Document;
provided, that (i) during any twelve-month period there shall not be more than
--------
four (4) Permitted Acquisitions and the aggregate purchase price (including all
deferred payments and seller notes)
67
for all such Permitted Acquisitions during such twelve-month period shall not
exceed $14,000,000, and (ii) the the total acquisition price (including all
deferred payments and seller notes) with respect to the acquisition of any
school may not exceed five (5) times EBITDA of such school for the most recently
completed fiscal year (as the EBITDA of such school may be adjusted to eliminate
the effect of any extraordinary compensation arrangements with regard to the
operation of such school).
"Permitted Indebtedness" means: (a) the Senior Debt, (b) the Existing
----------------------
Indebtedness, (c) Debt giving rise to Permitted Liens, (d) current trade
accounts payable or accrued, operating lease obligations and deferred
liabilities other than for borrowed money, all incurred and continuing in the
ordinary course of business, (e) Capital Lease Obligations which are with
recourse to the Company or other Debt of the Company which is with recourse to
the Company incurred for the purchase of real or personal property or businesses
that do not exceed, as of any date outstanding, the aggregate amount of such
Debt permitted under the Senior Loan Documents; provided, however, that, subject
-------- -------
to the other terms and conditions set forth herein, the Company may incur
Capital Lease Obligations or other Debt incurred for the purchase of real or
personal property or businesses in any amount so long as such Capital Lease
Obligations and other Debt is without recourse to the Company, (f) Debt which
serves to refund or refinance the Existing Indebtedness to the extent in each
case permitted by the terms of the documents and instruments evidencing such
Debt (each of such Debt being so incurred, "Refinancing Indebtedness"), it being
------------------------
understood that the Company shall be permitted to pay prepayment penalties and
premiums in connection with such refunding or refinancing; provided, however,
-------- -------
that such Refinancing Indebtedness (i) is subordinated to the Senior Debt to at
least the same extent as such Debt being refunded or refinanced, (ii) bears an
interest rate per annum which does not exceed by more than 150 basis points the
interest rate per annum then payable under such Debt being refunded or
refinanced (calculated in accordance with any formula set forth in the documents
evidencing any such Debt), (iii) has an aggregate principal amount outstanding
which does not exceed the then outstanding aggregate amount of such Debt being
refunded or
68
refinanced plus customary transaction costs incurred in connection with such
refinancing, and (iv) has, at the time of such refunding or refinancing, a
Weighted Average Life to Maturity greater than the Weighted Average Life to
Maturity of such Debt being refunded or refinanced, (g) Debt incurred in the
ordinary course of the Company's business in connection with any lease
obligations of the Company pursuant to any lease agreements executed by the
Company as lessee of any real property, (h) Debt payable to any seller or
sellers in Permitted Acquisition(s) by the Company up to a maximum of $2,000,000
in the aggregate for all such acquisitions (which amount shall not include any
amounts payable immediately and contingent upon the resumption of Title IV
funding with respect to the school which is the subject of such Permitted
Acquisition (the "Deferred Payment"), but shall be deemed to include the stated
value of any shares of preferred stock which provide for a current-pay dividend
and which are issued in connection with a Permitted Acquisition), (i) additional
Debt up to a maximum of $1,000,000, (j) any Deferred Payment and (k) additional
Debt incurred solely for the purposes of satisfying the Acid Test of DOE, or if
such requirement shall no longer be applicable, such similar requirement as in
effect at such time; provided, however, that such Debt (i) shall be fully cash-
-------- -------
collateralized, (ii) shall have a stated maturity of in excess of 1-year, and
(iii) shall not remain outstanding for a period of time in excess of one-hundred
twenty (120) days.
"Permitted Investments" means (i) an Investment by the Company or any
---------------------
Wholly-Owned Subsidiary of the Company in a Wholly-Owned Subsidiary of the
Company, subject, in the case of any such Investments that constitute Debt, to
the provisions of Section 6.1 hereof; (ii) loans or advances made in the
ordinary course of business to employees of the Company or its Sub sidiaries
for travel and like expenses and relocation expenses; (iii) Investments in
direct obligations of the United States of America or obligations of any
instrumentality or agency thereof, the payment of which is unconditionally
guaranteed by the United States of America; (iv) negotiable certificates of
deposit issued by any commercial bank or trust company organized under the laws
of the United States of America or any state thereof having capital and surplus
of not less than $100,000,000; (v) readily marketable commercial paper rated A-1
by Standard & Poor's
69
Corporation or Prime-1 by NCO/Moody's Commercial Paper Division of ▇▇▇▇▇'▇
Investor Services, Inc. (all of which Investments shall be payable in U.S.
dollars in the United States of America and shall have maturities not in excess
of twelve months); (vi) Current Assets arising from the sale of goods and
services in the ordinary course of business of the Company and its Subsidiaries;
(vii) Investments not to exceed $100,000 in the aggregate in connection with the
operation of any and all third party schools pursuant to any management or
similar agreement (including the School Management Agreement); provided, that
--------
such Investment shall only be permitted if (A) the Company has an option to
purchase such school and (B) the Board of Directors determines that such
Investment is necessary to preserve the value of such option to the Company; and
(viii) Permitted Acquisitions.
"Permitted Liens" means as to the property, personal and real, tangible and
---------------
intangible, of any Person: (a) Liens for Taxes or assessments and similar
charges either (i) not delinquent, or (ii) contested in Good Faith by
appropriate proceedings which have the effect of staying any action to foreclose
or to obtain a judgment to enforce such Liens and as to which such Person shall
have set aside on its books adequate reserves; (b) Liens incurred or pledges and
deposits in connection with workers' compensation, unemployment insurance and
other social security benefits, or securing the performance of bids, tenders,
leases, contracts (other than for the repayment of borrowed money), statutory
obligations, progress payments, surety and appeal bonds and other obligations of
like nature, incurred in the ordinary course of business; (c) Liens imposed by
law, such as mechanics', carriers', warehousemen's, materialmen's, supplier's
and vendors' Liens, incurred in Good Faith in the ordinary course or contested
in Good Faith by appropriate proceedings which have the effect of staying any
action to foreclose or to obtain a judgment to enforce such Liens; (d) zoning
restrictions, easements, licenses, covenants, reservations, restrictions on the
use of real property or minor irregularities of title incident thereto which do
not in the aggregate materially impair the use of such property in the operation
of the businesses of such Person; (e) Liens, other than as described in clause
(j) of this definition of Permitted Liens, existing on assets or properties at
the time of, or in connection with, the acquisition thereof by a Person which do
not materially
70
interfere with the use of the property subject thereto or extend to or cover any
assets or property of such Person other than the assets or property being
acquired; (f) Liens existing on the Closing Date and disclosed on Schedule 10.1
-------------
hereto; (g) Liens of landlords or mortgages of landlords, arising solely by
operation of law, on fixtures and movable property located on premises leased in
the ordinary course of business, provided that the rental payments secured
thereby are not yet due; (h) Liens of judgment creditors to the extent (i) any
judgment secured by such Lien does not give rise to a Preferred Stock Failure,
and (ii) not material alone or in the aggregate; (i) Liens in favor of the
Senior Lenders or to secure Debt permitted by subparagraph (e) of the definition
of Permitted Indebtedness, provided, however, that, if not in favor of the
-------- -------
Senior Lenders or any lender refinancing the Senior Debt, such Liens do not
extend to any assets other than the assets being acquired with the proceeds of
such Debt or being leased; and (j) Liens granted as a result of any Refinancing
Indebtedness (as defined in subparagraph (f) of the definition of Permitted
Indebtedness), provided that in the case of any such Refinancing Indebtedness
the aggregate scope of all Liens, if any, on the property, real and personal,
tangible and intangible, of the Company securing the Debt being refunded or
refinanced are not increased thereby (e.g., additional types or items of
---
collateral have been added).
"Person" means and includes an individual, a partnership, a joint venture,
------
a corporation, a trust, an unincorporated organization, a government or any
department or agency thereof, and any other legal entity.
"Plan" means an employee pension benefit plan within the meaning of Section
----
3(2) of ERISA, maintained or contributed to by the Company or any Subsidiary,
and subject to Section 412 of the Code.
"Predecessor" means those entities from whom the Company or its
-----------
Subsidiaries, as the case may be, has purchased or concurrently with the Closing
is purchasing assets constituting a private post-secondary vocational school, or
on whose behalf commencing concurrently with the Closing will operate a private
post-secondary vocational school as of the date hereof. Such
71
entities are (i) ▇.▇. ▇▇▇▇▇▇▇ Investment Corporation, an Arizona corporation
formerly known as ▇▇ ▇▇▇▇▇▇▇ Graphic Design School, Ltd., (ii) BC Venture, a
Texas general partnership formerly known as ▇▇▇▇▇▇ College, and (iii) National
Education Centers, Inc., a California corporation, with respect only to the
operations of the NEC Schools and Arizona Automotive Institute.
"Preferred Shares" means the shares of Series C Preferred Stock of the
----------------
Company.
"Preferred Stock Failure Event" means any of the events specified in
-----------------------------
Section 7.1 hereof, provided that there has been satisfied any requirement set
forth therein in connection with such event for the giving of notice, or the
lapse of time, or the happening of any further condition, event or act, and
"Preferred Stock Failure" shall mean any of such events, whether or not any such
-----------------------
requirement has been satisfied.
"Projections" has the meaning specified in Section 8.8 hereof.
-----------
"Purchase Agreement" has the meaning set forth in the recitals hereto.
------------------
"Registration Rights Agreement" has the meaning set forth in Section 4.14
-----------------------------
hereof.
"Release" means any spilling, leaking, pumping, emitting, emptying,
-------
discharging, injecting, escaping, leaching, dumping, or disposing of Hazardous
Materials (including the abandonment or discarding of barrels, containers or
other closed receptacles containing Hazardous Materials) into the environment.
"Restricted Payment" means (i) any dividend on, or any distribution in
------------------
respect of, any shares of Capital Stock of the Company or any of its
Subsidiaries or the incurrence of any liability in respect thereof, other than
(a) a dividend payable solely in shares of that class of stock, (b) dividends by
any of its Wholly-Owned Subsidiaries to the Company, (c) dividends payable on
the shares of Series C Preferred Stock and (d) dividends payable on any shares
of preferred stock issued in
72
connection with the Permitted Acquisitions, (ii) any payment or distribution on
account of the redemption, purchase, retirement or other acquisition of any
shares of Capital Stock of the Company or any of its Subsidiaries or any
warrant, option or other right to purchase or acquire any shares of Capital
Stock of the Company or any of its Subsidiaries, other than (a) the redemption
of the Series C Preferred Stock, (b) the redemption, purchase, retirement or
other acquisition of any and all shares of the Series C Preferred Stock in
connection with the "put" provided for in, and pursuant to, the Certificate of
Designations, (c) the exercise of the Warrants, (d) the redemption, purchase,
retirement or other acquisition of any and all Warrants in connection with the
"put" provided for in, and pursuant to, the Warrant Certificates, and (e) the
redemption, purchase, retirement or other acquisition of any and all warrants in
connection with the "put" provided for in, and pursuant to, the warrant
certificates issued to the Senior Lender as provided in the Senior Loan
Documents, and (iii) any payment, prepayment or retirement of Debt of the
Company or any of its Subsidiaries other than (a) mandatory scheduled payments
made in accordance with the terms of such Debt, (b) payments of the Senior Debt
and (c) payments of trade debt made in the ordinary course of business.
"Revolving Loans" means the total of all advances and extensions of
---------------
credit, if any, made from time to time on a revolving basis under the Senior
Loan Agreement.
"School Management Agreement" means the School Management Agreement, dated
---------------------------
the Closing Date, by and among NEC, NEC, Inc. CEC Management, Inc., an Illinois
corporation, and the Company.
"Schools" means (i) the NEC Schools, (ii) the ▇▇ ▇▇▇▇▇▇▇ Graphic Design
-------
School in Tempe, Arizona, and (iii) ▇▇▇▇▇▇ College in Long Beach, California.
"Securities" means the Warrants and the Series C Preferred Stock.
----------
"Securities Act" means the Securities Act of 1933, as amended, and the
--------------
rules and regulations promulgated thereunder.
73
"Senior Debt" means, subject to the proviso of Section 6.1 hereof and
-----------
Section 6.9 hereof, the Debt created pursuant to the Senior Loan Agreement in a
maximum aggregate principal amount equal to $20,000,000, minus the aggregate
amount of (a) all payments and prepayments of principal made from time to time
after the Closing Date (excluding any payments made on the Revolving Loans) and
(b) all permanent reductions made from time to time after the Closing Date in
the maximum commitment amounts for the Revolving Loans, and any refinancing
thereof; provided, however, that such refinancing shall not (i) increase the
-------- -------
amount of such indebtedness (other than with respect to prepayment penalties or
premiums or capitalized loan origination fees or expenses), (ii) result in any
earlier scheduled maturity date or payment date of any amount under the Senior
Loan Agreement, (iii) result in any increase in the interest rate by more than
150 basis points, prepayment charges, fees or other amounts payable pursuant to
the Senior Loan Agreement, (iv) increase the amount of collateral securing such
Senior Debt, (v) have, at the time of such refunding or refinancing, a Weighted
Average Life to Maturity less than the Weighted Average Life to Maturity of such
Senior Debt being refunded or refinanced, or (vi) in the judgment of the
Company's Board of Directors contain terms, provisions and conditions that taken
as a whole are more burdensome to the Company than those of the Senior Loan
Agreement.
"Senior Loan Agreement" means the loan agreement to be entered into by and
---------------------
among the Senior Lenders and the Company, in form and substance reasonably
acceptable to Electra.
"Senior Loan Documents" means the Senior Loan Agreement and the documents
---------------------
entered into in connection with or provided for in the Senior Loan Agreement,
each in form and substance reasonably acceptable to Electra.
"Senior Lenders" means the lenders under the Senior Loan Agreement, and
--------------
their successors, assigns and participants.
"Series C Preferred Stock" means the Series C Redeemable Preferred Stock of
------------------------
the Company, par value $.01 per share with a stated value of $10,000 per share,
to be issued solely to
74
Electra.
"Significant Holder" means, for so long as any shares of Series C Preferred
------------------
Stock are outstanding, any holder holding at least 25% of the outstanding shares
of Series C Preferred Stock, and thereafter, any holder holding at least 25% of
the outstanding Warrants. Any approval or consent of the Significant Holders
required or given hereunder shall be deemed given if the holders of a majority
of the aggregate shares of Series C Preferred Stock (or Warrants, if applicable)
then outstanding held by all Significant Holders give such approval or consent.
"Stockholders Agreement" has the meaning set forth in Section 4.13 hereof.
----------------------
"Subsidiary" means, with respect to any Person, any corporation or similar
----------
entity, a majority of the Capital Stock or other equity of which, except
directors' qualifying shares, shall, at the time as of which any determination
is being made, be owned by such Person either directly or through Subsidiaries.
"Substantial Part" means, as of any date, assets (i) having a net book
----------------
value equal to or in excess of 15% of the consolidated assets of the Company and
its Subsidiaries (determined in accordance with GAAP) or (ii) which have
provided 15% or more of Consolidated Net Earnings in any of the three most
recent fiscal years of the Company.
"Taxes" means, as to any Person, any present or future income, stamp or
-----
other taxes, levies, imposts, duties, charters, fees, deductions or
withholdings, of every kind and nature, now or hereafter imposed, levied,
collected, withheld or assessed by any Governmental Authority, including net
income and franchise taxes.
"Third Party Documents" means the Purchase Agreement, the School Management
---------------------
Agreement and the Senior Loan Documents.
"Title IV" means Chapter 28, Subchapter IV of the Higher Education Act of
--------
1965, as amended, 20 U.S.C.A. Section 1070, and any amendments or successor
statutes thereto.
75
"Trademarks" means, as to any Person, all of such Person's right, title and
----------
interest in and to all of its now owned or existing and filed, and hereafter
acquired or arising and filed, trademarks, service marks, trademark or service
▇▇▇▇ registrations, trade names, trademark rights, trade name rights and
trademark or service ▇▇▇▇ applications, and (a) the reissues, divisions,
continuations, renewals, extensions and continuations-in-part thereof, (b) all
income, royalties, damages and payments now or hereafter due and/or payable with
respect thereto, including, without limitation, damages and payment for past or
future infringements thereof, (c) the right to ▇▇▇ for past, present and future
infringements thereof, (d) all rights corresponding thereto throughout the
world, (e) all rights as licensor or licensee with respect to any of the
foregoing, and (f) together in each case with the goodwill of such Person's
business connected with the use of, and symbolized by any of the foregoing.
"Transaction Documents" means this Agreement, the Warrants, the Penalty
---------------------
Warrants, the Warrant Certificates, the Penalty Warrant Certificates, the
Certificate of Designations, the Stockholders Agreement, the Registration Rights
Agreement, the Guaranty Agreement, the Purchase Agreement, the School Management
Agreement and the Senior Loan Documents.
"United States" or "U.S." means the United States of America.
------------- ----
"Unrelated Person" means any Person other than (i) a Person that, on the
----------------
date of this Agreement, owns, directly or indirectly, any shares of any class of
common stock of the Company, and (ii) an Affiliate of a Person specified in
clause (i).
"Warrant Certificates" shall have the meaning set forth in Section 1
--------------------
hereof.
"Warrants" shall have the meaning set forth in Section 1 hereof.
--------
76
"Weighted Average Life to Maturity" means, when applied to any Debt at any
---------------------------------
date, the number of years obtained by dividing (a) the then outstanding
principal amount of such Debt into (b) the sum of all products obtained by
multiplying (i) the amount of each then remaining installment, sinking fund,
serial maturity or other required payment of principal, including payment at
final maturity, in respect thereof, by (ii) the number of years (calculated to
the nearest 1/12th) which will elapse between such date and the making of such
payment.
"Wholly-Owned Subsidiary" means any Subsidiary of which 100% of the total
-----------------------
voting power of shares of stock entitled to vote in the election of directors,
managers or trustees thereof (other than directors' qualifying shares) is at the
time owned or controlled, directly or indirectly, by any Person or one or more
of the other Subsidiaries of that Person or a combination thereof.
11. MISCELLANEOUS.
-------------
11.1 PAYMENTS. The Company agrees that, so long as any Electra
--------
entity shall hold any Securities, it will make payments in respect of such
Securities, in compliance with the terms of this Agreement and the other
Transaction Documents, by wire transfer of immediately available funds for
credit to the account set forth on Schedule 1 opposite such Electra entity's
----------
name, or to such other account or accounts as such Electra entity may designate
in writing, notwithstanding any contrary provision herein or in any Transaction
Document with respect to the place of payment. The Company agrees to afford the
benefits of this Section 11.1 to any transferee which shall have made the same
agreements as Electra has made in this Section 11.1.
------------
11.2 EXPENSES; INDEMNITY. (a) The Company hereby agrees, whether or
-------------------
not the transactions hereby contemplated shall be consummated, to pay, and
save any holder harmless against liability for the payment of, the costs and
expenses incurred by such holder, including, without limitation, the fees and
disbursements of special counsel engaged by the Significant Holders, on behalf
of Electra and any subsequent holder of Securities, in connection with (i) this
Agreement, the Warrants, the Series C Preferred Stock, the other Transaction
Documents or the trans-
77
actions contemplated hereby or thereby, (ii) any subsequent proposed amendment
to, modification of, or proposed consent under, whether or not such proposed
modification shall be effected or proposed consent granted, and (iii) the costs
and expenses, including attorney's fees, incurred by Electra or any subsequent
holder of the Securities in enforcing its rights under any of this Agreement,
the Warrants, the Series C Preferred Stock or any other Transaction Document
(other than the Third Party Documents) or in responding to any subpoena or other
legal process issued in connection with this Agreement or the other Transaction
Documents or the transactions contemplated hereby or by reason of Electra's or
any subsequent holder's of the Securities having acquired any Security,
including without limitation, costs and expenses incurred in any bankruptcy case
involving the Company or any of its Subsidiaries; provided, however, that the
-------- -------
Company shall not be obligated to pay any costs, fees or expenses incurred by
any holder solely by reason of such holder's gross negligence or willful
misconduct. The obligations of the Company under this Section 11.2 shall survive
the transfer of any Securities or portion thereof or interest therein by Electra
or any subsequent holder of the Securities and the redemption of the Preferred
Shares.
(b) Notwithstanding any investigation performed by Electra prior to
the Closing, from and after the Closing the Company shall indemnify, save and
hold harmless, release and discharge each holder of any Securities and all of
its officers, directors, stockholders, agents, representatives, consultants,
employees, and Affiliates, and all of its heirs, successors and permitted
assigns from and against any and all damages, obligations, losses, claims,
deficiencies, penalties, interest, expenses, fines, assessments, charges and
costs (including attorneys' fees and court costs) and other liabilities of any
kind, including, without limitation, Environmental Liabilities (collectively,
"Damages"), arising from, out of or in any manner connected with or based on (i)
notwithstanding any disclosure in this Agreement (including the exhibits and
schedules attached hereto) or otherwise, the breach of any covenant of the
Company or the failure by the Company to perform any of its obligations
contained herein or in any of the agreements, documents or instruments required
to be executed and delivered by the Company
78
in connection with the transactions contemplated hereby and in the other
Transaction Documents, (ii) any inaccuracy in or breach of any representation or
warranty of the Company under this Agreement or any agreement, document or
instrument required to be executed and delivered by the Company in connection
with the transactions contemplated hereby and in the other Transaction
Documents, (iii) notwithstanding any disclosure in this Agreement (including the
exhibits and schedules attached hereto) or otherwise, any and all acts,
omissions, events, conditions or circumstances involving or related to the
assets, properties, businesses, operations or activities of the Company, any of
its Subsidiaries or any predecessor of any thereof, whether occurring or
existing on, prior to or after the Closing, except if any such Damages arise
solely as a result of Electra's gross negligence or willful misconduct and (iv)
any of the items disclosed in Schedule 8.12.
-------------
11.3 CONSENT TO AMENDMENTS; SUBORDINATION. (a) This Agreement may be
------------------------------------
amended and the Company may take any action herein prohibited, or omit to
perform any act herein required to be performed by it, only if the Company shall
have obtained the written consent to such amendment, action or omission to act,
of the holders of sixty-six and two-thirds (66 2/3%) of the number of shares of
Series C Preferred Stock at the time outstanding, and each holder of any shares
of Series C Preferred Stock at the time or thereafter outstanding shall be bound
by any consent authorized by this Section 11.3. No course of dealing between the
Company and the holder of any share of Series C Preferred Stock nor any delay in
exercising any rights hereunder or under any share of Series C Preferred Stock
shall operate as a waiver of any rights of any holder of such shares of Series C
Preferred Stock. As used herein, the term "this Agreement" and references
--------------
thereto shall mean this Agreement as it may from time to time be amended or
supplemented.
(b) Once the Preferred Shares have been redeemed in full, this
Agreement may be amended and the Company may take any action herein prohibited,
or omit to perform any act herein required to be performed by it, only if the
Company shall have obtained the written consent to such amendment, action or
omission to act, of the holders of 51% of the then outstanding
79
Warrants, and each holder of Warrants at the time or thereafter outstanding
shall be bound by any consent authorized by this paragraph 11.3.
(c) Electra and the Company agree that, prior to the Company's taking
any action prohibited by Section 6 above, the Company will deliver to the
holders of the Warrants and/or shares of Series C Preferred Stock, as the case
may be, a written notice (the "Company Notice") setting forth in reasonable
detail the proposed action to be taken by the Company or any of its
Subsidiaries. Unless the Company receives written authorization from the
percentage of holders of Preferred Shares or the Warrants, as the case may be,
required for consent in paragraphs (a) and (b) above by the 20th Business Day
after delivery of the Company Notice, the Company may not proceed with the
proposed action set forth in the Company Notice.
11.4 PERSONS DEEMED OWNERS. Prior to due presentment for
---------------------
registration of transfer, the Company may treat the Person in whose name any
shares of Series C Preferred Stock is registered as the owner and holder of such
shares of Series C Preferred Stock for the purpose of receiving payment of the
liquidation value of, and dividends on, such shares and for all other purposes
whatsoever.
11.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES; ENTIRE AGREEMENT.
------------------------------------------------------------
All representations and warranties contained herein and under the other
Transaction Documents or made in writing by or on behalf of the Company in
connection herewith or therewith or in connection with the transactions
contemplated hereby or thereby shall survive the execution and delivery of this
Agreement and the Securities, the transfer by Electra of any Securities or
portion thereof or interest therein, or the repurchase or redemption of the
Securities and may be relied upon by any transferee regardless of any
investigation made at any time by or on behalf of Electra or any subsequent
Significant Holder; provided, however, that the representations and warranties
-------- -------
set forth in any Transaction Document shall survive only for such period of time
specifically set forth in such Transaction Document to the extent that a shorter
period is set forth therein. Subject to the preceding sentence, this Agreement,
the
80
Securities and the other Transaction Documents embody the entire agreement
and understanding among Electra, the Company and supersede all prior agreements
and understandings relating to the subject matter hereof.
11.6 SUCCESSORS AND ASSIGNS. All covenants and other agreements in
----------------------
this Agreement contained by or on behalf of any of the parties hereto shall bind
and inure to the benefit of the respective successors and assigns of the parties
hereto (including, without limitation, any subsequent Significant Holder and
Electra) whether so expressed or not.
11.7 NOTICES. All written communications provided for hereunder
-------
shall be sent by first class mail or nationwide overnight delivery service
(with charges prepaid) and (i) if to Electra, addressed to it at ▇▇ ▇▇▇▇▇▇▇▇,
▇▇▇▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇ ▇▇▇, Telecopier No.: 011-4471-242-1806, Attention: ▇▇.
▇▇▇▇▇▇ ▇▇▇▇, with a copy to Electra Inc., ▇▇ ▇▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇ ▇▇▇▇, ▇▇▇
▇▇▇▇ ▇▇▇▇▇, Telecopier No.: ▇▇▇-▇▇▇-▇▇▇▇, Attention: ▇▇. ▇▇▇▇▇ ▇. ▇▇▇▇▇, Senior
Vice President, with copies to Pryor, Cashman, ▇▇▇▇▇▇▇ & ▇▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇,
▇▇▇ ▇▇▇▇, ▇▇▇ ▇▇▇▇ ▇▇▇▇▇, Telecopier No.: 212-326-0806, Attention: ▇▇▇▇▇ ▇.
▇▇▇▇▇, Esq., or to such other address or addresses as Electra shall have
specified to the parties hereto in writing, (ii) if to any other holder of any
shares of Series C Preferred Stock, addressed to such holder at such address as
such other holder shall have specified to the Company in writing or, if any such
other holder shall not have so specified an address to the Company, then
addressed to such other holder in care of the last holder of such share of
Series C Preferred Stock which shall have so specified an address to the
Company, and (iii) if to the Company, addressed to it at Career Education
Corporation, ▇▇▇▇ ▇. ▇▇▇▇▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇, ▇▇▇▇▇▇▇ ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇,
Telecopier No.: (▇▇▇) ▇▇▇-▇▇▇▇, Attention: President, with a copy to: ▇'▇▇▇▇▇▇
and ▇▇▇▇▇▇, ▇▇ ▇▇▇▇▇ ▇▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇ ▇▇▇▇, ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇ ▇▇▇▇▇,
Telecopier No.: (▇▇▇) ▇▇▇-▇▇▇▇, Attention: ▇▇▇▇▇▇▇ ▇. ▇▇▇▇▇▇▇, Esq., and with a
copy to ▇▇▇▇▇▇ Equity Capital Corp., ▇▇▇ ▇▇▇▇ ▇▇▇▇▇▇ ▇▇▇▇▇▇, ▇▇▇▇▇▇▇, ▇▇▇▇▇▇▇▇
▇▇▇▇▇, Telecopier No.: (▇▇▇) ▇▇▇-▇▇▇▇, Attention: ▇▇▇▇ ▇. ▇▇▇▇▇▇, or to such
other address or addresses as the Company may have designated in writing to each
holder of the Securities at the time outstanding.
81
11.8 DESCRIPTIVE HEADINGS, ETC. The descriptive headings of the
-------------------------
several Sections of this Agreement are inserted for convenience only and do not
constitute a part of this Agreement. References herein to a Section are, unless
otherwise specified, to one of the Sections of this Agreement and references
to an "Exhibit" or "Schedule" are, unless otherwise specified, to one of the
------- --------
Exhibits or Schedules to this Agreement.
11.9 GOVERNING LAW; CHOICE OF FORUM. THIS AGREEMENT SHALL BE DEEMED
------------------------------
TO HAVE BEEN EXECUTED AND DELIVERED AT AND SHALL BE DEEMED TO HAVE BEEN MADE IN
NEW YORK, NEW YORK. THIS AGREEMENT, AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES HEREUNDER SHALL BE CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE
SUBSTANTIVE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO ANY
CONFLICTS OF LAW RULES OR PRINCIPLES) AND THE RIGHTS AND OBLIGATIONS OF THE
PARTIES UNDER THE SERIES C PREFERRED STOCK SHALL BE CONSTRUED IN ACCORDANCE WITH
AND BE GOVERNED BY THE SUBSTANTIVE LAWS OF THE STATE OF DELAWARE (WITHOUT GIVING
EFFECT TO ANY CONFLICTS OF LAW RULES OR PRINCIPLES). ANY LEGAL ACTION OR
PROCEEDING WITH RESPECT HERETO AND THERETO SHALL ONLY BE BROUGHT IN THE COURTS
OF THE UNITED STATES OF AMERICA FOR THE SOUTHERN DISTRICT OF NEW YORK, AND, BY
EXECUTION AND DELIVERY OF THIS AGREEMENT, THE COMPANY HEREBY ACCEPTS FOR ITSELF
AND IN RESPECT OF ITS PROPERTY, GENERALLY AND UNCONDITIONALLY, THE JURISDICTION
OF THE AFORESAID COURTS AND IRREVOCABLY WAIVES ANY DEFENSE OR CLAIM TO SUCH
JURISDICTION WHICH EITHER OR BOTH MAY HAVE BASED, DIRECTLY OR INDIRECTLY, ON THE
GROUNDS OF FORUM NON CONVENIENS. IF ANY ACTION IS COMMENCED IN ANY OTHER
JURISDICTION, THE PARTIES HERETO HEREBY CONSENT TO THE REMOVAL OF SUCH ACTION
TO THE SOUTHERN DISTRICT OF NEW YORK. THE COMPANY HEREBY IRREVOCABLY DESIGNATES
CT CORPORATION SYSTEM, AS THE DESIGNEE, APPOINTEE AND AGENT, OF THE COMPANY TO
RECEIVE, FOR AND ON BEHALF OF THE COMPANY, SERVICE OF PROCESS IN SUCH RESPECTIVE
JURISDICTIONS IN ANY LEGAL ACTION OR PROCEEDING WITH RESPECT TO THIS AGREEMENT
OR THE RIGHTS AND OBLIGATIONS HEREUNDER OR THEREUNDER OR UNDER THE SERIES C
PREFERRED STOCK AND SUCH SERVICE SHALL BE DEEMED COMPLETED UPON DELIVERY THEREOF
TO SUCH AGENT. IT IS UNDERSTOOD THAT A COPY OF SUCH PROCESS SERVED ON SUCH AGENT
WILL BE PROMPTLY FORWARDED BY MAIL TO THE COMPANY AT ITS ADDRESS SET FORTH IN
SECTION 11.7, BUT THE FAILURE OF THE COMPANY TO RECEIVE
82
SUCH COPY SHALL NOT AFFECT IN ANY WAY THE SERVICE OF SUCH PROCESS. THE COMPANY
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 THE COMPANY AT ITS
ADDRESS, SUCH SERVICE TO BECOME EFFECTIVE 30 DAYS AFTER SUCH MAILING. NOTHING
HEREIN SHALL AFFECT THE RIGHT OF ELECTRA, OR ANY HOLDER OF ANY OF THE SECURITIES
TO SERVE PROCESS IN ANY OTHER MANNER PERMITTED BY LAW OR COMMENCE LEGAL
PROCEEDINGS OR OTHERWISE PROCEED AGAINST THE COMPANY IN ANY OTHER JURISDICTION.
11.10 WAIVER OF JURY TRIAL. THE COMPANY AND ELECTRA HEREBY WAIVE
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THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED
UPON OR ARISING OUT OF THIS AGREEMENT OR ANY DEALINGS BETWEEN THEM RELATING TO
THE SUBJECT MATTER OF THIS AGREEMENT AND THE TRANSACTIONS CONTEMPLATED HEREBY
AND THE RELATIONSHIP THAT IS BEING ESTABLISHED HEREUNDER. THE COMPANY AND
ELECTRA ALSO WAIVE ANY BOND OR SURETY OR SECURITY UPON SUCH BOND WHICH MIGHT,
BUT FOR THIS WAIVER, BE REQUIRED OF THE OTHER PARTIES. THE SCOPE OF THIS WAIVER
IS INTENDED TO BE ALL-ENCOMPASSING OF ANY AND ALL DISPUTES THAT MAY BE FILED IN
ANY COURT AND THAT RELATE TO THE SUBJECT MATTER OF THIS AGREEMENT, INCLUDING,
WITHOUT LIMITATION, CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL
OTHER COMMON LAW AND STATUTORY CLAIMS. THE COMPANY AND ELECTRA ACKNOWLEDGE THAT
THIS WAIVER IS A MATERIAL INDUCEMENT TO ENTER INTO A BUSINESS RELATIONSHIP, THAT
EACH HAS ALREADY RELIED ON THE WAIVER IN ENTERING INTO THIS AGREEMENT AND THAT
EACH WILL CONTINUE TO RELY ON THE WAIVER IN THEIR RELATED FUTURE DEALINGS. THE
COMPANY AND ELECTRA FURTHER WARRANT AND REPRESENT THAT EACH HAS REVIEWED THIS
WAIVER WITH ITS LEGAL COUNSEL, AND THAT EACH KNOWINGLY AND VOLUNTARILY WAIVES
ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL COUNSEL. THIS WAIVER IS
IRREVOCABLE, MEANING THAT IT MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING,
AND THE WAIVER SHALL APPLY TO ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS
OR MODIFICATIONS TO THIS AGREEMENT OR TO ANY OTHER DOCUMENTS OR AGREEMENTS
RELATING TO THE TRANSACTIONS CONTEMPLATED HEREBY. IN THE EVENT OF LITIGATION,
THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
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IN WITNESS WHEREOF, the Company and Electra have caused this Agreement to
be executed by its duly authorized officer as of the date first above written.
CAREER EDUCATION CORPORATION
By: /s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇
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Name: ▇▇▇▇ ▇. ▇▇▇▇▇▇
Title: President
ELECTRA INVESTMENT TRUST P.L.C.
By: /s/ ▇▇▇▇ ▇. ▇▇▇▇▇▇▇
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Name: ▇▇▇▇ ▇. ▇▇▇▇▇▇▇
Title: Director
ELECTRA ASSOCIATES, INC.
By: /s/ ▇.▇. ▇▇▇▇▇
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Name: ▇.▇. ▇▇▇▇▇
Title: Director
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