-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Pi0BeUPyrYgNaL/DzH7gF2QTlM0+TVhHcymogNnSP0mwCKXZnGY4YfAcNp3P7ctS 2BW7gPmYF/o6dX0TVeHvBw== 0000927016-02-002034.txt : 20020416 0000927016-02-002034.hdr.sgml : 20020416 ACCESSION NUMBER: 0000927016-02-002034 CONFORMED SUBMISSION TYPE: S-4 PUBLIC DOCUMENT COUNT: 12 FILED AS OF DATE: 20020411 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ARISTOTLE CORP CENTRAL INDEX KEY: 0000790071 STANDARD INDUSTRIAL CLASSIFICATION: SURGICAL & MEDICAL INSTRUMENTS & APPARATUS [3841] IRS NUMBER: 061165854 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: S-4 SEC ACT: 1933 Act SEC FILE NUMBER: 333-86026 FILM NUMBER: 02608106 BUSINESS ADDRESS: STREET 1: 27 ELM STREET CITY: NEW HAVEN STATE: CT ZIP: 06510 BUSINESS PHONE: 2038674090 MAIL ADDRESS: STREET 1: 27 ELM STREET CITY: NEW HAVEN STATE: CT ZIP: 06510 FORMER COMPANY: FORMER CONFORMED NAME: FFB CORP DATE OF NAME CHANGE: 19880523 FORMER COMPANY: FORMER CONFORMED NAME: FIRST CONSTITUTION FINANCIAL CORP DATE OF NAME CHANGE: 19920703 S-4 1 ds4.txt FORM S-4 As filed with the Securities and Exchange Commission on April 11, 2002 Registration No. 333- ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM S-4 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ----------------- THE ARISTOTLE CORPORATION (Exact name of registrant as specified in its charter) ----------------- Delaware 3841 06-1165854 (State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or organization) Classification Code Number) Identification No.)
27 Elm Street New Haven, Connecticut 06510 (203) 867-4090 (Address, including zip code, and telephone number, including area code, of registrant's principal executive offices) ----------------- John J. Crawford Chief Executive Officer, President and Chairman of the Board The Aristotle Corporation 27 Elm Street New Haven, Connecticut 06510 (203) 867-4090 (Name, address, including zip code, and telephone number, including area code, of agent for service) ----------------- Copies to: Stanford N. Goldman, Jr., Esq. Steven B. Lapin Ezra G. Levin, Esq. Alex Seldin, Esq. President Kramer Levin Naftalis & Mintz, Levin, Cohn, Ferris, Glovsky Geneve Corporation Frankel LLP and Popeo, P.C. 96 Cummings Point Road 919 Third Avenue One Financial Center Stamford, Connecticut 06902 New York, New York Boston, MA 02111 (203) 358-8000 (212) 715-9100 (617) 542-6000
----------------- Approximate date of commencement of proposed sale of the securities to the public: As soon as practicable after this Registration Statement becomes effective and all other conditions to the proposed merger of Nasco International, Inc. with and into the Registrant described in the enclosed proxy statement-prospectus have been satisfied or waived. If any of securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 other than securities offered only in connection with dividend or interest reinvestment, check the following box. [X] If the securities being registered on this Form are being offered in connection with the formation of a holding company and there is compliance with General Instruction G, check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] CALCULATION OF REGISTRATION FEE ================================================================================
Proposed maximum Proposed maximum Amount of Amount to be offering price per aggregate offering registration Title of each class of securities to be registered registered share price fee(7) - -------------------------------------------------- ------------ ------------------ ------------------ ------------ Common stock, $0.01 par value per share.......... 15,000,000(1) N/A $13,926,800(4) $1,281.27(4) Series I $6.00 convertible voting cumulative 11% preferred stock, $0.01 par value per share...... 1,285,482(2) $6.00 $ 7,712,892(5) $ 709.59 Common Stock, $0.01 par value per share.......... 1,114,000(3) N/A N/A(6) N/A
================================================================================ (1)Based upon the number of shares of common stock of the Registrant that may be issued to the sole holder of Nasco common stock in connection with the merger described herein. (2)Based upon the estimated maximum number of shares of Series I preferred stock of the Registrant that may be issued to holders of Aristotle common stock pursuant to a dividend to be issued immediately prior to the closing of the merger, excluding shares of Series I preferred stock to be issued to Geneve Corporation. (3)Based upon the estimated maximum number of shares of common stock of the Registrant that may be issued upon conversion of the shares of Series I preferred stock, including the conversion of accrued but unpaid dividends pursuant to the terms of the Series I preferred stock. (4)Estimated solely for purposes of calculating the registration fee required by Section 6(b) of the Securities Act of 1933, as amended, and computed pursuant to Rule 457(f) thereunder. Under Rule 457(f)(2) of the Securities Act, the proposed maximum offering price is based on the book value of Nasco common stock computed as of December 31, 2001. (5)Estimated solely for purposes of calculating the registration fee required by Section 6(b) of the Securities Act and computed pursuant to Rule 457(e) thereunder. The proposed maximum offering price is based on a stated value of $6.00 per share of Series I preferred stock. (6)No filing fee is due pursuant to Rule 457(i) of the Securities Act. (7)A fee of $17,265 was previously paid by the Registrant pursuant to Rule 14a-6 under the Securities Exchange Act of 1934, as amended, in connection with the filing of the preliminary proxy materials included in this Registration Statement on February 8, 2002. Pursuant to Rule 457(b) under the Securities Act, such fee is being credited against the registration fee, and accordingly, no fee is being paid in connection with this Registration Statement. THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a), MAY DETERMINE. ================================================================================ [LOGO] The Aristotle Corporation To the Stockholders of The Aristotle Corporation ANNUAL MEETING OF STOCKHOLDERS--YOUR VOTE IS VERY IMPORTANT You are cordially invited to attend the annual meeting of stockholders of The Aristotle Corporation, which we will hold at a.m., eastern time, on , , 2002, at the New Haven Lawn Club, 193 Whitney Avenue, New Haven, Connecticut. The board of directors of The Aristotle Corporation has approved a merger agreement that will result in Nasco International, Inc. merging with Aristotle. Although Aristotle will be the surviving corporation and continue to be publicly held, Nasco is substantially larger and financially stronger than Aristotle. For example, Aristotle's annual revenues are approximately 5% of Nasco's annual revenues. In the merger, the sole shareholder of Nasco will receive 15,000,000 shares of Aristotle common stock and 10,000,000 shares of Aristotle Series J $6.00 non-voting cumulative 12% preferred stock, par value $0.01 per share. The board of directors of Aristotle will declare a dividend on the date of the closing of the merger so that each holder of Aristotle common stock on the date of the merger will receive one share of Aristotle Series I $6.00 convertible voting cumulative 11% preferred stock, par value $0.01 per share. In addition, Aristotle and Geneve, Nasco's indirect parent, have entered into an exchange agreement providing that immediately after the merger, Geneve will exchange its shares of Series I preferred stock for an identical number of shares of Series J preferred stock. As a result of these actions, Geneve, which currently owns approximately 51% of Aristotle's outstanding common stock, will be the beneficial owner of approximately 90% of Aristotle's voting stock after the merger. Following the merger, you will continue to own whatever shares of Aristotle common stock you owned prior to the merger plus an identical number of shares of Series I preferred stock. For example, if you own 1,000 shares of Aristotle common stock prior to the merger, after the merger you will own 1,000 shares of common stock and 1,000 shares of Series I preferred stock, which will have a stated value of $6.00 and accrue dividends at an annual rate of 11%. The board of directors of Aristotle has approved and adopted the merger agreement and declared its advisability and recommends that the stockholders of Aristotle vote FOR the merger agreement. The affirmative vote of stockholders of at least two-thirds of the shares of Aristotle common stock outstanding as of the record date and a majority of the shares of Aristotle common stock present or represented and voting at the annual meeting, excluding shares held by Geneve, is required to approve the merger agreement. In connection with and contingent upon the merger, the board of directors of Aristotle has also approved an amendment and restatement of Aristotle's certificate of incorporation and the adoption of Aristotle's 2002 Stock Plan and recommends that its stockholders vote FOR these proposals. Since Geneve currently owns approximately 51% of Aristotle's outstanding common stock, approval of each of these proposals is essentially assured. Further, with regard to proposals to be considered as part of Aristotle's annual meeting, the stockholders of Aristotle will be asked to elect three persons to the board of directors of Aristotle. The Aristotle board of directors recommends that stockholders vote FOR this proposal. In addition, any other business as may properly come before the annual meeting will be transacted. At the annual meeting, the stockholders of Aristotle will be asked to vote on these proposals, including the approval of the merger agreement. Only stockholders of record who hold shares of Aristotle common stock at the close of business on , 2002, the record date for the annual meeting, will be entitled to vote at the annual meeting of Aristotle stockholders. A list of stockholders entitled to vote will be kept at the offices of Aristotle, 27 Elm Street, New Haven, Connecticut 06510. Aristotle common stock is listed on The Nasdaq SmallCap Market under the trading symbol "ARTL". We urge you to read this entire document, including the section describing risk factors that begins on page 19. It is important that your shares be represented and voted at the annual meeting, whether or not you are able to attend. If you do not return your proxy card, you will in effect be voting against approval of the merger agreement. Your vote is very important, regardless of the number of shares you own. Therefore, please complete, sign and return the enclosed proxy card as soon as possible to make sure that your shares are represented at the meeting. I support this merger and join with the Aristotle board of directors in recommending that you vote in favor of the merger agreement and the other proposals to be voted on at the annual meeting. /s/ JOHN J. CRAWFORD John J. Crawford Chairman, Chief Executive Officer and President The Aristotle Corporation Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the securities to be issued in connection with the merger or determined if this proxy statement-prospectus is accurate or complete. Any representation to the contrary is a criminal offense. This proxy statement-prospectus is dated , 2002, and is first being mailed to stockholders of Aristotle on or about , 2002. ADDITIONAL INFORMATION This proxy statement-prospectus incorporates important business and financial information about Aristotle from other documents that are not included in or delivered with this proxy statement-prospectus. This information is available to you without charge upon your written or oral request. You can obtain the documents incorporated by reference in this proxy statement-prospectus by requesting them in writing or by telephone from Aristotle at the following address: The Aristotle Corporation 27 Elm Street New Haven, Connecticut 06510 Attn: Investor Relations Telephone: (203) 867-4090 If you would like to request any documents, please do so by , 2002 in order to receive them before the annual meeting. See "Where You Can Find More Information" beginning on page 116. This proxy statement-prospectus contains trademarks of Aristotle, Nasco and other companies. [LOGO] The Aristotle Corporation 27 Elm Street New Haven, Connecticut 06510 Notice of Annual Meeting of The Aristotle Corporation Stockholders , 2002 at a.m. To the Stockholders of The Aristotle Corporation: Notice is hereby given that the annual meeting of stockholders of The Aristotle Corporation will be held on , , 2002 at a.m. local time at the New Haven Lawn Club, 193 Whitney Avenue, New Haven, Connecticut for the following purposes: 1. To consider and vote upon the approval of the merger agreement among Aristotle, Geneve Corporation, Nasco Holdings, Inc. and Nasco International, Inc. providing for the merger of Nasco into Aristotle and, in conjunction with the merger, the filing of a second amended and restated certificate of incorporation of Aristotle that incorporates certain corporate governance changes. 2. To consider and vote upon a proposal to amend and restate Aristotle's certificate of incorporation, so as to, among other things, authorize additional shares of Aristotle common stock, authorize and set forth the rights of the Series I preferred stock and the Series J preferred stock, shares of which are to be issued under the terms of the merger agreement, and provide that Aristotle may indemnify its directors, officers and agents to the fullest extent allowed under Delaware General Corporation Law. 3. To consider and vote upon a proposal to adopt Aristotle's 2002 Stock Plan. 4. To consider and vote upon a proposal to elect three directors for three-year terms and until their successors are duly elected and qualified. 5. To transact any other business as may properly come before the annual meeting or any adjournment or postponement of the annual meeting. These items of business are described in the attached proxy statement-prospectus. Stockholders of record at the close of business on , 2002, the record date, are entitled to notice of, and to vote at, the annual meeting and any adjournments or postponements of the annual meeting. Your vote is very important, regardless of the number of shares you own. The merger cannot be completed unless the merger agreement is adopted by the affirmative vote of the holders of (i) at least two-thirds of the shares of Aristotle outstanding common stock as of the record date, and (ii) at least a majority of the shares of Aristotle common stock present or represented and voting at the annual meeting, excluding shares beneficially held by Geneve Corporation. Please vote as soon as possible to make sure that your shares are represented at the annual meeting. To vote your shares, you may complete and return the enclosed proxy card. If you are a holder of record, you may also cast your vote in person at the annual meeting. If your shares are held in an account at a brokerage firm or bank, you must instruct them on how to vote your shares. By Order of the Board of Directors, /s/ PAUL MCDONALD Paul M. McDonald Secretary New Haven, Connecticut , 2002 TABLE OF CONTENTS
Page ---- QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE ANNUAL MEETING.............................. 1 SUMMARY OF THE PROXY STATEMENT-PROSPECTUS.................................................. 5 The Companies........................................................................... 5 The Annual Meeting...................................................................... 6 Market Price Information................................................................ 7 The Merger.............................................................................. 7 Proposals for the Aristotle Annual Meeting.............................................. 14 Aristotle Selected Historical Consolidated Financial Data............................... 15 Nasco Selected Historical Consolidated Financial Data................................... 16 Summary of Unaudited Pro Forma Condensed Combined Financial Information................. 17 Unaudited Comparative Per Share Information............................................. 18 RISK FACTORS............................................................................... 19 Risks Relating to the Merger............................................................ 19 Risks Related to Series I Preferred Stock............................................... 20 Risks Related to the Business, Industry and Strategy of the Combined Company............ 21 THE ANNUAL MEETING......................................................................... 23 Proxy Statement-Prospectus.............................................................. 23 Date, Time and Place of the Annual Meeting.............................................. 23 Purposes of the Annual Meeting.......................................................... 23 Stockholder Record Date for the Annual Meeting.......................................... 23 Votes Required at the Annual Meeting.................................................... 23 Proxies................................................................................. 24 Revocation of Proxies................................................................... 24 Solicitation of Proxies................................................................. 25 MARKET PRICE AND DIVIDEND INFORMATION...................................................... 26 Market Price Information................................................................ 26 Dividend Information.................................................................... 26 THE MERGER................................................................................. 28 Structure of the Merger and Conversion of Nasco Stock................................... 28 Background of Merger.................................................................... 29 Nasco's Reasons for the Merger.......................................................... 31 Aristotle's Reasons for the Merger...................................................... 32 Recommendation of Aristotle's Board of Directors........................................ 34 Opinion of Aristotle's Financial Advisor................................................ 34 Interests of Aristotle Directors and Executive Officers in the Merger................... 42 Completion and Effectiveness of the Merger.............................................. 43 Effect of Merger on Aristotle's Stock Plans............................................. 43 Treatment of Nasco's Employees and Employee Benefits.................................... 43 Material United States Federal Income Tax Consequences of the Merger and Stock Dividend. 44 Accounting Treatment of the Merger...................................................... 45 Regulatory Matters...................................................................... 46 Appraisal Rights........................................................................ 46 Listing on The Nasdaq SmallCap Market of the Aristotle Series I Preferred Stock......... 46 The Merger Agreement.................................................................... 46 Restrictions on Sales of Shares of Aristotle Stock received by Nasco Holdings........... 56 Stockholders Agreements................................................................. 56 Exchange Agreement...................................................................... 57 Operations After the Merger............................................................. 57
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Page ---- MANAGEMENT OF ARISTOTLE FOLLOWING THE MERGER.............................................. 58 CHANGES TO ARISTOTLE'S CERTIFICATE OF INCORPORATION....................................... 60 RELATIONSHIP BETWEEN ARISTOTLE AND NASCO AND ITS AFFILIATES............................... 62 PRO FORMA FINANCIAL DATA.................................................................. 63 DESCRIPTION OF ARISTOTLE'S CAPITAL STOCK.................................................. 69 General................................................................................ 69 Aristotle Common Stock................................................................. 69 Aristotle Preferred Stock.............................................................. 69 Stockholders Agreement................................................................. 74 Aristotle Stockholder Rights Plan...................................................... 74 Transfer Agent and Registrar........................................................... 74 COMPARISON OF RIGHTS OF NASCO SHAREHOLDERS AND ARISTOTLE STOCKHOLDERS..................... 75 Capitalization......................................................................... 75 Voting Rights.......................................................................... 75 Number of Directors.................................................................... 76 Classification of Board of Directors................................................... 76 Removal of Directors................................................................... 76 Filling Vacancies on the Board of Directors............................................ 75 Amendments to the Charter.............................................................. 77 Amendments to the Bylaws............................................................... 77 Special Stockholder Meetings........................................................... 77 Action by Consent of Stockholders...................................................... 78 Limitation of Personal Liability of Directors.......................................... 78 Indemnification of Directors and Officers.............................................. 78 Change in Control and Anti-Takeover Provisions......................................... 79 Relevant Business Combination Provisions and Statutes.................................. 81 INFORMATION CONCERNING ARISTOTLE.......................................................... 82 Business............................................................................... 82 Subsequent Events...................................................................... 82 Certain Transactions................................................................... 82 Stock Owned by Management and Principal Stockholders of Aristotle as of April 1, 2002.. 84 Stock Owned by Management and Principal Stockholders of Aristotle Following the Merger. 85 Current Management..................................................................... 87 Executive Compensation................................................................. 90 Report of Audit Committee.............................................................. 92 Section 16(A) Beneficial Ownership Reporting Compliance................................ 92 INFORMATION CONCERNING NASCO.............................................................. 93 Business............................................................................... 93 Management's Discussion And Analysis Of Financial Condition And Results Of Operations.. 100 PROPOSALS FOR THE ANNUAL MEETING.......................................................... 107 Approval of the Merger Agreement....................................................... 107 Amendment and Restatement of Aristotle's Certificate of Incorporation.................. 108 Adoption of Aristotle's 2002 Stock Plan................................................ 109 Election of Directors.................................................................. 114 LEGAL MATTERS............................................................................. 115 EXPERTS................................................................................... 115 STOCKHOLDER PROPOSALS..................................................................... 115 WHERE YOU CAN FIND MORE INFORMATION....................................................... 116 STATEMENTS REGARDING FORWARD-LOOKING INFORMATION.......................................... 117 OTHER MATTERS............................................................................. 119
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INDEX TO FINANCIAL STATEMENTS ANNEX A -- Agreement and Plan of Merger ANNEX B -- The Aristotle Corporation's Amended and Restated Certificate of Incorporation (to be filed prior to merger) ANNEX C -- Opinion of Duff & Phelps, LLC ANNEX D -- The Aristotle Corporation 2002 Employee, Director and Consultant Stock Plan ANNEX E -- The Aristotle Corporation's Annual Report on Form 10-K for the fiscal year ended June 30, 2001 and Amendment No. 1 to The Aristotle Corporation's Annual Report on Form 10-K/A for the fiscal year ended June 30, 2001 ANNEX F -- The Aristotle Corporation's Quarterly Report on Form 10-Q for the quarter period ended December 31, 2001 ANNEX G -- The Aristotle Corporation's Second Amended and Restated Certificate of Incorporation (to be filed with Certificate of Merger) ANNEX H -- The Charter of The Aristotle Corporation's Audit Committee
iii QUESTIONS AND ANSWERS ABOUT THE MERGER AND THE ANNUAL MEETING Q: What is the proposed merger transaction? A: Nasco International, Inc., a privately-held, indirect subsidiary of Geneve Corporation, will merge into Aristotle. Nasco is a substantially larger and financially stronger company than Aristotle. For example, for the twelve months ended December 31, 2001, Nasco had net sales of $162 million and operating income of $17 million while Aristotle had net sales of $9 million and operating income of $400,000. As a result, Nasco's current business will constitute most of Aristotle's business after the merger. However, Aristotle, a public company, will be the surviving corporation following the merger. Q: What will Aristotle stockholders, other than Geneve, own after the merger? A: Following the merger, each Aristotle stockholder will continue to own whatever shares of Aristotle common stock he or she owned prior to the merger plus an identical number of shares of Series I preferred stock. For example, if a stockholder owns 1,000 shares of Aristotle common stock prior to the merger, after the merger he or she will own 1,000 shares of common stock and 1,000 shares of Series I preferred stock, which will have a stated value of $6.00 and accrue dividends at an annual rate of 11%. In total, stockholders other than Geneve will own approximately 10% of the voting power of Aristotle after the merger and Geneve will control approximately 90%. Q: What is Nasco? A: Nasco is a manufacturer and global catalog-distribution company serving the education, health and agriculture markets. Nasco offers a selection of more than 65,000 items, including educational materials and supplies for substantially all kindergarten through twelfth grade curricula, agricultural supplies, molded plastics and biology materials. Nasco also provides educational and training product lines for the health care market, including medical and nursing schools and paramedic and emergency-care training. The latter group of products includes resuscitation manikins similar to those produced by Aristotle's subsidiary, Simulaids, Inc. Q: How will the proposed transaction work? A: Aristotle has approximately 1,931,581 shares of common stock outstanding as of April 1, 2002. Geneve owns approximately 51% of these shares and is the beneficial owner of Nasco. As consideration for the merger, Nasco Holdings will receive 15,000,000 shares of Aristotle common stock and 10,000,000 shares of Series J preferred stock. The Series J preferred stock will have a stated value of $6.00 per share and will accrue dividends at an annual rate of 12%. Aristotle will also issue, through a stock dividend on the date of closing of the merger, approximately 2,100,000 shares of Series I preferred stock to its stockholders. For each share of Aristotle common stock owned, a stockholder will receive one share of Series I preferred stock. The Series I preferred stock will have a stated value of $6.00 per share and will accrue dividends at an annual rate of 11%. For a three month period beginning on the fifth anniversary of the merger, the Series I preferred stock will be convertible into one-half share of Aristotle common stock per share of preferred stock, subject to adjustment. Aristotle and Geneve have entered into an exchange agreement providing that immediately after the merger, Geneve will exchange its shares of Series I preferred stock for an identical number of shares of Series J preferred stock. As a result of the merger and related transactions, Geneve will be the beneficial owner of approximately 90% of Aristotle's voting stock after the merger. Q. Why is Aristotle issuing a stock dividend to its stockholders consisting of one share of Series I preferred stock? A. The intended purpose of the Series I preferred stock dividend is to ensure a minimum value of $6.00 per share for the outstanding common stock of Aristotle by providing all Aristotle stockholders with a 1 security which is senior to the common stock, carries a dividend rate of 11% per annum and contains appropriate voting, liquidation and conversion rights. Such Series I preferred stock dividend will provide current income to non-Geneve stockholders and allow for conversion to Aristotle common stock in the future if the price of the common stock makes conversion attractive. Q. Why have Aristotle and Geneve entered into an exchange agreement under which Geneve will exchange, on the date of closing of the merger, its shares of Series I preferred stock for an identical number of shares of Series J preferred stock? A. Under the terms of the merger, as an Aristotle stockholder, Geneve will receive shares of Series I preferred stock which, pursuant to its terms (i) will have the right to vote, and (ii) will be convertible into Aristotle common stock five years after the effective date of the merger. Due to such rights underlying the Series I preferred stock, Geneve's ownership of the shares of Series I preferred stock may jeopardize the ability of Aristotle to utilize its net operating loss carryforwards against future income. By exchanging the Series I preferred stock for non-voting, non-convertible Series J preferred stock, Aristotle should not jeopardize its ability to utilize its net operating loss carryforwards against future income. Duff & Phelps LLC, Aristotle's financial advisor, believes the Series I and Series J preferred stock are each worth $6.00 per share. Q: When will the transaction occur? A: Each of Aristotle and Nasco is working to complete the merger as soon as practicable after approval by Aristotle stockholders at the annual meeting. In order for the merger to be completed, the specified conditions to closing set forth in the merger agreement must be satisfied or waived. Q: How will the market price of Aristotle common stock affect the timing of the merger? A: The merger will not be consummated unless certain conditions relating to the price and value of Aristotle common stock and Series I preferred stock are satisfied. One way in which these conditions may be satisfied is if the price of Aristotle common stock on the closing date does not exceed $9.00 per share and the value of Aristotle Series I preferred stock is determined to be at least $6.00 per share. These price and value conditions insure that the percentage of the value of the voting stock of Aristotle beneficially owned by Geneve does not increase by more than 50 percentage points during the 3-year period ending on the merger date and, therefore, the utilization of the net operating loss carryovers of Aristotle will not be limited. If this condition is waived and the failure to satisfy this condition has been material, Aristotle will recirculate the proxy statement-prospectus and resolicit proxies. Q: What are the tax consequences of the stock dividend and merger to me? A: The distribution of the stock dividend of one share of Series I preferred stock for each share of common stock you hold generally will be tax-free to you for federal income tax purposes. In the event that Aristotle has current earnings and profits for its tax year within which the distribution of the Series I stock dividend occurs, such Series I preferred stock will be treated as "section 306 Stock" for federal income tax purposes. Stock treated as "Section 306 Stock" is subject to special rules under the Internal Revenue Code relating to the sale, exchange, redemption or other disposition thereof. The merger will be treated as a tax-free reorganization to Aristotle and Nasco and their respective stockholders for federal income tax purposes and generally no gain or loss will be recognized by Aristotle or its stockholders as a result of the merger. Q: What are the terms of the Series I preferred stock? A: Each share of Series I preferred stock to be received by holders of Aristotle common stock has a stated value of $6.00 per share and accrues dividends at an annual rate of 11%. During a three-month period beginning on the fifth anniversary of the merger, shares of Series I preferred stock may be converted 2 into shares of Aristotle common stock at a ratio of one-half share of common stock for each share of Series I preferred stock, subject to adjustment. Aristotle's board of directors is not required to declare any dividend on the Series I preferred stock, but all accrued and unpaid dividends up to the fifth anniversary date may also be converted into Aristotle common stock upon conversion of the Series I preferred stock on which the dividends accrue. In addition, dividends may not be declared on Aristotle common stock or Series J preferred stock unless dividends are also declared and paid with respect to shares of Series I preferred stock. We do not expect a highly liquid market to develop for the Series I preferred stock. This conclusion is based on the low historical trading volume of Aristotle's common stock, the fact that there will be approximately as many shares of Series I preferred stock outstanding post-merger as there are unrestricted shares of common stock available for trade in the market (the float) currently, and in general, preferred stocks tend to trade less frequently than common stocks of the same company. The terms of the Series I preferred stock, such as its dividend rate and its conversion ratio, were established taking into consideration that there would not be a highly liquid market for this security. Q: What will happen to options to purchase Aristotle common stock? A: Upon the effective date of the merger, each option to purchase one share of Aristotle common stock under Aristotle's 1997 Employee and Director Stock Option Plan will become exercisable into one share of Aristotle common stock and one share of Aristotle Series I preferred stock. As a condition to closing the merger, holders of options to purchase Aristotle common stock granted under Aristotle's 1997 Plan must agree not to exercise options for a period of at least fifteen months following the effective date of the merger. Upon the effective date of the merger, Aristotle's 1986 Stock Plan will terminate and the outstanding options under this plan will become null and void. All holders of options to purchase Aristotle common stock under the 1986 Stock Option Plan may exercise their respective options prior to the effective date of the merger. Q: What do I need to do now? A: After carefully reading and considering the information contained in this proxy statement-prospectus, please respond by completing, signing and dating your proxy card or voting instructions and returning it in the enclosed postage-paid envelope as soon as possible so that your shares may be represented at the annual meeting. Q: What if I don't vote? A: If you fail to respond or you respond and abstain from voting, it will have the same effect as a vote against the merger agreement and amendment and restatement of Aristotle's certificate of incorporation. If you return your properly executed proxy and do not indicate how you want to vote, your proxy will be counted as a vote in favor of the merger agreement, amendment and restatement of Aristotle's certificate of incorporation and other proposals set forth in the enclosed proxy card. Q: If my shares of Aristotle common stock are held in street name by my broker, will my broker vote my shares for me? A: If you hold your shares of Aristotle common stock through a brokerage firm or bank, they may only vote your Aristotle common stock in accordance with your instructions with respect to the proposals to approve the merger agreement, to approve the amendment and restatement of Aristotle's certificate of incorporation and to adopt Aristotle's 2002 Stock Plan. If the broker does not timely receive your instructions, it may not vote your Aristotle common stock with respect to these proposals. Because (i) approval of the merger agreement requires the affirmative vote of the holders of at least two-thirds 3 of the shares of Aristotle outstanding common stock as of the record date and a majority of the shares of Aristotle common stock present or represented and voting at the annual meeting, excluding shares beneficially held by Geneve Corporation, and (ii) approval of Aristotle's amended and restated certificate of incorporation requires the affirmative vote of holders of at least a majority of the shares of Aristotle's common stock outstanding on the record date, broker non-votes, as well as abstentions and failures to vote, will have the same effect as a vote against approval of the merger agreement and amendment and restatement of Aristotle's certificate of incorporation. Broker non-votes, as well as abstentions and failures to vote, will have no effect on the proposal to adopt Aristotle's 2002 Stock Plan. With respect to the proposal to elect three directors for three-year terms, your broker will have discretion to vote your shares even if you do not provide instructions. Abstentions and failures to vote will have no effect on the proposal to elect three directors for three-year terms. Q: Can I change my vote after I have delivered my proxy? A: Yes. You can change your vote at any time before your proxy is voted at the annual meeting. You can do this in one of three ways. First, you can notify Aristotle that you would like to revoke your proxy. Second, you can submit a new proxy. If you choose either of these two methods, you must submit your notice of revocation or your new proxy to the Secretary of Aristotle before the annual meeting. If your shares are held in an account at a brokerage firm or bank, you should contact your brokerage firm or bank to change your vote. Third, you can attend the annual meeting and vote in person. Q: Who can help answer my questions? A: If you have any questions about the merger or how to submit your proxy, or if you need additional copies of this proxy statement-prospectus or the enclosed proxy card or voting instructions, you should contact: The Aristotle Corporation 27 Elm Street New Haven, Connecticut 06510 Attn: Investor Relations Telephone: (203) 867-4090 Q: When and where is the annual meeting? A: The annual meeting will take place at a.m., local time, on , 2002 at: New Haven Lawn Club 193 Whitney Avenue New Haven, Connecticut 4 SUMMARY OF THE PROXY STATEMENT-PROSPECTUS This summary highlights selected information in the proxy statement-prospectus and may not contain all of the information that is important to you. You should carefully read this entire proxy statement-prospectus and the other documents we refer to for a more complete understanding of the merger. In particular, you should read the documents attached to this proxy statement-prospectus, including the merger agreement and the amended and restated certificate of incorporation, which are attached as Annex A and Annex B, respectively. In addition, we incorporate by reference other important business and financial information about Aristotle into this proxy statement-prospectus. You may obtain the information incorporated by reference into this proxy statement-prospectus without charge by following the instructions in the section entitled "Where You Can Find More Information" that begins on page 118 of this proxy statement-prospectus. The proposed transaction provides for the merger of Nasco into Aristotle, resulting in a company approximately twenty times Aristotle's current revenue base. The combined company will provide products to the education and commercial markets, with particular focus on the kindergarten through twelfth grade educational sectors. The enhanced size will give Aristotle the benefits of operating as a larger company, with greater diversity of product offerings, depth of management experience and financial strength. The Companies The Aristotle Corporation 27 Elm Street New Haven, Connecticut 06510 (203) 867-4090 Aristotle's web site address is www.aristotlecorp.net. The information contained in the Aristotle web site is not incorporated by reference in this proxy statement-prospectus. Aristotle has included its web site address in this proxy statement-prospectus only as an inactive textual reference and does not intend it to be an active link to its web site. Aristotle is a holding company which, through the following subsidiaries, develops and manufactures health and medical education teaching aids and computer-based training products: . Simulaids, Inc., a wholly-owned subsidiary, primarily designs, manufactures and markets manikins and simulation kits used for training in cardiopulmonary resuscitation, emergency rescue and patient-care fields. Simulaids' products are sold throughout the United States and internationally via distributors and catalogs to end users such as fire and emergency medical departments and nursing and medical schools. . Safe Passage International, Inc., of which Aristotle owns 80% of the outstanding stock, develops and licenses computer-based training products to government and industry clients focused upon aviation security and general security industries. Nasco International, Inc. 901 Janesville Avenue P.O. Box 901 Fort Atkinson, Wisconsin 53538 (920) 563-2446 Nasco's web site address is www.enasco.com. The information contained in the Nasco web site is not incorporated by reference in this proxy statement-prospectus. Nasco has included its web site address in this proxy statement-prospectus only as an inactive textual reference and does not intend it to be an active link to its web site. Nasco is a manufacturer and global catalog-distribution company serving the education health and agriculture markets. Nasco offers a selection of more than 65,000 items in its various markets. 5 The Company's business activities are organized into two principal business segments. The educational segment, compromising approximately 80% of total net sales, and approximately 80% of gross profit for the year ended December 31, 2001, markets instructional teaching aids and materials to educational institutions nationwide, primarily for kindergarten through grade 12 classes. Nasco also provides educational and training product lines for the health care market, including medical and nursing schools and paramedic and emergency-care training. The latter group of products includes cardiopulmonary resuscitation manikins and senior care related products. The commercial segment is compromised of several commercial industries, including agriculture, sterile sampling containers and systems, nursing home activities and novelty and gift products. The Annual Meeting The Annual Meeting (see page 24) The annual meeting will be held at the New Haven Lawn Club, 193 Whitney Avenue, New Haven, Connecticut on , 2002, starting at a.m., local time. At the annual meeting, Aristotle will ask holders of its common stock to consider and vote upon proposals relating to the merger, including: . a proposal to approve the merger agreement including the filing of a second amended and restated certificate of incorporation that incorporates certain corporate governance changes; . a proposal to amend and restate Aristotle's certificate of incorporation; and . a proposal to adopt Aristotle's 2002 Stock Plan. Further, at the annual meeting, Aristotle will ask holders of its common stock to consider and vote upon proposals relating to other matters, including: . a proposal to elect three directors to Aristotle's board of directors; and . any other matters as may properly come before the annual meeting or any postponements or adjournments of the annual meeting. Votes Required (see page 24) The affirmative vote of the holders of (i) at least two-thirds of the shares of Aristotle common stock outstanding on the record date and (ii) a majority of the shares of Aristotle common stock present or represented and voting at the annual meeting, excluding shares held by Geneve Corporation, is required to approve the merger agreement including the filing of a second amended and restated certificate of incorporation that incorporates certain corporate governance changes. The affirmative vote of the holders of at least a majority of the shares of Aristotle common stock outstanding on the record date is required to approve the amendment and restatement of Aristotle's certificate of incorporation. Therefore, since Geneve currently owns approximately 51% of Aristotle's outstanding common stock and the approval of this proposal is necessary to complete the merger, approval of this proposal is essentially assured. The affirmative vote of the holders of at least a majority of the shares of Aristotle common stock outstanding on the record date, present or represented and voting, is required to approve the adoption of Aristotle's 2002 Stock Plan. Therefore, since Geneve currently owns approximately 51% of Aristotle's outstanding common stock and the approval of this proposal is necessary to complete the merger, approval of this proposal is essentially assured. The affirmative vote of a plurality of the votes cast for directors by the holders of the outstanding common stock, as of the record date, present and represented and voting at the annual meeting is required to elect the three directors to Aristotle's board of directors. As of April 1, 2002, the most recent practicable date, Aristotle's directors, executive officers and affiliates owned approximately 60% of the outstanding shares of Aristotle common stock, of which approximately 51% was held by Geneve and approximately 9% was held by all other directors, executive officers and their affiliates. 6 Recommendations of the Board of Directors (see page 34) Aristotle's board of directors believes that the following proposals are fair to you and in your best interest and recommends that you vote FOR the following proposals: . The proposal to approve the merger agreement that will result in Nasco merging with Aristotle including the filing of a second amended and restated certificate of incorporation that incorporates certain corporate governance changes. . The proposal to approve the amendment and restatement of Aristotle's certificate of incorporation. . The proposal to approve the adoption of Aristotle's 2002 Stock Plan. . The proposal to elect three directors for three-year terms and until their successors are duly elected and qualified. Market Price Information Aristotle common stock is listed on the Nasdaq SmallCap Market under the symbol "ARTL". On November 27, 2001, the last full trading day prior to the public announcement that Aristotle and Nasco had entered into the merger agreement, Aristotle common stock closed at $6.40 per share. Aristotle is unable to provide information with respect to the market prices of Aristotle's Series I preferred stock and Series J preferred stock because there are no shares of Series I preferred stock or Series J preferred stock currently outstanding, and therefore, there is no established trading market for those shares. Aristotle is unable to provide information with respect to the market price of Nasco stock because there is no established trading market for shares of Nasco stock. The Merger The Structure of the Merger (see page 28) The proposed transaction is a merger in which Nasco will merge with Aristotle. Although Aristotle will be the surviving corporation and continue to be publicly held, Nasco is substantially larger and financially stronger than Aristotle. For example, Aristotle's annual revenues are approximately 5% of Nasco's annual revenues. In the merger, the sole shareholder of Nasco will receive 15,000,000 shares of Aristotle common stock and 10,000,000 shares of Aristotle Series J $6.00 non-voting cumulative 12% preferred stock, par value $0.01 per share. The board of directors of Aristotle will declare a dividend payable on the date of the closing of the merger so that each holder of Aristotle common stock on a record date to be set by the board of directors will receive one share of Aristotle Series I $6.00 convertible voting cumulative 11% preferred stock, par value $0.01 per share. In addition, Aristotle and Geneve, Nasco's indirect parent, have entered into an exchange agreement providing that immediately after the merger, Geneve will exchange its shares of Series I preferred stock for an identical number of shares of Series J preferred stock. As a result of the merger and related transactions, Geneve, which currently owns approximately 51% of Aristotle's outstanding common stock, will be the beneficial owner of approximately 90% of Aristotle's voting stock after the merger. 7 The organization of the companies before and after the merger is illustrated below: [FLOW CHART] All percentages represent approximate voting rights. Opinion of Aristotle Financial Advisor (see page 34) In deciding to approve the merger, the Aristotle board of directors considered the opinion of its financial advisor, Duff & Phelps, LLC, that, as of the date of its opinion, based upon and subject to the factors and assumptions described in its opinion, the merger was fair from a financial point of view to Aristotle's stockholders, other than Geneve. The full text of this opinion is attached as Annex C to this proxy statement-prospectus. Aristotle urges its stockholders to read the opinion of Duff & Phelps, LLC in its entirety. Duff & Phelps' opinion is directed to the Aristotle board of directors and does not constitute a recommendation to any stockholders as to how such stockholders should vote with respect to the merger. Interests of Directors and Officers of Aristotle in the Merger (see page 42) Two of the directors of Aristotle, Edward Netter and Steven B. Lapin, are also principals of Nasco and have interests in the merger that are different from, or are in addition to, the interests of Aristotle's stockholders. Mr. Netter and his family own, directly or indirectly, all of the capital stock of Nasco and, therefore, will own, directly or indirectly, all of the shares of capital stock which will be received by the sole shareholder of Nasco in the merger. As of the closing, it is anticipated that Mr. Lapin will be appointed as Aristotle's President and Chief Operating Officer; in such event, Mr. Lapin will be compensated in that position as determined by the board of directors of Aristotle. Treatment of Nasco Employees and Employee Benefits (see page 43) Aristotle currently has no intention of terminating any employees of Nasco after completion of the merger. Aristotle has agreed that all employees of Nasco who continue employment will be eligible to participate in Aristotle's retirement, health, vacation and other non-equity-based employee benefit plans after the merger as well as any Nasco benefit plans that are continued after the merger. In addition, after the merger, Nasco employees will be eligible to participate in Aristotle's 2002 Stock Plan. 8 Accounting Treatment of the Merger (see page 45) The parties intend to account for the merger as a reverse acquisition using the purchase method of accounting under generally accepted principles and the rules and regulations of the Securities and Exchange Commission. Although under the terms of the merger, Nasco is merging with and into Aristotle and Aristotle will be the surviving legal entity, for accounting purposes Nasco will be deemed the acquiring company. Therefore, subsequent to the merger, any prior period financial information reported will be that of Nasco. Regulatory Approvals (see page 46) The merger is not subject to the filing and waiting-period requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Aristotle has filed a registration statement, of which this proxy statement-prospectus forms a part, with the Securities and Exchange Commission, in order to register: . the shares of Aristotle common stock that are being offered to Nasco's sole shareholder in the merger; . the shares of Aristotle Series I preferred stock that are being issued to the holders of Aristotle common stock through a stock dividend prior to the consummation of the merger, except that, the registration statement will not register shares of Series I preferred stock to be issued to Geneve; . the shares of Aristotle common stock to be issued upon the conversion of shares of Aristotle Series I preferred stock; and . the shares of Aristotle's Series I preferred stock to be issued upon exercise of options to purchase Aristotle common stock under Aristotle's 1997 Employee and Director Stock Plan. Appraisal Rights (see page 46) Aristotle. Under Delaware law, Aristotle stockholders are not entitled to appraisal rights in connection with the merger. Nasco. The sole holder of Nasco common stock has by written consent voted in favor of the merger and merger agreement. Therefore, under Wisconsin law, the shareholder is no longer entitled to appraisal rights in connection with the merger. The Merger Agreement (see page 46) The terms of the merger are set forth in the merger agreement dated November 27, 2001 executed by Aristotle, Nasco, Nasco Holdings, Inc. (Nasco's sole shareholder) and Geneve Corporation (Nasco Holdings, Inc.'s majority shareholder and, accordingly, Nasco's beneficial majority shareholder). Conditions to Completion of the Merger. Each of Aristotle's, Nasco's, Nasco Holdings' and Geneve's obligations to complete the merger are subject to the satisfaction or waiver of the following conditions before completion of the merger: . approval of the merger agreement at Aristotle's annual meeting by the affirmative vote of holders of at least two-thirds of the shares of Aristotle's outstanding common stock as of the record date and holders of a majority of the shares of Aristotle's outstanding common stock present or represented and voting at Aristotle's annual meeting, excluding shares beneficially held by Geneve; . the absence of any law, decree, order, injunction, proceeding or other legal restraint or prohibition prohibiting or seeking to prevent completion of the merger; 9 . as of the closing date of the merger but after the filing of Aristotle's amended and restated certificate of incorporation, the value of one share of Aristotle common stock must not exceed $3.00, which is to be determined by subtracting the value of one share of Aristotle Series I preferred stock from the price of one share of Aristotle common stock on the closing date. For this purpose, (A) the price of Aristotle common stock on the closing date will be the higher of (i) the mean between the highest and lowest sale price of Aristotle common stock on the Nasdaq Small Cap Market on the closing date, and (ii) the closing price of Aristotle common stock on the Nasdaq Small Cap Market on the closing date and (B) the value of one share of Aristotle Series I preferred stock on the closing date must not be less than $6.00. The value of Aristotle Series I preferred stock on the closing date will be as determined by Duff & Phelps, LLC or any other mutually satisfactory nationally recognized financial advisor. One way in which this condition may be satisfied is if the price of one share of Aristotle common stock on the closing date does not exceed $9.00 and the value of one share of Aristotle Series I preferred stock is determined to be at least $6.00. These price and value conditions insure that the percentage of the value of the voting stock of Aristotle beneficially owned by Geneve does not increase by more than 50 percentage points during the 3-year period ending on the closing date and, therefore, the utilization of the net operating loss carryovers of Aristotle will not be limited; . the receipt of all authorizations, consents, orders, permits or approvals of, or declarations or filings with, and expiration of waiting periods imposed by, any governmental authority necessary for completion of the merger, other than those which, if not obtained, would not in the aggregate have a Material Adverse Effect, as described in the section entitled "The Merger--The Merger Agreement" of this proxy statement-prospectus, on Aristotle or Nasco; . the receipt of all authorizations, consents, waivers or approvals of any third parties necessary for completion of the merger, other than those which, if not obtained, would not in the aggregate have a Material Adverse Effect on Aristotle or Nasco; . Aristotle's proposed amended and restated certificate of incorporation shall have been filed with the Secretary of State of Delaware; . Aristotle shall have declared and paid a stock dividend to all holders of Aristotle common stock by issuing one share of Series I preferred stock for each share of Aristotle common stock outstanding; . Aristotle and Geneve shall have entered into a stockholders agreement relating to the nomination and election of Aristotle's board of directors, which agreement is described elsewhere in this proxy statement-prospectus; . the preferred stock purchase agreement dated as of October 23, 1997 between Aristotle and Geneve, as amended, and the management agreement dated as of January 1, 1993 between Nasco Holdings and Nasco, as amended, shall have been terminated and be of no further force and effect; . the fairness opinion previously delivered by Duff & Phelps to Aristotle's board of directors, attached hereto as Annex C, shall not have been revoked or withdrawn; . Aristotle shall have filed a registration statement, which will have been declared effective by the SEC, on Form S-3 (if eligible or, if not eligible, on such other form as may be required) and on Form 8, registering the issuance of the Series I preferred stock to be issued to holders of Aristotle's common stock prior to the consummation of the merger (since Aristotle will register the Series I preferred stock on Form S-4, to which this proxy statement-prospectus forms a part, the parties to the merger agreement have waived this covenant); . Aristotle's Series I preferred stock shall have been approved for listing on the Nasdaq SmallCap Market; . the holders of all options to purchase Aristotle common stock outstanding after the effective date of the merger shall have agreed that they will not exercise the options for a period of 18 months following the effective date of the merger; 10 . the value of one share of Aristotle's Series I preferred stock and Series J preferred stock on the effective date of the merger will be determined by Duff & Phelps, LLC or any other mutually satisfactory nationally recognized financial advisors, except that the value of one share of each of Aristotle's Series I preferred stock and Series J preferred stock, as valued on the effective date of the merger, will be no less than $6.00 per share and will have the same value; and . the employment agreements between Aristotle and each of John J. Crawford and Paul M. McDonald shall have been amended to reduce the stock appreciation rights, or SARs, target price from $7.00 to $1.00 per share to reflect the fact that the value of each SAR per-share equivalent will not include the value of one share of Series I preferred stock to be received for each share of Aristotle common stock held. Aristotle's obligation to complete the merger is subject to the satisfaction or waiver of each of the following additional conditions before completion of the merger: . Nasco's, Geneve's or Nasco Holdings' representations and warranties must be true and correct in all material respects as of the date the merger is to be completed, as though made on that date, and Aristotle will have received a certificate of the chief operating officer of Geneve to that effect; . Nasco, Geneve and Nasco Holdings must have complied with or performed, in all material respects, each of the covenants and obligations required of it by the merger agreement and Aristotle will have received a certificate of the chief operating officer of Geneve to that effect; . Aristotle must have received satisfactory evidence that NHI, LLC and Nasco have entered a binding agreement providing for the transfer of the parcel of real estate located at 801 Janesville Avenue, Fort Atkinson, Wisconsin from NHI, LLC to Nasco within three months of the closing of the merger for a purchase price equal to NHI, LLC's adjusted cost of the property at the time of transfer, and Aristotle will have received a certificate of the chief operating officer of Geneve as to the adjusted cost of the property; and . Aristotle must have received evidence reasonably satisfactory to it that the funded indebtedness of Nasco as of the effective date of the merger is less than $46 million. Each of Nasco's, Nasco Holdings' and Geneve's obligation to complete the merger is subject to the satisfaction or waiver of each of the following additional conditions before completion of the merger: . Aristotle's representations and warranties must be true and correct in all material respects as of the date the merger is to be completed, as though made on that date, and Geneve will have received a certificate of the chief executive officer of Aristotle to that effect; . Aristotle must have complied with or performed, in all material respects, each of the covenants and obligations required of it by the merger agreement and Geneve will have received a certificate of the chief executive officer of Aristotle to that effect; . Aristotle and Geneve shall have entered into an exchange agreement which is described elsewhere in this proxy statement-prospectus; and . Aristotle must have received resignations from current members of its board of directors who will not continue as directors after the merger. Aristotle intends to recirculate the proxy statement-prospectus and resolicit proxies in the event that any material provision of the merger agreement is materially amended and/or any material condition to completion of the merger is waived and the failure to satisfy such condition is material. Registration and Listing of Aristotle Series I Preferred Stock. The merger agreement contains covenants whereby Aristotle promises to: . have filed a registration statement on Form S-3 (if eligible or, if not eligible, on such other form as may be required) and on a Form 8, registering the issuance of the Series I preferred stock to be issued to holders of Aristotle's common stock prior to the consummation of the merger; 11 . use its reasonable best efforts to cause the registration statements to be declared effective by the SEC as promptly as practicable after the filing thereof; and . use its reasonable best efforts to have the Aristotle Series I preferred stock approved for listing on the Nasdaq SmallCap Market. "No Solicitation" Provision. The merger agreement contains detailed provisions prohibiting Nasco, Geneve and Aristotle from seeking an alternative transaction. These "no solicitation" provisions prohibit each of Nasco, Geneve and Aristotle, as well as its officers, directors, subsidiaries and representatives, from taking any action to solicit a Competing Transaction (as described on page 50). The merger agreement does not, however, prohibit Aristotle or its board of directors from considering, and potentially recommending, an unsolicited bona fide written superior proposal from a third party. Issuance of Additional Shares of Aristotle's Common Stock. The merger agreement states that, in the event that Aristotle issues any shares of its common stock or any securities convertible into its common stock prior to the closing date of the merger, Geneve will have the right to purchase, and Aristotle agrees to issue and sell to Geneve, at Geneve's sole discretion, a number of shares of Aristotle common stock sufficient to maintain Geneve's 50.99% ownership in Aristotle. This sale of securities to Geneve by Aristotle will be at a price equal to the mean of the high and low sales prices of Aristotle's common stock on the Nasdaq SmallCap Market on the date of the sale. Termination. The merger agreement may be terminated at any time prior to completion of the merger, whether or not stockholder approval has already been obtained, as follows: . by mutual written consent of Aristotle and Geneve duly authorized by each of Aristotle's and Geneve's board of directors; . by either Aristotle or Geneve if the merger is not completed by May 15, 2002, except that this right to terminate the merger agreement will not be available to any party whose failure to fulfill any obligation under the merger agreement has been the cause of, or has resulted in, the failure of the merger to be completed by that date; . by either Aristotle or Geneve if any governmental authority issues an order, decree or ruling or takes any other action permanently restraining, enjoining or otherwise prohibiting the merger, and the order, decree, ruling or other action becomes final and nonappealable; . by Geneve, if: . Aristotle's board of directors withdraws, modifies or changes its recommendation of the merger agreement in a manner adverse to Geneve, or will have resolved to do so; . Aristotle's board of directors will have refused to affirm its recommendation of the merger agreement as promptly as practicable after receiving a bona fide proposal or offer relating to a competing transaction, but in any case within ten business days after receipt of any written request from Geneve or Nasco; . Aristotle's board of directors will have recommended to the stockholders of Aristotle a competing transaction, or will have resolved to do so; or . a tender offer or exchange offer for 15% or more of the outstanding shares of capital stock of Aristotle is commenced, and Aristotle's board of directors fails to recommend against acceptance of the tender offer or exchange offer by its stockholders (including not taking a position with respect to the acceptance of the tender offer or exchange offer by its stockholders); . by Geneve if Aristotle breaches or fails to perform in any material respect (which breach or failure cannot be or has not been cured within 30 days after giving notice of such breach or failure) any of its representations, warranties, covenants or other obligations contained in the merger agreement; and . by Aristotle if each of Nasco, Nasco Holdings or Geneve breaches or fails to perform in any material respect (which breach or failure cannot be or has not been cured within 30 days after giving notice of 12 such breach or failure) any of its representations, warranties, covenants or other obligations contained in the merger agreement. Conduct of Aristotle's and Nasco's Business Pending the Merger. Under the merger agreement, each of Aristotle and Nasco has agreed that during the period before completion of the merger, it will ensure that it and its subsidiaries will conduct business and operations in the ordinary course in accordance with past practices. Each of Aristotle and Nasco has also agreed that it will use reasonable efforts to ensure that it and each of its subsidiaries preserves intact its current business organization, keeps available the services of its current officers, significant employees and consultants and maintains its relations and goodwill with all suppliers, customers, landlords, creditors, licensors, licensees, employees and others with whom they have business relationships. Miscellaneous Provisions. The merger agreement also contains provisions and agreements among the parties relating to confidentiality, access to information, directors and officers liability and insurance, expenses, notice of certain events, resignation of Aristotle directors, representations and warranties of the parties and amendments to the merger agreement. Restrictions on Sales of Shares of Aristotle Stock Received by Nasco Holdings (see page 56) The shares of Aristotle common stock to be issued to the sole Nasco shareholder, Nasco Holdings, in connection with the merger will be registered under the Securities Act of 1933, as amended, or the Securities Act. Nasco Holdings may not sell its shares of Aristotle common stock acquired in connection with the merger except under limited exceptions under the Securities Act because Nasco Holdings is deemed to be an "affiliate" of Nasco due to its control of Nasco at the time that Nasco consented to the merger. Additionally, any transfer of the shares of Aristotle Series J preferred stock to be issued to Nasco Holdings in connection with the merger will be subject to restrictions. Stockholders Agreement (see page 56) Upon closing of the merger, Aristotle will enter into a stockholders agreement with Geneve and Nasco Holdings in which Geneve and Nasco Holdings agree to vote their shares of Aristotle common stock, which will comprise approximately 90% of Aristotle's outstanding voting stock after the merger, to nominate and elect as directors John J. Crawford, John Lahey and Sharon Oster. This stockholders agreement will terminate on the third anniversary of the closing date of the merger. Exchange Agreement (see page 57) Aristotle and Geneve have entered into an exchange agreement providing that, immediately following the filing of the certificate of merger, Geneve will transfer to Aristotle all shares of Series I preferred stock owned by Geneve in exchange for the issuance by Aristotle to Geneve of an identical number of newly issued shares of Series J preferred stock. Operations After the Merger (see page 57) As part of the merger, Nasco will be merged with Aristotle. Upon completion of the merger, Aristotle's officers will remain unchanged except that Steven B. Lapin, Geneve's current President and Chief Operating Officer, will be appointed and act also as Aristotle's President and Chief Operating Officer, and Richard J. Ciurczak, Nasco's current President, will be appointed and act also as Aristotle's Executive Vice President of Business Development. Following the merger, the members of Aristotle's board of directors will be John Crawford, John Lahey, Steven B. Lapin, Donald T. Netter, Edward Netter, Sharon Oster, James G. Tatum and Roy T.K. Thung. Management of new Aristotle subsidiaries to be acquired as a result of the merger with Nasco and the respective membership of the subsidiaries' board of directors, will remain unchanged as a result of the merger. It is contemplated that, as soon as practicable after the merger, the assets and liabilities of Nasco acquired and assumed by Aristotle by virtue of the merger may be contributed to Simulaids, Inc., a wholly-owned subsidiary of Aristotle. Further, at the closing of the merger, Aristotle will change its accounting fiscal year to a calendar accounting fiscal year and will amend its bylaws accordingly. 13 Comparison of Stockholder Rights (see page 75) After the merger, Nasco's sole shareholder will become a stockholder of Aristotle. Its rights as a stockholder of Aristotle will differ from its rights as a shareholder of Nasco. After the merger, as a stockholder of Aristotle, its rights will be governed by Aristotle's amended and restated certificate of incorporation, Aristotle's amended and restated bylaws and the laws of the State of Delaware, rather than by Nasco's articles of incorporation, as amended, Nasco's amended and restated bylaws and the laws of the State of Wisconsin. Proposals for the Aristotle Annual Meeting Proposal to Approve the Merger Agreement (see page 107) The merger will be consummated on the terms and subject to the conditions set forth in the merger agreement. Upon completion of the merger, Nasco will merge with Aristotle. As a result of the merger, the separate corporate existence of Nasco will cease and Aristotle will be the surviving corporation. Accordingly, upon consummation of the merger, all of the property, rights, privileges, powers and franchises of Nasco will vest in Aristotle and all debts, liabilities, obligations, restrictions, disabilities and duties of Nasco will become the debts, liabilities, obligations, restrictions, disabilities and duties of Aristotle, the surviving corporation. The affirmative vote of the holders of (i) at least two-thirds of the shares of Aristotle common stock outstanding on the record date and (ii) a majority of the shares of Aristotle common stock present or represented and voting at the annual meeting, excluding shares held by Geneve, is required to authorize and approve the merger agreement including the filing of a second amended and restated certificate of incorporation that incorporates certain corporate governance changes. Proposal to Amend and Restate Aristotle's Certificate of Incorporation (See page 108) As a result of the merger, Aristotle will be issuing (1) 15,000,000 shares of common stock and 10,000,000 shares of Series J preferred stock to the sole holder of Nasco common stock, (2) an aggregate of up to 2,400,000 shares of Series I preferred stock (including shares which may be issued upon exercise of options under Aristotle's 1997 Employee and Director Stock Plan) to holders of Aristotle common stock, and (3) up to 1,200,000 shares of Series J preferred stock at the closing of the merger to Geneve in exchange for Geneve's Series I preferred stock under an exchange agreement entered into between Geneve and Aristotle. As a result, Aristotle's certificate of incorporation must be amended to, among other things, authorize for issuance additional shares of common stock and authorize and set forth the rights, preferences and privileges of the Series I preferred stock and the Series J preferred stock. The affirmative vote of the holders of at least a majority of the shares of Aristotle common stock, outstanding on the record date is required to approve the amendment and restatement of the certificate of incorporation. Proposal to Adopt Aristotle's 2002 Stock Plan (see page 109) As a result of the merger of Aristotle and Nasco, the board of directors of Aristotle believes that it is in Aristotle's best interest to adopt a new stock plan whereby Aristotle reserves 1,500,000 shares of common stock for issuance in the form of incentive stock options, unqualified stock options or stock grants. The affirmative vote of the holders of a majority of the common stock voted at the annual meeting is required to adopt Aristotle's 2002 Stock Plan, which is attached to this proxy statement-prospectus as Annex D. Proposal to Elect Three Members of Aristotle's Board of Directors (see page 114) Aristotle's amended and restated bylaws and certificate of incorporation provide for a classified board of directors. Aristotle's board of directors currently consists of nine members, divided into three classes. John J. Crawford, Edward Netter and Sharon M. Oster constitute a class with a term which expires at the upcoming annual meeting. Aristotle's board of directors met on September 13, 2001 and nominated Messrs. Crawford and Netter and Ms. Oster as directors whose three-year terms will expire in 2004. The affirmative vote of a plurality of the votes cast for directors by the holders of Aristotle's outstanding common stock present or represented and voting at the annual meeting is required to approve the election of the three directors for three-year terms and until their successors are duly elected and qualified. 14 Aristotle Selected Historical Consolidated Financial Data (Amounts in thousands, except share and per share data) The following are selected consolidated financial data for Aristotle and The Strouse, Adler Company (now known as S-A Subsidiary) on a consolidated basis for the fiscal years ended June 30, 1997 and 1998 and also includes Simulaids, Inc. for the fiscal years ended June 30, 1999, 2000 and 2001, and Safe Passage, Inc. for the year ended June 30, 2001. Aristotle acquired Strouse in 1994. Strouse was sold effective June 3, 1998 and as a result is reflected as a discontinued operation for fiscal years 1997 and 1998. The selected consolidated financial data presented below should be read in conjunction with the Consolidated Financial Statements of Aristotle, together with the Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in the annual and quarterly reports of Aristotle which have been incorporated by reference into this proxy statement-prospectus and attached as Annex E and F.
1997 1998 1999 2000 2001 ---------- ---------- ---------- ---------- ---------- Consolidated statements of operations data: Net sales........................................................ $ -- $ -- $ 966 $ 6,887 $ 8,147 Costs and expenses: Costs of goods sold............................................ -- -- 789 3,949 4,176 Selling, general and administrative............................ 649 685 1,250 2,168 3,507 Goodwill amortization.......................................... -- -- 39 228 428 Nonrecurring tax claim contingency fee........................... -- 480 -- -- -- ---------- ---------- ---------- ---------- ---------- Operating income (loss).......................................... (649) (1,165) (1,112) 542 36 Other income (expense): Investment and interest income................................. 146 151 725 337 354 Interest expense............................................... (9) (5) (32) (174) (115) Equity loss in unconsolidated subsidiary....................... -- -- -- -- (14) ---------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations before income taxes and minority interest............................................... (512) (1,019) (419) 705 261 (Provision for) benefit from income taxes (1).................... (32) 1,182 (89) (31) (79) ---------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations before minority interest (544) 163 (508) 674 182 Minority interest................................................ (175) (72) -- -- 36 ---------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations......................... (719) 91 (508) 674 218 Discontinued operations: Income from operations of Strouse.............................. 732 624 -- -- -- Gain on sale of Strouse........................................ -- 873 911 -- -- ---------- ---------- ---------- ---------- ---------- Net income....................................................... 13 1,588 403 674 218 Preferred dividends.............................................. -- 126 233 439(2) -- ---------- ---------- ---------- ---------- ---------- Net income applicable to common shareholders..................... $ 13 $ 1,462 $ 170 $ 235 $ 218 ========== ========== ========== ========== ========== Diluted earnings per common share: Continuing operations.......................................... $ (0.65) $ (0.03) $ (0.60) $ .16(2) $ .11 Discontinued operations........................................ 0.66 0.54 -- -- -- Gain on sale of discontinued operations........................ -- 0.75 0.74 -- -- ---------- ---------- ---------- ---------- ---------- Net income..................................................... $ 0.01 $ 1.26 $ 0.14 $ .16 $ .11 ========== ========== ========== ========== ========== Weighted average shares........................................ 1,100,700 1,151,920 1,226,144 1,506,192 1,921,560 Consolidated balance sheet data: Working capital.................................................. $ 4,551 $ 9,764 $ 1,817 $ 6,809 $ 4,732 Total assets..................................................... 20,381 14,582 18,485 15,211 14,908 Long-term debt................................................... 1,670 -- 111 1,672 702 Stockholders' equity............................................. 6,511 8,455 8,608 11,947 12,368
(1)Income tax benefit for the year ended June 30, 1998 includes a tax refund received resulting from a tax loss carryback claim. (2)Subsequent to the issuance of Aristotle's consolidated financial statements, the Company determined that the $330 note issued to Geneve Corporation (See Note 5 at Annex E) should have been reflected as an additional dividend. Accordingly, the diluted earnings per common share reflects the recognition of such dividend. 15 Nasco Selected Historical Consolidated Financial Data (Amounts in thousands, except share and per share data) The following are selected financial data for Nasco International, Inc. as of and for each of the fiscal years ended December 31, 1997, 1998, 1999, 2000 and 2001. The financial data is presented from the audited financial statements on a historic basis of accounting and reflect adjustments resulting from the adoption of EITF #00-10, Accounting for Shipping and Handling Fees and Costs for all years presented. The selected financial data presented below should be read in conjunction with the Consolidated Financial Statements of Nasco, together with the Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this proxy-statement prospectus.
1997 1998 1999 2000 2001 -------- -------- -------- -------- -------- Consolidated statements of operations data: Net merchandise sales...................... $101,694 $107,587 $118,719 $137,218 $153,905 Other revenues............................. 5,085 5,600 6,097 6,581 8,056 -------- -------- -------- -------- -------- Total net sales......................... 106,779 113,187 124,816 143,799 161,961 Costs and expenses: Costs of goods sold..................... 70,234 73,454 81,200 93,758 105,447 Selling, general and administrative..... 21,963 24,157 26,538 31,745 36,595 -------- -------- -------- -------- -------- 14,582 15,576 17,078 18,296 19,919 Special charges--American Educational Products, Inc. (AMEP)................. -- -- -- 786 612 Goodwill amortization................... -- -- -- 275 455 Management fees......................... 1,275 1,352 1,434 1,520 1,612 -------- -------- -------- -------- -------- Earnings from operations................ 13,307 14,224 15,644 15,715 17,240 Other expense (income) Interest expense, net................... 1,756 1,303 816 2,601 2,864 Other, net.............................. (88) (87) (132) (70) (160) -------- -------- -------- -------- -------- Earnings before income taxes and minority interest................................. 11,639 13,008 14,960 13,184 14,536 Provision for income taxes................. (4,486) (5,030) (5,774) (5,217) (5,860) Minority interest.......................... -- -- -- 195 99 -------- -------- -------- -------- -------- Net income................................. $ 7,153 $ 7,978 $ 9,186 $ 8,162 $ 8,775 ======== ======== ======== ======== ======== Weighted average common shares outstanding. 100 100 100 100 100 Basic and diluted earnings per share....... $ 71,530 $ 79,779 $ 91,864 $ 81,619 $ 87,747 Cash dividend per share.................... -- -- -- $250,000 $ 18,000 Consolidated balance sheet data: Working capital............................ $ 15,479 $ 17,160 $ 20,867 $ 20,283 $ 32,510 Total assets............................... 34,061 36,344 39,648 56,234 67,436 Long-term debt............................. 15,692 10,237 4,837 23,428 36,027 Stockholder's equity....................... 6,506 14,457 23,662 6,816 13,927
16 Summary of Unaudited Pro Forma Condensed Combined Information The following table summarizes the unaudited pro forma condensed combined information of Aristotle and Nasco for the twelve months ended December 31, 2001, adjusted to give pro forma effect of the Aristotle acquisition as if the transaction had occurred at the beginning of the period presented. The transaction will be accounted for as a reverse acquisition using the purchase method of accounting under generally accepted accounting principles and the rules and regulations of the Securities and Exchange Commission. The unaudited pro forma condensed combined statement of operations give effect to the merger of Aristotle and Nasco by combining the results of operations of both Aristotle and Nasco for the twelve months ended December 31, 2001, as if the merger transaction had occurred at the beginning of the period presented. The unaudited pro forma condensed combined balance sheet presents the combined financial position of Aristotle and Nasco as of December 31, 2001, assuming the merger had occurred on that date. The summary unaudited pro forma condensed combined information is not necessarily indicative of the results of operations or financial position that Aristotle would have reported if the merger actually occurred on the dates indicated, nor is the information necessarily indicative of the future operating results or financial position of the combined company. We derived the summary of unaudited pro forma condensed combined information from the unaudited pro forma financial data and related notes included elsewhere in this proxy statement-prospectus, which you should read in their entirety.
Twelve Months Ended December 31, 2001 ----------------- (in thousands, except per share data) Pro Forma Unaudited Condensed Combined Statement of Operations Data: Net sales........................................................... $170,871 Operating costs and expenses........................................ 151,794 Net income available to common shareholders......................... 1,380 Net income per basic and diluted share.............................. $ 0.08 Pro Forma Unaudited Condensed Combined Balance Sheet Data: (at December 31, 2001) Cash and cash equivalents........................................... $ 8,884 Working capital..................................................... 42,603 Total assets........................................................ 105,836 Stockholders' equity................................................ 48,736
- -------- Note: The gain of $20,137 resulting from the generation of negative goodwill is not reflected in the pro forma statement of operations because it is considered extraordinary. 17 Unaudited Comparative Per Share Information The following table summarizes the per-share information for Aristotle and Nasco on a historical and pro forma combined basis. You should read this information in conjunction with Aristotle's historical audited consolidated financial statements and related notes that are contained in Aristotle's annual and unaudited quarterly reports attached to this proxy statement-prospectus as Annex E and F, respectively, and Nasco's historical audited consolidated financial statements and related notes that are included elsewhere in this proxy statement-prospectus and the unaudited pro forma combined financial information and related notes that are included elsewhere in this proxy statement-prospectus. The Nasco pro forma per share equivalent data converts the per share pro forma combined data to a basis consistent with the Nasco capital structure prior to the merger. The pro forma per share data is not necessarily indicative of the results that would have occurred if the merger had been completed on the dates indicated or the results that will occur after the merger.
Year Ended December 31, 2001 ----------------- Aristotle Historical Basic Net Income Per Common Share....... $ .25 Diluted Net Income Per Common Share..... .25 Cash Dividends Declared Per Common Share -- Book Value Per Common Share............. 6.85 Nasco Historical Basic Net Income Per Common Share....... $ 87,747 Diluted Net Income Per Common Share..... 87,747 Cash Dividends Declared Per Common Share 18,000 Book Value Per Common Share............. 139,268
Year Ended December 31, 2001 ----------------- Aristotle and Nasco Pro Forma Combined Basic Net Income Per Common Share......... $ .08 Diluted Net Income Per Common Share....... .08 Cash Dividends Declared Per Common Share.. -- Cash Dividend Per Series I Preferred Share .66 Cash Dividend Per Series J Preferred Share .72 Book Value Per Common Share............... (1.34) Book Value Per Series I Preferred Share... 6.00 Book Value Per Series J Preferred Share... 6.00/(1)/ Equivalent Nasco Pro Forma Combined Basic Net Income Per Common Share......... $ 12,226 Diluted Net Income Per Common Share....... 12,193 Cash Dividends Declared Per Common Share.. -- Book Value Per Common Share............... (201,148)
/(1)/The book value per share is calculated before the provision for the estimated future cost of registering the Series J preferred stock. Aristotle has not declared or paid any cash dividends on its common stock for over ten years. Aristotle does not expect to pay cash dividends on its common stock in the foreseeable future. The gain of $20,137 resulting from the generation of negative goodwill is not included in the pro forma net income per share because it is considered extraordinary. 18 RISK FACTORS In addition to the other information contained in or incorporated by reference into this proxy statement-prospectus, you should carefully consider the following risk factors, which Aristotle believes comprise all material risks of the merger, in deciding how to vote on the merger agreement. See "Where You Can Find More Information" on page 118. Risks Relating to the Merger Geneve Corporation will beneficially own approximately 90% of the voting stock of, and will have voting control over, Aristotle. Stockholders of Aristotle other than Geneve currently own approximately 49% of the outstanding common stock of Aristotle. After the completion of the merger, the dividend of the Series I preferred stock and the exchange provided for in the exchange agreement, stockholders of Aristotle other than Geneve will own approximately 10% of the outstanding voting power of Aristotle. Accordingly, stockholders of Aristotle other than Geneve will have no ability to determine the outcome of any corporate actions requiring stockholder approval, including the election of directors, the merger of Aristotle with or into another company, a sale of substantially all of Aristotle's assets, the issuance of additional shares of Aristotle capital stock or amendments to Aristotle's certificate of incorporation. Aristotle's business may be affected by factors different from those currently affecting its business. The current business of Aristotle will represent only a small portion of Aristotle's business after the merger. Aristotle's business differs in some respects from that of Nasco, and, therefore, Aristotle's results of operations, as well as the price of Aristotle's common stock after the merger, may be affected by factors different from those affecting its current results of operations and the value of its stock. For instance, since the combined company will have a larger share of the education supply market, Aristotle may be more susceptible to the financial fluctuations of this market. For a discussion of Nasco's and Aristotle's business and specified factors to consider in connection with its business, see also the sections of this proxy statement-prospectus entitled "Information Concerning Aristotle--Business", "Information Concerning Nasco--Business" and Aristotle's Annual Report on Form 10-K for the fiscal year ended June 30, 2001 and Aristotle's Quarterly Report on Form 10-Q for the quarter period ended December 31, 2001, which are attached as Annex E and Annex F, respectively, to this proxy statement-prospectus. Although Aristotle and Nasco expect that the merger will result in benefits, those benefits may not be realized. Aristotle and Nasco entered into the merger agreement with the expectation that the merger will result in benefits. For example, the boards of directors of both Aristotle and Nasco believe that combining the strengths of Aristotle and Nasco could produce one of the largest and financially strongest publicly traded companies in the fragmented field of supplying the kindergarten through twelfth grades school and health education markets, as well as the agricultural, farm and ranch product marketplace. It is possible that some or all of these benefits may not be realized by Aristotle after the merger. Failure to complete the merger could negatively impact Aristotle's stock price and future business and operations. The merger agreement contains conditions that, if not satisfied or waived, would result in the merger not occurring, even though Aristotle and Nasco stockholders may have approved it. If the merger is not completed for any reason, Aristotle may be subject to a number of material risks, including the following: . the price of Aristotle common stock may decline to the extent that the current market price reflects a market assumption that the merger will be completed; . expenses related to the merger, such as legal and accounting fees and expenses and the financial advisor fees (which Aristotle estimates will be approximately $1 million), must be paid even if the merger is not completed; and 19 . costs and management's time associated with the integration of Nasco's operations, technology, development programs, products, services, clients and personnel, including combining teams and processes in various functional areas, as well as fees and expenses of professionals and consultants involved in completing the integration process must be paid even if the merger is not completed. While the merger agreement is in effect, Aristotle is prohibited, with limited exceptions, from soliciting, initiating or knowingly encouraging or entering into transactions such as a merger, sale of assets or other business combination, with any party other than Nasco. Aristotle will assume Nasco's accumulated long-term debt of approximately $44,000,000; any material adverse effect on Aristotle's operating results would have a negative effect on Aristotle's ability to repay this long-term debt. Nasco has credit agreements under which it has long-term debt of approximately $44,000,000 as of March 31, 2002, which will be assumed and become an obligation of Aristotle upon completion of the merger. This debt carries a variable rate of interest that is based on LIBOR rates and is adjusted from time to time within a one to six month term. At less than 5% per annum, the variable interest rates are currently favorable, and considerably less than interest rates one year ago. Aristotle cannot provide assurance that these interest rates will continue to be favorable, or that no event, economic or political, will occur that would substantially increase the interest rates during future periods containing this amount of debt. The credit agreement currently has a committed LIBOR rate of interest, including applicable margins, of less than 5% which is effective until October 2002. Nasco's long-term debt credit agreement requires principal reductions of approximately $8,000,000 in 2002, and approximately $9,000,000 in each of years 2003 through 2006. Aristotle's ability to repay its debt obligations under its credit agreements depends upon future earnings performance. Risks Related to the Series I Preferred Stock An active public market for the Series I preferred stock may not develop. Although the shares of Series I preferred stock to be issued to Aristotle stockholders, other than Geneve, prior to the merger will be listed on the Nasdaq SmallCap Market, the Series I preferred stock has not previously been publicly traded, Aristotle common stock has historically had a low trading volume, and preferred stocks generally do not trade as actively as common stock and it is possible that, for reasons outside of Aristotle's control, an active public market for the shares will not develop or be maintained. If there is not an active market for the Series I preferred stock, it may be difficult to sell shares of Series I preferred stock, which could lower the price of the shares. Aristotle may not pay dividends on the Series I preferred stock. Each share of Series I preferred stock will accrue cumulative dividends at the rate of 11% per share, based on the $6.00 stated value of the Series I preferred stock. However, the payment of this dividend will be subject to the discretion of the board of directors of Aristotle, which will have no obligation to declare or pay the dividend. While no dividends may be paid with respect to Aristotle common stock or Series J preferred stock until dividends are paid with respect to the Series I preferred stock, there can be no assurance that any cash dividend payments will be made to holders of Series I preferred stock. Conversion of the Series I preferred stock may not compensate for non-payment of dividends or lack of liquidity. Although each share of Series I preferred stock and any accrued but unpaid dividends may be converted into shares of Aristotle common stock, the market price of Aristotle common stock when the Series I preferred stock is convertible may not be sufficient for such conversion to adequately compensate for Aristotle's failure to pay 20 accrued dividends. Moreover, there can be no assurance that the market for Aristotle common stock at the time of conversion will have sufficient trading volume so as to provide liquidity for holders of Series I preferred stock. Risks Related to the Business, Industry and Strategy of the Combined Company If Aristotle fails to retain key personnel and hire, train and retain qualified employees, Aristotle may not be able to compete effectively, which could result in reduced revenues. The performance of Aristotle is substantially dependent on the services and performance of its senior management and other key personnel. After the merger, Aristotle's performance will depend upon its ability to retain officers and key employees currently employed by Nasco. The loss of the services of, and the failure to promptly replace, any of Aristotle's or Nasco's executive officers or other key employees, as well as Aristotle's inability to attract and retain qualified personnel, could have a negative effect on the business, prospects, financial condition and results of operations of Aristotle. Competition for qualified personnel is intense, and there can be no assurance that Aristotle will be able to successfully attract, integrate or retain sufficiently qualified personnel. If Aristotle competitors are successful in developing, manufacturing and selling competitive products, Aristotle's results could suffer. Aristotle and Nasco operate in highly competitive and fragmented markets, including the retail and e-commerce markets. Businesses that compete with Aristotle are likely to continue expansion of their product offerings that may erode Aristotle's gross margins. The broad range of product lines to be offered by Aristotle and Nasco after the merger is unique to the market as few competitors offer the depth of subject matter in their product mix. However, each of Aristotle's and Nasco's catalogs competes against a unique list of businesses that specialize in limited numbers of curriculum subjects. Some competitors may be able to commit greater resources to product development, invest greater amounts on capital equipment and marketing plans, or offer more aggressive discounts for its products or services. In this fragmented market, competitors may further merge and consolidate, increasing market competition. Any of these competitive pressures could have a negative effect on Aristotle's operating results. If Aristotle is unable, for technical, legal, financial or other reasons, to adapt in a timely manner in response to changing market conditions or customer requirements, Aristotle's business, prospects, financial condition and results of operations would be materially adversely affected. Aristotle's success depends on its ability to enhance existing products and services, develop new products, services and technologies that address the increasingly sophisticated and varied needs of customers and its ability to respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. If Aristotle is unable, for technical, legal, financial or other reasons, to adapt in a timely manner in response to changing market conditions or customer requirements, Aristotle's business, prospects, financial condition and results of operations would be negatively affected. Aristotle expects its results of operation to fluctuate from quarter to quarter and the price of its common and preferred stock could fall if quarterly results are lower than the expectations of securities analysts. Each of Aristotle's and Nasco's revenues and results of operations have fluctuated in the past, and Aristotle's revenues and results of operations may vary from quarter to quarter in the future. If quarterly results fall below the expectations of securities analysts, the price of Aristotle's common stock and/or preferred stock could fall. A number of factors, many of which are outside of Aristotle's control, may cause variations in its results of operations including: . fluctuations in the demand for educational and health care materials and supplies; . seasonality of sales typically experienced by educational supply retailers; 21 . changes in the level of traffic on Aristotle's subsidiaries' web sites; and . fluctuations in sales and marketing expenses and technology infrastructure costs. A substantial portion of Aristotle's operating expenses is and will be related to sales and marketing, product development, technology and infrastructure, which expenses cannot be adjusted quickly and are therefore relatively fixed in the short term. Aristotle's operating expense levels are based in significant part on its expectations of future revenues on a quarterly basis. As a result, if revenues for a particular quarter are below expectations, Aristotle may not be able to reduce operating expenses proportionately for that quarter; this revenue shortfall would have a negative effect on Aristotle's operating results and cash flow for that quarter, which would likely have a negative impact on the price of Aristotle's common stock. In addition, Aristotle expects that it will experience seasonality in its business, reflecting traditional retail seasonality patterns. For instance, sales in the educational material industry are traditionally higher in the third calendar quarter of each year than in the other three quarters, amounting to as much as 35% of sales from the educational segment for the total fiscal year, and 28% of total sales for the fiscal year. Aristotle's stock price may fluctuate based on factors beyond its control. Market prices for securities of companies comparable to Aristotle are highly volatile. Within the twelve months ended December 31, 2001, Aristotle common stock traded between $3.65 and $9.00. The market for Aristotle common stock has from time to time experienced significant price and volume fluctuations that are unrelated to Aristotle's operating performance. Further, the Series I preferred stock will be subject to price and volume fluctuations due to the factors listed above. Certain factors may affect Aristotle's ability to fully utilize its tax loss carry forwards. Aristotle believes that its tax loss carryforwards will be available to offset future taxable income, and that Aristotle's stockholders have, as a result of the terms of the merger, benefited, and will continue to benefit, from its tax loss carryforwards. In that regard, and based upon projected future operating results of the combined companies in the merger, tax loss carryforwards of $87,800,000 are expected to be utilized to offset federal taxable income through 2006 and a portion of 2007. Accordingly, a deferred tax asset of $30,700,000, reflecting a 35% federal tax rate, has been recognized as an asset when recording the fair market value of the assets and liabilities acquired in the merger. Aristotle has calculated that, as at December 31, 2001, it had tax loss carryforwards of approximately $123,000,000, the substantial portion of which expire in 2006; however, events may limit the use of all or a portion of Aristotle's tax loss carryforwards, thus potentially resulting in a higher tax liability for Aristotle in the future. 22 THE ANNUAL MEETING Proxy Statement-Prospectus This proxy statement-prospectus is being furnished to stockholders of Aristotle in connection with the solicitation of proxies by the Aristotle board of directors relating to the proposed merger of Aristotle and Nasco and other matters connected with Aristotle's annual meeting. The Aristotle board of directors will use the proxies at the annual meeting to be held on and at the date, time and place set forth below. This proxy statement-prospectus is first being furnished to stockholders of Aristotle on or about , 2002. Date, Time and Place of the Annual Meeting The annual meeting is scheduled to be held at the New Haven Lawn Club, 193 Whitney Avenue, New Haven, Connecticut 06511, at a.m. local time on , , 2002. Purposes of the Annual Meeting The annual meeting of Aristotle is being held so that stockholders of Aristotle may consider and vote upon: . a proposal to approve the merger agreement including the filing of a second amended and restated certificate of incorporation that incorporates certain corporate governance changes; . a proposal to approve and amend the certificate of incorporation of Aristotle that changes the authorized capital stock and provides that Aristotle may indemnify its directors, officers and agents to the fullest extent allowed under Delaware General Corporation Law; . a proposal to approve and adopt Aristotle's 2002 Stock Plan; and . a proposal to elect three directors for three-year terms and until their successors are duly elected and qualified. Approval of the merger agreement by Aristotle will also constitute approval of the other transactions contemplated by the merger agreement including the filing of a second amended and restated certificate of incorporation that incorporates certain corporate governance changes. At the annual meeting, stockholders of Aristotle will also consider and transact any other business that properly comes before the annual meeting or any adjournment or postponement of the annual meeting. Stockholder Record Date for the Annual Meeting Aristotle's board of directors has fixed the close of business on , 2002 as the record date for determination of Aristotle's stockholders entitled to notice of and to vote at the annual meeting. On the record date, there were shares of Aristotle common stock outstanding, held by approximately holders of record. Votes Required at the Annual Meeting The holders of at least one-third of the shares of Aristotle common stock outstanding on the record date must be represented, either in person or by proxy, to constitute a quorum at the Aristotle annual meeting. Abstentions and broker non-votes will each be included in determining whether a quorum is present. The affirmative vote of the holders of at least (i) two-thirds of the shares of Aristotle common stock outstanding on the record date and (ii) a majority of the shares of Aristotle common stock present or represented and voting at the annual meeting, excluding shares held by Geneve Corporation, is required to approve the merger agreement including the filing of a second amended and restated certificate of incorporation that incorporates certain corporate governance changes. The affirmative vote of the holders of at least a majority of the shares of Aristotle common stock outstanding on the record date is required to approve the amendment and restatement of the certificate of incorporation of Aristotle which, among other things, authorizes additional capital stock and provides that Aristotle may indemnify its officers, directors and agents. 23 The affirmative vote of the holders of at least a majority of the shares of Aristotle common stock present or represented and voting at the annual meeting is required to approve the adoption of Aristotle's 2002 Stock Plan. The affirmative vote of a plurality of the votes cast for directors by the holders of the outstanding common stock present or represented and voting at the annual meeting is required to elect the three directors for three-year terms and until their successors are duly elected and qualified. At the Aristotle annual meeting, each share of Aristotle common stock is entitled to one vote on all matters properly submitted to the Aristotle stockholders at the annual meeting. As of April 1, 2002, Geneve, directors and executive officers of Aristotle and their affiliates owned approximately 60% of all outstanding shares of Aristotle common stock entitled to vote at the annual meeting, of which approximately 51% was held by Geneve and approximately 9% was held by all other directors, executive officers and their affiliates. Proxies All shares of Aristotle common stock represented by properly executed proxies or voting instructions received before or at the Aristotle annual meeting will, unless the proxies or voting instructions are revoked, be voted as indicated in the instructions on those proxies or voting instructions. If no instructions are indicated on a properly executed proxy card, the shares will be voted FOR the approval and adoption of the merger agreement, FOR the approval and amendment to the certificate of incorporation, FOR the approval of the adoption of Aristotle's 2002 Stock Plan and FOR the election of the three nominees for director. You are urged to mark the boxes on the proxy card to indicate how to vote your shares. If you hold your shares of Aristotle common stock through a brokerage firm or bank, they may only vote your Aristotle common stock with respect to the proposals to approve and adopt the merger agreement, to approve the amendment to the certificate of incorporation and to adopt Aristotle's 2002 Stock Plan in accordance with your instructions. If the broker does not timely receive your instructions, it may not vote your Aristotle common stock with respect to these proposals. Because (i) the approval and adoption of the merger agreement requires the affirmative vote of the holders of at least two-thirds of the shares of Aristotle outstanding common stock as of the record date and a majority of the shares of Aristotle common stock present or represented and voting at the annual meeting, excluding shares beneficially held by Geneve, and (ii) the approval of Aristotle's amended and restated certificate of incorporation requires the affirmative vote of the holders of at least a majority of the shares of Aristotle's common stock outstanding on the record date, broker non-votes, as well as abstentions and failures to vote, will have the same effect as a vote against approval and adoption of the merger agreement and the amendment to Aristotle's certificate of incorporation. Broker non-votes, as well as abstentions and failures to vote, will have no effect on the proposal to adopt Aristotle's 2002 Stock Plan. With respect to the proposal to elect three directors for three-year terms, your broker will have discretion to vote your shares even if you do not provide instructions. Abstentions and failures to vote will have no effect on the proposal to elect three directors for three-year terms. Aristotle does not expect that any matter other than the approval of the merger agreement, the approval of the amendment to the certificate of incorporation, the approval to adopt Aristotle's 2002 Stock Plan and the approval to elect three directors for three-year terms will be brought before the Aristotle annual meeting. If, however, other matters are properly presented, the persons named as proxies will vote based on their judgment with respect to those matters, unless authority to do so is withheld on the proxy card. Revocation of Proxies A stockholder of record may revoke his or her proxy at any time before it is voted by: . notifying in writing the Secretary of The Aristotle Corporation at 27 Elm Street, New Haven, Connecticut 06511, stating that you would like to revoke your proxy; . completing and submitting a subsequently dated proxy; or . appearing in person and voting at the annual meeting if you are a holder of record. 24 If your shares are held in an account at a brokerage firm or bank, you must follow the directions received from your broker to revoke your vote or to vote at the annual meeting. Attendance at the annual meeting will not in and of itself constitute revocation of a proxy. If you choose either the first or second method, you must submit your notice of revocation or your new proxy card to Aristotle's Secretary at the address indicated prior to the date of the annual meeting. Solicitation of Proxies Aristotle will pay the expenses incurred in connection with the printing and mailing of this proxy statement-prospectus. Aristotle will also request banks, brokers and other intermediaries holding shares of Aristotle common stock beneficially owned by others to send this proxy statement-prospectus to, and obtain proxies from, the beneficial owners and will reimburse the holders for their reasonable expenses in so doing. Solicitation of proxies by mail may be supplemented by telephone, telegram, and other electronic means, advertisements and personal solicitation by the directors, officers or employees of Aristotle. No additional compensation will be paid to directors, officers or employees for the solicitation. TO ASSURE THAT YOUR SHARES ARE REPRESENTED AT THE MEETING, PLEASE COMPLETE, DATE AND SIGN THE ENCLOSED PROXY AND MAIL IT PROMPTLY IN THE POSTAGE-PAID ENVELOPE PROVIDED, WHETHER OR NOT YOU PLAN TO ATTEND THE MEETING. YOU MAY REVOKE YOUR PROXY AT ANY TIME BEFORE IT IS VOTED. 25 MARKET PRICE AND DIVIDEND INFORMATION Market Price Information Aristotle common stock has traded on the Nasdaq SmallCap Market under the symbol "ARTL" since April 15, 1993. The table below sets forth, for the periods indicated, the reported high and low sale prices of Aristotle common stock on the Nasdaq SmallCap Market. Because there is no established trading market for shares of Aristotle's Series I and Series J preferred stock or Nasco's common stock, information with respect to the market prices of Aristotle's preferred stock and Nasco's common stock have been omitted.
MARKET PRICE ------------ HIGH LOW ---- --- FISCAL YEAR 2002 Quarter ended March 31, 2002..... $9.360 $7.000 Quarter ended December 31, 2001.. 8.000 4.990 Quarter ended September 30, 2001. 7.790 3.650 FISCAL YEAR 2001: Quarter ended June 30, 2001...... 9.000 5.510 Quarter ended March 31, 2001..... 6.625 5.250 Quarter ended December 31, 2000.. 7.625 5.000 Quarter ended September 30, 2000. 7.250 4.875 FISCAL YEAR 2000: Quarter ended June 30, 2000...... 9.625 3.500 Quarter ended March 31, 2000..... 5.438 3.000 Quarter ended December 31, 1999.. 5.500 3.750 Quarter ended September 30, 1999. 6.500 5.000
On November 27, 2001, the last full trading day prior to the public announcement of the proposed merger, the last reported sales price of Aristotle common stock on the Nasdaq SmallCap Market was $6.40 per share. On , 2002, the most recent practicable date prior to the printing of this proxy statement-prospectus, Aristotle had stockholders of record and the last reported sales price of Aristotle common stock on the Nasdaq SmallCap Market was $ per share. There were no outstanding shares of Aristotle's Series I preferred stock and Series J preferred stock. Because the market price of Aristotle common stock may fluctuate, the market price per share of the shares of Aristotle common stock that the sole holder of Nasco common stock will receive in the merger may increase or decrease prior to the merger. Aristotle stockholders are urged to obtain a current market quotation for Aristotle common stock. Dividend Information Aristotle Aristotle has not declared or paid any cash dividends on its common stock for over ten years. In the future, any cash dividends are subject to the discretion of the Aristotle board of directors and will be affected in part by future financial performance, available cash and restrictions on cash dividends as set forth in credit agreements which have been entered into by Nasco. Under Aristotle's proposed amended and restated certificate of incorporation, unless all cumulative dividends on shares of Aristotle's Series I preferred stock and Series J preferred stock have been paid in cash or declared in full and cash sums set apart to pay those dividends, Aristotle may not pay or declare any dividend or make any other distribution, to holders of common stock or any other stock junior to the Series I preferred stock or Series J preferred stock. 26 Each holder of Aristotle Series I preferred stock will be entitled to receive, when and as declared by the board of directors, but only out of funds that are legally available, cash dividends at a cumulative rate of 11% per year on each share of Series I preferred stock. These dividends will accrue daily on each share of Series I preferred stock, whether or not earned or declared. The dividends are cumulative and are payable on March 31 and September 30 of each year, if declared by the board of directors. If Aristotle pays in cash any dividend on the Series J preferred stock, or declares any dividends on the Series J preferred stock and sets apart cash sums to pay those dividends, it will also pay or declare dividends on the Series I preferred stock representing a percentage of cumulated Series I dividends that is equal to the percentage of cumulated Series J dividends that is represented by the dividends paid or declared on the Series J preferred stock. Each holder of Aristotle Series J preferred stock will be entitled to receive, when and as declared by the board of directors, but only out of funds that are legally available, cash dividends at a cumulative rate of 12% per year on each share of Series J preferred stock. These dividends will accrue daily on each share of Series J preferred stock, whether or not earned or declared. These dividends are cumulative, and are payable on March 31 and September 30 of each year, if declared by the board of directors. If Aristotle pays in cash any dividend on the Series I preferred stock, or declares any dividends on the Series I preferred stock and sets apart cash sums to pay those dividends, it will also pay or declare dividends on the Series J preferred stock representing a percentage of cumulated Series J dividends that is equal to the percentage of cumulated Series I dividends that is represented by the dividends paid or declared on the Series I preferred stock. Nasco Nasco distributed to its sole shareholder, Nasco Holdings, a cash dividend of $25 million in the first quarter of 2000 and a cash dividend of $1.8 million to Nasco Holdings in the last quarter of 2001. Nasco's credit agreements restrict dividend payments by Nasco to shareholders in 2002 and any subsequent year through 2006 to amounts up to 50% of excess cash flow, which is an amount equal to Nasco's and its subsidiaries' net income, income tax expense, depreciation and amortization cost, decreases in working capital and non-cash charges less any amounts repaid under the credit agreements, capital expenditures, income taxes paid and increases in working capital, for the preceding year. 27 THE MERGER This section of this proxy statement-prospectus describes material aspects of the proposed merger, including the merger agreement. While Aristotle believes that the description covers the material terms of the merger, this summary may not contain all of the information that is important to you. You should read this entire proxy statement-prospectus, the merger agreement attached as Annex A, which is incorporated by reference into this proxy statement prospectus, Aristotle's amended and restated certificate of incorporation attached as Annex B, the fairness opinion of Duff & Phelps, LLC attached as Annex C and the other documents Aristotle refers to carefully for a more complete understanding of the merger. In addition, Aristotle incorporates important business and financial information about it into this proxy statement-prospectus by reference. You may obtain the information incorporated by reference into this proxy statement-prospectus without charge by following the instructions in the section entitled "Where You Can Find More Information" that begins on page 116 of this proxy statement-prospectus. Structure of the Merger and Conversion of Nasco Stock At the effective time of the merger, Nasco, a privately-held indirect subsidiary of Geneve, will merge with Aristotle. As a result of this merger, the separate corporate existence of Nasco will cease and Aristotle will be the surviving corporation. Accordingly, upon consummation of the merger, all of the property, rights, privileges, powers and franchises of Nasco will vest in Aristotle and all debts, liabilities, obligations, restrictions, disabilities and duties of Nasco shall become the debts, liabilities, obligations, restrictions, disabilities and duties of Aristotle, the surviving corporation. Although Aristotle will be the surviving corporation and continue to be publicly held, Nasco is substantially larger and financially stronger than Aristotle. For example, Aristotle's annual revenues are approximately 5% of Nasco's annual revenues. As a result, Nasco's current business will constitute most of Aristotle's business after the merger. As consideration for the merger, the sole shareholder of Nasco will receive 15,000,000 shares of Aristotle common stock and 10,000,000 shares of Aristotle Series J $6.00 non-voting cumulative 12% preferred stock, par value $0.01 per share. The board of directors of Aristotle will declare a dividend payable on the date of the closing of the merger so that each holder of Aristotle common stock on a record date to be set by the board of directors will receive one share of Aristotle Series I $6.00 convertible voting cumulative 11% preferred stock, par value $0.01 per share. Aristotle's Series I preferred stock will have a stated value of $6.00 per share and will accrue dividends at an annual rate of 11%. For a three month period beginning on the fifth anniversary of the merger, the Series I preferred stock will be convertible into one-half share of Aristotle common stock per share of preferred stock, subject to adjustment. Aristotle and Geneve, Nasco's indirect parent, have entered into an exchange agreement providing that immediately after the merger, Geneve will exchange its shares of Series I preferred stock for an identical number of Series J preferred stock. As a result of these actions, Geneve, which currently owns approximately 51% of Aristotle's outstanding common stock, will be the beneficial owner of approximately 90% of Aristotle's voting stock after the merger. Following the merger, each option to purchase one share of Aristotle common stock under Aristotle's 1997 Employee and Director Stock Plan will become exercisable into one share of Aristotle common stock and one share of Aristotle Series I preferred stock. Upon the effective date of the merger, Aristotle's 1986 Stock Option Plan will terminate and the outstanding options under this plan will become null and void. All holders of options to purchase Aristotle common stock under the 1986 Stock Option Plan may exercise their respective options prior to the effective date of the merger and will thereafter receive the dividends to be declared by Aristotle's board of directors issuing one share of Aristotle's Series I preferred stock for each share of common stock held as of the record date. The number of shares of Aristotle common stock and Series J preferred stock issuable to Nasco's sole shareholder in the merger will be proportionately adjusted for any stock split, stock dividend or similar event with respect to the Aristotle common stock, Aristotle preferred stock or Nasco common stock effected between the date of the merger agreement and the date of completion of the merger. 28 Background of the Merger One of the strategic goals of Aristotle management and the Aristotle board of directors has been to increase Aristotle's size through acquisitions of profitable businesses with seasoned management teams in place. Since the acquisition by Aristotle of Simulaids and Safe Passage, Aristotle management and the Aristotle board of directors have considered various strategic opportunities to sustain the momentum of these acquisitions and increase Aristotle's growth rate in the educational products and services industry. From time to time, Aristotle has explored various alternatives and engaged in preliminary discussions with a number of complementary companies. Nasco's strategy has been to acquire or combine with companies in the school and health education markets. Aristotle's subsidiary, Simulaids, specifically complements Nasco's medical education teaching aids product line. Geneve, Nasco's beneficial owner, has been an Aristotle stockholder since 1994. In 1998, Geneve made a direct investment of $2,250,000 in Aristotle in the form of convertible preferred stock which was later converted to Aristotle common stock. In conjunction with the 1998 transaction, Edward Netter, the Chairman and Chief Executive Officer of Geneve, and Steven B. Lapin, the President and Chief Operating Officer of Geneve, became members of the Aristotle board of directors. Geneve currently owns approximately 51% of Aristotle's outstanding common stock. For a more detailed description of Geneve's relationship with Aristotle, see "Relationship between Aristotle and Nasco and its Affiliates" beginning on page 61 of this proxy statement-prospectus. At a meeting of the Aristotle board of directors held on July 12, 2001, John J. Crawford, Aristotle's Chairman and Chief Executive Officer, reported to the Aristotle board that he and Mr. Lapin had recently discussed the possibility of a business combination between Aristotle and Nasco. Mr. Netter and Mr. Lapin then recused themselves from the meeting, and from that date forward recused themselves from all discussions and votes by the board of directors of Aristotle concerning any proposed transaction with Nasco. Mr. Crawford then informed the Aristotle board that his conversation with Mr. Lapin covered three principal points: (1) a combination of Nasco and Simulaids would probably provide savings through operating and marketing synergies; (2) any combination should recognize the importance of not jeopardizing the ability of Aristotle to utilize its net operating carryforwards against future income; and (3) any combination should be in the form of a stock for stock transaction with Aristotle, as the public company, being the surviving legal corporation. Each of these points was eventually incorporated into the final agreement between the parties. Mr. Crawford reported to the board that no financial terms had been discussed with Mr. Lapin pending a determination by the board to proceed with negotiations. The board of Aristotle discussed the possible merits of a business combination with Nasco, and then authorized senior management of Aristotle and two members of the Aristotle board, Daniel J. Miglio and Sharon M. Oster, to engage in further discussions with Geneve and Nasco senior management regarding a possible transaction. Later that day, Mr. Crawford and Paul M. McDonald, Chief Financial Officer of Aristotle, communicated to Messrs. Netter and Lapin the Aristotle board's willingness to consider a business combination transaction. Messrs. Netter and Lapin indicated that Geneve would prepare a proposal for consideration. Over the next several weeks, representatives of Aristotle's management exchanged financial and operational information with Nasco's management and began an internal analysis of the potential transaction, including an analysis of the synergies created by the combination and the potential impact of the transaction on Aristotle's financial results and stockholder value. On August 9, 2001, Messrs. Crawford, McDonald and Miglio and Ms. Oster met in New Haven, Connecticut with Messrs. Netter and Lapin to further discuss a possible combination, each noting the complementary strengths of the businesses of the two companies. At the conclusion of the meeting, Messrs. Netter and Lapin presented orally a preliminary proposal outlining possible terms of a merger between Aristotle and Nasco. The proposed terms included a stock for stock merger between Nasco and Aristotle with Aristotle as the surviving legal corporation. Geneve would receive eighteen million shares of Aristotle Common Stock, and ten million shares of Aristotle preferred stock valued at $6.00 per share with an annual dividend yield of 11.75% in exchange for 100% of the common stock of Nasco. In addition, Aristotle would recapitalize the company by 29 declaring a dividend of one share of preferred stock for each share of common stock owned. The preferred stock to be received as a dividend would be worth $6.00 per share and have an annual dividend yield of 11.75%. The Aristotle negotiating team valued the Geneve proposal to be worth between $9.30 and $9.85 per share of Aristotle common stock. The attendees then agreed to meet again and continue their discussions. On August 31, 2001, Ms. Oster and Messrs. Crawford, McDonald, Netter, Lapin and Miglio met at Geneve's offices in Stamford, Connecticut, at which time the Aristotle representatives proposed alternative terms and conditions for a merger transaction. The Aristotle team expressed its belief that each share of Aristotle common stock should be worth $13 to $14 based upon the liquidation value of Aristotle and the value that Aristotle's tax loss carryforwards would bring to the combined companies. Messrs. Lapin and Netter disagreed with that valuation, but modified Geneve's original proposal to lower the eighteen million shares of Aristotle common stock to be received as a portion of the merger consideration to sixteen million shares. The Aristotle team believed that this change increased the upper value of Geneve's proposal to approximately $10.25 per share. On September 7, 2001, Messrs. Crawford, McDonald, Netter and Lapin met in Stamford and continued their discussions of a possible transaction. The major element discussed was the potential for the market to discount the market price of Aristotle common stock after the transaction because Geneve would own such a significant percentage of the outstanding shares. Messrs. McDonald and Crawford proposed that non-Geneve stockholders be given a "put" for their common shares at $6.00 per share which could be exercised eighteen months after the closing. The put, along with the $6.00 preferred stock would guarantee a value of $12.00 for each share of Aristotle common stock. Messrs. Lapin and Netter agreed to consider the concept. On September 10, Mr. Lapin called Mr. Crawford to indicate that Geneve would not agree to such terms. Mr. Lapin stated that Geneve already owned a majority of Aristotle's outstanding common stock and that the "float" would remain the same; therefore, in his view, there should be no reason for the market to discount Aristotle's common stock. At a September 13, 2001 meeting of the Aristotle board of directors, the board discussed the status of negotiations and reviewed the possible merits of the proposed transaction. Mr. Lapin then joined the meeting to answer questions posed by the board concerning Nasco and its business. At the conclusion of the meeting, the board authorized management to retain the services of Duff & Phelps, LLC to advise the board with regard to the fairness of any proposed transaction. Over the next several weeks, numerous telephone conversations took place between senior members of Aristotle and Geneve management, and their respective advisors, in an effort to reach agreement on the terms of a business combination. On October 9, 2001, Messrs. Crawford and McDonald met with members of Nasco management in Fort Atkinson, Wisconsin to view Nasco's principal business operations in person and to discuss possible complementary strategies that could be pursued following a business combination of Aristotle and Nasco. On October 24, 2001, Messrs. Crawford, McDonald and Lapin met in New York City for further discussions about the terms and conditions of a possible transaction. Attorneys for both parties were also present. On October 25, 2001, Messrs. Crawford, Netter and Lapin met in Stamford for further discussions regarding the terms and conditions of the proposed transaction. During these meetings, the parties agreed that Geneve would receive fifteen million shares of Aristotle's common stock rather than the earlier proposed sixteen million shares and that each share of Series I preferred stock would be convertible into one-half share of common stock for a set period commencing five years after the closing. In addition, at the time of conversion, the value of any unpaid preferred dividends could also be converted into common stock. The parties agreed to pay an 11% dividend on the Series I preferred stock and 12% on the Series J preferred stock. On November 5, 2001, Aristotle mailed selected materials to its directors including a draft of the merger agreement and the proposed amended and restated certificate of incorporation together with a summary of the key terms of the proposed transaction. 30 At a meeting of Aristotle's board of directors, other than Messrs. Netter and Lapin, on November 8, 2001, the Aristotle board reviewed the proposed transaction in detail. Representatives of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., counsel to Aristotle, also attended the meeting. At the meeting, Mr. Crawford described the transaction and discussed the potential strategic benefits and risks of the transaction to Aristotle. Further, he discussed alternative strategies, including Aristotle's ability to meet its strategic goals on a standalone basis. Mr. Crawford also discussed the terms and conditions of the Series I and Series J preferred stock as well as the projected financial results of the proposed transaction and the anticipated impact of the transaction on the stockholders of Aristotle. Mr. Crawford also discussed with the board whether the proposed transaction could be accomplished without affecting adversely Aristotle's net operating tax losses. Finally, Mr. Crawford reviewed the proposed governance arrangements for the combined company, including shared management and the provision for representation on the board of directors of Aristotle by three members of the current Aristotle board. Aristotle's legal advisors then discussed the fiduciary duties of Aristotle's directors in evaluating and entering into the proposed transaction. After extensive discussion, the Aristotle board of directors directed Aristotle management to continue their discussions with Geneve regarding the proposed transaction. Between the original discussions in August 2001 and the proposal to the Aristotle board in November 2001, the major changes which had occurred were the reduction in the number of shares of Aristotle's common stock to be issued to Geneve from eighteen million to fifteen million and the change in the terms of the Series I preferred stock from non-convertible preferred with an 11.75% dividend to a convertible preferred with an 11% dividend. The revised draft of the agreement dated November 19, 2001 primarily differed from the draft of November 5, 2001 in that it contained detailed provisions relating to outstanding Aristotle stock options. On November 19, 2001, Aristotle mailed additional materials to its directors, including revised drafts of the merger agreement, the proposed amended and restated certificate of incorporation and materials prepared by Duff & Phelps, LLC, Aristotle's financial advisor. On November 21, 2001, the Aristotle board of directors, again without Messrs. Netter and Lapin, held a telephonic meeting at which representatives of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. and Duff & Phelps, LLC were also present. At the meeting, Mr. Crawford again reviewed the transaction with the directors. The Duff & Phelps representatives reviewed Duff & Phelps' analysis of the financial aspects of the proposed transaction and provided their preliminary opinion that the terms of the proposed merger were fair to Aristotle and, accordingly, to holders (other than Geneve) of Aristotle common stock. The directors then further discussed the transaction with Aristotle's legal and financial advisors. At the conclusion of the meeting, the Aristotle board voted to approve the merger agreement and transactions contemplated thereby and to recommend to Aristotle stockholders that they approve the merger agreement and transactions contemplated thereby. On November 21, 2001, the boards of directors of Nasco and Nasco Holdings, the sole shareholder of Nasco, executed written consents approving the merger agreement. Following approval of the merger agreement by the respective boards of directors, Aristotle, Nasco, Nasco Holdings and Geneve executed the merger agreement during the evening of November 27, 2001. On the morning of November 28, 2001, Aristotle announced that it had entered into an agreement to merge Nasco with Aristotle subject to stockholder approval. On December 4, 2001, Aristotle filed a Form 8-K with the Securities and Exchange Commission, or the SEC, describing the basic terms of the proposed merger, including specified principal conditions, and attaching, as exhibits, the merger agreement and certain ancillary agreements and documents. Nasco's Reasons for the Merger The boards of directors of Nasco, Nasco Holdings, Inc. (Nasco's sole shareholder) and Geneve Corporation (Nasco Holdings, Inc.'s majority shareholder and, accordingly, Nasco's beneficial majority shareholder) approved the merger agreement on November 21, 2001. In the course of reaching its decision to approve the 31 merger agreement, each of Nasco's, Nasco Holdings' and Geneve's board of directors consulted with Nasco's management team as well as its legal advisors regarding the duties of the members of each entity's board of directors. Each board of directors evaluated the business, assets, liabilities, results of operations and financial condition of Aristotle, including considering the following possible benefits of the merger: . The merger would further Nasco's strategic goal of acquiring or combining with companies in the school and health education markets. Nasco believes that the combined strengths of Aristotle and Nasco could produce one of the largest and strongest publicly traded companies in the fragmented field of supplying the kindergarten through twelfth grade school and health education sectors, as well as the agricultural, farm and ranch product marketplace; . Simulaids, one of Aristotle's wholly owned subsidiaries, specifically complements Nasco's medical education teaching aids product line; . The merger of Nasco, a historically privately-held entity, with Aristotle, a publicly traded company, permits an additional currency, in the form of Aristotle capital stock, with which to take advantage of other acquisition opportunities; . Nasco employees will have the opportunity to participate in Nasco's performance through ownership of Aristotle's publicly traded capital stock; and . A significant amount of the higher income expected to be generated by the surviving company may be sheltered from federal taxation by applying Aristotle's tax loss carryforwards against the income of the combined company. The only significant countervailing factor considered by the boards of directors of Nasco, Nasco Holdings and Geneve was that Nasco would no longer be a private company whose management would only be responsible to one shareholder. As a public company, Nasco's management would be accountable to a number of different shareholders and, therefore, Nasco would incur additional, costs, including legal, accounting and administrative costs, associated with being a publicly traded company. The boards determined, after discussions with Nasco management, that this countervailing factor did not outweigh the possible benefits of the merger set forth above. Aristotle's Reasons for the Merger Two members of Aristotle's board of directors, Edward Netter and Steven B. Lapin, are also officers and directors of Geneve and Nasco. Because of their relationship with Geneve and Nasco, each of Messrs. Netter and Lapin recused himself from all discussions of Aristotle's board of directors regarding the merger and from the vote taken to approve the merger. The decision of Aristotle's board of directors to approve the merger agreement was based on its assessment of several potential benefits of the merger, including the fact that the combined company will be substantially larger and financially stronger after the merger. For instance, Aristotle's annual revenues are approximately 5% of Nasco's annual revenues. In addition, the board determined that the increased size of Aristotle after the merger could result in the following benefits: . Aristotle should be able to consider acquisition opportunities of greater size and significance than it currently can prudently consider; . the combined resources of Nasco and Aristotle may facilitate Aristotle's ability to attract attention from market analysts and potential investors more so than if Aristotle continued as a comparatively smaller public company; and . A significant amount of the higher income expected to be generated by the surviving company may be sheltered from federal taxation by applying Aristotle's tax loss carryforwards against the income of the combined company. 32 Aristotle's board of directors also considered the fact that Nasco's medical education teaching aids product line specifically complements Simulaids' business model. In connection with its approval of the merger agreement and recommendation that stockholders approve the merger agreement and all transactions related thereto, Aristotle's board of directors consulted with members of management, with its financial advisors and its legal advisors. The board of directors of Aristotle also considered the following information and factors in reaching its decision to approve the merger: . the benefits described above; . the strategic fit of Aristotle and Nasco, including the belief that the merger has the potential to enhance stockholder value; . presentations by senior members of Aristotle's management regarding the strategic advantages of acquiring Nasco, operational aspects of the transaction and the results of management's operational and legal due diligence review; . historical information concerning Aristotle's and Nasco's respective businesses, financial performance and condition, operations, technology, management, competitive position and stock performance; . Aristotle's management's view as to the financial condition, results of operations and businesses of Aristotle and Nasco before and after giving effect to the merger based on management's due diligence and other publicly available information; . the opportunities and alternatives available to Aristotle if the merger were not to be completed, including pursuing an acquisition of or business combination, joint venture or collaboration with entities other than Nasco and the conclusion that the merger is expected to yield greater benefits and is more feasible than the alternatives; . the analysis and presentation of Duff & Phelps, LLC on the financial aspects of the merger, and their written opinion to the effect that, as of November 27, 2001, and based upon and subject to the factors and assumptions set forth in the opinion, the merger was fair from a financial point of view to Aristotle's stockholders, other than Geneve; . the terms and conditions of the merger agreement, the proposed amendment and restatement of Aristotle's certificate of incorporation, the proposed stockholders agreement and the exchange agreement; . the likelihood that the merger will be completed; . the expected tax treatment of the merger as a tax-free reorganization for United States federal income tax purposes; and . the impact of the merger on Aristotle's stockholders and its subsidiaries' employees. Aristotle's board of directors also identified and considered the potential adverse consequences of other factors on the proposed merger, including: . the loss of control over Aristotle by stockholders other than Geneve as Geneve and its affiliates will own in excess of 90% of the common stock of the combined company and will be able to control the board of directors; . the risk that the potential benefits of the merger might not be realized; . the challenges and risks involved in a smaller company acquiring the business of a larger company and combining the businesses of the companies; . the risk of diverting management's focus and resources from other strategic opportunities and from operational matters while working to complete and implement the merger; 33 . the risk that all or a portion of Aristotle's tax loss carry forwards may be subject to limitations under the tax laws; . the effect of the announcement of the merger on Aristotle's business; and . the risk that the merger would not be completed. This discussion of the information and factors considered by the Aristotle board of directors is not intended to be exhaustive, but includes the material factors considered. The board did not assign particular weight or rank to the factors it considered in approving the merger. The board of directors considered all of these factors as a whole, and overall considered them to be favorable to and to support its determination to approve the merger agreement. Recommendation of Aristotle's Board of Directors Aristotle's board of directors, other than Edward Netter and Steven B. Lapin, believe that the merger is fair to Aristotle's stockholders and in their best interest, have approved the merger agreement and transactions contemplated thereby and recommend approval of the merger agreement. Because of their relationship with Geneve and Nasco, Messrs. Netter and Lapin recused themselves from the discussions and vote of the board of directors relating to the merger and related proposals. The Aristotle board of directors recommends a vote "FOR" approval of the merger agreement. Opinion of Aristotle's Financial Advisor Aristotle retained Duff & Phelps, LLC on September 13, 2001, to act as its financial advisor in connection with a possible business combination transaction with Nasco. In connection with its engagement, Aristotle requested Duff & Phelps to evaluate the fairness, from a financial point of view, of the merger and related transactions to Aristotle stockholders, other than Geneve. On November 21, 2001, Duff & Phelps participated in a meeting of the Aristotle board of directors at which the board considered whether to approve the merger and related transactions. At the meeting, Duff & Phelps delivered to the board an oral opinion, subsequently confirmed in writing, that the merger and related transactions are fair, from a financial point of view, to the stockholders of Aristotle, other than Geneve. The full text of the written fairness opinion of Duff & Phelps dated November 27, 2001 is attached as Annex C to this proxy statement-prospectus. Duff & Phelps will update the fairness opinion within three days prior to the closing of the merger. We urge stockholders to read the Duff & Phelps opinion in its entirety. The following summary of Duff & Phelps' opinion is qualified in its entirety by reference to the full text of the opinion. Duff & Phelps' opinion is directed to the Aristotle board of directors and does not constitute a recommendation to any stockholder as to how such stockholder should vote with respect to the merger. Duff & Phelps' opinion addresses the fairness of the consideration to Aristotle stockholders only from a financial point of view and does not address the relative merits of the merger and related transactions or any alternatives to those transactions, the underlying decision of the Aristotle board of directors to proceed with or effect the merger and related transactions or any other aspect of the merger and related transactions. The Duff & Phelps opinion was rendered without regard to the necessity for, or level of, any restrictions, obligations or undertakings which may be imposed or required in the course of obtaining regulatory approvals for the merger. Although Duff & Phelps evaluated the financial terms of the merger, Duff & Phelps was not asked to and did not recommend the merger consideration, which was the result of arms-length negotiations between Aristotle, Nasco and Geneve. 34 Scope of Analysis In arriving at its fairness opinion, Duff & Phelps reviewed, among other items: . The Agreement and Plan of Merger among The Aristotle Corporation, Geneve Corporation, Nasco Holdings, Inc. and Nasco International, Inc. dated November 27, 2001; . the proposed Amended and Restated Certificate of Incorporation of The Aristotle Corporation to be effectuated as part of the proposed transactions related to the merger; . Aristotle's Annual Report on Form 10-K filed with the SEC for the fiscal years ended June 30, 2000 and 2001; . Aristotle's Quarterly Report on Form 10-Q with the SEC for the three months ended September 30, 2001; . audited financial statements for Nasco for the fiscal years ended December 31, 1998, 1999 and 2000; . interim financial statements for Nasco for the nine months ended September 30, 2000 and 2001, prepared by Nasco management; . certain operating and financial information provided by the management of Aristotle and Nasco, including financial projections; . historical stock prices and trading volume of the common stock of Aristotle; . transactions involving companies deemed similar to Aristotle; and . financial information and market valuations of publicly traded companies deemed to be reasonably comparable to Aristotle and Nasco. Duff & Phelps also conducted other financial studies, analyses, and investigations as it deemed appropriate. In addition, Duff & Phelps held discussions with members of the senior management of Nasco at its headquarters in Fort Atkinson, Wisconsin regarding the history, current business operations, financial condition and future prospects of Nasco. Duff & Phelps also held discussions with members of the senior management of Aristotle regarding its history, current business operations, financial condition and future prospects. Duff & Phelps took into account its assessment of general economic, market and financial conditions, as well as its experience in securities and business valuation, in general, and with respect to similar transactions, in particular. Duff & Phelps did not make any independent appraisals of the physical assets or liabilities of Aristotle or Nasco. Duff & Phelps obtained all industry information and data on public companies deemed comparable to Aristotle and Nasco used in its analysis from regularly published industry and investment sources. In performing its analysis and rendering its opinion with respect to the merger, Duff & Phelps relied upon the accuracy and completeness of all information provided to it, whether obtained from public or private sources, including Aristotle and Nasco management, and did not attempt independently to verify any such information. In the course of its analysis, nothing led Duff & Phelps to believe that it is not reasonable to rely on the information described above, including the projections and reports of the management of Aristotle and Nasco. Duff & Phelps' opinion assumes that information supplied and representations made by Aristotle and Nasco management are substantially accurate. The opinion is necessarily based upon market, economic, financial and other conditions as they exist and can be evaluated as of the date of Duff & Phelps' opinion. Neither Aristotle management nor the board of directors placed any limitations upon Duff & Phelps with respect to the procedures followed or factors considered by Duff & Phelps in rendering its opinion. Summary of Analyses The summary of the opinion set forth below provides a description of the main elements of Duff & Phelps' presentation to the board of directors on November 21, 2001. It does not purport to be a complete description of the presentation Duff & Phelps made to the board or the analyses performed by Duff & Phelps. The preparation 35 of a fairness opinion is a complex process and is not necessarily susceptible to partial analysis or summary description. Selecting portions of the analyses or of the summary set forth below, without considering the analyses as a whole, could create a misleading or an incomplete view of the financial analyses conducted by Duff & Phelps or of the process underlying the fairness opinion. In addition, the following summary contains information presented in tabular format. You must read the tables together with the text of each summary in order to fully understand the financial analyses performed by Duff & Phelps. The tables alone do not constitute a complete description of the financial analyses. In arriving at its fairness opinion, Duff & Phelps considered the results of all its analyses taken as a whole. Duff & Phelps did not attribute any particular weight to any analysis or factor considered by it, but rather made qualitative judgments as to the significance and relevance of each analysis and factor. No company or transaction used in the analyses as a comparison is identical to Aristotle, Nasco or the merger. Duff & Phelps prepared the analyses solely for the purpose of providing its opinion to the board as to the fairness of the merger from a financial point of view. The financial analyses do not purport to be appraisals or to necessarily reflect the prices at which businesses or securities actually may be sold. Analyses based upon forecasts of future results are not necessarily indicative of actual future results, which may be significantly more or less favorable than suggested by the analyses. These analyses are based upon numerous factors or events beyond the control of Aristotle, Nasco, their advisors or any other person, and are inherently uncertain. Duff & Phelps performed a variety of financial and comparative analyses regarding the valuation of Aristotle prior to and after the merger with Nasco, including: . a discounted cash flow analysis of the projected free cash flows of Aristotle prior to and after the merger; . a comparison of financial performance and market valuation ratios of Aristotle prior to and after the merger with those of publicly traded companies Duff & Phelps deemed relevant for purposes of its opinion; . a review of recent change-of-control transactions involving companies that Duff & Phelps deemed similar to Aristotle for purposes of its opinion; . an analysis of the premiums paid in change-of-control transactions involving public companies that Duff & Phelps deemed similar to Aristotle for the purposes of its opinion; and . an analysis of the premiums paid in transactions in which controlling interest shareholders acquired the remaining shares of publicly traded companies. Pre-merger Aristotle Analysis Discounted Cash Flow Analysis Duff & Phelps performed a discounted cash flow analysis of the projected free cash flows of Aristotle. A discounted cash flow analysis derives the economic value of a business based on the net present value of the future free cash flow anticipated to be generated by the assets of the business. The projected free cash flows are discounted to the present at a rate which reflects the relative risk associated with these cash flows as well as the rates of return which securityholders could expect to realize on alternative investment opportunities. 36 Duff & Phelps considered a fiscal 2002 financial forecast for Aristotle provided by Aristotle management and consulted with Aristotle management in developing an independent long-term estimate of the future free cash flows of Aristotle. Duff & Phelps estimated Aristotle's future free cash flows based on projected earnings, working capital, and capital expenditure requirements for the fiscal years ending June 30, 2002 to 2011 from the perspective of a hypothetical buyer of a controlling interest in Aristotle. The following table is a summary of the financial projections for the fiscal years ending June 30, 2002 to 2006 used in Duff & Phelps' discounted cash flow analysis. DCF OPERATING ASSUMPTIONS (Amounts in thousands)
Pro Forma Projected --------- -------------------------------------- 2001 2002 2003 2004 2005 2006 --------- ------ ------- ------- ------- ------- Net Revenues........ $8,834 $9,572 $10,146 $10,755 $11,293 $11,857 Net Revenue Growth.. -0.1% 8.4% 6.0% 6.0% 5.0% 5.0% Gross Profit........ $4,730 $5,040 $ 5,347 $ 5,668 $ 5,951 $ 6,249 Gross Profit Margin. 53.5% 52.7% 52.7% 52.7% 52.7% 52.7% EBITDA.............. $1,116 $1,646 $ 1,755 $ 1,861 $ 1,954 $ 2,051 EBITDA Margin....... 12.6% 17.2% 17.3% 17.3% 17.3% 17.3% Working Capital..... $ 776 $ 977 $ 1,036 $ 1,098 $ 1,153 $ 1,211 Capital Expenditures $ 300 $ 239 $ 254 $ 269 $ 282 $ 296
Duff & Phelps discounted the resulting free cash flows at rates of 15.0% to 17.0%. The discount rate range reflects, among other things, industry risks, the relatively small market capitalization of Aristotle, and current rates of return required by investors in debt and equity instruments in general. The discounted cash flow analysis resulted in a reasonable estimate of the price that a fully informed buyer would pay for all of the common stock of Aristotle. The discounted cash flow analysis yielded a per share value ranging from about $6.85 to $7.45 for the common stock of Aristotle. Comparable Company Analysis Since the number of public companies similar to Aristotle is limited, Duff & Phelps selected a set of publicly traded companies based on the following criteria: . SIC code 3841--surgical and medical instruments and apparatus, or SIC code 5047--medical, dental, and hospital equipment supplies; and . latest twelve months', or LTM, revenues ranging from $5.0 million to $50.0 million; and . LTM EBITDA of at least $250,000. Duff & Phelps' search generated 14 comparable public companies. Although these companies are not directly comparable to Aristotle, their size and the markets in which they participate are similar to those of Aristotle. Duff & Phelps derived a value estimate for Aristotle from the rate at which these comparable companies are capitalized in the public market, after giving consideration to differences in operations and performance. Using publicly available information, Duff & Phelps analyzed the historical financial performance of the comparable companies for the latest twelve months and the past three years. Duff & Phelps calculated enterprise values for the comparable companies by taking total market capitalization (based on recent stock prices) and adding debt and preferred stock and subtracting cash and cash equivalents. Duff & Phelps then analyzed the enterprise values for the comparable companies as multiples of various financial performance measurements-- 37 including EBITDA and revenues--available as of the date of the opinion. The following table summarizes Duff & Phelps' analysis of the comparable companies and compares Aristotle's financial performance. The "Selected Comparables" are those companies that Duff & Phelps deemed most comparable to Aristotle, giving particular consideration to size, profitability, growth and returns. COMPARABLE COMPANY ANALYSIS
Enterprise Equity LTM LTM LTM LTM Enterprise Value / Value / Revenues EBITDA Revenue Returns Value / LTM Book (in millions) Margin Growth on Assets LTM Rev. EBITDA Value ------------- ------ ------- --------- ---------- ---------- ------- Highest/(1)/........ $49 49.5% 90.2% 24.2% 4.2x 20.6x 10.5x Lowest/(1)/......... $ 7 1.1% -18.5% -26.0% 0.5x 4.5x 0.4x Median/(1)/......... $27 14.3% 5.2% 7.5% 1.8x 6.3x 2.6x Selected Comparables Arrhythmia Research. $ 7 14.3% -18.5% 1.7% 0.9x 6.4x 1.0x ACME United......... $35 8.4% 0.1% 7.6% 0.5x 6.2x 1.2x Dynatronics......... $17 7.1% NA 3.7% 0.9x 12.3x 1.4x United Guardian..... $10 31.9% 4.4% 20.7% 1.8x 5.8x 2.6x Aristotle........... $ 9 8.8% -1.5% 2.2%
- -------- (1) Includes all 14 comparable companies. Duff & Phelps used Aristotle's fiscal 2001 results in the LTM calculations due to an unusually poor performance by Safe Passage in the first quarter of fiscal 2002. The comparable company analysis suggests that a reasonable estimate of the enterprise value of Aristotle is 0.8x to 0.9x LTM revenues and 6.0x to 7.0x LTM EBITDA and a reasonable estimate of the equity value of Aristotle is 1.0x to 1.1x book value. These multiples produced a value ranging from approximately $6.60 to $7.40 per share for Aristotle common stock. Comparable Transactions Analysis Duff & Phelps reviewed recent control transactions involving target companies deemed similar to Aristotle. Duff & Phelps analyzed 18 transactions that had been announced or completed since April 1998. Duff & Phelps noted that the amount of available public information pertaining to many of these transactions and the financial performance of the acquired companies is limited. The table below summarizes Duff & Phelps' comparable transactions analysis, including the transactions involving targets that Duff & Phelps deemed to be most comparable to Aristotle. 38 COMPARABLE TRANSACTIONS (Amounts of thousands)
Target Enterprise Enterprise Target LTM Value / Value / LTM EBITDA LTM LTM Target Acquirer Sales Margin Sales EBITDA - ------ -------- ------- ------ ---------- ---------- Median performance and multiples from all transactions reviewed $16,480 10.3% 1.0x 8.3x Selected Education Transactions Safe Passage....................... Aristotle $ 1,953 18.3% 1.1x 5.8x American Educational Products...... Nasco International $15,616 10.6% 1.1x 10.3x Dolphin............................ American Education Corp. $ 2,278 15.4% 0.8x 5.1x Sportime........................... School Specialty $32,202 9.6% 0.7x 7.5x Hammond and Stephens............... School Specialty $ 9,027 25.8% 1.8x 7.1x Selected Medical Transactions Scherer Healthcare................. Investor Group $17,344 18.5% 1.1x 5.8x Simulaids.......................... Aristotle $ 5,860 27.9% 1.5x 5.3x Neurocare.......................... Integra Lifesciences $32,547 14.9% 0.8x 5.1x Medical Products Division of ACME.. Medical Action Industries $10,090 4.7% 0.8x 17.9x Stepic Corp........................ Horizon Medical Products $41,059 7.9% 0.7x 8.3x Biotechnology Tools................ Ventana Medical Systems $ 5,385 6.8% 1.0x 14.4x
Duff & Phelps imputed Aristotle's fiscal 2001 results in the LTM calculations due to an unusually poor performance by Safe Passage in the first quarter of fiscal 2002. The comparable transactions analysis suggests that a reasonable estimate of the enterprise value of Aristotle is 0.9x to 1.0x LTM revenues and 6.5x to 7.5x LTM EBITDA. These multiples produced a value ranging from approximately $6.90 to $7.75 per share for Aristotle common stock. Premiums Analysis Five of the control transactions that Duff & Phelps analyzed involved acquisitions of public companies. The following table indicates the implied premiums offered over the 5-day average trading price prior to the announcement of these transactions. TRANSACTION PREMIUMS
Date Date of Acquisition Announced Transaction Target Acquirer Consideration Premium - --------- ----------- ------ -------- ------------- ----------- 6/1/01.. 8/3/01 Houghton Mifflin Vivendi Universal Cash 8.3% 1/31/01. 4/5/01 Watasch Interactive Learning PLATO Learning Stock 32.6% 8/14/00. 6/22/01 American Educational Products Nasco International Cash 0.9% 7/18/00. Terminated Scherer Healthcare Investor Group Cash 41.2% 6/9/99.. 7/28/99 VWR Scientific Products Merck Kgaa Cash 31.4%
Since Aristotle is being merged with a subsidiary of its controlling interest shareholder, Duff & Phelps also reviewed premiums paid in transactions in which controlling interest shareholders acquired the remaining shares of publicly traded companies. These transactions cover a variety of industries. Of the 20 transactions Duff & Phelps reviewed, the premiums paid ranged from 1.2% to 43.1%. Applying these premiums to Aristotle's five-day average trading price prior to its announcement of a potential transaction on August 14, 2001 ($6.45) results in a range of values of approximately $6.50 to $9.20 per share. Applying the median premium of 19.4% to Aristotle's five-day average trading price prior to August 14, 2001 results in a value of approximately $7.70 per share. 39 Post-merger Aristotle Analysis (Aristotle and Nasco Combined) Discounted Cash Flow Analysis Duff & Phelps performed a discounted cash flow analysis of the projected free cash flows of Aristotle after the merger. Duff & Phelps used the same financial forecast to value Aristotle post-merger as it used to determine Aristotle's pre-merger value. In addition, Duff & Phelps considered Nasco's fiscal 2001 and 2002 financial forecasts provided by Nasco management and consulted with Nasco management in developing an independent long-term estimate of the future free cash flows for Nasco. The forecasts did not include potential financial synergies resulting from the merger, but did incorporate additional administrative costs anticipated by management. Duff & Phelps estimated Nasco's future free cash flows based on projected earnings, working capital, and capital expenditure requirements for the fiscal years ending December 31, 2001 to 2010. The following table is a summary of the Nasco financial projections for the fiscal years ending December 31, 2001 to 2005 used in Duff & Phelps' discounted cash flow analysis to determine the post-merger value of Aristotle. NASCO OPERATING ASSUMPTIONS (Amounts in thousands)
Adjusted Projected -------- --------- 2000(1) 2001 2002 2003 2004 2005 -------- -------- -------- --------- -------- -------- Net Revenues........... $132,047 $162,810 $175,835 $186,385 $197,568 $207,446 Net Revenue Growth..... 5.8% 23.3% 8.0% 6.0% 6.0% 5.0% Gross Profit........... $ 45,133 $ 56,574 $ 60,663 $ 64,303 $ 68,161 $ 71,569 Gross Profit Margin.... 34.2% 34.7% 34.5% 34.5% 34.5% 34.5% EBITDA................. $ 18,047 $ 21,245 $ 22,986 $ 24,375 $ 25,848 $ 27,147 EBITDA Margin.......... 13.7% 13.0% 13.1% 13.1% 13.1% 13.1% Average Working Capital $ 27,119 $ 34,692 $ 37,576 $ 39,830 $ 42,220 $ 44,331 Capital Expenditures... $ 1,054 $ 1,240 $ 1,950 $ 2,300 $ 2,371 $ 2,489
- -------- (1)2000 results have been adjusted to include additional ongoing administrative costs anticipated by management as a result of the merger. Duff & Phelps discounted the expected free cash flows from Nasco and Aristotle at rates of 12.0% to 13.0%. The discount rate range reflects, among other things, industry risks, the relatively small market capitalization of post-merger Aristotle, and current rates of return required by investors in debt and equity instruments in general. The discounted cash flow analysis resulted in an enterprise value of post-merger Aristotle ranging from $148.7 million to $165.2 million. Comparable Company Analysis Duff & Phelps selected a set of publicly traded companies based on comparability to Nasco. Although no single company chosen is identical to Nasco, these companies share many of the same operating characteristics and are affected by many of the same economic forces. Duff & Phelps derived a value estimate for post-merger Aristotle from the rate at which these companies are capitalized in the public market, after giving consideration to differences in operations and performance. Using regularly published earnings estimates from securities analysts and other publicly available information, Duff & Phelps analyzed the historical financial performance of the Nasco comparable companies for the latest twelve months as well as projected financial performance. Duff & Phelps calculated enterprise values for the Nasco comparable companies by taking total market capitalization (based on recent stock prices) and adding debt and preferred stock and subtracting cash and cash equivalents. The following table shows the respective LTM revenues and recent enterprise values of the Nasco comparable companies. 40 COMPARABLE PUBLIC COMPANIES ($ in millions)
LTM Enterprise Company Revenues Value ------- -------- ---------- Acme United Corp............. $ 35 $ 18 Dynatronics Corp............. 17 15 Educational Development Corp. 19 21 First Years, Inc............. 134 72 Plato Learning, Inc.......... 68 143 Renaissance Learning, Inc.... 127 990 Scholastic Corp.............. 1,906 2,257 School Specialty, Inc........ 765 618 Varsity Brands, Inc.......... 157 101
Duff & Phelps analyzed the enterprise and equity values of the Nasco comparable companies as multiples of various financial performance measurements available as of the date of the opinion. Duff & Phelps also compared the pro forma financial performance of post-merger Aristotle with the financial performances of the Nasco comparable companies. The following table summarizes Duff & Phelps' analysis of the Nasco comparable companies. The "Selected Comparables" are those companies that Duff & Phelps deemed most comparable to post-merger Aristotle, giving particular consideration to markets served, size, profitability, growth and returns. COMPARABLE COMPANY ANALYSIS
Enterprise Equity LTM LTM LTM LTM Enterprise Value / Value / Revenues EBITDA Revenue Returns Value / Proj. Proj. (in millions) Margin Growth on Assets LTM Rev. EBITDA Earnings ------------- ------ ------- --------- ---------- ---------- -------- Highest/(1)/.............. $1,906 38.1% 30.5% 22.0% 7.8x 15.7x 29.1x Lowest/(1)/............... $ 17 8.4% -1.7% 4.2% 0.5x 5.2x 12.9x Median/(1)/............... $ 127 10.7% 11.8% 7.8% 0.9x 7.4x 14.9x Selected Comparables School Specialty, Inc..... $ 765 9.4% 14.0% 6.7% 0.8x 7.4x 13.4x Scholastic Corp........... $1,906 9.3% 19.9% 5.2% 1.2x 9.2x 14.9x First Years, Inc.......... $ 134 10.4% -1.7% 10.2% 0.5x 5.2x 12.9x Post-Merger Aristotle/(2)/ $ 175 12.8% 7.3% 16.0%
- -------- /(1)Includes all Nasco comparable companies reviewed. / /(2)LTM revenues and EBITDA are based on pro forma estimates. Return on assets is Nasco only. Revenue growth reflects pro forma Aristotle from 6/30/00 to 6/30/01 and Nasco from 12/31/00 to estimated 12/31/01 excluding acquisitions. / The Nasco comparable company analysis suggests that a reasonable estimate of the enterprise value of post-merger Aristotle is 1.0x to 1.1x LTM revenues, 7.5x to 8.5x LTM EBITDA, and 6.5x to 7.5x projected EBITDA, and a reasonable estimate of the equity value of post-merger Aristotle is 18.0x to 20.0x LTM net income and 13.0x to 15.0x projected net income. These values produced an enterprise value of post-merger Aristotle ranging from $140.7 million to $192.7 million. Preferred Stock As a part of Duff & Phelps' analysis of the post-merger capital structure of the combined company, Duff & Phelps valued Aristotle's Series I preferred stock and Series J preferred stock at their stated values of $6.00 per share. Duff & Phelps took into consideration, among other things, the yields to maturity of publicly traded debt and preferred securities with similar credit quality to post-merger Aristotle and the convertibility option and the marketability limitations of Aristotle's Series I preferred stock. 41 Post-merger Aristotle Common Stock Valuation Conclusion Based on its discounted cash flow analysis, which resulted in an enterprise value of post-merger Aristotle ranging from $148.7 million to $165.2 million, and its comparable company analysis, which resulted in an enterprise value of post-merger Aristotle ranging from $140.7 million to $192.7 million, Duff & Phelps concluded the post-merger enterprise value of Aristotle will range from $145.0 million to $185.0 million. In order to estimate the post-merger equity value of Aristotle, Duff & Phelps adjusted the enterprise value for the following: 1) current combined debt and excess cash of Nasco and Aristotle, 2) the minority interest in Safe Passage, 3) cash from the exercise of Aristotle's options, 4) the estimated value of Aristotle's net operating loss carryforwards, 5) the Series I and J preferred stock, and 6) Aristotle's stock appreciation rights. The resulting equity value ranged from $54.2 million to $94.4 million. Based on approximately 17.1 million shares of common stock outstanding post-merger, Duff & Phelps estimated Aristotle's post-merger common stock value to be in the range of $3.20 to $5.50 per share, prior to any discount for lack of marketability. Although the common stock will continue to be publicly traded, Duff & Phelps deemed it appropriate to apply a 20.0% discount for lack of marketability to its estimate of Aristotle's post-merger common stock value, because Aristotle's size and ownership concentration will limit trading activity. After application of the discount for lack of marketability, Duff & Phelps' estimate of Aristotle's post-merger common stock value ranges from approximately $2.60 to $4.40. Summation Duff & Phelps' valuation analysis of the common stock of Aristotle pre-merger resulted in a per share value ranging from approximately $6.60 to $7.75 on a controlling interest basis. Post-merger, a current shareholder of Aristotle common stock would own securities with an estimated combined value ranging from $8.60 to $10.40 per share (consisting of one share of Series I Preferred Stock valued at $6.00 and one share of common stock valued at $2.60 to $4.40). Fee and other Information Duff & Phelps is one of the nation's largest independent specialty investment banking and financial advisory firms, possessing substantial experience in business valuations, financial opinions, merger and acquisition advisory, and transaction financing. The board of directors of Aristotle selected Duff & Phelps as its financial advisor based upon Duff & Phelps' experience, ability and reputation for providing fairness opinions and other advisory services on a wide variety of corporate transactions. As compensation for its services as financial advisor to the board of directors in connection with the merger, Aristotle agreed to pay Duff & Phelps $100,000. No portion of the fee paid to Duff & Phelps is contingent upon the conclusion reached in its opinion. In addition, Aristotle has agreed to reimburse Duff & Phelps for its reasonable out-of-pocket expenses, including the fees and expenses of its legal counsel, and to indemnify Duff & Phelps against certain liabilities, including liabilities under the federal securities laws, relating to, arising out of or in connection with its engagement. Interests of Aristotle Directors and Executive Officers in the Merger In considering the recommendation of the board of directors of Aristotle to vote for the proposal to approve the merger agreement, stockholders of Aristotle should be aware that members of the Aristotle board of directors have interests in the merger that differ from those of Aristotle's stockholders, including the fact that Geneve Corporation and its affiliates beneficially own approximately 51% of the issued and outstanding capital stock of Aristotle and beneficially own all of the outstanding shares of Nasco. In connection with Geneve's ownership of Aristotle stock, Edward Netter, Chairman, Chief Executive Officer and a Director of Geneve, and Steven B. Lapin, President, Chief Operating Officer and a Director of Geneve, are members of Aristotle's board of directors. Because of their relationship with Geneve and Nasco, each of Messrs. Netter and Lapin recused himself from the discussion and vote taken with respect to Aristotle's board of directors approval of the merger. Mr. Netter and his family own, directly or indirectly, all of the capital of Nasco, and, therefore, will own, directly or indirectly, all of the shares of capital stock of Aristole which will be received by the sole shareholder of Nasco in the merger. 42 Additionally, as of the closing of the merger, it is anticipated that Steven B. Lapin will be appointed and act as Aristotle's President and Chief Operating Officer. In such event, Mr. Lapin will be compensated in that position as determined by Aristotle's board of directors. Completion and Effectiveness of the Merger The merger will be completed when all of the conditions to completion of the merger are satisfied or waived, including the approval of the merger agreement by Aristotle stockholders and the approval of the amendment and restatement of Aristotle's certificate of incorporation. The merger will become effective upon filing of a certificate of merger with the Secretary of State of the State of Delaware and articles of merger with the Department of Financial Institutions of the State of Wisconsin. Each of Aristotle and Nasco is working to complete the merger as soon as practicable after approval by Aristotle stockholders at the annual meeting. In order for the merger to be completed, the conditions to closing in the merger agreement must be satisfied or waived. Effect of Merger on Aristotle's Stock Plans Aristotle's 1986 Stock Option Plan. Upon the effective date of the merger, under the terms of Aristotle's 1986 Stock Option Plan and the authority of Aristotle's board of directors thereunder, Aristotle's 1986 Stock Option Plan will terminate and all outstanding options granted under the plan will become null and void. All holders of options to purchase Aristotle common stock under the 1986 Stock Option Plan may exercise their respective options and purchase shares of common stock prior to the effective date of the merger. All options not exercised prior to the effective date of the merger will terminate and become null and void. Aristotle's 1997 Employee and Director Stock Plan. Following the merger, each option to purchase one share of Aristotle common stock granted under Aristotle's 1997 Employee and Director Stock Plan will become exercisable into one share of Aristotle common stock and one share of Aristotle Series I preferred stock. Aristotle does not intend to grant further options under the 1997 Employee and Director Stock Plan. Furthermore, as a condition to closing of the merger, holders of options to purchase Aristotle common stock granted under Aristotle's 1997 Plan which will be outstanding after the effective date of the merger must agree not to exercise options for a period of at least 15 months following the effective date of the merger. Aristotle's 2002 Stock Plan. As set forth more fully elsewhere in this proxy statement-prospectus, Aristotle's board of directors has approved and recommended, for adoption by holders of Aristotle's common stock, the 2002 Stock Plan under which Aristotle may issue options to purchase common stock and may issue Aristotle common stock to its employees, directors and consultants in the future. The 2002 Stock Plan will be effected only if the merger is consummated. Treatment of Nasco's Employees and Employee Benefits Aristotle currently has no intention of laying off any employees of Nasco after completion of the merger. Aristotle has agreed that all employees of Nasco who continue employment after the merger will be eligible to participate in Aristotle's retirement, health, vacation and other non-equity-based employee benefit plans after the merger as well as any Nasco benefit plans that are continued after the merger. In addition, after the merger, certain Nasco employees will be eligible to participate in Aristotle's 2002 Stock Plan. If Aristotle terminates an employee benefit plan, Nasco employees will be eligible to participate in Aristotle's employee benefit plans, to substantially the same extent as employees of Aristotle in similar positions and at similar levels. Nasco employees will receive full credit for purposes of eligibility and vesting under any employee benefit plans or arrangements for their service with Nasco. 43 Material United States Federal Income Tax Consequences of the Merger and Stock Dividend The following general discussion summarizes the anticipated material United States federal income tax consequences of the merger and stock dividend. This discussion is based on the Internal Revenue Code of 1986, the regulations promulgated thereunder, existing administrative interpretations and court decisions, all of which are subject to change, possibly with retroactive effect, and assumptions, limitations, representations and covenants, including those contained in certificates of officers of Aristotle, Nasco and Nasco Holdings, which may be executed as of the completion of the merger. Consummation of the Merger The following tax consequences will result from the merger: . The merger will qualify as a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code. . Nasco's sole shareholder, Nasco Holdings, will not recognize gain or loss for United States federal income tax purposes when its shares of Nasco common stock are exchanged solely for Aristotle common stock and Aristotle Series J preferred stock under the merger. . The aggregate tax basis of the Aristotle common stock and Aristotle preferred stock received by Nasco Holdings as a result of the merger will be the same as the aggregate tax basis in the Nasco common stock surrendered in the exchange. . Neither Aristotle, Nasco, nor Aristotle's stockholders will recognize gain or loss for United States federal income tax purposes as a result of the merger. This summary is not binding on the Internal Revenue Service. A successful challenge by the Internal Revenue Service to the reorganization status of the merger generally would result in Nasco recognizing gain or loss with respect to the merger. Neither Aristotle nor its stockholders would recognize gain or loss as a result of the merger, although Aristotle's adjusted bases in the assets which it acquires from Nasco in the merger would differ from the adjusted bases which those assets would have if the merger qualified as a reorganization under section 368(a) of the Internal Revenue Code. Distribution of Series I Preferred Stock The board of directors of Aristotle will declare a dividend on the date of the closing of the merger so that each holder of Aristotle common stock on the date of the merger will receive one share of Aristotle Series I preferred stock. Pursuant to section 305(a) of the Internal Revenue Code, Aristotle's stockholders will not recognize income or gain as a result of their receiving this stock dividend. Aristotle will not recognize any income, or gain or loss, on the distribution of the Series I preferred stock. Section 307 of the Internal Revenue Code requires that if a stockholder receives a stock dividend, and under section 305 such distribution is not includible in gross income, then the basis of the stock with respect to which the distribution was made must be allocated between the old and new stocks in proportion to the fair market values of each on the date of distribution. Accordingly, each Aristotle stockholder must allocate his, her or its adjusted tax basis in each share of Aristotle common stock between the Aristotle common stock and Series I preferred stock received with respect thereto in proportion to the fair market values of each on the date of the stock dividend. The holding period of the distributed Series I preferred stock will include the period during which the Aristotle common stock with respect to which the Series I preferred stock was distributed was held. A U.S. holder will generally recognize gain or loss on a sale, exchange or other disposition of the Series I preferred stock in an amount equal to the difference between the amount realized on the sale, exchange or other disposition and such holder's adjusted tax basis in the preferred stock. Any such gain or loss will be capital gain or loss and will be long-term capital gain or loss if the holding period of the preferred stock exceeds one year as 44 of the date of the disposition. However, in the event that Aristotle realizes earnings and profits for its tax year within which the distribution of the Series I preferred stock occurs, then a holder who receives Series I preferred stock in the distribution could be subject to special rules under section 306 of the Internal Revenue Code on the sale, exchange, redemption or other disposition thereof. Because the effects of a disposition of "section 306 stock" depend on each stockholder's particular facts, each holder should consult his, her or its tax advisors concerning the consequences of the disposition of the Series I preferred stock under section 306 of the Internal Revenue Code. During a three-month period beginning on the fifth anniversary of the merger, shares of Series I preferred stock may be converted into shares of Aristotle common stock at a ratio of one-half share of common stock for each share of Series I preferred stock, as adjusted over time under the terms of Aristotle's proposed amended and restated certificate of incorporation. Aristotle's board of directors is not required to declare any dividend on the Series I preferred stock, but all accrued and unpaid dividends up to the fifth anniversary date may also be converted into Aristotle common stock upon conversion of the preferred stock on which the dividends accrue. A holder of Series I preferred stock who converts accrued and unpaid dividends into Aristotle common stock may be treated under section 305(c) of the Internal Revenue Code as having received a deemed stock dividend under section 305(b)(4). As such, it will be treated as a distribution of property under section 301, the ultimate taxability of which will depend in part on the extent of Aristotle's accumulated and current earnings and profits through its tax year in which the conversion occurs. Holders of Series I preferred stock should consult their tax advisors concerning the consequences of converting their Series I preferred stock into shares of Aristotle common stock. The foregoing is intended as a general summary only and is not intended to be a complete analysis or description of all potential United States federal income tax consequences of the merger and stock distribution. Moreover, this discussion does not address any non-income tax or any foreign, state or local tax consequences of the merger and stock distribution. Each stockholder should consult his, her or its own tax advisor regarding the tax consequences of the merger and stock distribution. Tax Opinion Regarding the Merger. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. has delivered to Aristotle an opinion stating that the merger will qualify as a tax-free reorganization within the meaning of Section 368(a) of the Internal Revenue Code. This opinion assumes the absence of changes in existing facts and relies on assumptions, representations and covenants contained in this opinion and in certificates executed by officers of Aristotle. This opinion neither binds the Internal Revenue Service, or IRS, nor precludes the IRS from adopting a position contrary to that expressed below, and no assurance can be given that contrary positions will not be successfully asserted by the IRS or adopted by a court if the issues are litigated. Aristotle does not intend to obtain a ruling from the IRS with respect to the tax consequences of the merger. Accounting Treatment of the Merger Although under the terms of the merger Nasco will merge with and into Aristotle and Aristotle will be the surviving corporation, for accounting purposes Nasco will be deemed the acquiring company. Therefore, subsequent to the merger, any prior period financial information reported will be that of Nasco. Consistent with generally accepted accounting principles, the merger will be accounted for as a reverse acquisition using the purchase method of accounting and accordingly, the purchase price will be allocated to the assets and liabilities acquired based on their fair market values at the date of the merger. In accordance with such purchase accounting, Aristotle and Nasco expect to recognize a significant deferred income tax asset resulting from existing Aristotle net operating losses. Aristotle had historically recorded a full valuation allowance against their net operating losses as a result of uncertainties regarding the realization of the asset, including the lack of predictability of Aristotle profitability and the variability of its operating results. However, as a result of the merger and the anticipated operating results of the combined entities, a significant portion of such deferred 45 income tax asset will be recognized at its fair value at the date of acquisition. As a result of the recognition of this deferred income tax asset, Aristotle's non-current assets will be reduced to zero and negative goodwill will be recognized. Regulatory Matters The merger is not subject to the filing and waiting period requirements of the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Aristotle has filed a registration statement, of which this proxy statement-prospectus forms a part, with the Securities and Exchange Commission, or SEC, in order to register: . the shares of Aristotle common stock that are being offered to Nasco's sole shareholder in the merger; . the shares of the Aristotle Series I preferred stock that are to be issued to the holders of Aristotle's common stock through a stock dividend prior to the consummation of the merger, except that the registration statement will not register shares of Aristotle's Series I preferred stock to be issued to Geneve due to the fact that Geneve will exchange, on the date of the closing of the merger, such shares of Series I preferred stock for shares of Aristotle Series J preferred stock under the exchange agreement entered into by Geneve and Aristotle; . the shares of Aristotle's common stock to be issued upon conversion of shares of Aristotle's Series I preferred stock; and . the shares of Aristotle's Series I preferred stock to be issued upon exercise of options to purchase Aristotle common stock under Aristotle's 1997 Employee and Director Stock Plan. Appraisal Rights Aristotle. Under Delaware law, Aristotle stockholders are not entitled to appraisal rights in connection with the merger. Nasco. The sole holder of Nasco common stock has by written consent voted in favor of the merger and merger agreement. Therefore, under Wisconsin law, the shareholder is no longer entitled to appraisal rights in connection with the merger. Listing on The Nasdaq SmallCap Market of the Aristotle Series I Preferred Stock Aristotle will use its reasonable best efforts to cause the shares of Aristotle Series I preferred stock to be issued to each holder of Aristotle common stock through a stock dividend prior to the consummation of the merger, to be approved for listing on the Nasdaq SmallCap Market, subject to official notice of issuance, before the completion of the merger. The Merger Agreement The following summary of the merger agreement is qualified in its entirety by reference to the complete text of the merger agreement, which is incorporated by reference and attached as Annex A to this proxy statement-prospectus. The merger agreement dated as of November 27, 2001 was executed by Aristotle, Nasco, Nasco Holdings, Inc. (Nasco's sole shareholder) and Geneve Corporation (Nasco Holdings, Inc.'s majority stockholder and, accordingly, Nasco's beneficial majority stockholder). Conditions to Completion of the Merger. Each of Aristotle's, Nasco's, Nasco Holdings' and Geneve's obligations to complete the merger are subject to the satisfaction or waiver of the following conditions before completion of the merger: . approval of the merger agreement at Aristotle's annual meeting by the affirmative vote of holders of: . at least two-thirds of the shares of Aristotle's common stock outstanding on the record date; and 46 . at least a majority of the shares of Aristotle's outstanding common stock present or represented and voting at Aristotle's annual meeting, excluding shares beneficially held by Geneve; . the absence of any law, decree, order, injunction, proceeding or other legal restraint or prohibition prohibiting or seeking to prevent completion of the merger; . as of the closing date of the merger but after the filing of Aristotle's amended and restated certificate of incorporation, the value of one share of Aristotle common stock must not exceed $3.00, which is to be determined by subtracting the value of one share of Aristotle Series I preferred stock from the price of one share of Aristotle common stock on the closing date. For this purpose, (A) the price of Aristotle common stock on the closing date will be the higher of (i) the mean between the highest and lowest sale price of Aristotle common stock on the Nasdaq Small Cap Market on the closing date, and (ii) the closing price of Aristotle common stock on the Nasdaq Small Cap Market on the closing date and (B) the value of one share of Aristotle Series I preferred stock on the closing date must not be less than $6.00. The value of Aristotle Series I preferred stock on the closing date will be as determined by Duff & Phelps, LLC or any other mutually satisfactory nationally recognized financial advisor. One way in which this condition may be satisfied is if the price of one share of Aristotle common stock on the closing date does not exceed $9.00 and the value of one share of Aristotle Series I preferred stock is determined to be at least $6.00. In order to insure that Aristotle's tax loss carryforwards are not limited, the percentage of the value of the voting stock of Aristotle beneficially owned by Geneve cannot have increased by more than 50 percentage points during the 3-year period ending on the closing date. At its lowest point during such period, the percentage of the value of the voting stock of Aristotle beneficially owned by Geneve was approximately 33.4%; therefore, as of the closing date, the value of the voting stock of Aristotle beneficially owned by Geneve cannot be greater than 83.4% of the total value of the voting stock of Aristotle. Based upon the terms of the merger and the other transactions which will occur on the closing date of the merger, if the value of Aristotle's common stock does not exceed $3.00 on the closing date of the merger, after giving effect to the $6.00 Series I preferred stock dividend, the value of the voting stock of Aristotle beneficially owned by Geneve cannot exceed 83.4% of the total value of the voting stock of Aristotle. . the receipt of all authorizations, consents, orders, permits or approvals of, or declarations or filings with, and expiration of waiting periods imposed by, any governmental authority necessary for completion of the merger, other than those which, if not obtained, would not in the aggregate have a Material Adverse Effect, as described below, on Aristotle or Nasco; . the receipt of all authorizations, consents, waivers or approvals of any third parties necessary for completion of the merger, other than those which, if not obtained, would not in the aggregate have a Material Adverse Effect on Aristotle or Nasco; . Aristotle's proposed amended and restated certificate of incorporation will have been filed with the Secretary of State of Delaware; . Aristotle shall have declared and paid a stock dividend to all holders of Aristotle common stock issuing one share of Series I preferred stock for each share of Aristotle common stock outstanding; . Aristotle and Geneve shall have entered into a stockholders agreement relating to the nomination and election of Aristotle's board of directors, which agreement is described elsewhere in this proxy statement-prospectus; . the preferred stock purchase agreement dated as of October 23, 1997 between Aristotle and Geneve, as amended, and the management agreement dated as of January 1, 1993 between Nasco Holdings and Nasco, as amended, shall have been terminated and be of no further force and effect; . the fairness opinion previously delivered by Duff & Phelps to Aristotle's board of directors, attached hereto as Annex C, shall not have been revoked or withdrawn; 47 . Aristotle will have filed a registration statement, which shall have been declared effective by the SEC, on Form S-3 (if eligible or, if not eligible, on another form as may be required) and on Form 8, registering the issuance of the Series I preferred stock to be issued to holders of Aristotle's common stock prior to the consummation of the merger (since the Series I preferred stock will be registered on Form S-4, to which this proxy statement-prospectus forms a part, the parties to the merger agreement have waived this condition); . Aristotle's Series I preferred stock shall have been approved for listing on the Nasdaq SmallCap Market; . the holders of all options to purchase Aristotle common stock outstanding after the effective date of the merger will have agreed that they will not exercise their options for a period of at least 15 months following the effective date of the merger; . the value of each of Aristotle's Series I preferred stock and Series J preferred stock on the effective date of the merger will be determined by Duff & Phelps, LLC or any other nationally recognized financial advisors, except that the value of one share of each of Aristotle's Series I preferred stock and Series J preferred stock, as valued on the effective date of the merger, will be no less than $6.00 per share and will have the same value; and . the employment agreements between Aristotle and each of John J. Crawford and Paul M. McDonald shall have been amended to reduce the stock appreciation rights, or SARs, target price from $7.00 to $1.00 per share to reflect the fact that the value of each SAR per-share equivalent will not include the value of one share of Series I preferred stock to be received for each share of Aristotle common stock held. As of April 1, 2002, none of the conditions have been completed. "Material Adverse Effect" means any event, change or effect that is materially adverse to the condition (financial or otherwise), property, assets, liabilities, businesses, operations, results of operations or prospects of either Aristotle or Nasco and its subsidiaries, as the case may be, taken as a whole or either Aristotle's or Nasco's ability to perform its respective obligations under the merger agreement. However, no adverse change, effect, event, occurrence, state of facts or development with respect to or affecting the following will be deemed to constitute, or will be taken into account in determining, a Material Adverse Effect: . the disallowance by the Internal Revenue Service, or IRS, of any previous tax refunds of Aristotle or the entering into an agreement with the Internal Revenue Service by Aristotle to this effect; . any impairment of goodwill resulting from Aristotle's acquisition of Safe Passage International, Inc.; and . any events, changes or effects that are consequences of terrorist activity or of the related war against terrorism. Aristotle's obligation to complete the merger is subject to the satisfaction or waiver of each of the following additional conditions before completion of the merger: . Nasco's, Geneve's or Nasco Holdings' representations and warranties must be true and correct in all material respects as of the date the merger is to be completed, as though made on that date, and Aristotle will have received a certificate of the chief operating officer of Geneve to that effect; . Nasco, Geneve and Nasco Holdings must have complied with or performed, in all material respects, each of the covenants and obligations required of it by the merger agreement and Aristotle will have received a certificate of the chief operating officer of Geneve to that effect; 48 . Aristotle must have received satisfactory evidence that NHI, LLC and Nasco have entered a binding agreement providing for the transfer of the parcel of real estate located at 801 Janesville Avenue, Fort Atkinson, Wisconsin from NHI, LLC to Nasco within three months of the closing of the merger for a purchase price equal to NHI, LLC's adjusted cost of the property at the time of transfer, and Aristotle will have received a certificate of the chief operating officer of Geneve as to the adjusted cost of the property; and . Aristotle must have received evidence reasonably satisfactory to it that the funded indebtedness of Nasco as of the effective date of the merger is less than $46 million. Each of Nasco's, Nasco Holding's or Geneve's obligation to complete the merger is subject to the satisfaction or waiver of each of the following additional conditions before completion of the merger: . Aristotle's representations and warranties must be true and correct in all material respects as of the date the merger is to be completed, as though made on that date, and Geneve will have received a certificate of the chief executive officer of Aristotle to that effect; . Aristotle must have complied with or performed, in all material respects, each of the covenants and obligations required of it by the merger agreement and Geneve will have received a certificate of the chief executive officer of Aristotle to that effect; . Aristotle and Geneve shall have entered into an exchange agreement which is described elsewhere in this proxy statement-prospectus; and . Aristotle must have received resignations from the current members of its board of directors except for John Crawford, John Lahey and Sharon Oster, each of whom will continue to serve as a member of the Aristotle board of directors: . Aristotle intends to recirculate the proxy statement-prospectus and resolicit proxies in the event that any material provision of the merger agreement is materially amended and/or any material condition to completion of the merger is waived and the failure to satisfy such condition is material. Registration and Listing of Aristotle Series I Preferred Stock. The merger agreement contains covenants whereby Aristotle promises to: . have filed a registration statement on Form S-3 (if eligible or, if not eligible, on another form as may be required) and on a Form 8, registering the issuance of the Series I preferred stock to be issued to holders of Aristotle's common stock prior to the consummation of the merger (since Aristotle will register the Series I preferred stock on Form S-4, to which this proxy statement-prospectus forms a part, the parties to the merger agreement have waived this covenant); . use its reasonable best efforts to cause the registration statements to be declared effective by the SEC as promptly as practicable after the filing thereof; and . use its reasonable best efforts to have the Aristotle Series I preferred stock approved for listing on the Nasdaq SmallCap Market. Access to Information; Confidentiality. The merger agreement contains covenants which state that, from the date of the merger agreement through the date the merger is effective, each party to the merger agreement shall: . upon ten days prior notice, provide to the requesting party, reasonable access at reasonable times to the officers, employees, agents, properties, offices and other facilities of each party and each party's subsidiaries and to the books and records thereof, including, without limitation, access to each party's accountants, any correspondence between each party and the accountants and work papers prepared with respect to any party to the merger agreement by the accountants; . furnish promptly information concerning its business, properties, contracts, assets, liabilities, personnel and other aspects as the requesting party may reasonably request; and 49 . comply with, and will cause their respective subsidiaries to comply with, all of their respective obligations under the confidentiality agreement dated July 17, 2001 between Geneve and Aristotle, as amended. No Solicitation of Other Proposals by Aristotle, Nasco and Geneve. The merger agreement contains detailed provisions prohibiting Aristotle, including its subsidiaries, Nasco and Geneve from seeking an alternative transaction. Under these "no solicitation" provisions, each of Aristotle, Nasco and Geneve has agreed that until the merger agreement is terminated, it will not, nor will it permit any of its subsidiaries or representatives acting on behalf of its subsidiaries to, directly or indirectly: . initiate, solicit or encourage any inquiries or the making of any proposal or offer with respect to a Competing Transaction, as defined below; . have any discussion with or provide any confidential information or data relating to the party or its subsidiaries to any person relating to a Competing Transaction; or . engage in any negotiations concerning a Competing Transaction, or otherwise facilitate any effort or attempt to make or implement a Competing Transaction or accept a Competing Transaction. However, the merger agreement does not prevent Aristotle from entering into discussions, or furnishing confidential information to a third party if: . Aristotle engages in any discussions or negotiations with, or provides any information to, any person in response to an unsolicited written Competing Transaction by the person; or . Aristotle recommends an unsolicited written Competing Transaction to the holders of its common stock if: . Aristotle's board of directors concludes in good faith, after consultation with independent financial advisors, that the Competing Transaction would, if consummated, result in a transaction more favorable to all or substantially all of the holders of its common stock other than the merger; and . Aristotle's board of directors determines, in good faith, after consultation with independent legal counsel, that this action is necessary for its board of directors to act in a manner consistent with its fiduciary duties under applicable law; and . prior to providing any information or data regarding Aristotle to any person or any of the person's representatives in connection with a proposal by the person, Aristotle receives from the person an executed confidentiality agreement on terms at least as restrictive on the person as those contained in the confidentiality agreement that was entered into between Geneve and Aristotle; and . prior to providing any information or data to any person or any of the person's representatives or entering into discussions or negotiations with any person or any of the person's representatives, Aristotle notifies Geneve and Nasco promptly of the receipt of a proposal indicating, in connection with the notice, the name of the person and attaching a copy of the proposal or offer or providing a complete written summary thereof. A "Competing Transaction" means any proposal or offer relating to a merger, reorganization, share exchange, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving, or any purchase or sale of all or any significant portion of the assets of Nasco, Aristotle or any of their subsidiaries, as applicable, taken as a whole, or 15% or more of the equity securities of Nasco or Aristotle, as applicable. Directors' and Officers' Indemnification and Insurance. The merger agreement contains provisions which state that, after the merger is complete: . Aristotle's proposed amended and restated certificate of incorporation and bylaws will contain the provisions regarding liability of directors and indemnification of directors, officers, employees, fiduciaries and agents of Aristotle that provide the maximum protection for them under Delaware law, 50 which provisions will not be amended, repealed or otherwise modified for a period of five years from the date on which the merger becomes effective in any manner that would affect adversely the rights thereunder of individuals who at or at any time prior to the date the merger becomes effective were directors, officers, employees, fiduciaries or agents of Aristotle. . For a period of five years after the date the merger becomes effective, Aristotle will cause to be maintained in effect policies of directors' and officers' liability insurance with coverage in amount and scope at least as favorable as Aristotle's existing policies with respect to claims arising from facts or events that occurred prior to the date the merger became effective. . Aristotle shall indemnify and hold harmless each of its present and former directors and officers as well as any other person covered by Aristotle's directors' and officers' liability insurance, as of the date the merger becomes effective, from and against any costs, judgments, fines, losses, obligations, claims, damages, liabilities, or expenses (including interest, penalties, reasonable out-of-pocket expenses and reasonable attorneys' fees incurred in the investigation or defense of any of the same or in asserting any of their rights hereunder), incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, to which the director or officer has been made a party by reason of the fact that the individual was a director or officer of Aristotle, arising out of, resulting from, or pertaining to matters existing or occurring at or prior to the date the merger becomes effective to the fullest extent that Aristotle would have been permitted or required under Delaware law and under Aristotle's certificate of incorporation, as in effect prior to the effectiveness of the merger, to indemnify the officers and directors; provided that any determination required to be made with respect to whether an officer's or director's conduct complies with the standards set forth under Delaware law and Aristotle's certificate of incorporation will be made by independent counsel selected by Aristotle. Issuance of Additional Shares of Aristotle's Common Stock. The merger agreement contains provisions which state that, in the event Aristotle issues any shares of its common stock or any securities convertible into its common stock prior to the closing date of the merger, Geneve will have the right to purchase, and Aristotle agrees to issue and sell to Geneve, at Geneve's sole discretion, a number of shares of Aristotle common stock sufficient to maintain Geneve's 50.99% ownership in Aristotle. The sale of securities to Geneve by Aristotle will be at a price equal to the mean of the high and low sales prices of Aristotle's common stock on the Nasdaq SmallCap Market on the date of the sale. Termination. The merger agreement may be terminated at any time prior to completion of the merger, whether or not stockholder approval has already been obtained, as follows: . by mutual written consent of Aristotle and Geneve duly authorized by each of Aristotle's and Geneve's board of directors; . by either Aristotle or Geneve if the merger is not completed by May 15, 2002, except that this right to terminate the merger agreement will not be available to any party whose failure to fulfill any obligation under the merger agreement has been the cause of, or has resulted in, the failure of the merger to be completed by this date; . by either Aristotle or Geneve if any governmental authority issues an order, decree or ruling or takes any other action permanently restraining, enjoining or otherwise prohibiting the merger, and the order, decree, ruling or other action becomes final and nonappealable; . by Geneve, if: . Aristotle's board of directors withdraws, modifies or changes its recommendation of the merger agreement in a manner adverse to Geneve, or has resolved to do so; . Aristotle's board of directors has refused to affirm its recommendation of the merger agreement as promptly as practicable after receiving a bona fide proposal or offer relating to a Competing 51 Transaction, but in any case within ten business days after receipt of any written request from Geneve or Nasco; . Aristotle's board of directors has recommended to the stockholders of Aristotle a Competing Transaction, or has resolved to do so; or . a tender offer or exchange offer for 15% or more of the outstanding shares of capital stock of Aristotle is commenced, and Aristotle's board of directors fails to recommend against acceptance of the tender offer or exchange offer by its stockholders, including not taking a position with respect to the acceptance of the tender offer or exchange offer by its stockholders. . by Geneve if Aristotle breaches or fails to perform in any material respects (which breach or failure cannot be or has not been cured within 30 days after giving notice of such breach or failure) any of its representations, warranties, covenants or other obligations contained in the merger agreement; and . by Aristotle if each of Nasco, Nasco Holdings or Geneve breaches or fails to perform in any material respects (which breach or failure cannot be or has not been cured within 30 days after giving notice of such breach or failure) any of its representations, warranties, covenants or other obligations contained in the merger agreement. Conduct of Aristotle's and Nasco's Business Pending the Merger. Under the merger agreement, each of Aristotle and Nasco has agreed that during the period before completion of the merger, it will ensure that it and its subsidiaries will conduct business and operations in the ordinary course in accordance with past practices. Each of Aristotle and Nasco has also agreed that it will use reasonable efforts to ensure that it and each of its subsidiaries preserves intact its current business organization, keeps available the services of its current officers, significant employees and consultants and maintains its relations and goodwill with all suppliers, customers, landlords, creditors, licensors, licensees, employees and others with whom they have business relationships. In addition to these agreements regarding the general conduct of its business, each of Aristotle and Nasco has agreed to some specific restrictions (except as disclosed in the disclosure schedules to the merger agreement), including the agreement not to: . amend or otherwise change its certificate of incorporation or bylaws except as set forth in Aristotle's proposed amended and restated certificate of incorporation; . issue, sell, pledge, dispose of, grant, transfer, lease, license, guarantee, encumber or authorize the issuance, sale, pledge, disposition, grant transfer, lease, license, guarantee or encumbrance of: . any property or assets of Nasco or Aristotle or any of its subsidiaries, except in the ordinary course of business and in a manner consistent with past practice; provided that, the aggregate amount of any the sale or disposition (other than a sale or disposition of products or other inventory in the ordinary course of business consistent with past practice) or pledge, grant, transfer, lease, license, guarantee or encumbrance of the property or assets of Nasco or Aristotle or any of its subsidiaries will not exceed $50,000; . any shares of capital stock of any class, or any options, warrants, convertible securities or other rights of any kind, including any phantom interest, to acquire any shares of capital stock of, or any other ownership interest in, Nasco or Aristotle or any of its subsidiaries, unless Geneve is given the right to purchase, and Aristotle agrees to issue and sell to Geneve, at Geneve's sole discretion, a number of shares of Aristotle common stock sufficient to maintain Geneve's 50.99% ownership in Aristotle; . declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock; . reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock; 52 . acquire, including, without limitation, by merger, consolidation, or acquisition of stock or assets, any interest in any corporation, partnership, other business organization, person or any division thereof or any assets, other than: . acquisitions of any assets in the ordinary course of business consistent with past practice that are not, in the aggregate, in excess of $50,000, or . purchases, whether for cash or upon an exchange, of inventory for resale in the ordinary course of business and consistent with past practice; . incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse, or otherwise as an accommodation become responsible for, the obligations of any person for borrowed money, except for indebtedness for borrowed money incurred in the ordinary course of business and consistent with past practice, provided, however, that in no event will Nasco incur funded indebtedness which would cause its aggregate funded indebtedness to exceed $46 million as of the closing date of the merger; . terminate, cancel or request any material change in, or agree to any material change in any material contract, as further described in the merger agreement, or enter into any contract or agreement material to the business, results of operations or financial condition of Nasco or Aristotle or any of its subsidiaries taken as a whole, in either case other than in the ordinary course of business, consistent with past practice; . make or authorize any capital expenditure; . increase the compensation payable or to become payable to its officers or employees, except for increases in accordance with past practices in salaries or wages of employees of Nasco or Aristotle or any of their respective subsidiaries who are not officers of the party, or grant any rights to severance or termination pay to, or enter into any employment or severance agreement with, any director, officer or other employee of Nasco or Aristotle or any of their respective subsidiaries, or establish, adopt, enter into or amend any collective bargaining, bonus, profit sharing, thrift, compensation, stock option (including, without limitation, the granting of stock options, stock appreciation rights, stock option appreciation unit awards, performance awards or performance restricted stock awards), stock purchase, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any director, officer or employee, except as set forth in the merger agreement and to the extent required by applicable law or the terms of a collective bargaining agreement or a contractual obligation existing on the date of the merger agreement; . take any action with respect to modifying accounting policies or procedures, other than actions in the ordinary course of business, consistent with past practice or the requirements of GAAP and as advised by Nasco's or Aristotle's regular certified independent public accountants; . waive, release, assign, settle or compromise any material claims or litigation involving money damages in excess of $50,000, except for claims asserted by Nasco or Aristotle or its subsidiaries; . make any material tax election or settle or compromise any material federal, state, local or foreign tax liability; . take any action that will be likely to result in Aristotle's or Nasco's applicable representations and warranties set forth in the merger agreement becoming false or inaccurate in any material respect; . take any action or fail to take any action that results in a Material Adverse Effect; or . allow the occurrence, as a result of the merger, of the triggering of a change of control or similar clause or any event which constitutes a default, or an event which with notice or lapse of time or both would become a default, under any material contract, agreement, lease, license, permit, franchise or other instrument or obligation to which it or any of its subsidiaries is a party. 53 Notice of Certain Events. Each of Aristotle, Nasco and Geneve promises to give the other prompt notice of the following events: . any notice or other communication from any person alleging the consent of the person is or may be required in connection with the merger; . any notice or other communication from any government entity, as further described in the merger agreement, in connection with the merger; . any actions, suits, claims, investigations or proceedings commenced or, to the best of its knowledge threatened in writing against, relating to or involving or otherwise affecting Aristotle, Nasco or Geneve, as the case may be, or any of its respective subsidiaries that relate to the consummation of the merger; . the occurrence of a default or event that, with notice or lapse of time or both, will become a default under any material contract; and . any change that is reasonably likely to result in a Material Adverse Effect or is likely to delay or impede the ability of either Aristotle, Nasco or Geneve, as the case my be, to consummate the transactions contemplated by the merger. Resignation of Specified Aristotle Directors. The merger agreement provides that Aristotle will use reasonable best efforts to obtain the resignations of the directors who no longer are required by the merger agreement and the stockholders agreement to be members of Aristotle's board of directors after the consummation of the merger. Expenses. All fees and expenses incurred in connection with the merger agreement will be paid by the party incurring the expenses, whether or not the merger is completed; provided however, in the event the merger agreement is terminated due to a breach of the agreement by a party, the breaching party will promptly pay to the non-breaching party the non-breaching party's expenses. Representations and Warranties. The merger agreement contains representations and warranties given by Geneve, Nasco Holdings, Nasco and, when applicable, Nasco's subsidiaries, relating to, among other things: . Nasco's corporate organization and qualification to do business; . subsidiaries of Nasco; . Nasco's charter documents and bylaws; . capitalization of Nasco; . each of Nasco's, Nasco Holdings' and Geneve's authority to enter into and binding nature of the merger agreement; . the absence of conflicts, violations and defaults under each of Nasco's, Nasco Holdings' and Geneve's articles of incorporation and bylaws or under other documents and agreements to which Nasco is a party; . required governmental consents; . permits, as described in the merger agreement, necessary to run Nasco's business; . litigation; . the absence of changes, as specified in the merger agreement, in Nasco's business since December 31, 2000; . Nasco's financial statements; . Nasco's employee benefit plans and labor matters; 54 . Nasco's contracts and debt instruments; . environmental matters; . Nasco's intellectual property; . taxes; . Nasco's property and leases; . Nasco's insurance policies; or . whether brokers, finders or investment bankers were involved in the merger. The representations and warranties given by Nasco, Nasco Holdings and Geneve in the merger agreement do not survive completion of the merger. The merger agreement also contains representations and warranties given by Aristotle and, when applicable, its subsidiaries, relating, to among other things: . corporate organization and qualification to do business; . subsidiaries of Aristotle; . Aristotle's charter documents and bylaws; . capitalization; . authority to enter into and binding nature of the merger agreement; . the absence of conflicts, violations and defaults under Aristotle's certificate of incorporation and bylaws or under other documents and agreements to which Aristotle is a party; . required governmental consents; . permits, as described in the merger agreement, necessary to run its business; . documents filed with the Securities and Exchange Commission and the financial statements included in those documents; . the absence of changes, as specified in the merger agreement, in Aristotle's business since June 30, 2001; . Aristotle's employee benefit plans and labor matters; . Aristotle's contracts and debt instruments; . absence of undisclosed litigation; . environmental matters; . Aristotle's intellectual property; . taxes; . Aristotle's property and leases; . Aristotle's insurance policies; or . whether brokers, finders or investment bankers were involved in the merger. The representations and warranties given by Aristotle in the merger agreement do not survive completion of the merger. The representations and warranties in the merger agreement are complicated and not easily summarized. You are urged to read carefully Article III of the merger agreement entitled "Representations and Warranties of 55 the Company" and Article IV of the merger agreement entitled "Representations and Warranties of Parent, Nasco Holdings and Nasco." Amendment. The merger agreement may be amended with the approval of the board of directors of Aristotle, Nasco, Geneve and Nasco Holdings at any time, except that, after the approval and adoption of the merger agreement by Aristotle's stockholders, no amendment will be made which increases the consideration to be given to Nasco's sole shareholder upon consummation of the merger. Restrictions on Sales of Shares of Aristotle Stock Received by Nasco Holdings The shares of Aristotle common stock to be issued to Nasco's sole shareholder, Nasco Holdings, in connection with the merger will be registered under the Securities Act of 1933, as amended, or the Securities Act. Nasco Holdings is deemed to be an "affiliate" of Nasco because it is Nasco's sole controlling shareholder. For this reason, Nasco Holdings may not sell its shares of Aristotle common stock acquired in connection with the merger except under: . an effective registration statement under the Securities Act covering the resale of those shares; . an exemption under paragraph (d) of Rule 145 of the Securities Act; or . any other applicable exemption under the Securities Act. The shares of Series J preferred stock to be issued to Nasco Holdings in connection with the merger will be issued in reliance upon the exemption from the registration requirements of the Securities Act as a private placement of unregistered securities under Section 4(2) of the Securities Act. Accordingly, the shares of Series J preferred stock will be "restricted securities," subject to a legend and will not be freely tradable in the United States until the shares are registered for resale under the Securities Act, or to the extent they are tradable under Rule 144 promulgated under the Securities Act or any other available exemption. Accordingly, any resale or other disposition of the securities in the United States must be made either under a registration statement filed by Aristotle with the Securities and Exchange Commission or under an exemption from the registration requirements of the Securities Act. Rule 144 of the Securities Act may provide an exemption from the registration requirements of the Securities Act for resale of the securities in the United States. However, since Nasco Holdings will be deemed an "affiliate" of Aristotle, any sale of any its securities under Rule 144 would be subject to volume limitations and require the satisfaction of specified conditions, including, among other things: . the sale occurring not less than one year after the effective time of the merger; . the availability of specified current public information about Aristotle; and . the sale being through an unsolicited "broker's transaction" or in transactions directly with a market maker (as the term is defined under the Securities Exchange Act of 1934, as amended). Aristotle's registration statement on Form S-4, of which this proxy statement-prospectus forms a part, does not cover the resale of shares of Aristotle common stock and Aristotle preferred stock to be received by Nasco Holdings in the merger. Stockholders Agreement Upon closing of the merger, Aristotle will enter into a stockholders agreement with Geneve and Nasco Holdings whereby Geneve and Nasco Holdings agree to vote their shares of Aristotle common stock which will comprise approximately 90% of Aristotle's voting stock after the merger, to nominate and elect as directors John J. Crawford, John Lahey and Sharon Oster. In the case of the death, incapacity or resignation of any of these directors, Geneve and Nasco Holdings agree to vote their shares of Aristotle common stock to elect another person from the members of Aristotle's board of directors prior to the close of merger (other than Edward Netter and Steven B. Lapin), who are willing to serve in this capacity. This stockholders agreement will terminate on the third anniversary of the closing date of the merger. 56 Exchange Agreement Aristotle and Geneve have entered into an exchange agreement providing that, immediately following the filing of the certificate of merger, Geneve will transfer to Aristotle all shares of Series I preferred stock owned by Geneve in exchange for the issuance by Aristotle to Geneve of an identical number of newly issued shares of Series J preferred stock. This exchange agreement results in Geneve owning less voting stock which insures that the percentage of the value of the voting stock of Aristotle beneficially owned by Geneve does not increase by more than 50 percentage points during the 3-year period ending on the merger date and, therefore, the utilization of the net loss operating carryovers of Aristotle will not be limited. Operations After the Merger As a result of the merger, Nasco will merge with Aristotle. Following the merger, John J. Crawford and Paul M. McDonald, Aristotle's current Chief Executive Officer and Chief Financial Officer, respectively, will remain in those positions, and Steven B. Lapin, Geneve's current President and Chief Executive Officer, will be appointed and act also as Aristotle's President and Chief Operating Officer, and Richard J. Ciurczak, Nasco's current President, will be appointed and act also as Aristotle's Executive Vice President of Business Development. Following the merger, the members of Aristotle's board of directors will be John J. Crawford, John Lahey, Steven B. Lapin, Donald T. Netter, Edward Netter, Sharon Oster, James G. Tatum and Roy T.K. Thung. Management of new Aristotle subsidiaries to be acquired as a result of the merger with Nasco and the respective membership of the subsidiaries' board of directors will remain unchanged as a result of the merger. As soon as practicable after the merger the assets and liabilities of Nasco acquired or assumed by Aristotle by virtue of the merger may be contributed to Simulaids, Inc., a wholly-owned subsidiary of Aristotle. Further, at the closing of the merger, Aristotle will change its accounting fiscal year, which currently ends on June 30th of each year, to a calendar accounting fiscal year and will amend its bylaws accordingly. Under the merger, the sole shareholder of Nasco will become a stockholder of Aristotle and its rights as a stockholder will be governed by Aristotle's amended and restated certificate of incorporation, Aristotle's amended and restated bylaws and the laws of the State of Delaware. See "Comparison of Rights of Nasco Shareholders and Aristotle Stockholders." 57 MANAGEMENT OF ARISTOTLE FOLLOWING THE MERGER Executive Officers of Aristotle The following table sets forth the name and age of and all positions to be held by individuals who will be the principal executive officers of Aristotle upon completion of the merger. These executive officers will serve at the discretion of Aristotle's board of directors, subject to employment agreements entered into with Messrs. Crawford and McDonald:
Name Age Title ---- --- ----- John J. Crawford 57 Chief Executive Officer Steven B. Lapin 56 President and Chief Operating Officer Paul M. McDonald 49 Chief Financial Officer
Compensation of Executive Officers Messrs. Crawford and McDonald have entered into employment agreements with Aristotle which terms are discussed on page 92 of this proxy statement-prospectus. No compensation agreement has been agreed to with Mr. Lapin. It is anticipated that Aristotle's board of directors will meet shortly after the completion of the merger to consider compensation arrangements for Mr. Lapin and other officers. Board of Directors of Aristotle Upon completion of the merger, the board of directors of Aristotle will be comprised of eight individuals, three of whom will be designated as provided in a stockholders agreement to be entered into by Aristotle, Geneve and Nasco Holdings in connection with the merger, which is described in more detail on page 74 of this proxy statement-prospectus. In connection with the consummation of the merger, Aristotle's amended and restated certificate of incorporation will be amended upon the filing of the certificate of merger to include changes whereby, among other things, the board of directors of Aristotle will no longer be subject to staggered terms. The following individuals have been initially designated to be directors of Aristotle upon completion of the merger:
Name Age Position to be held with Aristotle ---- --- ---------------------------------- John J. Crawford+* 57 Director and Chief Executive Officer John Lahey+* 55 Director Steven B. Lapin+ 56 Director, President and Chief Operating Officer Donald T. Netter 40 Director Edward Netter+ 69 Director Sharon Oster+* 53 Director James G. Tatum 60 Director Roy T.K. Thung 57 Director
- -------- + Existing member of Aristotle's board of directors * Designated as provided under the stockholders agreement between Aristotle, Geneve and Nasco Holdings Donald T. Netter will become a director of Aristotle upon consummation of the merger. He has served as Chairman and Chief Executive Officer of the managing member of the general partner of The Dolphin Limited Partnerships, investment limited partnerships for the last five years. Mr. Netter is also a director of Nasco and Nasco Holdings. Donald Netter is the son of Edward Netter. James G. Tatum will become a director of Aristotle upon consummation of the merger. For the past five years, he has served as a registered investment advisor in Birmingham, Alabama, managing funds for individual, corporate and trust clients. Mr. Tatum has served as a director of Independence Holding Company since April 2000. 58 Roy T.K. Thung will become a director of Aristotle upon consummation of the merger. Since January 2000, he has served as Chief Executive Officer of Independence Holding Company, a holding company engaged principally in the life and health insurance business. From July 1999 through January 2000, he served as President of Independence Holding Company. For more than five years prior to July 1999, Mr. Thung served as Executive Vice President and Chief Financial Officer of Independence Holding Company. He has also served as Executive Vice President of Geneve for the past five years. Mr. Thung also is a director of Nasco and Nasco Holdings. Biographies for John J. Crawford, John Lahey, Steven B. Lapin, Edward Netter and Sharon Oster are contained in the section entitled "Information Concerning Aristotle--Current Management" on page 87 of this proxy statement-prospectus. Committees of Aristotle's Board of Directors. Upon completion of the merger, the board of directors of Aristotle initially will have two committees: . an audit committee, which will be comprised of three directors, who will be John Lahey, Sharon Oster and James Tatum. The duties of the audit committee include reviewing Aristotle's financial statements and the scope of the independent annual audit and internal audits. It also reviews the independent accountants' letter to management concerning the effectiveness of Aristotle's internal financial and accounting controls, and reviews and recommends to Aristotle's board of directors the firm to be engaged as Aristotle's independent accountants. The audit committee may also examine and consider any other matters relating to the financial affairs and operations of Aristotle as it determines to be appropriate; and . a human resources and stock option committee, which will be comprised of three directors to be appointed shortly after the completion of the merger. The human resources and stock option committee will review the salary structure and policies of Aristotle and its subsidiaries and make recommendations to Aristotle's board of directors relating to Aristotle's 2002 Stock Plan. Compensation of Directors The three independent members of Aristotle's board of directors after the merger, Messrs. Lahey and Tatum and Ms. Oster, each will receive a retainer of $7,500. In addition to the retainer, the chairperson and the members of the committees of the board will receive $550 or $500, respectively, for each meeting attended. Non-employee directors will be eligible to receive grants of stock options under the 2002 Stock Plan. The 2002 Stock Plan provides for the automatic grant of non-qualified options to Aristotle's non-employee directors. Each non-employee director, upon first being elected to the board of directors, will be eligible to receive an option to purchase 2,500 shares of Aristotle common stock, which will vest one year after the date of the grant of the option. Additionally, the 2002 Stock Plan provides for a grant to each non-employee director on the date of his or her reelection (provided that the director has served as a director since his or her initial election) of an option to purchase 500 shares, which will vest one year after the date of the grant of the option, assuming uninterrupted service on the board of directors. None of these options will be exercisable until at least 15 months following the effective date of the merger. If the merger is consummated and the stockholders of Aristotle approve the proposed 2002 Stock Plan, Aristotle will cease issuing options under the 1997 Employee and Director Stock Plan and, accordingly, will discontinue the automatic grants of options to non-employee directors under the 1997 Stock Plan. 59 CHANGES TO ARISTOTLE'S CERTIFICATE OF INCORPORATION Aristotle's Proposed Amended and Restated Certificate of Incorporation In connection with the merger, at Aristotle's annual meeting, holders of Aristotle common stock will be asked to consider and vote upon a proposal to amend and restate its certificate of incorporation as set forth in Aristotle's amended and restated certificate of incorporation attached to this proxy statement-prospectus as Annex B. Attached to the certificate of merger to be filed with the Delaware Secretary of State is a further Aristotle amended and restated certificate of incorporation reflecting additional changes discussed below. The initial amended and restated certificate of incorporation, among other things, increases the amount of Aristotle common stock authorized for issuance and authorizes and sets forth the rights, preferences and privileges of the Series I preferred stock and the Series J preferred stock. The increase in the amount of authorized common stock and the authorization of the Series I and Series J preferred stock is required as a condition to the closing of the merger to enable Aristotle to issue the merger consideration. More specifically, the initial amended and restated certificate of incorporation does the following: . increases the number of shares of Aristotle common stock authorized for issuance from 3,000,000 to 25,000,000, to, among other things, allow Aristotle to issue an aggregate of 15,000,000 shares of common stock to the sole shareholder of Nasco upon consummation of the merger between Aristotle and Nasco and issue shares of common stock upon conversion of the Series I preferred stock to be issued as a condition to closing of the merger. . authorizes issuance of up to 2,400,000 shares of Aristotle Series I $6.00 convertible cumulative 11% preferred stock for issuance (1) to holders of existing shares of Aristotle common stock on the closing date of the merger and (2) upon exercise of the options, to holders of options to purchase Aristotle common stock under Aristotle's 1997 Employee and Director Stock Plan as a closing condition of the merger agreement with the rights, preferences and privileges set forth in the section entitled "Description of Aristotle's Capital Stock" of this proxy statement-prospectus on page 70 herein. . authorizes issuance of up to 11,200,000 shares of Aristotle Series J $6.00 non-voting cumulative 12% preferred stock to be issued to the sole holder of shares of Nasco common stock under the terms of the merger and to Geneve under the terms of the exchange agreement with the rights, preferences and privileges set forth in the section entitled "Description of Aristotle's Capital Stock" of this proxy statement-prospectus on page 70 herein. Additionally, the initial amended and restated certificate of incorporation directly addresses issues regarding officer, director and agent liability for actions taken on behalf of Aristotle, including limiting personal liability of Aristotle's directors to the fullest extent allowed under Delaware General Corporate Law and detailing certain indemnification obligations of Aristotle relating to its directors, officers and agents. For instance, the amended and restated certificate of incorporation states that Aristotle: . will indemnify, and advance expenses to, directors and officers subject only to limits created by applicable Delaware law, statutory or non-statutory, with respect to action for breach of duty to Aristotle, its stockholders, and others; . will indemnify each person who is in any way involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that he or she is or was a director or officer of Aristotle or subsidiary of Aristotle, and Aristotle will advance all expenses actually or reasonably incurred by any of those persons in defense of any proceeding prior to its final determination, to the fullest extent authorized by the Delaware General Corporation Law; . may enter into contracts to provide officers, directors, employees or agents with specified rights of indemnification to the maximum extent permitted by the Delaware General Corporation Law; and . in the event that the Delaware General Corporation Law is amended to expand the indemnification permitted to directors and officers, must indemnify those persons to the fullest extent provided by the law, as amended. 60 Aristotle's amended and restated certificate of incorporation further states that in any proceeding against Aristotle to enforce these rights, each person will be presumed to be entitled to indemnification and Aristotle will have the burden of proving that the person has not met the standards of conduct for permissible indemnification set forth in the Delaware General Corporation Law, except that if the Delaware General Corporation Law requires the payment of expenses in advance of the final disposition of a proceeding, Aristotle may only pay the expenses if that person undertakes to repay Aristotle if it is ultimately determined that he or she was not entitled to indemnification. Aristotle's amended and restated certificate of incorporation also provides that, if Aristotle fails to make an indemnification payment within 60 days after a payment is claimed by a director or officer, the person is permitted to petition a court of Delaware to make an independent determination as to whether the person is entitled to indemnification. Under the terms of the merger agreement, if approved by Aristotle's stockholders, Aristotle's amended and restated certificate of incorporation will be filed immediately prior to the closing of the merger. Changes to Aristotle's Certificate of Incorporation Following the Merger In connection with the merger, Aristotle's certificate of incorporation will be further amended. This amended and restated certificate of incorporation, which will be filed with the certificate of merger and is attached as Annex G to this proxy statement-prospectus, will reflect the removal of provisions that do the following: . establish staggered terms for and classification of the members of Aristotle's board of directors; . mandate that special meetings of Aristotle's stockholders may only be called by the chairman of Aristotle's board of directors, Aristotle's president or Aristotle's board of directors; and . state that any action required or permitted to be taken by Aristotle's stockholders must be taken at an annual or special meeting of the stockholders and may not be affected by any consent in writing unless such consent is unanimous. The amended and restated certificate of incorporation to be filed with the certificate of merger also revises the manner in which Aristotle may adopt, amend or repeal its certificate of incorporation and bylaws. The second amended and restated certificate of incorporation will not take effect unless and until the merger is declared effective by the Secretary of State of the State of Delaware. By voting for the merger agreement proposal, you will be voting in favor of filing, in conjunction with the merger, the second amended and restated certificate of incorporation. 61 RELATIONSHIP BETWEEN ARISTOTLE AND NASCO AND ITS AFFILIATES Nasco is a wholly owned subsidiary of Nasco Holdings, Inc., a majority owned subsidiary of Geneve Corporation. Geneve beneficially owns approximately 51% of the outstanding Aristotle common stock, and immediately after the merger will beneficially own approximately 90% of the voting stock of Aristotle. Through its ability to elect a majority of the directors of Aristotle, after the merger Geneve will have the ability to control all matters relating to the management of Aristotle, the issuance of Aristotle common stock and other securities of Aristotle and the payment of dividends on Aristotle capital stock. Geneve will also have the ability to control Aristotle's development, capital, operating and acquisition expenditure plans. In addition, Geneve will have effective control over the outcome of all matters upon which Aristotle stockholders vote. Aristotle and Geneve entered into a preferred stock purchase agreement dated October 22, 1997, as amended, whereby Geneve purchased 489,131 shares of Aristotle's Series E convertible preferred stock for $4.60 per share and an aggregate purchase price of $2,250,000. Geneve has since converted all of its outstanding shares of Series E preferred stock to Aristotle common stock. Under Section 5.05 of the preferred stock purchase agreement, Aristotle granted Geneve the right to designate two members to Aristotle's board of directors. Currently, Geneve has designated Steven B. Lapin and Edward Netter to Aristotle's board of directors. Further, Section 5.05 includes the provision that, at any meeting of the holders of Aristotle capital stock through January 1, 2003, Geneve will exercise its voting rights and privileges of those shares that exceed 30% of the then outstanding voting securities for or against any proposal related to the election of directors or the appointment of auditors in the same percentage as all other voting securities in Aristotle were voted for or against the proposal in a preliminary vote taken for this purpose at the meeting. Under the terms of the merger agreement, effective on the date of the consummation of the merger, the preferred stock purchase agreement, and all amendments thereto, will terminate and be of no further force or effect. In connection with Geneve's purchase of Aristotle's Series E preferred stock, Aristotle entered into a registration rights agreement dated October 22, 1997 with Geneve whereby Aristotle agreed, at Geneve's request, to register with the SEC Geneve's shares of common stock obtained upon conversion of any Aristotle preferred stock owned by Geneve. On February 9, 2000, Geneve loaned Aristotle $330,000 under a promissory note with interest to accrue at a rate of 8% per annum, payable quarterly in arrears. In consideration of the loan, on February 5, 2000 and May 5, 2000, Geneve converted all of its outstanding Aristotle Series F, Series G and Series H preferred stock into 98,715 shares of Aristotle common stock. Under a letter dated April 28, 2000, Geneve agreed not to acquire, without the prior written consent of Aristotle's board of directors, additional shares of Aristotle capital stock, if the purchase would cause Geneve to beneficially own more than 51% of the total issued and outstanding shares of Aristotle capital stock. Under a letter dated June 16, 2000, Geneve agreed to accept as payment in full for the February 9, 2000 promissory note 56,100 shares of Aristotle common stock. Nasco Holdings and its wholly owned subsidiary, Nasco, are parties to a management agreement dated January 1, 1993, as amended from time to time, under which Nasco Holdings provides consulting, advisory and other services to Nasco. The management agreement calls for Nasco to pay Nasco Holdings $1,611,600 per year for services rendered. As a closing condition to the merger, the management agreement will be terminated prior to or on the closing date of the merger. 62 PRO FORMA FINANCIAL DATA (unaudited) The following unaudited pro forma statement of operations for the twelve months ended December 31, 2001 reflects the historical accounts of Nasco International, Inc. and Aristotle for the period adjusted to give pro forma effect to the Aristotle acquisition as if the transaction and the related stock dividend issuance had occurred at the beginning of the period. The pro forma statements of operations also reflect the Nasco acquisition of Spectrum Educational Supplies, Ltd., or Spectrum, as if it had occurred at the beginning of the period. The following unaudited pro forma balance sheet as of December 31, 2001 reflects the historical accounts of Nasco and Aristotle as of that date adjusted to give pro forma effect to the Aristotle acquisition as if the transaction had occurred as of December 31, 2001. Under the merger agreement, Nasco Holdings, the direct parent of Nasco, will receive 15,000,000 shares of Aristotle common stock and 10,000,000 shares of Series J $6.00 non-voting cumulative 12% preferred stock, carrying a per annum dividend of 12% (collectively, the Nasco Consideration), in exchange for all of the common stock of Nasco. The board of directors of Aristotle will also declare a stock dividend on the date of the closing of the merger so that each holder of Aristotle common stock as of the date of the merger will receive one share of Series I $6.00 convertible voting cumulative 11% preferred stock. Each share of Series I preferred stock will carry a dividend of 11% per annum and will be convertible for a three month period beginning on the fifth anniversary of the merger into one-half share of Aristotle common stock, subject to adjustment. Immediately after the merger, Geneve will exchange its shares of Series I preferred stock for an identical number of Series J preferred stock. After the merger, Aristotle will have a capitalization of approximately 17 million common shares and 12 million preferred shares. Geneve, the indirect parent of Nasco, owns approximately 51% of Aristotle. However, as a result of a voting restriction agreement between Geneve and Aristotle, for accounting purposes, Geneve is deemed not to have control over Aristotle. Following the merger, Geneve will beneficially own approximately 90% of the combined companies. Because Geneve will beneficially own a majority of the outstanding shares of Aristotle common stock upon completion of the transaction, the merger will be accounted for as a reverse acquisition of entities under common ownership. Accordingly, for accounting purposes, Aristotle will be treated as the acquired company and Nasco will be considered to be the acquiring company. The accompanying pro forma balance sheet therefore reflects the recapitalization of Nasco's stockholders equity resulting from the Nasco Consideration. Under reverse acquisition accounting, the purchase price of Aristotle is based on the fair market value of the Aristotle common and Series I preferred stock held by and issued to the non-Geneve stockholders and the historical cost carryover basis of the Aristotle common stock held by Geneve. The Series I preferred stock issued to Geneve will be treated as a stock dividend as a result of Nasco's ownership in Aristotle prior to the merger. The purchase price will be allocated to the Aristotle assets and liabilities acquired by Nasco based on their estimated fair market values at the merger date. Aristotle's financial position and results of operations will not be included in Nasco's consolidated financial statements prior to the date the merger is consummated. The pro forma financial data and accompanying notes should be read in conjunction with the Consolidated Financial Statements and related notes included in Aristotle's 2001 Annual Report on Form 10-K previously filed with the Securities and Exchange Commission, or SEC, the Form 10-Q for the quarter ended September 30, 2001 previously filed with the SEC, the Form 10-Q for the quarter ended December 31, 2001 previously filed with the SEC, and the financial information presented for Nasco included with this proxy statement-prospectus. Aristotle believes that the assumptions used in the following statements provide a reasonable basis on which to present the pro forma financial data. The pro forma financial data is provided for informational purposes only and should not be construed to be indicative of Aristotle's financial condition or results of operations had the Aristotle acquisition been consummated on the dates assumed and are not intended to project Aristotle's financial condition on any future date or results of operations for any future period. 63 The Aristotle Corporation Pro Forma Results of Operations For the Twelve Months Ended December 31, 2001 (dollars in thousands, except share data) (unaudited)
Nasco Nasco Aristotle Purchase Historical Acquisitions Historical of Aristotle Pro Forma ---------- ------------ ---------- ------------ ----------- Net revenues.............................. $161,961 $1,769/(1)/ $ 9,203 $(2,062)/(8)/ $ 170,871 Cost of goods sold........................ 105,447 1,049/(2)/ 4,639 (1,394)/(9)/ 109,741 -------- ------ ---------- ------- ----------- Gross profit (loss).................... 56,514 720 4,564 (668) 61,130 Selling expenses.......................... 15,631 185/(3)/ 1,020 (143)/(10)/ 16,693 General and administrative expenses....... 22,234 535/(4)/ 2,196 (1,771)/(11)/ 23,194 Product development expenses.............. 342 -- 714 -- 1,056 Special charges--American Educational Products, Inc. (AMEP)................... 612 -- -- -- 612 Goodwill amortization..................... 455 43/(5)/ 239 (239)/(12)/ 498 -------- ------ ---------- ------- ----------- Total operating expenses............... 39,274 763 4,169 (2,153) 42,053 -------- ------ ---------- ------- ----------- Operating income....................... 17,240 (43) 395 1,485 19,077 Investment and interest income............ 295 -- 219 -- 514 Interest expense.......................... (3,159) (58)/(6)/ (69) -- (3,286) Other, net................................ 160 -- -- -- 160 -------- ------ ---------- ------- ----------- Income (loss) before income taxes and minority interest.................... 14,536 (101) 545 1,485 16,465 Provision for income taxes................ (5,860) 22/(7)/ (71) (741)/(13)/ (6,650) -------- ------ ---------- ------- ----------- Income (loss) before minority interest. 8,676 (79) 474 744 9,815 Minority interest......................... (99) -- -- -- (99) -------- ------ ---------- ------- ----------- Net income............................. 8,775 (79) 474 744 9,914 Preferred dividends....................... -- -- -- 8,534 /(14)/ 8,534 -------- ------ ---------- ------- ----------- Net income applicable to common shareholders......................... $ 8,775 $ (79) $ 474 $(7,790) $ 1,380 ======== ====== ========== ======= =========== Basic earnings per common share........... $ 87,747 $ 0.25 $ 0.08 Diluted earnings per common share......... $ 87,747 $ 0.25 $ 0.08 Weighted average shares outstanding: Basic shares........................... 100 1,892,220 16,931,581 Diluted shares......................... 100 1,929,448 16,977,493
64 FOOTNOTES TO PRO FORMA STATEMENT OF OPERATIONS FOR THE TWELVE MONTHS ENDED DECEMBER 31, 2001 (dollars in thousands) (unaudited) (1) To record the historical sales of Spectrum of $1,801 for the three months ended March 31, 2001 to include results prior to the acquisition date, partially offset by the elimination of intercompany sales of $32 between Spectrum and Nasco. (2) To record the historical cost of sales of Spectrum of $1,801 for the three months ended March 31, 2001, partially offset by the elimination of intercompany costs between Aristotle and Nasco of $752. (3) To record the historical selling expenses of Spectrum of $185 for the three months ended March 31, 2001. (4) To record the historical administrative expenses of Spectrum of $535 for the three months ended March 31, 2001. (5) To record goodwill amortization related to the Nasco acquisition of Spectrum. (6) To record interest costs incurred related to the acquisition of Spectrum. (7) To record the income tax benefit related to costs incurred in the acquisition of Spectrum. (8) The elimination of intercompany sales between Nasco and Aristotle. (9) The elimination of intercompany transactions between Nasco and Aristotle of $1,911, additional costs of $631 resulting from the increase in the historical carrying value of the inventory and the resulting sale of such inventory in the twelve months ended December 31, 2001, and the reduction in depreciation and amortization expense of $114 due to the elimination of all Aristotle long-term assets. (10) The elimination of intercompany transactions between Nasco and Aristotle. (11) The elimination of Nasco Holdings management fees paid by Nasco of $1,612 and the reduction in depreciation and amortization expense of $159 due to the elimination of Aristotle long-term assets. (12) The reduction in amortization expense due to the elimination of Aristotle goodwill resulting from the application of purchase accounting to the assets and liabilities of Aristotle. (13) Recognition of an effective tax rate as a result of the balance sheet recognition of the deferred tax asset of $30,700 related to the future utilization of net operating loss carryforwards. (14) To record dividends on the preferred stock: 946,610 shares of Series I $6.00 preferred stock with an 11% dividend. The Series I preferred stock represents the shares distributed to the non-Geneve shareholders on the date of the closing of the merger................................................................$ 625 10,984,971 shares of Series J $6.00 preferred stock with a 12% dividend. The Series J preferred stock represents 984,971 shares distributed to Geneve on the date of the closing of the merger and 10,000,000 shares received by Nasco Holdings as part of the exchange for the common stock of Nasco..........................................................._7,909 Total............................................................................................$8,534
Dividends are subject to the discretion of the Aristotle board of directors and will be affected in part by future financial performance, available cash and restrictions on cash dividends as set forth in credit agreements which have been entered into by Nasco. Notes: Aristotle's financial information has been presented on a calendar year basis. A gain of $20,137 resulting from the generation of negative goodwill does not appear in the pro forma statement of operations because it is considered extraordinary. 65 The Aristotle Corporation Pro Forma Balance Sheet As of December 31, 2001 (dollars in thousands) (unaudited)
Nasco Aristotle Recapitalization Purchase Pro Historical Historical of Nasco of Aristotle Forma ---------- ---------- ---------------- ------------ -------- Cash and cash equivalents............... $ 4,465 $ 4,388 $ -- $ 31 /(2)/ $ 8,884 Marketable securities................... -- 794 -- -- 794 Accounts receivable..................... 13,750 716 -- (211)/(3)/ 14,255 Inventories............................. 24,326 847 -- 659 /(4)/ 25,832 Deferred income taxes................... 1,176 -- -- 5,647 /(5)/ 6,823 Other current assets.................... 6,275 154 -- -- 6,429 ------- --------- -------- --------- -------- Total current assets................. 49,992 6,899 -- 6,126 63,017 Property, plant and equipment, net...... 9,561 1,544 -- (1,544)/(6)/ 9,561 Other assets: Goodwill-net......................... 7,346 6,768 -- (6,768)/(6)/ 7,346 Deferred income taxes................ 423 -- -- 25,375 /(7)/ 25,798 Other noncurrent assets.............. 114 529 -- (529)/(6)/ 114 ------- --------- -------- --------- -------- $67,436 $ 15,740 $ -- $ 22,660 $105,836 ======= ========= ======== ========= ======== Current maturities of long-term debt.... $ 8,403 $ 85 $ -- $ -- $ 8,488 Accounts payable........................ 3,694 497 -- (50)/(8)/ 4,141 Accrued expenses........................ 5,385 482 150 /(1)/ 975 /(9)/ 6,992 Accrued tax reserves.................... -- 720 -- -- 720 Deferred revenue........................ -- 73 -- -- 73 ------- --------- -------- --------- -------- Total current liabilities............ 17,482 1,857 150 925 20,414 Long-term debt.......................... 36,027 659 -- -- 36,686 ------- --------- -------- --------- -------- Total liabilities.................... 53,509 2,516 150 925 57,100 Common stock............................ -- 20 150 /(1)/ (1)/(10)/ 169 Additional paid-in capital.............. 3,253 163,904 (3,253)/(1)/ (154,679)/(10)/ 9,225 Preferred stock--series I............... -- -- -- 5,680 /(11)/ 5,680 Preferred stock--series J............... -- -- 59,850 /(1)/ 5,910 /(12)/ 65,760 Retained earnings (deficit)............. 10,872 (150,541) (56,897)/(1)/ 164,666 /(13)/ (31,900) Treasury stock.......................... -- (69) -- 69 /(14)/ -- Foreign currency translation............ (198) 16 -- (16)/(15)/ (198) Net unrealized investment gains (losses) -- (106) -- 106 / (16)/ -- ------- --------- -------- --------- -------- Total stockholders' equity........... 13,927 13,224 (150) 21,735 48,736 ------- --------- -------- --------- -------- $67,436 $ 15,740 $ -- $ 22,660 $105,836 ======= ========= ======== ========= ========
66 FOOTNOTES TO PRO FORMA BALANCE SHEET AS OF DECEMBER 31, 2001 (dollars in thousands, except share data) (unaudited) (1)(a) The issuance of fifteen million shares of common stock to Nasco Holdings: Number of shares............. 15,000,000 Common stock ($.01 par value) $ 150 Paid-in-capital.............. (150)
(b) The issuance of ten million shares of Series J preferred stock to Nasco Holdings: Number of shares....................................... 10,000,000 Preferred stock ($6.00 stated value per share)......... $ 60,000 Preferred stock--estimated future cost of registration. (150) ----------- Preferred stock--net............................ 59,850 Accrued expenses--estimated future cost of registration 150 Paid-in-capital........................................ (3,103) Retained earnings...................................... (56,897)
(2) Thetiming of payments between Nasco and Aristotle. (3) Eliminationof intercompany transactions between Nasco and Aristotle. (4) The fair market value purchase price adjustment of Aristotle inventory... $631 The elimination of intercompany transactions between Nasco and Aristotle... 28 ---- Total............................................................... $659
(5)(a) Thecurrent portion of the net deferred tax asset of $30,700 related to the expected future utilization of Aristotle's federal net operating loss carryforwards, or NOLs. Aristotle's historical financial statements reflected a full valuation allowance related to its NOLs as a result of uncertainties regarding the realization of assets, including the lack of predictability of Aristotle's profitability and the variability of its operating results. However, as a result of projected future operating results of the combined entities, NOLs of $87,800 are expected to be utilized to offset federal taxable income through 2006 and a portion of 2007. Accordingly, a net deferred tax asset of $30,700, reflecting a 35% federal tax rate, has been recognized as an asset when recording the fair market value of assets and liabilities acquired. Aristotle NOLs which are projected to expire unutilized at the end of 2006 are included in the valuation allowance and, therefore, are not recognized as an asset................... $5,900 (b) The deferred tax liability resulting from the fair value adjustment of Aristotle's inventory........................................................................... (253) ------ Total....................................................................... $5,647
(6) The elimination of Aristotle long-term assets resulting from the recognition of negative goodwill. (7)(a) The non-current portion of the deferred tax asset of $30,700 related to the expected future utilization of Aristotle federal NOLs.......................................... $24,800 (b) The deferred tax asset resulting from the difference between the carrying value of property, plant and equipment for accounting and tax purposes......................... 575 ------- Total........................................................................... $25,375
(8) Elimination of intercompany transactions between Nasco and Aristotle. (9) Estimated transaction costs to be incurred in connection with the merger. (10)(a) The value of common stock issued to Non-Geneve shareholders at fair market value: Number of shares............. 946,610 Price per share.............. $ 3.00 Total value.................. $ 2,839 Common stock ($.01 par value) $ 9 Paid-in-capital.............. $ 2,830
67 In accordance with the merger agreement, on the date that the transaction is consummated the value of one share of Aristotle common stock shall not exceed $3.00, determined by subtracting from the Aristotle price of one share of Aristotle common stock prior to the merger the value of one share of Series I preferred stock at a stated value of $6.00. (b)The value of common stock issued to Geneve at historical carryover basis: Number of shares............... 984,971 Average weighted cost per share $ 5.91 Total value.................... $ 5,817 Common stock ($.01 par value).. $ 10 Paid-in-capital................ $ 5,807
The cost per share used in the adjustment is based on the historical cost of such shares adjusted to reflect the applicable equity income and loss of Aristotle but unadjusted for the subsequent Series I dividend to be issued as a condition to the consummation of the merger. (c)The value of the 115,500 stock options included in the 1997 Stock Plan and 80,000 stock appreciation rights, or SARs, included in Aristotle employment agreements. Aristotle has computed the value of each stock option at $3.70 using the Black-Scholes option-pricing model and the value of each SAR at $2.00, which is equivalent to the excess of the assumed fair market value over the stated price. All 1997 Stock Plan options are fully vested. Paid-in-capital $588
(d)The elimination of Aristotle's common stock and paid-in-capital: Common stock... $ 20 Paid-in-capital $163,904
(11) The Series I preferred stock issued to non-Geneve stockholders in conjunction with the merger: Number of shares...... 946,610 Stated value per share $ 6.00 Total value........... $ 5,680
(12) The Series J preferred stock issued to Geneve in conjunction with the merger: Number of shares...... 984,971 Stated value per share $ 6.00 Total value.......... $ 5,910
(13)(a) Theextraordinary gain related to the negative goodwill created by the merger: Purchase price....................................................... $ 14,924 Transaction costs incurred........................................... 975 -------- Total Purchase Price................................................. 15,899 Fair market value of net assets acquired............................. (44,877) Elimination of Aristotle long term assets............................ 8,841 -------- Excess of fair market value of net assets acquired over the purchase price recognized as negative goodwill..................... 20,137 (b) The elimination of Aristotle's historical retained deficit..... 150,541 (c) The issuance of the Series J preferred stock dividend to Geneve (5,910) (d) The elimination of intercompany transactions between Nasco and Aristotle........................................................ (102) -------- Total........................................................ $164,666
(14) Theelimination of Aristotle's historical treasury stock. (15) Theelimination of Aristotle's historical foreign currency translation gains. (16) Theelimination of Aristotle's historical unrealized investment losses. 68 DESCRIPTION OF ARISTOTLE'S CAPITAL STOCK The following is a summary of the material terms of Aristotle's capital stock, as proposed in the amended and restated certificate of incorporation to be voted on at the 2001 Annual Meeting. Because it is only a summary, it does not contain all information that may be important to you. Therefore, you should read carefully the more detailed provisions of Aristotle's amended and restated certificate of incorporation attached hereto as Annex B and Aristotle's amended and restated bylaws. General The total authorized shares of capital stock of Aristotle will consist of (1) 25,000,000 shares of common stock, par value $0.01 per share, and (2) 15,000,000 shares of preferred stock, par value $0.01 per share. As of the record date, there were shares of Aristotle common stock outstanding and no shares of Aristotle preferred stock outstanding. After the closing of the merger, assuming the exercise of 58,000 options under the 1986 Stock Option Plan, the purchase at the closing of the merger of 135,000 shares of common stock by management at market price and the exchange by Geneve of its Series I preferred stock for an identical amount of shares of Series J preferred stock, it is anticipated that there will be approximately 17,124,000 shares of Aristotle common stock outstanding, approximately 1,140,000 shares of Aristotle Series I preferred stock outstanding and approximately 10,985,000 shares of Series J preferred stock outstanding. Aristotle Common Stock As of the record date, there were shares of Aristotle common stock outstanding held by approximately stockholders of record. Shares of Aristotle common stock are currently listed on the Nasdaq Small Cap Market under the symbol "ARTL". Holders of Aristotle common stock are entitled to one vote for each share held on all matters submitted to a vote of stockholders and do not have cumulative voting rights. Holders of Aristotle common stock are entitled to receive ratably dividends, if any, as may be declared by Aristotle's board of directors out of funds legally available therefor, subject to any preferential dividend rights of any outstanding class or series of preferred stock. Upon the liquidation, dissolution or winding up of Aristotle, the holders of Aristotle common stock are entitled to receive ratably the net assets of Aristotle available after the payment of all debts and other liabilities and subject to any prior rights of any outstanding class or series of preferred stock. Holders of Aristotle common stock have no preemptive, subscription, redemption or conversion rights. The outstanding shares of Aristotle common stock are fully paid and nonassessable. The rights, preferences and privileges of holders of Aristotle common stock are subject to, and may be adversely affected by, the rights of the holders of shares of any class or series of preferred stock which Aristotle may designate and issue in the future. For information concerning voting rights of the common stock in the event of a proposed change in control of Aristotle, review the change in control section under "Comparison of Rights of Nasco Shareholders and Aristotle Stockholders" beginning on page 76. Aristotle Preferred Stock The authorized but unissued shares of Aristotle preferred stock are available for issuance from time to time at the discretion of the Aristotle board of directors without stockholder approval. The Aristotle board of directors has the authority to determine for each series of Aristotle preferred stock it establishes the number, designation, preferences, limitations, and relative rights of the shares of each series, subject to applicable law and the provisions of any outstanding series of Aristotle preferred stock. The terms of any series of Aristotle preferred stock, including without limitation the dividend rate, redemption price, liquidation rights, sinking fund provisions, conversion rights, voting rights, and any corresponding effect on other stockholders, will be dependent largely on factors existing at the time of issuance. The terms and effects could include restrictions on dividends on the Aristotle common stock if dividends on the Aristotle preferred stock are in arrears, dilution of the voting power of other stockholders to the extent a series of the Aristotle preferred stock has voting rights, and reduction of amounts available for liquidation as a result of any liquidation preference granted to any series of Aristotle preferred stock. 69 Aristotle Series I Preferred Stock The description set forth below of the Aristotle Series I preferred stock is qualified in its entirety by reference to Aristotle's proposed amended and restated certificate of incorporation, a copy of which is attached as Annex B to this proxy statement-prospectus. Upon the adoption and filing of the proposed amended and restated certificate of incorporation, Aristotle will authorize the Series I preferred stock as a new series of Aristotle preferred stock, consisting of up to 2,400,000 shares, par value $0.01 per share. The stated value of the Series I preferred stock is $6.00 per share, subject to adjustment for stock dividends, combinations, splits, or recapitalizations. Holders of Aristotle Series I preferred stock have no subscription or redemption rights. For information concerning voting rights of Series I preferred stock in the event of a proposed change in control of Aristotle, review the change in control section under "Comparison of Rights of Nasco Shareholders and Aristotle Stockholders" beginning on page 76. Dividends Each holder of Series I preferred stock is entitled to receive, if declared by the board of directors but only out of funds that are legally available, cash dividends at the rate of 11% per year on each share of Series I preferred stock. The dividends are cumulative and accrue daily on each share of Series I preferred stock, whether or not earned or declared. The dividends are payable on March 31 and September 30 of each year, if declared by the board of directors. Unless all cumulative dividends on shares of Series I preferred stock have been paid in cash or been declared in full and cash sums set apart to pay those dividends, Aristotle may not pay or declare any dividend or make any other distribution, to holders of common stock or any other stock junior to the Series I preferred stock, nor may Aristotle purchase, redeem, or otherwise acquire for value any shares of stock junior to Series I preferred stock (except for shares of common stock that it acquires (1) under any agreement permitting or requiring Aristotle to purchase shares of common stock held by any individual ceasing to provide services to Aristotle or (2) upon exercising a right of first refusal upon proposed transfer by a holder of common stock). The Series I preferred stock ranks on a parity with the Series J preferred stock. If Aristotle pays in cash any dividends on the Series J preferred stock, or declares any dividends on the Series J preferred stock and sets apart cash sums to pay those dividends, it will also pay or declare dividends on the Series I preferred stock representing a percentage of cumulated Series I dividends that is equal to the percentage of cumulated Series J dividends that is represented by the dividends paid or declared on the Series J preferred stock. Liquidation Upon occurrence of a liquidation, dissolution, or winding up of Aristotle, whether voluntary or involuntary, each holder of shares of Series I preferred stock will be entitled to receive out of the remaining assets of Aristotle available for distribution to stockholders, before any distribution of assets is made to holders of stock junior to the Series I preferred stock, an amount per share of Series I preferred stock equal to the stated value of $6.00 plus an amount equal to all accumulated and unpaid dividends, whether or not declared by the board of directors, on each share up to the date fixed for distribution. After payment of the full amount of the liquidating distribution to which they are entitled, holders of shares of Series I preferred stock will not be entitled to participate any further in any distribution of assets by Aristotle. If upon occurrence of a liquidation the assets of Aristotle available for distribution to its stockholders are insufficient to pay the holders of the Series I preferred stock the full amount, holders of Series I preferred stock will share ratably in any distribution of assets so that each holder receives, per share, the same percentage. A reorganization, consolidation or merger of Aristotle or a sale or other disposition of all or substantially all of the assets of Aristotle will not constitute liquidation, dissolution or winding up for purposes of the Series I liquidation preference. The Series I preferred stock ranks on a parity with the Series J preferred stock. If Aristotle pays any amount to the holders of Series J preferred stock, it will simultaneously pay an equal percentage to the holders of Series I preferred stock. 70 Optional Conversion Any time during the 90-day period starting at midnight at the beginning of the fifth anniversary of the effective date of the merger, each share of Series I preferred stock will be convertible at the option of the holder into the number of fully paid and nonassessable shares of common stock as is determined by dividing (i) an amount equal to the stated value of the Series I preferred stock at that time plus an amount equal to the unpaid dividends that have accrued on each share of Series I preferred stock up to the fifth anniversary date, by (ii) the conversion price for the Series I preferred stock in effect on the date the certificate is surrendered for conversion. The conversion price is initially $12.00, but is subject to adjustment as described below. Subsequent to the conversion of any shares of Series I preferred stock, Aristotle will not be required to pay any dividends that have accumulated on those shares. Aristotle will give each holder of shares of Series I preferred stock between 60 to 90 days' advance notice of the conversion period. Shares of Series I preferred stock may not be converted at any time other than during the 90-day conversion period. After the expiration of the 90-day period following the fifth anniversary of the effective date of the merger, holders of Series I preferred stock will no longer be able to convert their shares. The conversion price is subject to adjustment in several circumstances including: . If Aristotle issues, after the date upon which any shares of Series I preferred stock were first issued, shares of common stock without consideration, to an affiliate of Aristotle for a consideration per share less than the conversion price in effect immediately prior to the issuance of the additional stock, or to any other person for less than the market price immediately prior to the issuance, the conversion price in effect immediately prior to the issuance will automatically be adjusted. The adjusted conversion price is determined by multiplying the initial conversion price by a fraction, the numerator of which is the fully diluted number of shares of common stock outstanding immediately prior to the issuance plus the number of shares of common stock that the aggregate consideration received by Aristotle for the issuance would purchase at the conversion price in effect immediately prior to the issuance, and the denominator of which is the number of shares of common stock deemed outstanding immediately prior to the issuance plus the number of shares of common stock issued. In no circumstances may the conversion price be increased. The number of shares of common stock deemed to be outstanding as of a given date will be the sum of the number of shares of the common stock actually outstanding (which excludes shares held in treasury), the number of shares of common stock into which the then-outstanding shares of Series I preferred stock would be converted if fully converted on the day immediately preceding the given date and the number of shares of common stock that would be obtained through the exercise or conversion of all other rights, options and convertible securities exercisable or convertible on the day immediately preceding the given date. The adjustment to the conversion price described above shall not occur if Aristotle issues: . shares of common stock to officers, employees, directors, or consultants under an agreement or plan approved by Aristotle's board of directors or shares of common stock underlying options to purchase or rights to subscribe for shares of common stock or securities by their terms convertible into or exchangeable for common stock approved by the board of directors; or . common stock issued upon the conversion of the Series I preferred stock. . If, at any time after the date upon which any shares of Series I preferred stock were first issued, the number of shares of common stock outstanding is increased by a stock dividend payable in shares of common stock or by a subdivision or split-up of shares of common stock, then, upon the record date fixed for determining holders of common stock entitled to receive that stock dividend, subdivision or split-up, the conversion price will be appropriately decreased so as to increase the number of shares of common stock issuable on conversion of each share of Series I preferred stock in proportion to that increase in outstanding shares of common stock. 71 . If, at any time after the date upon which any shares of Series I preferred stock were first issued, the number of shares of common stock outstanding is decreased by a combination or reverse split of the outstanding shares of common stock, then, upon the record date for that combination or reverse split, the conversion price will be appropriately increased so as to decrease the number of shares of common stock issuable on conversion of each share of Series I preferred stock in proportion to that decrease in outstanding shares of common stock. . If, at any time after the date upon which any shares of Series I preferred stock were first issued until the end of the conversion period, Aristotle pays any dividend or makes any other distribution to holders of shares of its common stock other than a dividend or distribution of shares of common. . stock and the aggregate value of the dividends and distributions made during any fiscal year exceeds $3,000,000, the conversion price will be decreased by the value, per share of outstanding common stock, of the amount by which those dividends or distributions exceed $3,000,000 in that fiscal year. In the case of this type of dividend or distribution to holders of common stock that is not a cash payment, the value per share of common stock of that dividend or distribution will be deemed to be the market value per share of common stock of the property so dividend or distributed, as determined in good faith by Aristotle's board of directors irrespective of any accounting treatment. . In the event, at any time after the date upon which any shares of Series I preferred stock were first issued, of any capital reorganization or any reclassification of the stock of Aristotle (other than a change in par value or as a result of a stock dividend or subdivision, split-up or combination of shares), consolidation, merger or sale of all or substantially all the assets of Aristotle, each share of Series I preferred stock will be convertible into the kind and number of securities or property of Aristotle or the resulting corporation equal to the number of shares of common stock the Series I preferred stock were convertible into immediately prior to the change. Voting Rights Each holder of shares of Series I preferred stock is entitled to one vote for each share of common stock into which each share of Series I preferred stock could then be converted. With respect to the vote, each holder has full voting rights and powers equal to the voting rights and powers of the holders of common stock and is entitled to vote, together with holders of common stock and not as a separate class, except as required by law, with respect to any question upon which holders of common stock have the right to vote. Lack of Established Market for the Series I Preferred Stock There is currently no public market for the Aristotle Series I preferred stock. Although an application will be made prior to the effective time for the listing of the Aristotle Series I preferred stock on the Nasdaq SmallCap Market, there can be no assurance that an active market for the Aristotle Series I preferred stock will develop or that, if approved for listing, the listing will continue while the Aristotle Series I preferred stock is outstanding. Future trading prices for the Aristotle Series I preferred stock will depend on many factors, including, among others, Aristotle's financial results, the market for similar securities and the volume of trading activity in the Aristotle Series I preferred stock. Aristotle Series J Preferred Stock The description set forth below of the Aristotle Series J preferred stock is qualified in its entirety by reference to Aristotle's proposed amended and restated certificate of incorporation, a copy of which is attached as Annex B to this proxy statement-prospectus. 72 Upon the adoption and filing of the proposed amended and restated certificate of incorporation, Aristotle will authorize the Series J preferred stock as a new series of Aristotle preferred stock, consisting of 11,200,000 shares, par value $0.01 per share. The stated value of the Series J preferred stock is $6.00 per share, subject to adjustment for stock dividends, combinations, splits, or recapitalizations. Holders of Aristotle Series J preferred stock have no subscription, redemption or conversion rights. For information concerning voting rights of Series J preferred stock in the event of a proposed change in control of Aristotle, review the change in control section under "Comparison of Rights of Nasco Shareholders and Aristotle Stockholders" beginning on page 76. Dividends Each holder of one or more shares of Series J preferred stock is entitled to receive, when and as declared by the board of directors, but only out of funds that are legally available, cash dividends at a rate of 12% per year on each share of Series J preferred stock. These dividends are cumulative and accrue on each share of Series J preferred stock, whether or not earned or declared. These dividends are payable on March 31 and September 30 of each year, if declared, by the board of directors. Unless all cumulative dividends on shares of Series J preferred stock have been paid in cash or declared in full and cash sums set apart to pay those dividends, Aristotle may not pay or declare any dividend or make any other distribution, to holders of common stock or any other stock junior to the Series J preferred stock. Aristotle may not purchase, redeem, or otherwise acquire for value any shares of stock junior to Series J preferred stock (except for shares of common stock that it acquires (1) under any agreement permitting or requiring Aristotle to purchase shares of common stock held by any individual ceasing to provide services to Aristotle or (2) upon exercising a right of first refusal upon proposed transfer by a holder of common stock). The Series J preferred stock ranks on a parity with the Series I preferred stock. If Aristotle pays in cash any dividends on the Series I preferred stock, or declares any dividends on the Series I preferred stock and sets apart cash sums to pay those dividends, it will also pay or declare dividends on the Series J preferred stock representing a percentage of cumulated Series J dividends that is equal to the percentage of cumulated Series I dividends that is represented by the dividends paid or declared on the Series I preferred stock. Liquidation Upon occurrence of a voluntary or involuntary liquidation, dissolution or winding up of Aristotle, each holder of shares of Series J preferred stock will be entitled to receive out of the remaining assets of Aristotle available for distribution to stockholders, before any distribution of assets is made to holders of stock junior to the Series J preferred stock, an amount per share of Series J preferred stock equal to $6.00 plus an amount equal to all accumulated and unpaid dividends, whether or not declared by the board of directors, on each share, up to the date fixed for distribution. After payment of the full amount of the liquidating distribution to which they are entitled, holders of shares of Series J preferred stock will not be entitled to participate any further in any distribution of assets by Aristotle. If upon occurrence of a liquidation, the assets of Aristotle available for distribution to its stockholders are insufficient to pay the holders of the Series J preferred stock the full amount due, holders of Series I preferred stock will share ratably in any distribution of assets so that each holder receives, per share, the same percentage of the liquidation amount. A reorganization, consolidation or merger of Aristotle or a sale or other disposition of all or substantially all of the assets of Aristotle will not constitute liquidation, dissolution or winding up for purposes of the Series J liquidation preference. Voting Rights Holders of shares of Series J preferred stock are not entitled to a vote with respect to their shares of Series J preferred stock, except as required by law. 73 Lack of Established Trading Market for the Series J Preferred Stock There is not currently, and there will not be, a public market for the Aristotle Series J preferred stock. Please see the section of this proxy statement-prospectus entitled "Restrictions on Sales of Shares of Aristotle Stock Received by Nasco Holdings" beginning on page 55 for more information. Stockholders Agreement At the time of the merger, Aristotle will enter into a stockholders agreement with Geneve and Nasco Holdings whereby Geneve and Nasco Holdings agree to vote their shares of Aristotle common stock which will comprise approximately 90% of Aristotle's voting stock after the merger, to nominate and elect as directors John J. Crawford, John Lahey and Sharon Oster. In the case of the death, incapacity or resignation of any of these directors, Geneve and Nasco Holdings agree to vote their shares of Aristotle common stock to elect another person from the members of Aristotle's board of directors prior to the close of merger, other than Edward Netter and Steven B. Lapin, who are willing to serve in this capacity. The stockholders agreement will terminate on the third anniversary of the closing of the merger. Aristotle Stockholder Rights Plan Aristotle does not have a stockholder rights plan. Transfer Agent and Registrar The transfer agent and registrar for Aristotle common stock is American Stock Transfer & Trust Company. The transfer agent's address is 59 Maiden Lane, New York, NY 10038, and its telephone number is (800) 937-5449. 74 COMPARISON OF RIGHTS OF NASCO SHAREHOLDERS AND ARISTOTLE STOCKHOLDERS Nasco is a Wisconsin corporation subject to the provisions of the Wisconsin Business Corporation Law, or WBCL. Aristotle is a Delaware corporation subject to the provisions of the Delaware General Corporation Law, or DGCL. Nasco's shareholder's rights are currently governed by Nasco's articles of incorporation, as amended, and Nasco's amended and restated bylaws, or Nasco's charter and bylaws, and the WBCL. Aristotle's stockholders' rights are currently governed by Aristotle's restated certificate of incorporation, or Aristotle's current charter, and Aristotle's amended and restated bylaws, or Aristotle's bylaws, and the DGCL. However, upon the affirmative vote of Aristotle's stockholders to approve and amend Aristotle's current charter at Aristotle's 2001 Annual Meeting and upon the filing of the certificate of merger, Aristotle's stockholders' rights will be governed by Aristotle's amended and restated certificate of incorporation, or Aristotle's amended charter, Aristotle's amended and restated bylaws and the DGCL. In addition, upon completion of the merger, Nasco's sole shareholder will become a stockholder of Aristotle and its rights will be governed by Aristotle's amended charter, Aristotle's amended and restated bylaws and the DGCL. The following description summarizes the material differences which may affect the current rights of the sole shareholder of Nasco and the rights of stockholders of Aristotle assuming (1) the stockholders approve the amendment and restatement of Aristotle's current charter at the 2001 Annual Meeting, and (2) the certificate of merger is filed further revising Aristotle's current charter. However, the following description is not a complete statement of all the differences, or a complete description of the specific provisions referred to in this summary. You are encouraged to read carefully the relevant provisions of the DGCL, the WBCL, Aristotle's current charter, Aristotle's amended charter, Aristotle's bylaws, and Nasco's charter and bylaws. Capitalization Nasco. The total authorized capital stock of Nasco consists of (1) 4,500 shares of common stock, par value $0.01 per share, and (2) 4,500 shares of preferred stock, par value $0.01 per share. As of the record date, there were 100 shares of Nasco common stock outstanding and no shares of Nasco preferred stock outstanding. Aristotle. Upon the approval and filing of Aristotle's amended charter, the total authorized shares of capital stock of Aristotle will consist of (1) 25,000,000 shares of common stock, par value $0.01 per share, and (2) 15,000,000 shares of preferred stock, par value $0.01 per share, of which 2,400,000 shares will be designated as Series I preferred stock and 11,200,000 shares will designated as Series J preferred stock. As of the record date, there were shares of Aristotle common stock outstanding and no shares of Aristotle preferred stock outstanding. After the closing of the merger, assuming the exercise of 58,000 options under the 1986 Stock Option Plan, the purchase at the closing of the merger of 135,000 shares of common stock by management at market price and the exchange by Geneve of its Series I preferred stock for an identical number of shares of Series J preferred stock, it is anticipated that there will be approximately 17,124,000 shares of Aristotle common stock outstanding, approximately 1,140,000 shares of Aristotle Series I preferred stock outstanding and approximately 10,985,000 shares of Series J preferred stock outstanding. The authorized but unissued shares of Aristotle preferred stock are available for issuance from time to time at the discretion of the Aristotle board of directors without stockholder approval. Voting Rights Nasco. Each holder of Nasco common stock is entitled to one vote for each share held of record. Under Nasco's charter, holders of Nasco preferred stock will have no voting rights, unless otherwise required under the WBCL. Aristotle. Each holder of Aristotle common stock is entitled to one vote for each share held of record. Each holder of Aristotle Series I preferred stock is entitled to one vote for each share of common stock into which each share of Series I preferred stock may then be converted. Holders of Aristotle Series J preferred stock are entitled to no voting rights. 75 Number of Directors Nasco. Nasco's board of directors currently consists of seven members. Nasco's bylaws provide that the number of directors will be fixed exclusively by Nasco's board of directors. Aristotle. Aristotle's board of directors currently consists of nine members. Aristotle's bylaws state that the number of directors will be fixed by the affirmative vote of a majority of the directors then in office, but will not be less than seven nor more than fifteen persons. Upon completion of the merger, the number of directors will be decreased to eight. Classification of Board of Directors Nasco. The WBCL allows the board of directors of a Wisconsin corporation to be divided into classes in order that the members of the board of directors will have staggered terms of office. However, Nasco's charter and bylaws do not provide for the classification of its board of directors. Accordingly, each director holds office for one year and until the director's successor has been elected or there is a decrease in the number of directors, or until the director's prior death, resignation or removal. Aristotle. The DGCL permits, but does not require, a classified board of directors, divided into as many as three classes with staggered terms under which one half or one-third of the directors are elected for terms of two or three years. However, Aristotle's amended charter and Aristotle's bylaws, which Aristotle anticipates will be amended shortly after the merger, will not provide for the classification of its board of directors. Accordingly, each director holds office for one year and until the director's successor has been elected or there is a decrease in the number of directors, or until the director's prior death, resignation or removal. Removal of Directors Nasco. Under the WBCL, absent a provision to the contrary contained in the corporation's articles of incorporation or bylaws, a director may be removed from office, with or without cause, by the affirmative vote of shareholders. Under the Nasco bylaws, a director may be removed from office for cause or without cause by the affirmative vote of the holders of a majority of the outstanding shares entitled to vote for the election of the director. Aristotle. Under the DGCL, absent a provision to the contrary contained in the corporation's certificate of incorporation any director or the entire board of directors may be removed from office, with or without cause, by the affirmative vote of the holders of at least a majority of the shares then entitled to vote at an election of directors. Aristotle's amended charter does not contain provisions relating to removal of directors; however, under the stockholders agreement to be entered into upon the closing of the merger, Geneve and Nasco Holdings agree for three years following the merger to vote for specified directors. Filling Vacancies on the Board of Directors Nasco. Under the WBCL and Nasco's bylaws, vacancies may be filled by the shareholders or by the affirmative vote of a majority of the directors, even if the directors remaining in office constitute less than a quorum. The WBCL also provides that if the vacant office was held by a director elected by a voting group of shareholders, only the shareholders of that voting group may vote to fill the vacancy if filled by shareholders, and only the remaining directors elected by that voting group may vote to fill the vacancy if filled by the directors. Aristotle. A vacancy or newly created directorship, whether resulting from an increase in the size of the board of directors, the death, resignation, disqualification or removal of a director or other cause may be filled solely by the affirmative vote of a majority of the remaining directors then in office, even if less than a quorum; provided that, under the stockholders agreement to be entered into upon the closing of the merger, Geneve and 76 Nasco Holdings agree for three years following the merger to fill a vacancy created by the death, resignation, incapacity of John J. Crawford, John Lahey or Sharon Oster, solely with a designee selected from the members of the board of directors prior to the closing of the merger, other than Edward Netter and Steven B. Lapin, who are willing to serve in this capacity. Amendments to the Charter Nasco. The WBCL permits the board of directors of a corporation to amend the corporation's articles of incorporation without shareholder action in specified limited circumstances. Unless the corporation's articles of incorporation provide otherwise, with respect to amendments requiring shareholder action, the board of directors must propose the amendments for submission to the corporation's shareholders. Under the WBCL, unless otherwise stated in the articles of incorporation, bylaws, or elsewhere in the WBCL, a proposed amendment is adopted by the shareholders if approved by a majority of the votes cast by every voting group entitled to vote on the amendment. The WBCL further provides that if the rights of a class of shares will be affected with respect to specified matters by an amendment, the holders of those shares may vote separately as a class, regardless of any limitations or restrictions on the voting power of the class. Nasco's charter does not limit the board of directors' right to amend the articles, without shareholder action, as allowed by the WBCL. With respect to amendments requiring shareholder approval, since Nasco's charter and bylaws do not contain any provisions requiring a greater vote, any amendment to its charter requires the approval of the holders of a majority of the outstanding shares of Nasco common stock. Aristotle. Under the DGCL, a corporation's certificate of incorporation may be amended only when proposed by a majority of the board of directors and the affirmative vote of the holders of a majority of the outstanding shares entitled to vote for the amendment, unless a higher vote is required by the corporation's certificate of incorporation. Aristotle's amended charter generally may be amended by the affirmative vote of the holders of a majority of the outstanding shares entitled to vote for the amendment. However, Aristotle's amended charter also requires the affirmative vote of holders of at least 80% of the outstanding shares of Aristotle's capital stock entitled to vote to amend provisions related to the required approval of proposed business combinations or the requisite vote necessary to amend the charter. Amendments to the Bylaws Nasco. Nasco's bylaws may generally be amended or repealed by the vote of a majority of the shareholders entitled to vote. The bylaws may also be amended or repealed by a majority of the board of directors unless the amendment will amend or repeal a bylaw adopted by the shareholders (i) prohibiting the director action or (2) requiring a greater or lower director quorum requirement for the board of directors. A bylaw that fixes a greater or lower voting or quorum requirement for shareholders than is otherwise provided in the WBCL may not be adopted, amended or repealed by the board of directors. Aristotle. Under the DGCL, the power to amend the bylaws rests with the stockholders entitled to vote, although the certificate of incorporation may give the board of directors power to amend the bylaws. Aristotle's amended charter and Aristotle's bylaws, which Aristotle anticipates will be amended shortly after the merger, will provide that Aristotle's bylaws may be amended or repealed, and new bylaws may be adopted, by the board of directors subject to the power of Aristotle's stockholders to adopt bylaws and to amend or repeal bylaws adopted by the board of directors. Special Stockholder Meetings Nasco. The WBCL provides that a corporation shall hold an annual meeting of shareholders if: (i) an annual meeting of shareholders is called by the board of directors or by any person or persons as may be authorized to do so by the corporation's articles of incorporation or bylaws or (ii) the holders of at least 10% of 77 all the votes entitled to be cast on any issue proposed to be considered at the proposed annual meeting sign, date and deliver to the corporation one or more written demands for the meeting describing one or more purposes for which it is to be held. Nasco's bylaws provide that an annual meeting may be called by the chairperson of the board of directors, the president, the board of directors, or by the person designated in a written request of the holders of not less than 10% of all shares of the corporation entitled to vote at the meeting. Aristotle. Under the DGCL, a special meeting of stockholders may be called by the board of directors or by such other person as may be authorized by the certificate of incorporation or bylaws. Aristotle's amended charter has no provision setting forth individuals authorized to call a special meeting of stockholders. Action by Consent of Stockholders Nasco. Under the WBCL, any action required to be taken at an annual or special meeting of the shareholders may be taken by the written consent of shareholders in lieu of a meeting. Further, the WBCL requires unanimous consent unless the articles of incorporation provide for action by less than unanimous consent. Nasco's charter provides that action may be taken by shareholders entitled to vote, but not by less than the minimum number of shares that would be required at a meeting where all shares entitled to vote were present. Aristotle. Under the DGCL, unless a corporation's certificate of incorporation specifies otherwise, stockholders may execute an action by written consent in lieu of a stockholder meeting. Limitation of Personal Liability of Directors Nasco. Wisconsin law imposes a statutory limit on the liability of directors of Wisconsin corporations without requiring the inclusion of a provision in a corporation's articles of incorporation. Under Wisconsin law, a director of a corporation is not liable to the corporation, its shareholders or persons asserting rights on behalf of the corporation or its shareholders, unless (1) the liability is based on a breach of the director's duty, whether the duty of care or duty of loyalty, to the corporation and its shareholders and (2) the breach constitutes (A) the director's willful failure to deal fairly with the corporation or its shareholders in connection with a matter in which the director had a material conflict of interest, (B) a violation of criminal law, unless the director had reasonable cause to believe that his or her conduct was lawful or no reasonable cause to believe his or her conduct was unlawful, (C) a transaction from which the director derived an improper personal profit, or (D) willful misconduct. Aristotle. The DGCL provides that a corporation's charter may include a provision limiting the personal liability of a director to the corporation or its stockholders for monetary damage for breach of fiduciary duty as a director. However, no provision in a corporation's charter can eliminate or limit the liability of a director for: . any breach of the director's duty of loyalty to the corporation or its stockholders; . acts or omissions not in good faith or which involve intentional misconduct of a knowing violation of the law; . willful or negligent violation of the laws governing the payment of dividends or the purchase or redemption of stock; or . any transaction from which the director derived an improper personal benefit. Aristotle's amended charter eliminates personal liability of the directors to the fullest extent allowed under the DGCL. Indemnification of Directors and Officers Nasco. Nasco's charter provides that Nasco will indemnify any and all persons to the fullest extent permitted by the WBCL. The WBCL provides that a director or officer that is party to a proceeding because of 78 his or her status as a director or officer is entitled to mandatory indemnification if he or she is successful in the defense of the proceeding. If he or she is not successful in the defense, the director or officer is still entitled to mandatory indemnification, unless the liability was incurred because the director or officer breached or failed to perform a duty that he or she owed to the corporation and the breach or failure to perform constitutes any of the following: . a willful failure to deal fairly with the corporation or its shareholders in a matter where he or she had a material conflict of interest; . a violation of criminal law, unless the director or officer had reasonable grounds to believe his or her conduct was lawful or no reasonable cause to believe the conduct was unlawful; . a transaction from which he or she derived an improper personal profit; or . willful misconduct. Furthermore, the WBCL states that it is the public policy of Wisconsin to require or permit indemnification in connection with a proceeding involving securities regulation, to the extent otherwise required or permitted under the WBCL. Nasco's bylaws state that provisions related to indemnification should be interpreted liberally in order to obtain and retain qualified officers, directors and employees. Aristotle. Aristotle's amended charter and Aristotle's bylaws provide that Aristotle will indemnify and make advancement of expenses to each of its directors, officers and agents to the fullest extent permitted by law. Aristotle will indemnify each of its directors and officers against all liabilities and expenses, including amounts paid in satisfaction of judgments, in compromise, or as fines and penalties, and counsel fees reasonably incurred by the director or officer in connection with the defense or disposition of any action, suit, or other proceeding, whether civil or criminal, in which the director or officer may be involved or with which the person may be threatened, while in office or thereafter, by reason of the person's being or having been a director or officer. However, indemnification will not apply with respect to any matter as to which the director or officer was adjudicated in any proceeding not to have acted in good faith in the reasonable belief that the director's or officer's action was in the best interest of Aristotle. Aristotle's amended charter provides that Aristotle is entitled to purchase and maintain indemnity insurance. Change in Control and Anti-Takeover Provisions Nasco. Wisconsin has enacted anti-takeover provisions. However, these provisions do not apply to Nasco shareholders because Nasco is not a publicly traded company. Aristotle. Aristotle's amended charter provides that the following business combinations must be approved by the affirmative vote of at least (a) the holders of two-thirds of the total number of outstanding shares of voting stock and (b) the holders of a majority of the voting power of the outstanding shares of voting stock, excluding shares held by an Affiliated Party, as defined below, or a party that will become an Affiliated Party after the approval of the matter: . any merger, consolidation or share exchange of Aristotle with any party that is, or will be after the event, an Affiliated Party; . any sale, lease, transfer or the like, outside the normal course of business, of assets of Aristotle with a book value of at least ten percent of the market value of Aristotle's stock to any Affiliated Party; . any issuance or transfer by Aristotle of any equity securities of Aristotle having an aggregate market value of five percent or more of the total market value of the outstanding shares of Aristotle to any Affiliated Party, except upon the exercise of warrants, rights or options to subscribe to or purchase securities offered, issued or granted pro rata to all holders of voting stock; 79 . any adoption of a plan for liquidation or dissolution of Aristotle proposed by an Affiliated Party; and . any reclassification of securities (including any reverse stock split), or recapitalization of Aristotle or any other transaction (whether or not with or into or otherwise involving an Affiliated Party) which has the effect, directly or indirectly of increasing the proportionate amount of the outstanding shares of any class of equity or convertible securities of Aristotle owned by any Affiliated Party. However, if the following conditions are met in any of the proposed business matters listed above, only the affirmative vote as is required by law and any other provision of Aristotle's amended charter is required: . The matter is approved by at least two-thirds of the unaffiliated directors who were in office prior to the time that the Affiliated Party became an affiliate; or . The aggregate amount of cash and market value of the stock or property of the business combination to be received per share by holders of common stock in the business combination will be at least equal to the highest of: (1) the highest per share price paid by the Affiliated Party for any shares of common stock acquired by it (a) within the two-year period immediately prior to the first public announcement of the proposal of the business combination or (b) in the transaction in which it became an Affiliate Party, whichever is higher; or (2) the market value per share of common stock of the same class or series on the announcement date or on the date that the Affiliated Party became an Affiliated Party, whichever is higher; or (3) the price per share equal to the market value per share of common stock of the same class or series, multiplied by the fraction of (a) the highest per share price paid by the Affiliated Party for any shares of common stock of the same class or series acquired by it within the two-year period immediately prior to the announcement date, over (b) the market value per share of common stock of the same class or series on the first day in the two-year period on which the affiliated party acquired shares of common stock; and . The aggregate amount of the cash and the market value of the stock or property to be received per share by holders of shares of any class or series of outstanding voting stock, other than common stock, will be at least equal to the highest of the following: (1) the highest per share price paid by the Affiliated Party for any shares of the class or series of voting stock acquired by it within the two-year period immediately prior to the announcement or in the transaction in which it became an Affiliated Party, whichever is higher; (2) the highest preferential amount per share to which the holders of shares of the class or series of voting stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of Aristotle; (3) the market value per share of the class or series of voting stock as of the announcement or closing date, whichever is higher; or (4) the price per share equal to the market value per share of the class or series of stock multiplied by the fraction of the highest per share price paid by the Affiliated Party for any shares of any class or series of voting stock acquired by it within the two-year period immediately prior to the announcement over the market value per share of the same class or series of voting stock on the first day in the two-year period on which the Affiliated Party acquired any shares of the same class or series of voting stock; and . The consideration to be received by holders of a particular class or series of outstanding voting stock will be in cash or in the same form as the Affiliated Party has previously paid for shares of the class or series of voting stock; and . After the Affiliated Party has become an Affiliated Party and prior to the consummation of the business combination: (1) all dividends, whether or not cumulative, declared must be paid on any outstanding preferred stock of Aristotle, unless a failure to do so is approved by a majority of the unaffiliated directors; (2) there may be no reduction in the annual rate of dividends paid on any class or series of the capital stock Aristotle, except as necessary to reflect any reclassification or subdivision of the capital stock, and except as approved by a majority of the unaffiliated directors; and (3) the Affiliated Party has not become the beneficial owner of any additional shares of capital stock except as part of the transaction which results in the Affiliated Party becoming an Affiliated Party or by virtue of proportionate stock splits or stock dividend; and 80 . After the Affiliated Party has become an Affiliated Party, the Affiliated Party may not receive the benefit, except proportionately as a shareholder, of any loans, advances, or any other financial assistance provided by Aristotle; and . A proxy or information statement describing the proposed business combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations must be mailed to public shareholders of Aristotle at least 20 days prior to the consummation of the business combination. "Affiliated Party" means any person who or which: (i)is the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding voting stock; or (ii)is an affiliate of Aristotle and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10% or more of the voting power of the then outstanding voting stock. Relevant Business Combination Provisions And Statutes Nasco. Sections 180.1130 to 180.1134 of the WBCL provide that certain business combinations not meeting specified fair price standards set forth in the statute must be approved by the affirmative vote of at least (i) 80% of the votes entitled to be cast by the outstanding voting shares of the corporation, and (ii) two-thirds of the votes entitled to be cast by the holders of voting shares other than voting shares beneficially owned by a "significant shareholder" or an affiliate or associate thereof who is a party to the transaction. The term "business combination" is defined to include, subject to certain exceptions, a merger or share exchange of the issuing public corporation (or any subsidiary thereof) with, or the sale or other disposition of substantially all of the property and assets of the issuing public corporation to, any significant shareholder or affiliate thereof. "Significant shareholder" is defined generally to mean a person that is the beneficial owner of 10% or more of the voting power of the outstanding voting shares of the issuing public corporation. Sections 180.1140 to 180.1144 of the WBCL prohibit certain "business combinations" between the corporation and an "interested shareholder" within three years after the date the person became an "interested shareholder." The term "interested shareholder" is defined to include a person beneficially owning 10% or more of the voting power of the outstanding voting stock of the corporation. These statute sections provide that a business combination or acquisition of stock by an "interested shareholder" not meeting specified adequacy-of-price standards may be consummated only with the approval of the holders of a majority of the voting stock not beneficially owned by the interested shareholder at a meeting called for this purpose. Section 180.1150 of the WBCL is a "scaled voting rights/control share acquisition" statute and, subject to enumerated exceptions, acts to reduce to one-tenth of their voting power all shares in excess of twenty percent owned by an acquiring person of an issuing public corporation. Aristotle. The DGCL provides that if a person acquires 15% or more of the stock of a Delaware corporation, the person may not engage in specified transactions with the corporation for a period of three years. The statute contains exceptions to this prohibition. If, for example, the board of directors approves the acquisition of stock or the transaction prior to the time that the person becomes an interested stockholder, or if the interested stockholder acquires at least 85% of the voting stock of the corporation (excluding voting stock owned by directors who are also officers and specified employee stock plans) in one transaction, or if the transaction is approved by the board of directors and the affirmative vote of two-thirds of the holders of the outstanding voting stock which is not owned by the interested stockholder at a meeting of the stockholders, then the prohibition on business combinations is not applicable. 81 INFORMATION CONCERNING ARISTOTLE Business Aristotle is a holding company which, through the following subsidiaries, develops and manufactures health and medical education teaching aids and computer-based training products: . Simulaids, Inc., a wholly-owned subsidiary, primarily designs, manufactures and markets manikins and simulation kits used for training in cardiopulmonary resuscitation, emergency rescue and patient-care fields. Simulaids' products are sold throughout the United States and internationally via distributors and catalogs to end users such as fire and emergency medical departments and nursing and medical schools. . Safe Passage International, Inc., of which Aristotle owns 80% of the outstanding stock, develops and licenses computer based training products to government and industry clients focused upon aviation security and general security industries. For further information about Aristotle's business and other information, you should review Aristotle's Annual Report on Form 10-K and Amendment No. 1 to Aristotle's Annual Report on Form 10-K/A attached hereto as Annex E. Subsequent Events On April 11, 2002, Aristotle announced that it had reached a settlement with the Internal Revenue Service regarding a refund it had received in 1997 for a net operating loss carryback claim relating to its 1996 tax year. As previously reported, the IRS had been reviewing the amount of the refund, and Aristotle recorded a tax reserve of $720,000 with respect to such refund. In the settlement, Aristotle agreed to pay approximately $682,000, (net of the amount due from a previously paid contingency fee), plus approximately $318,000, (net of the amount due from a previously paid contingency fee), which represents interest on the portion of the unallowed refund claim. Accordingly, Aristotle will expense $280,000 which will result in an earnings reduction of $0.14 per share as of March 31, 2002. Certain Transactions On September 14, 2000, Aristotle acquired 80% of the outstanding shares of common stock of Safe Passage, a privately-held Rochester, New York-based company, under a stock purchase agreement dated as of September 13, 2000 between Aristotle and the Safe Passage stockholders. In consideration for these shares, Aristotle paid an aggregate purchase price of $1.625 million in cash to Safe Passage shareholders. In addition, Aristotle has incurred approximately $0.3 million of transaction and other related costs associated with the acquisition of Safe Passage. 82 Stock Owned by Management and Principal Stockholders of Aristotle as of April 1, 2002 The following table sets forth, as of April 1, 2002, information regarding beneficial ownership of Aristotle's common stock by: . each person who is known to Aristotle to own beneficially more than 5% of the outstanding shares of Aristotle's common stock; . each director of Aristotle; . each executive officer of Aristotle who is named in the Summary Compensation Table on page 90; and . all executive officers and directors of Aristotle as a group. Unless otherwise indicated, all persons listed below have sole voting and investment power with respect to their shares and the address for each person is The Aristotle Corporation, 27 Elm Street, New Haven, Connecticut. In accordance with applicable securities regulations, the table below includes outstanding shares of common stock and shares of common stock subject to options which are exercisable within 60 days following April 1, 2002. All percentages assume that the options to purchase Aristotle common stock of a particular person or group in question, and no others, have been exercised. In preparing the table, Aristotle has relied on information furnished by each person.
Number of Shares of 5% Stockholders, Directors Common Stock Voting and Executive Officers Beneficially Owned Power -------------------------- ------------------- ------ 5% Stockholders: Geneve Corporation/(1)/........................ 984,971 51.0% Directors: John J. Crawford............................ 138,968/(2)/ 6.9% Robert L. Fiscus............................ 13,932/(3)/ * Betsy Henley-Cohn........................... 30,451/(4)/ 1.6% John Lahey.................................. 4,898/(5)/ * Steven B. Lapin............................. 0/(6)/ * Daniel J. Miglio............................ 20,732/(7)/ 1.1% Edward Netter............................... 984,971/(8)/ 51.0% Sharon M. Oster............................. 49,931/(9)/ 2.6% John C. Warfel.............................. 11,504/(10)/ * Named Officers (excluding Mr. Crawford) Paul McDonald............................... 47,639/(11)/ 2.4% All Executive Officers and Directors as a group (10 persons)................................. 1,303,056 62.8%
- -------- * Less than 1% (1)Geneve Corporation's address is 96 Cummings Point Road, Stamford, Connecticut. Director Steven B. Lapin is the President and Chief Operating Officer of Geneve Corporation and Director Edward Netter is the Chairman and Chief Executive Officer of Geneve Corporation. (2)Includes 66,468 shares held by Mr. Crawford directly and stock options, which are currently exercisable, to purchase 72,500 shares. (3)Includes 10,074 shares held by Mr. Fiscus directly and 400 shares held jointly with his wife; and stock options, which are currently exercisable, to purchase 3,458 shares. (4)Includes 9,653 shares held by Ms. Henley-Cohn directly; 11,840 shares held in trusts in which Mrs. Henley-Cohn has the power to vote the shares; 2,750 shares held by each of Ms. Henley-Cohn's son and daughter; and stock options, which are currently exercisable, to purchase 3,458 shares. 83 (5)Includes 2,398 shares held by Mr. Lahey directly, and stock options, which are currently exercisable, to purchase 2,500 shares. / / (6)Does not include any shares owned by Geneve Corporation. Mr. Lapin is the President and Chief Operating Officer of Geneve Corporation. (7)Includes 16,274 shares held by Mr. Miglio directly; and stock options, which are currently exercisable, to purchase 4,458 shares. (8)Includes 984,971 shares owned by Geneve Corporation. Mr. Netter is the Chairman and Chief Executive Officer of Geneve Corporation. Mr. Netter disclaims beneficial ownership of these shares. (9)Includes 13,094 shares held by Ms. Oster directly and 31,900 held by Ms. Oster's husband; and stock options, which are currently exercisable, to purchase 4,937 shares. Ms. Oster disclaims control over shares owned by her husband. (10)Includes 8,525 shares held by Mr. Warfel directly; and stock options, which are currently exercisable, to purchase 2,979 shares. (11)Includes Mr. McDonald's stock options, which are currently exercisable, to purchase 47,639 shares. 84 Stock Owned by Management and Principal Stockholders Of Aristotle Following the Merger The following table sets forth pro forma information as of April 1, 2002 regarding beneficial ownership of Aristotle's capital stock, assuming consummation of the merger, by: . each person who will beneficially own more than 5% of the outstanding shares of the combined company; . each individual who will be a director of the combined company; . the chief executive officer of the combined company and the other most highly compensated executive officer of the combined company based on anticipated compensation after the merger for fiscal year 2002; and . all executive officers and directors of the combined company as a group. Unless otherwise indicated, all persons listed below will have sole voting and investment power with respect to their shares. In accordance with applicable securities regulations, the table below includes outstanding shares of common stock and shares of common stock subject to options which are exercisable within 60 days following April 1, 2002 and assumes the issuance of (a) 15,000,000 shares of Aristotle's common stock, issued to Nasco's sole shareholder in connection with the merger, and (b) 946,610 shares of Aristotle's Series I preferred stock issued to the current holders of Aristotle common stock, other than Geneve, as a condition to the closing of the merger. All percentages assume that the options to purchase Aristotle common stock of a particular person or group in question, and no others, have been exercised.
Number of Shares of 5% Stockholders, Directors Voting Stock Voting and Executive Officers Beneficially Owned Power/(1)/ -------------------------- ------------------- --------- 5% Stockholders: Geneve Corporation/(2)/............................... 15,984,971 91.8% Directors: John J. Crawford................................... 277,936/(3)/ 1.2% John Lahey......................................... 9,796/(4)/ * Steven B. Lapin.................................... 0/(5)/ * Donald T. Netter................................... 0/(6)/ * Edward Netter...................................... 15,984,571/(7)/ * Sharon Oster....................................... 99,862/(8)/ * James G. Tatum..................................... 0// * Roy T.K. Thung..................................... 0/(9)/ * Named Officers (excluding Mr. Crawford and Mr. Lapin): Richard J. Ciurczak................................ 0 * Paul McDonald...................................... 95,278/(10)/ * All Executive Officers and Directors as a group (10 persons)...................................... 16,467,843 92.8%
- -------- * Less than 1% (1) This column represents voting power rather than percentage of equity interest as each share of common stock is entitled to one vote while each share of Series I preferred stock is entitled to one-half of a vote per share, assuming a Series I preferred stock stated value of $6.00 per share and a conversion price of $12.00 per share. (2) Geneve Corporation's address is 96 Cummings Point Road, Stamford, Connecticut. Director Steven B. Lapin is the President and Chief Operating Officer of Geneve Corporation, Director Edward Netter is the Chairman and Chief Executive Officer of Geneve Corporation, Director Donald Netter is the Senior Vice President--Investments of Geneve Corporation and Director Roy Thung is the Executive Vice President of Geneve Corporation. 85 (3) Includes 66,468 shares of common stock and 66,468 shares of Series I preferred stock to be held by Mr. Crawford directly; and stock options, which are currently exercisable, to purchase 72,500 shares of common stock and 72,500 shares of Series I preferred stock. (4) Includes 2,398 shares of common stock and 2,398 shares of Series I preferred stock, and stock options, which are currently exercisable, to purchase 2,500 shares of common stock and 2,500 shares of Series I preferred stock. (5) Does not include any shares beneficially owned by Geneve Corporation. Mr. Lapin is the President and Chief Operating Officer of Geneve Corporation. (6) Does not include any shares beneficially owned by Geneve Corporation. Mr. Netter is the Senior Vice President --Investments of Geneve Corporation. (7) Includes 15,984,971 shares beneficially owned by Geneve Corporation. Mr. Netter is the Chairman and Chief Executive Officer of Geneve Corporation. Mr. Netter disclaims beneficial ownership of these shares. (8) Includes 13,094 shares of common stock and 13,094 shares of Series I preferred stock held by Ms. Oster directly, 31,900 shares of common stock and 31,900 shares of Series I preferred stock held by her husband, and stock options, which are currently exercisable, to purchase 4,937 shares of common stock and 4,937 shares of Series I preferred stock. Ms. Oster disclaims control over shares owned by her husband. (9) Does not include any shares beneficially owned by Geneve Corporation. Mr. Thung is the Executive Vice President of Geneve Corporation. (10)Includes Mr. McDonald's stock options, which are currently exercisable, to purchase 47,639 shares of common stock and 47,639 shares of Series I preferred stock. 86 Current Management Board of Directors Aristotle's amended and restated bylaws, or Aristotle's bylaws, provide that the number of directors will not be less than seven nor more than fifteen, as fixed by the board of directors. Aristotle's current certificate of incorporation and Aristotle's bylaws provide that the directors be divided into three classes, as equal in number as possible, with terms expiring in successive years. Directors are elected by the stockholders, other than in the case of newly created directorships, in which case a majority of the directors then in office appoint an individual to fill the newly created directorship. Directors are elected for terms of three years, or, in the case of newly created directorships, for a full term for the class of directors in which the new directorship was created and, in any case, until their successors are elected and qualified. However, upon the consummation of the merger, Aristotle's board of directors will no longer be subject to classification and staggered terms. See the section entitled "Changes to Aristotle's Certificate of Incorporation" on page 60 of this proxy statement-prospectus. At the annual meeting, three directors will each be elected for three-year terms. As of the date of the last annual meeting, there were nine directorships. As of June 30, 2001, there were nine directorships. Set forth below are the names of the board of directors' three nominees for election as directors, their ages at September 1, 2001, the periods during which each served as a director of Aristotle and the positions currently held with Aristotle. Following the table is biographical information about each nominee, including each nominee's principal occupation or employment during the past five years. Some of this information has been obtained from Aristotle's records and some has been supplied by the nominees and continuing directors.
Positions Held with Nominees Age the Company -------- --- ------------------- John J. Crawford 57 Director, President, Chief Executive Officer and Chairman of the Board Edward Netter... 69 Director Sharon M. Oster. 53 Director
John J. Crawford has served as a director of Aristotle since 1989. He has been President and Chief Executive Officer of Aristotle since April 1990 and Chairman of the Board since April 1993. From July 1994 through December 2000, Mr. Crawford served Aristotle in a part-time capacity. Since January 2001, Mr. Crawford has served Aristotle in a full-time capacity. Mr. Crawford also serves as Chairman of Simulaids and Safe Passage International, Inc, subsidiaries of Aristotle. Mr. Crawford was the Chief Executive Officer of the Regional Water Authority until December 2000, a utility located in New Haven, Connecticut. Mr. Crawford is also a member of the board of directors of Webster Financial Corporation. Edward Netter has served as a director of Aristotle since 1998. He has been Chairman, Chief Executive Officer and a director of Geneve Corporation, a private diversified holding company, for more than five years. Mr. Netter is also Chairman and a director of Independence Holding Company, a holding company engaged principally in the life and health insurance business. Sharon M. Oster has served as a director of Aristotle since 1992. She has been a Professor of Economics at the School of Organization and Management, Yale University since 1982. Ms. Oster is a director of two publicly-held companies, Health Care REIT, a real estate investment company, and TransPro, Inc., a manufacturer of automotive/industrial-related products. 87
Director of the Positions Held with Continuing Directors Age Company Since the Company -------------------- --- --------------- ------------------- Directors with terms expiring in 2002: Steven B. Lapin....................... 56 1998 Director John Lahey............................ 55 1999 Director Daniel J. Miglio*..................... 61 1990 Director Directors with terms expiring in 2003: Betsy Henley-Cohn*.................... 49 1993 Director Robert Fiscus*........................ 64 1991 Director John C. Warfel*....................... 49 1994 Director
* Will not remain as a director after completion of the merger. Steven B. Lapin has been President, Chief Operating Officer and a director of Geneve Corporation, a private diversified holding company, for more than five years. Mr. Lapin is also Vice Chairman and a director of Independence Holding Company, a holding company engaged principally in the life and health insurance business. John Lahey is the President of Quinnipiac University, a private university located in Hamden, Connecticut. Dr. Lahey has been the President for the past 14 years. He also serves on the board of directors of Trustees of Yale-New Haven Hospital and on the board of directors of UIL Holdings Corporation and The United Illuminating Company. Daniel J. Miglio was formerly Chairman, President and Chief Executive Officer of Southern New England Telecommunications Corporation, a publicly-held telecommunications company. He had been employed by Southern New England Telecommunications from 1962 through 1998. Mr. Miglio also serves as a director of UIL Holdings Corporation and The United Illuminating Company. Betsy Henley-Cohn is Chairperson of Birmingham Utilities, Inc., a water utility in Ansonia, Connecticut, and Joseph Cohn & Son, Inc., in New Haven, Connecticut. Ms. Henley-Cohn has been employed by Birmingham Utilities, Inc. since 1993 and by Joseph Cohn & Son, Inc. since 1978. She also serves as a director of UIL Holdings Corporation and The United Illuminating Company. Robert L. Fiscus is Vice Chairman and Chief Financial Officer of UIL Holdings Corporation, the publicly-held holding company parent of The United Illuminating Company, an electric utility company, and several smaller non-utility companies. Mr. Fiscus is also Vice Chairman and Chief Financial Officer of The United Illuminating Company, where he previously served as President and Chief Financial Officer. Mr. Fiscus has been employed by The United Illuminating Company since 1972 and also serves as a director of UIL Holdings Corporation and The United Illuminating Company. John C. Warfel has been the Vice President and Chief Financial Officer of FYC International, Inc., a privately held manufacturer of women's apparel since October 1999. Prior to that, Mr. Warfel was the Senior Vice President, Administration and Finance and Chief Financial Officer of Starter Corporation, a sports apparel manufacturer. He had been employed by Starter Corporation since 1988. Committees of the Board of Directors and Meetings Board of Directors Meeting Attendance. During the fiscal year ended June 30, 2001, the board of directors of Aristotle held five meetings. During fiscal 2001, none of the directors attended less than 80% of the total number of meetings of the board of directors and committees of which they were members, except for Betsy Henley-Cohn who attended 40% of the meetings. Audit Committee. The board of directors has appointed a standing Audit Committee, which during the year ended June 30, 2001, conducted four meetings. The members of the Audit Committee were Messrs. Fiscus, Lahey, Lapin and Warfel. The duties of the Audit Committee include reviewing the financial statements of 88 Aristotle and the scope of the independent annual audit and internal audits. It also reviews the independent accountants' letter to management concerning the effectiveness of Aristotle's internal financial and accounting controls, and reviews and recommends to Aristotle's board of directors the firm to be engaged as Aristotle's independent accountants. The Audit Committee may also examine and consider any other matters relating to the financial affairs and operations of Aristotle as it determines to be appropriate. Please see also the report of the Audit Committee set forth elsewhere in this proxy statement-prospectus. Human Resources and Stock Option Committee. The board of directors of Aristotle also has appointed a Human Resources and Stock Option Committee comprised of three directors, which during the fiscal year ended June 30, 2001 conducted one meeting. The Human Resources and Stock Option Committee reviews the salary structure and policies of Aristotle and its subsidiaries, administers Aristotle's 1997 Employee and Director Stock Plan, selects the eligible persons to whom stock options or stock appreciation rights will be granted, and prescribes the terms and provisions of each option or right. The members of the Human Resources and Stock Option Committee during the fiscal year ended June 30, 2001 were Ms. Oster and Messrs. Fiscus and Miglio. Compensation of Directors Effective January 1, 1998, each of the directors of Aristotle, other than officers, receives a retainer of $7,500, payable semi-annually in 50% Aristotle common stock and 50% cash. The Aristotle common stock is payable in six month intervals and is valued based on its average market value during the ten days preceding the determination date. In addition to the retainer, the Chairperson and the members of the board of directors receive $550 or $500, respectively, for each meeting attended. Non-employee directors are eligible to receive grants of stock options under the 1997 Employee and Director Stock Plan. The 1997 Stock Plan provides for the automatic grant of non-qualified options to Aristotle's non-employee directors. Each non-employee director, upon first being elected to the board of directors, is eligible to receive an option to purchase 2,500 shares, which will vest one year after the date of the grant of the option. Additionally, the 1997 Stock Plan provides for a grant to each non-employee director on the date of his or her reelection (provided that the director has served as a director since his or her initial election) of an option to purchase 1,000 shares, which will vest one year after the date of the grant of the option, assuming uninterrupted service on the board of directors. None of the options will be exercisable until at least 15 months following the effective date of the merger. If the merger is consummated and the stockholders of Aristotle approve the proposed 2002 Stock Plan, Aristotle will cease issuing options under the 1997 Stock Plan and, accordingly, will discontinue the automatic grants of options to non-employee directors under the 1997 Stock Plan. See the section entitled "Management of Aristotle Following the Merger" on page 58 of this proxy statement-prospectus for information regarding the anticipated compensation of Aristotle's directors after the consummation of the merger. Executive Officers The following table sets forth the name of Aristotle's current executive officer who is not a director, his age, and all positions held with Aristotle as of December 31, 2001. The executive officer serves at the discretion of the board of directors, subject to an Employment Agreement that Aristotle has entered into with the executive officer.
Name Age Position with the Company ---- --- --------------------------- Paul M. McDonald 48 Chief Financial Officer and Secretary
The principal occupations of the executive officer for the last five years are set forth below. Paul M. McDonald has been the Chief Financial Officer of Aristotle since November 1994. Mr. McDonald has been the Secretary of Aristotle since April 1994. Mr. McDonald also serves as Vice Chairman, Treasurer and Secretary of Simulaids and Safe Passage, Aristotle's subsidiaries. 89 Executive Compensation The following table sets forth information for the periods indicated regarding cash and other compensation paid to, earned by, or awarded to Aristotle's chief executive officer and other executive officers of Aristotle whose salary and bonus exceeded $100,000 during the last three fiscal years ended June 30, 2001. Summary Compensation Table
Annual Compensation Long Term Compensation --------------------- -------------------- Options All Other Name and Principal Position Year Salary $ Bonus $ Awarded # Compensation $ --------------------------- ---- -------- ------- --------- -------------- John J. Crawford....................... 2001 $117,500 $ 0 0 $ 909/(3)/ President, Chief Executive Officer and 2000 80,000/(1)/ 0 20,000 0 Chairman of the Board 1999 100,000/(1)/ 0 20,000 0 Paul McDonald.......................... 2001 $150,000 $ 0 3,500 $2,506/(4)/ Chief Financial Officer and Secretary 2000 149,000 0 10,000 3,324/(4)/ 1999 149,000 24,213/(2)/ 20,000 2,622/(4)/
- -------- (1)In fiscal 2000, salary includes $20,000 in shares of Aristotle common stock and in fiscal 1999, salary includes $40,000 in shares of Aristotle common stock. (2)In fiscal 1999, Aristotle paid Mr. McDonald a $24,213 performance bonus for meeting management objectives. (3)In fiscal 2001, other compensation for Mr. Crawford, included $190 for term life, AD&D and disability insurance premiums and $719 for business dues. (4)Other compensation for Mr. McDonald is comprised of the following: in fiscal 2001, $644 for term life, AD&D and disability insurance premiums and $1,862 as a contribution to the 401K Plan for Mr. McDonald; fiscal 2000, $176 paid for term life insurance premiums and $3,148 paid as a contribution pursuant to the SEP Plan for Mr. McDonald; in fiscal 1999, $373 paid for term life insurance premiums and $2,249 paid as a contribution pursuant to the SEP Plan for Mr. McDonald. Option Grants in Last Fiscal Year The following table sets forth information regarding each stock option granted to Aristotle's chief executive officer and other executive officers during the fiscal year ended June 30, 2001.
% of Total Number of Securities Options/SARs Underlying Options/(1)/ Awarded to /SARs/(2)/ Employees in Fiscal Exercise Prices Name Granted Year 2001 ($/share) Expiration Date ---- ---------------------- ------------------- --------------- --------------- Paul McDonald 3,500/(3)/ 3.6% $6.000 August 31, 2010 30,000/(2)/ 30.8% $7.000 June 30, 2004 John Crawford 50,000/(2)/ 51.3% $7.000 June 30, 2004
- -------- (1)All stock options were granted under the 1997 Employee and Director Stock Plan. (2)Stock Appreciation Rights granted under an employment agreement vest over a period of three years. (3)The options granted to the named executive officer are non-qualified stock options and may be exercised after August 31, 2001. 90 Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values The following table sets forth information regarding unexercised stock options held as of June 30, 2001, by the chief executive officer and other executive officers of Aristotle. No stock options were exercised by these executive officers during the fiscal year ended June 30, 2001.
Number of Securities Value of Unexercised Underlying Unexercised In-the-Money Options/SARs Options/SARs at June 30, 2001 (#) at June 30, 2001 ($)(1) --------------------------------- ------------------------- Name Exercisable Unexercisable Exercisable Unexercisable ---- ----------- ------------- ----------- ------------- John J. Crawford 72,500 50,000 147,000/(2)/ $37,500/(3)/ Paul McDonald... 39,139 38,500 92,786/(4)/ $42,375/(5)/
- -------- (1)The value of unexercised, "in-the-money" options at June 30, 2001 is the difference between (a) the closing price of Aristotle's common stock on June 29, 2001 as reported by NASDAQ ($7.75)--the assumed fair market value--and (b) the per share option exercise price, multiplied by the number of shares of Aristotle's common stock underlying the options. (2)Mr. Crawford holds exercisable options to purchase 12,500 shares of Aristotle' common stock that have an exercise price of $10.00 per option which is greater than the fair market value of Aristotle's common stock as of June 30, 2001 ($7.75). The options are not "in-the-money" and their value, therefore, is zero. The exercise price of Mr. Crawford's remaining 60,000 exercisable options have an average exercise price of $5.30. (3)Mr. Crawford holds 50,000 unexercisable stock appreciation rights that have an average price of $7.00. (4)Mr. McDonald holds exercisable options to purchase 39,139 exercisable options that have an average exercise price of $5.38. (5)Mr. McDonald holds unexercisable options to purchase 8,500 shares of Aristotle's common stock that have an average exercise price of $5.41. In addition, Mr. McDonald holds 30,000 unexercisable stock appreciation rights that have an average price of $7.00. Employment Agreements Aristotle entered into an employment agreement with Mr. Crawford effective February 1, 2001 for a term expiring December 31, 2003, under which he will serve as Aristotle's Chief Executive Officer. The agreement provides for an annual base salary of $175,000 and any stock options and bonuses as the board of directors in its sole discretion shall award, including 50,000 stock appreciation rights vesting over the term of the agreement. Aristotle entered into an employment agreement with Mr. McDonald effective February 1, 2001 for a term expiring December 31, 2003, under which he will serve as Aristotle's Vice President and Chief Financial Officer. The agreement provides for an annual base salary of $150,000 and any stock options and bonuses as the board of directors in its sole discretion shall award, including 30,000 stock appreciation rights vesting over the term of the agreement. As a condition to the merger, the employment agreements between Aristotle and each of Messrs. Crawford and McDonald will be amended to reduce the stock appreciation rights, or SAR, target price from $7.00 to $1.00 per share to reflect the fact that the value of each SAR's per share equivalent will not include the value of one share of Series I preferred stock to be received for each share of Aristotle common stock held. 91 Report of Audit Committee The Audit Committee of Aristotle's board of directors, which consists entirely of directors who meet the independence and experience requirements of NASDAQ, has furnished the following report: The Audit Committee assists Aristotle's board of directors in overseeing and monitoring the integrity of Aristotle's financial reporting process, its compliance with legal and regulatory requirements and the quality of its internal and external audit processes. The role and responsibilities of the Audit Committee are set forth in a written charter adopted by Aristotle's board of directors, which is attached as Annex H to this proxy statement-prospectus. The Audit Committee reviews and reassesses the charter annually and recommends any changes to Aristotle's board of directors for approval. The Audit Committee is responsible for overseeing Aristotle's overall financial reporting process. In fulfilling its responsibilities for the financial statements for fiscal year ended June 30, 2001, the Audit Committee took the following actions: . Reviewed and discussed the audited financial statements for the fiscal year ended June 30, 2001 with management and Arthur Andersen LLP, Aristotle's independent auditors; . Discussed with Arthur Andersen LLP the matters required to be discussed by Statement on Auditing Standards No. 61 relating to the conduct of the audit; and . Received written disclosures and the letter from Arthur Andersen LLP regarding its independence as required by Independence Standards Board Standard No. 1. The Audit Committee further discussed with Arthur Andersen LLP their independence. The Audit Committee also considered the status of pending litigation, taxation matters and other areas of oversight relating to the financial reporting and audit process that the Audit Committee determined appropriate. Based on the Audit Committee's review of the audited financial statements and discussions with management and Arthur Andersen LLP, the Audit Committee recommended to Aristotle's board of directors that the audited financial statements be included in Aristotle's Annual Report on Form 10-K for the fiscal year ended June 30, 2001 for filing with the Securities and Exchange Commission. Members of the Audit Committee: Robert L. Fiscus, Chairman John Lahey Steven B. Lapin John C. Warfel Section 16(A) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934, as amended, requires Aristotle's executive officers and directors, and persons who beneficially own more than 10% of Aristotle's common stock, to file with the Securities and Exchange Commission, or the SEC, and any national securities exchange on which Aristotle's securities are registered initial reports of beneficial ownership and reports of changes in beneficial ownership of Aristotle's common stock or other equity securities of Aristotle. Executive officers, directors and greater than 10% beneficial owners are required by SEC regulations to furnish Aristotle with copies of all Section 16(a) forms they file. To Aristotle's knowledge, based solely on a review of the copies of reports furnished to Aristotle, all Section 16(a) filing requirements applicable to its executive officers, directors and greater than 10% beneficial owners were complied with for the fiscal year ended June 30, 2001. 92 INFORMATION CONCERNING NASCO Business Company Overview Nasco, which was founded in 1941 and is wholly-owned by Nasco Holdings, Inc., is a manufacturer and global catalog-distribution company serving the education, health and agriculture markets. Nasco offers a selection of more than 65,000 items, including educational materials and supplies for substantially all kindergarten through twelfth grade curricula, molded plastics and biology materials. Nasco also provides educational and training product lines, such as cardiopulmonary resuscitation manikins for the health care market, including medical and nursing schools, and paramedic and emergency-care training. Nasco also services a commercial business segment, providing product lines for agriculture, senior care and food industries. Substantial portions of the products distributed by Nasco are purchased from manufacturers and distributors worldwide. Approximately 21% of Nasco's sales are from proprietary products with 75% of those sales developed by Nasco's own research and development staff. To broaden its product mix to meet specific customer needs, Nasco operates manufacturing facilities that produce proprietary items equating to more than 9% of its product line. Sales of Nasco's proprietary products generally result in a higher profit margin and enable Nasco to sell the products wholesale in the U.S. and foreign markets where Nasco often develops distribution relationships. As its main marketing tool, Nasco publishes and distributes 26 different catalogs annually to over three million potential customers. The catalog pages are primarily created and edited using in-house photography and desktop publishing equipment. Nasco catalog teams pursue sales growth goals through efforts to present more than 3,200 catalog pages with broad selections of popular and new items at competitive catalog prices. In May 2000, Nasco established an e-commerce website, enasco.com, as a new marketing tool. The website provides the shopper with the ability to order any of the 65,000 items currently offered in the Nasco catalogs. Through the catalog department, the website presentation is updated frequently to present fresh shopping experiences for the repeat customer. In recent years, Nasco has expanded its efforts in international markets, primarily in the health care and agricultural product lines. While international sales still only represent less than 5% of total net sales, the acceptance of Nasco product lines by international markets has been a significant growth contributor to these particular product lines. Recent Acquisitions . American Educational Products, Inc. In March 2001, Nasco acquired American Educational Products, Inc., a catalog distributor of teaching aids for math, science and other curricula. American Educational Products also manufactures several proprietary product lines. . Spectrum Educational Supplies, Ltd. In April 2001, Nasco acquired Spectrum Educational Supplies, Ltd., a Canadian distributor of hands-on teaching aids that support curricula in the math, science and technology subjects. Industry Overview Educational. Nasco's school supply market consists primarily of the sale of supplemental educational supplies and equipment to school districts, individual schools, teachers and curriculum specialists who purchase products for school and classroom use. According to a survey of all state boards of education conducted by Market Data Retrieval, public schools reported spending in excess of $9 billion on instructional materials alone during the most recent school year tracked (1999-2000). That amount equates to $195 per student and represents an increase of 6.1% from the prior year's total of $184 per student. 93 According to the U.S. Department of Education, there are approximately 16,000 school districts, 118,500 elementary and secondary schools and 3.3 million teachers in the United States. Administrators for both school districts and individual schools usually make the decision to purchase the general school supplies needed to operate the school. Teachers and curriculum specialists generally decide on curriculum-specific products for use in their classrooms and individual disciplines. According to the National School Supply Equipment Association, or NSSEA, teachers spent approximately $1.3 billion of their own money in 2000 on supplies to supplement classroom materials. Nasco produces and distributes manikins and simulation kits used for training in cardiopulmonary resuscitation, emergency rescue and patient care fields as part of its education offerings. These health care-related products are sold throughout the United States and internationally through distributors and catalogs to end users, such as fire and emergency medical departments and nursing and medical schools. The industry has highly predictable and favorable trends. Education expenditures have risen each year for the past 15 years and are expected to exceed $390 billion in 2001, according to the U.S. Department of Education. The most common measure of education spending is current expenditures per student. According to the National Education Association, current expenditures per student in constant dollars have increased from $5,843 in 1985 to an estimated $7,086 in 2000 and are expected to increase further approximately to $8,300 in 2005, an aggregate 42% increase since 1985. Incremental spending will thus exceed enrollment growth, which according to the U.S. Department of Education is projected to grow by 19% from 1985 to 2005 to a record level of approximately 53.5 million students. As the market is affected by prevailing political and social trends, the attitude of the government towards education determines, to some extent, total expenditures on education. Although no company or industry is recession-proof, Nasco's management believes that the educational segment is recession-resistant. Factors that contribute to the expansion of the education sector in which Nasco operates include: . increases in school enrollment, . consistent growth in the supplemental education market, and . a national political climate that promotes increasing federal and state education funding. The traditional school model of lectures, workbooks, written assignments and text memorization has been criticized for failing to engage students, as opposed to methods that emphasize active learning techniques. The prevailing inclination among educators to use manipulatives, models or other hands-on tools places Nasco within a particularly favorable segment of the already well-positioned education industry. Domestic expenditures on education continue to increase. According to the National Center for Educational Statistics, or the NCES, from 1985 to 1998, annual governmental spending on public and private education for grades kindergarten through the twelfth grade has increased by $93.8 billion. The NCES reports that the estimated amount of overall state and local education funding in 2000 increased to $308.0 billion from $298.2 billion in 1999. NCES estimates an additional 20% increase between 2000 and 2010. Nasco believes that American school systems have shown a clear trend toward decentralization, which enables school teachers and administrators at the school to make many of the key decisions regarding instruction methods and school purchases. In prior years, larger government agencies usually made these decisions for entire school districts or states. Under the new structure, teachers have the ability to choose the curricular materials that they need to teach effectively. Site-based management is forcing the industry to rethink its sales and marketing strategies in order to address the added challenge and increased cost of delivering goods and services to an increasingly decentralized marketplace. In terms of purchasing methods, mail ordering, as well as the internet, are on the rise among administrators in charge of budgets as purchasing mechanisms. 94 The industry is also highly fragmented with a substantial number of direct marketers of supplemental education supplies, many of which are family- or employee-owned businesses that operate in a single geographic region. Nasco believes the increasing demand for single-source suppliers, prompt order fulfillment and competitive pricing, along with the related need for suppliers to invest in automated inventory and electronic ordering systems, is fostering consolidation within the industry. In addition, the industry is currently experiencing a shift in growth to the higher margin specialty business, which offers products focused upon specific educational disciplines. Increased purchasing at the school and classroom levels, which increases individual schools' and teachers' roles in educational supply procurement decisions, is also driving this trend. Nasco's extensive selection of products and vendors allows it to offer a complete listing in each product line. Nasco believes that by having available to school teachers and administrators all of the items they need in one place, the inclination to search other sources is reduced. This "one stop shopping" approach is a Nasco hallmark. Moreover, Nasco seeks to be competitive with its catalog prices rather than offering large discounts to single customers. With many products, two or more choices are offered in order to give customers a lower price point with a product that will meet their budget yet perform to acceptable standards. Commercial. Nasco markets to farmers and ranchers providing items to assist in animal livestock production and products for other segments of the industry. The United States Department of Agriculture, or the USDA, indicates there were 2.17 million farms in the U.S. in 2000. Nasco not only markets to various groups within this total but its catalog is also directed to the "hobby farmer" as well. One of the largest groups marketed to is the "Dairy Farmer". In 2000, there were 105,250 farms in this category, but this number has been declining. As the number of farms declines, which is a national trend, the remaining farms are becoming larger. This trend in Nasco's opinion has in many areas eliminated the classic farm store, which at one time was a standard feature of almost all rural towns. When the farm store disappears, Nasco believes that those remaining will turn to the catalog industry. Nasco, with its extensive farm catalog offering, is well positioned to supply the market with the type of small hand tools and equipment needed. Nasco provides sterile sampling bags and containers worldwide to the food industry, including water treatment facilities. The product lines provide a stable vehicle for the containment and transporting of food and water samples to laboratories without threat of sample contamination. In the senior care industry, Nasco offers a broad product selection of activities used by nursing home and senior care facilities to support therapy programs. Growth Strategy Key members of Nasco's management team develop and execute multiple action plans to continue its steady growth in revenues and earnings. These action plans are continuously monitored by Nasco's senior management to assess the progress in achieving the planned goals. Nasco's principal action plans are as follows: . Consistently dedicate resources to the discovery of new product lines to meet the ever-changing needs of Nasco's customers, including closely observing the evolution in classroom curricula and continuously updating product selection to meet these changing needs. . Commit resources to the internal development of new products with features that meet changing customer demands, as Nasco's proprietary items carry the added benefits of higher profit margins and exclusive availability. Research and development staffs maintain a constant flow of proprietary items to the catalog offerings. 95 . Exploit the revenue and earnings potential of its recent acquisitions, including: . expansion into the Canadian educational markets (through the Spectrum group of companies) by supplementing existing Canadian catalogs with Nasco product lines, . expansion of the Canadian catalog publications into new curricula, and . energize the research and development efforts of the recently acquired businesses such as American Educational Products to develop and market competitive proprietary products. . Through senior management evaluation of the relative profitability of catalog performance and operational efficiencies, pursue options for consolidation of overhead costs. Particularly with acquisitions of new businesses, all appropriate opportunities to consolidate overhead and service support functions are utilized to maximize earnings benefits. . With minimal investment of capital and manpower, penetrate international markets in the health care and agricultural product lines. . Expand the proportional efforts of Nasco's e-commerce website to encourage customer awareness and use of the website. Product Lines Nasco markets the following product lines through its catalogs: Educational Offerings. . Science--Complete catalog of equipment and supplies for general science, biology, chemistry, physical science, earth science, and technology education. Also offers live and preserved specimens as well as alternatives to dissection. Target--science teachers in grades three to twelve and specimens for the college instructor. . Arts and Crafts--A complete offering of supplies to nurture the creative artistic spirit of all ages and skill levels. A source for the specialty art teacher as well as anyone interested in this discipline. Target--grades kindergarten to twelve, camps, recreation centers. . Learning Fun--Features a selection of teaching materials, learning toys and games that were developed to make learning fun. A carefully chosen selection of items for the early childhood market. Target--grades pre-kindergarten to three. . Family and Consumer Sciences--A broad listing of products, including products to teach life skills, cooking, sewing, and teaching resources for the entire profession. Also features teaching aids for dieticians in hospitals, schools and diabetics education. Target--family and consumer science teachers, dieticians and nutrition instructors. . Math--Provides the teaching aids for the primary grades through pre-algebra and geometry. Includes manipulatives, calculators, games, overhead math items, software and other math products. Target--grades kindergarten to twelve. . Health Care--Features the proprietary Nasco Life/Form product line, anatomical replicas, and medical procedure simulators to aid in the training of the medical profession. Includes videos, software, games, charts, and replicas. Also includes hands-on teaching aids developed to make learning about health fun and interesting for kindergarten through twelfth grade students. Target--nursing and medical schools, emergency professionals and health teachers. . Fitness Fundamentals--Over 3,000 items specifically for physical education professionals. Target--physical education teachers in grades kindergarten to twelve. 96 Commercial Offerings. . Farm and Ranch Catalog--Includes products for identification, showing and grooming, breed promotion, artificial insemination, animal health, crops and soils and equine supplies. Also features instructional teaching aids for agricultural education. Target--farmers and ranchers. . Activity Therapy--Products developed by Nasco to assist the activity therapist to have the best activities program in the nursing home and assisted living industries. Includes products for sensory, memory, and musical activities plus games and arts and crafts. Target--activity therapists in nursing and assisted living homes. . Assisted Living--Resources beneficial to conduct an outstanding activity program in an Assisted Living Home, including products for all levels of residents. Target--activity therapists in assisted living homes. . Whirl-Pak Sampling Products--Features Nasco's sterile Whirl-Pak Sampling Bags, the industry leader in sampling containers for over 35 years. This laboratory product is sold throughout the world as well as the U.S. Target--food and microbiology laboratories throughout the world. Tradenames Nasco has a number of trademarks and trade names that it applies to various product lines. Except for the "Nasco" trademark, the various trademarks and trade names are not considered material or vital to on-going business operations. To protect the unique product lines developed by Nasco, Nasco has applied for and received patents for four product lines, two in the U.S. and two in Canada. Nasco also has applied for two additional U.S. patents. None of these issued or pending patents are considered vital or material to on-going business operations. Sales and Marketing Nasco markets products mostly via catalog to selected sectors. After a sector is identified, research is conducted by sales and marketing personnel to identify needed products. Nasco often hires consultants or sales directors from the niche served. There is a continuous search by catalog teams for new, improved, and unique products. Nasco attempts to offer its customers a wide range of products and choices of similar types of products with different price points, qualities, or with different features. If Nasco is unable to find products to meet a specified demand, it has the option of attempting to manufacture the product in its own plants or contract manufacturing under a private label. Nasco attempts to time distribution of catalogs to meet the peak buying period and mails the catalogs to the individuals whom Nasco believes make the buying decision. Nasco believes that the actual user of the materials usually makes the buying decision, except for those items that are a part of school bid requests. Nasco's mailing concentrates on putting the catalog in the hands of these decision makers. Nasco's bid request goal is also to be very competitively priced. Nasco issues most major catalogs one time a year with supplemental offerings depending on the market. Nasco relies mainly on its 26 catalogs as its "sales staff", which relieves the need for expensive sales calls on customers. Orders are received via mail, phone, fax, or Internet. Nasco attempts to provide fast delivery to customers depending on the customers' directions and the market's expectations. Nasco's business is transacted by open order and purchased orders. Nasco ships many orders the same day received and most orders are shipped within three days. Sale terms are typically net 30 days and orders are normally filled within 14 days. 97 Purchasing Although the educational products market is extremely stable, it is inherently seasonal. There are wide variations in sales from month to month and as a result, accounts receivable, inventories, and accounts payable also vary. The summer months are the most active as educational institutions restock their supplemental materials for the next school year. Nasco's purchasing group is in contact with over 5,000 vendors to ensure that Nasco remains aware of new products, timely delivery is increased and pricing is competitive. With its broad range of vendors, including alternative product sources, Nasco does not maintain fulfillment contractual agreements for purchase quantity commitments. All catalogs are annually reviewed for revision. Vendors often review, copy and make suggestions for the following year's offering. Alternate vendors are reviewed on a continuous basis. Facilities Nasco's corporate headquarters and primary distribution center are located in Fort Atkinson, Wisconsin. The 220,000 square foot distribution center services all Nasco catalogs and is the headquarters for all international marketing efforts. A graphics arts center houses the creative staff and equipment for the maintenance of the catalog pages. Nasco also operates a plastics and biological production facility to support the catalog product lines. In addition, Nasco leases approximately 300,000 square feet of adjacent warehouse space and 40,000 square feet of office space from an affiliate. Nasco currently occupies 70,000 square feet of the warehouse space, and leases the office space and remaining warehouse space to a third party. The subtenant will surrender additional portions of the warehouse to Nasco over the course of the next three years. This facility affords Nasco the necessary expansion capacity for the foreseeable future. It is contemplated that, within 90 days of the closing, Aristotle will purchase the facility from the owner at the owner's adjusted cost of approximately $4,500,000. In connection with that purchase, Aristotle will assume the owner's obligation under an outstanding mortgage in the amount of approximately $3,800,000, and pay to the owner the $700,000 balance in cash from its working capital. To service the western United States, Nasco operates a 68,000 square foot distribution center in Modesto, California. This distribution center services all Nasco catalogs for customers in the 12 western states. Nasco operates an arts and crafts catalog operation, along with three other independent catalogs, from a 28,000 square foot facility in Plymouth, Minnesota. Catalogs are distributed to schools nationwide from this facility. As a result of its acquisition of American Educational Products, Nasco also maintains an educational materials catalog distribution center in Fort Collins, Colorado from an 18,000 square foot owned facility. From this location and American Educational Product's second location, a 37,000 square foot leased facility in northern Wisconsin, Nasco services math and science teachers and distributors worldwide. Light manufacturing operations are situated at both these locations, producing proprietary items. Nasco's acquisition of the Spectrum group of companies in April 2001 included a 40,000 square foot facility north of Toronto, Ontario. The facility operates as a distribution center of math, science and technology teaching aids and materials sold via catalog mailings to schools throughout Canada. Nasco maintains inventories at each of these locations to promptly fulfill customer orders. Nasco has consistently applied procedures at these locations to keep inventories in current and saleable condition. The procedures include effective methods of minimizing overstocked or obsolete inventories, through vendor returns and outlet sales at normal margins. 98 Competition Although there are several large general school suppliers and wholesale and retail stores which compete with Nasco, Nasco believes that it offers more specialty items in more disciplines in the education, health and agriculture market than any other company. Although Nasco faces competition with regard to each of its catalogs, few, if any, of Nasco's competitors have as broad a range of products and serve as many market areas. Information Systems Nasco's main computer system, housed in Fort Atkinson, Wisconsin, is an AS 400 IBM computer. Nasco's business is highly computerized, with almost all functions including sales, order processing, purchasing, quotes, phone orders, billing, receivables, payables, and warehousing running on this system. The system is routinely upgraded. In recent years, increased capacity has been added to handle Nasco's needs. To facilitate and continuously improve the software system, a staff of six programmers responds to suggestions from all departments and management. Catalog preparation is also handled in Fort Atkinson. A staff of 35 graphic artists and editors work with Macintosh desktop publishing systems to complete all production work in house, with the exception of printing. Employees At March 31, 2002, Nasco and its subsidiaries had approximately 650 full time employees. In addition, to accommodate the peak summer business season, Nasco engages approximately 250 temporary employees. All employees at all locations are employed at will and are not represented by a labor union. 99 Management's Discussion and Analysis of Financial Condition and Results of Operations of Nasco This discussion and analysis of financial condition and results of operations reviews the results of operations of Nasco, on a consolidated basis, for: . the year ended December 31, 2001, as compared to the year ended December 31, 2000; and . the year ended December 31, 2000, as compared to the year ended December 31, 1999. This discussion and analysis of financial condition and results of operations have been derived from, and should be read in conjunction with, Nasco's Consolidated Financial Statements and Notes to Consolidated Financial Statements for the years ended December 31, 2001, 2000 and 1999, contained elsewhere in this proxy statement-prospectus. The consolidated financial statements include the accounts of Nasco and its subsidiaries and are prepared in accordance with accounting principles generally accepted in the United States of America. Nasco is a wholly-owned subsidiary of Nasco Holdings, Inc. Nasco Holdings is currently an 80% owned subsidiary of Geneve Corporation. Geneve is a wholly-owned subsidiary of Geneve Holdings, Inc. During 2000, G.C. Associates Holdings Corp., a wholly-owned subsidiary of Geneve, purchased a majority of the outstanding common stock of American Educational Products, Inc., or AMEP, an educational materials catalog distributor located in Colorado. In March 2001, Nasco became the successor to the shares of AMEP previously owned by GC Associates. As a result of this transfer of ownership interests between entities under common control, Nasco has accounted for the fair value of AMEP's net assets and AMEP's operations, using the "as-if pooling of interests" method as of April 2000, the date GC Associates gained a controlling interest in AMEP. In April 2001, Nasco acquired 100% of the stock ownership of Spectrum Educational Supplies Ltd, or Spectrum, a Canadian provider of educational product lines. The transaction has been accounted for as a purchase and the results of Spectrum's operations have been included in Nasco's financial statements since the acquisition date. Nasco's business is comprised of two segments. The educational segment offers products in the science, arts and crafts, early childhood, family and consumer science, math, health care and fitness fundamentals categories. The commercial segment offers products in the farm and ranch, activity therapy, assisted living and Whirl-Pak sampling packaging categories. Critical Accounting Issues Nasco's significant accounting policies are disclosed in Note 2 to the Consolidated Financial Statements. As noted in Note 8 to Nasco's Consolidated Financial Statements, in assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets at December 31, 2001 is dependent upon Nasco's generation of approximately $4.0 million in future taxable income during the periods in which those temporary differences become deductible, including sufficient taxable income at AMEP in order to fully utilize its tax loss carryovers which are subject to a $0.6 million annual limitation. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that Nasco will realize the benefits of these deferred tax assets at December 31, 2001. As discussed in Note 10 to Nasco's Consolidated Financial Statements, Nasco has noncontributory defined benefit pension plans covering substantially all salaried and hourly employees. The plan covering salaried employees provides pension benefits that are based on years of service and average compensation. The plan covering hourly employees provides pension benefits that are based on stated amounts for each year of service. Nasco's policy is to fund pension costs accrued up to a maximum deductible contribution but not less than the 100 minimum required by the Employee Retirement Income Security Act of 1974. In the determination of the plans' funded status and prepaid pension costs, Nasco applies certain assumptions, including an estimated discount rate, expected return on assets, and projected rates of compensation increases. In the three years presented in the financial statements, these assumptions have been applied consistently in each of the years. A change in any of these assumptions can result in a material reduction in the $1.4 million prepaid pension asset reported in the balance sheet for the year ended December 31, 2001. Management believes that the assumptions applied in each of the years reasonably approximate the average rates that may be experienced under the plans. Results of Operations for the Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000 Net sales increased 12.6% to $162.0 million in 2001 from $143.8 million in 2000. The acquisition of Spectrum, effective April 2001, contributed $5.9 million to this sales growth. The increase is also attributed to internal growth through catalog enhancements and product development. Excluding the sales from the Spectrum acquisition, educational sales increased $10.6 million, or 9.2%. Commercial sales in 2001 increased by $1.7 million to $29.6 million, reflecting growth of 5.9%. Gross profit increased 12.9% to $56.5 million in 2001 from $50.0 million in 2000. Incremental sales from the Spectrum acquisition generated $2.2 million in incremental gross profit. Gross profit margin increased to 34.9% in 2001 from 34.8% in 2000. Excluding the incremental Spectrum gross profit, educational gross profit margin declined in 2001 to 36.4% compared to 36.6% in 2000. The decline in educational gross profit margin is caused by the growth in quoted sales that capture large customer tenders by pricing at margins below standard catalog listings. Comprising 28.6% of 2001 educational sales, 2001 quote gross profit margins averaged 31.7%. In 2000, quote gross profit margins averaged 31.2% when comprising 28.1% of 2000 educational sales. The commercial gross profit margin averaged 36.7% in 2001, remaining consistent with the 2000 average gross profit margin. Selling and administrative expenses increased 15.7% in 2001, compared to 2000, to $37.0 million. Spectrum's expenses increased Nasco's overall 2001 selling, general and administrative expenses by $1.7 million. Excluding Spectrum, selling, general and administrative expenses increased by 10.4%. Expenses included in this total include advertising and catalog costs, warehouse & shipping activities, customer service and general administrative functions.Advertising costs, primarily catalog production and delivery costs, increased $1.2 million or 13.8% in 2001 compared to 2000. This increase is attributed to postal rate increases implemented in early 2001, an increase of 5.0% in the number of catalog pages produced, and a 3.6% increase in the quantity of catalogs distributed, excluding recently acquired AMEP and Spectrum catalogs. Group health care costs increased by 24.3% to $2.0 million in 2001, increasing at a rate substantially greater than revenues or other operating expenses. In operations that continued from 2000 through 2001, $8.96 in net sales was generated for every $1.00 of payroll, compared to $8.88 in 2000. Wage rates increased by approximately 4% in 2001. During 2001, AMEP incurred certain costs classified as special charges in the accompanying Consolidated Statement of Earnings. These non-recurring costs include approximately $370,000 related to the redemption of AMEP stock options held by AMEP employees, $180,000 related to the satisfaction of AMEP employment agreements, and $62,000 of various legal, accounting and regulatory fees incurred by AMEP as a result of the AMEP acquisition. The special charges are reported as a reduction to earnings from operations. Each year, Nasco pays a management fee to its parent, Nasco Holdings. Under the terms of the management agreement, Nasco Holdings provides to Nasco specified legal, tax and other corporate services. In 2001, the management fee paid to Nasco Holdings was $1.6 million, compared to $1.5 million in 2000. In future months, Nasco will continue to accrue and pay to Nasco Holdings a monthly amount equivalent to a $1.7 million annual fee. Upon completion of the merger, Aristotle, as the surviving corporation, will not continue to accrue or pay the management fee to Nasco Holdings. 101 Interest expense increased to $3.2 million in 2001, compared to $2.8 million in 2000. The increase in interest expense is due to a $20.0 million increase in long-term debt in May 2001. The increase in long-term debt was used to fund the Spectrum acquisition, and to complete the acquisition of AMEP's minority interests. The effect of the additional long-term debt on interest expense in 2001 was offset by the decline in the interest rate of the credit agreement. At January 1, 2001, the credit agreement assessed interest at an annual rate of 8.6%. The applicable interest rate declined throughout 2001, to 4.1% by December 31, 2001. The average annual rate of interest on the long-term debt was 6.1% in 2001, compared to 8.4% in 2000. Although the interest rate continues to be variable, the credit agreement has set the interest rate at approximately 4.5% until September 29, 2002. The income tax provision for the twelve months ended December 31, 2001 was $5.9 million compared to $5.2 million for the year ended December 31, 2000. These tax provisions reflect effective tax rates of 40.3% and 39.6% for 2001 and 2000, respectively. The difference between the Federal statutory income tax rate of 35% and the effective income tax rate results principally from state income taxes. In 2001, inflationary impact on costs of materials was approximately 1.0%. Due to the limited increase in the cost of merchandise, price increases to customers were limited to less than 3.0%. Results of Operations for the Year ended December 31, 2000 Compared to the Year ended December 31, 1999 Net sales increased 15.2% to $143.8 million in 2000 from $124.8 million in 1999. The acquisition of AMEP, effective March 2000, contributed $11.8 million to this sales growth. The increase is also the result of internal growth through catalog enhancements and product development. Excluding the sales from the AMEP acquisition, educational sales increased $5.8 million, which is an organic growth of 7.0%. Commercial sales in 2000 totaled $27.9 million, increasing 4.7% compared to 1999. Gross profit increased 14.7% to $50.0 million in 2000 from $43.6 million in 1999. Incremental sales from the AMEP acquisition generated $4.9 million in incremental gross profit. Gross profit margin declined to 34.8% in 2000 from 34.9% in 1999. Before including the gross profit from the AMEP acquisition, educational gross profit margin declined in 2000 to 36.3% compared to 36.6% in 1999. The decline in gross profit margin is caused by the growth in quote and bid contract sales that capture large customer tenders by pricing at margins below standard catalog listings. Quote gross profit margins were 31.2% for 2000 and 1999. The commercial gross profit margin declined in 2000 to 36.7% compared to 37.1% in 1999. This decline in gross profit margin is attributed to the shift in mix of products sold in the various commercial product lines that generate varying levels of gross profit margin. The consolidated gross profit margin was also unfavorably impacted by increased freight costs due to fuel surcharges assessed in the last half of 2000. Selling and administrative expenses increased 21.5% in 2000, compared to 1999, to $32.0 million. AMEP increased 2000 selling, general and administrative expenses by $4.3 million. Excluding AMEP, selling and administrative expenses increased by 5.0%. Expenses included in this total include advertising and catalog costs, warehouse & shipping activities, customer service and general administrative functions. This group of operating expenses has absorbed a 15% increase in paper costs for catalog production and a group health insurance cost increase of 22% to $1.6 million in 2000. This expense group also includes the first year of maintenance costs for the Internet e-commerce website. As a measure of labor efficiency, salaries and wages are measured against sales revenues in terms of net sales per payroll dollar. In operations that continued from 1999 through 2000, $8.88 in net sales was generated for every $1.00 of payroll, compared to $8.49 in 1999, a 4.6% improvement in labor efficiency. Wage rates increased by approximately 4%. During 2000, AMEP incurred certain costs classified as special charges in the accompanying Consolidated Statement of Earnings. These non-recurring costs include approximately $350,000 related to the redemption of AMEP stock options held by AMEP directors, $98,000 related to the redemption of AMEP stock options held by 102 AMEP employees, $250,000 related to the settlement of shareholder litigation related to the AMEP acquisition, and $87,000 of various legal, accounting and regulatory fees incurred by AMEP as a result of the AMEP acquisition. Each year, Nasco pays a management fee to its parent, Nasco Holdings. Under the terms of the management agreement, Nasco Holdings provides to Nasco specified legal, tax and other corporate services. In 2000, the management fee paid to Nasco Holdings was $1.5 million, compared to $1.4 million for 1999. Interest expense increased by $1.9 million to $2.8 million in 2000. The increase in interest expense in 2000 is the result of an amendment to Nasco's credit agreement in March 2000, that increased the total debt outstanding from $10.0 million to $35.0 million. The revised credit agreement provided for a variable rate of interest, which was 8.6% at December 31, 2000. In addition, the AMEP acquisition included the assumption of a $3.0 million working capital line of credit. Interest from AMEP debt increased net interest expense by $0.3 million. The income tax provision for the twelve months ended December 31, 2000 was $5.2 million compared to $5.8 million for the year ended December 31, 1999. These tax provisions reflect income tax rates of 39.6% and 38.6% for 2000 and 1999, respectively. The increase of 1.0 percentage point is due to non-deductible special charges in 2000 that were not present in 1999. The remaining difference between the Federal statutory income tax rate of 35% and the effective income tax rate results principally from state income taxes. In 2000, inflationary impact on costs of materials was limited to less than 1.0%. Due to the limited increase in the cost of merchandise, price increases to customers were limited to less than 3.0%. Liquidity and Capital Resources At December 31, 2001, Nasco had working capital of $32.5 million, increasing from $20.3 million at December 31, 2000. Cash and cash equivalents increased $1.9 million in 2001, ending the year at $4.5 million. This increase in cash and cash equivalents is primarily due to the following activities: . Nasco generated cash of $8.6 million from operations during the year ended December 31, 2001; . During 2001, the generation of cash from operations was principally the result of earnings plus depreciation and amortization of $11.0 million, offset by an increase in inventories of $2.1 million. The growth in inventory is attributed to incremental purchases in the 4th quarter of 2001 to capitalize on year-end discounts offered by vendors. Nasco applied $11.7 million to investing activities for the year ended December 31, 2001, and $1.2 million for the year ended December 31, 2000. In 2001, the investing activity included $5.2 million paid to the minority shareholders of AMEP for their minority ownership interests, and $5.2 million for the acquisition of the ownership interests in Spectrum. Capital expenditures to replace and upgrade existing capital equipment and install new equipment and fixtures to provide additional operating efficiencies totaled $1.3 million in both 2001 and 2000. Financing activities provided $5.0 million in the year ended December 31, 2001. Nasco borrowed $20.0 million under an amended credit agreement with its lenders. The funds were used to retire AMEP short-term debt of $2.5 million, and to retire $5.4 million of short-term debt to Geneve related to the 2000 transfer of the AMEP ownership interest. Nasco deployed $5.4 million to retire debt in accordance with the terms of its current credit agreement. Nasco also paid a 2001 cash dividend to Nasco Holdings of $1.8 million. In 2000, Nasco used $7.4 million for financing activities. Nasco generated $35.0 million from its amended credit agreement with its lenders and retired $16.0 million of debt related to the current and prior credit agreements, in accordance with those agreements, and $1.4 million in AMEP debt. Also in 2000, Nasco paid a cash dividend of $25.0 million to Nasco Holdings. 103 Nasco's current credit facility, with an outstanding balance of $44.0 million at December 31, 2001, is supported by variable rate promissory notes due in scheduled reductions of $4.0 million on September 30 and December 31, 2002, with graduating increases in installment payments on each September 30 and December 31 thereafter, with a final installment due in March 2006. The credit facility is collateralized by property, plant and equipment, accounts receivable and all shares of Nasco's subsidiaries capital stock outstanding. This debt carries a variable rate of interest that is based on LIBOR rates and is adjusted from time to time within a one to six month term based on LIBOR rates in effect at the dates of rate adjustment. At December 31, 2001, the weighted average interest rate on this debt was 4.1%. The credit agreement currently has a committed LIBOR rate of interest (including applicable margins) of less than 5% which is effective until October 2002. Also in 2001, Nasco obtained a $2.5 million secured bank line of credit for working capital purposes, of which no amount was outstanding at December 31, 2001, and Nasco made no draws against the facility during the year. The line of credit, which expired on March 29, 2002, has been extended to June 28, 2002, and Nasco anticipates the line of credit will be renewed for another one-year term. The line of credit is also collateralized by property, plant and equipment, accounts receivable, and all shares of Nasco's subsidiaries' capital stock outstanding. Minimum capital commitments for the next five years are comprised of the following components ($000):
2002 2003 2004 2005 2006 -------- -------- -------- -------- -------- Variable rate bank debt.. $8,000.0 $9,000.0 $9,000.0 $9,000.0 $9,000.0 Other long term debt..... 332.2 0.0 0.0 0.0 0.0 Capital leases........... 71.3 27.4 0.0 0.0 0.0 Other lease commitments.. 953.0 749.0 564.0 425.0 96.0 -------- -------- -------- -------- -------- Total capital commitments $9,356.5 $9,776.4 $9,564.0 $9,425.0 $9,096.0
In the year 2007 and thereafter, the minimum capital commitments would be minimal. Capital expenditures for 2002 are expected to be approximately $1.7 million. This capital expenditure plan is comprised of distribution fixtures and equipment, production molds, data systems hardware and improvements. Capital resources in the future are expected to be used for the development of Nasco's catalogs and product lines, and to acquire additional businesses. Nasco anticipates that there will be sufficient financial resources to meet Nasco's projected working capital and other cash requirements for at least the next twelve months. Significant 2002 Events In November 2001, Nasco entered into an agreement to merge with The Aristotle Corporation, a developer and manufacturer of health and medical education teaching aids and computer based training products. Nasco anticipates that the merger will be completed in 2002. Fluctuations in Quarterly Results of Operations Nasco is subject to seasonal influences. Historical revenues and earnings have been significantly higher in the second and third quarters of the fiscal year primarily due to increased educational shipments coinciding with the fall start of new school years. Quarterly results may also be materially affected by the timing of acquisitions, the timing and magnitude of costs related to such acquisitions, variations in costs of products sold, the mix of products sold and general economic conditions. Results for any quarter are not indicative of the results that Nasco may achieve for any subsequent fiscal quarter or for a full fiscal year. 104 The following table sets forth specified unaudited consolidated quarterly financial data for 2001 and 2000.
Fiscal Year Ended December 31, 2001 ----------------------------------- 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr ------- ------- ------- ------- ($ millions) Net sales............... $33.1 $43.2 $52.7 $33.0 Gross profit............ 11.2 14.8 18.3 12.2 Earnings from operations 1.8 4.3 7.9 3.2 Net earnings............ 0.8 2.2 4.3 1.5 Fiscal Year Ended December 31, 2000 ----------------------------------- 1st Qtr 2nd Qtr 3rd Qtr 4th Qtr ------- ------- ------- ------- Net sales............... $28.1 $37.2 $49.1 $29.4 Gross profit............ 9.6 12.9 16.8 10.7 Earnings from operations 2.7 3.6 7.0 2.4 Net earnings............ 1.5 1.8 3.5 1.4
Inflation has had and is expected to have only a minor effect on Nasco's operating results and its sources of liquidity. Recent Accounting Pronouncements In September 2000, Nasco adopted the consensus of the Financial Accounting Standards Board's Emerging Issues Task Force (EITF) Issue No. 00-10, Accounting for Shipping and Handling Fees and Costs. This consensus requires that all amounts billed to a customer in a sale transaction related to shipping and handling represent revenues earned for the goods provided and should be classified as revenue. In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets, or SFAS 144. This Statement supersedes SFAS 121 yet retains its fundamental provisions for recognition and measurement of the impairment of long-lived assets to be held and used and for measurement of long-lived assets to be disposed of by sale. In addition, SFAS 144 requires companies to separately report discontinued operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. Nasco is required to adopt SFAS 144 on January 1, 2002. In June 2001, the FASB issued SFAS No. 141, Business Combinations, or SFAS 141 and SFAS No. 142, Goodwill and Other Intangible Assets, or SFAS 142. SFAS 141 requires that the purchase method of accounting be used for all business combinations. SFAS 141 specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported separately from goodwill. SFAS 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values, and reviewed for impairment in accordance with SFAS 121 and, after its adoption, SFAS 144. Nasco adopted the provisions of SFAS 141 as of July 1, 2001 and SFAS 142 is effective January 1, 2002. Goodwill and intangible assets determined to have an indefinite useful life acquired in business combinations completed before July 1, 2001 continue to be amortized and tested for impairment using the guidance contained in SFAS 121 prior to the full adoption of SFAS 142. Upon adoption of SFAS 142, Nasco is required to evaluate its existing intangible assets and goodwill that were acquired in purchase business combinations, and to make any necessary reclassifications in order to conform with the new classification criteria in SFAS 141 for recognition separate from goodwill. Nasco will be 105 required to reassess the useful lives and residual values of all intangible assets acquired, and make any necessary amortization period adjustments by the end of the first interim period after adoption. If an intangible asset is identified as having and indefinite useful life, Nasco will be required to test the intangible asset for impairment in accordance with the provisions of SFAS 142 within the first interim period. Impairment is measured as the excess of carrying value over the fair value of an intangible asset with an indefinite life. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. As of the date of adoption of SFAS 142, Nasco expects to have unamortized goodwill in the amount of $4,500,000 and unamortized identifiable intangible assets in the amount of $268,000, all of which will be subject to the transition provisions of SFAS 142. Amortization expense related to goodwill was $275,000 for the year ended December 31, 2000 and $294,000 for the nine months ended September 30, 2001. There was no goodwill recorded and correspondingly, no amortization of goodwill recognized during the years ended December 31, 1999 and 1998. Because of the extensive effort needed to comply with the requirements of SFAS 141 and SFAS 142, it is not practicable to reasonably estimate the impact of adopting the Statements on Nasco's consolidated financial statements at the date of this report, including whether it will be required to recognize any transitional impairment losses as the cumulative effect of a change in accounting principle. Quantitative and Qualitative Disclosure About Market Risk Qualitative: Nasco holds financial instruments, including cash and cash equivalents, accounts receivable, accounts payable, and long-term debt. Market risks relating to Nasco's operations result primarily from changes in interest rates. Nasco's borrowings are dependent upon LIBOR rates. The estimated fair value of long-term debt approximates its carrying value at December 31, 2001 and December 31, 2000. Nasco does not hold or issue derivative financial instruments for trading purposes. Quantitative (in millions except for percentages):
2002 2003 2004 2005 ----- ----- ----- ---- Long-Term Debt....... $36.0 $27.0 $18.0 $9.0 Average Interest Rate 4.1% 4.1% 4.1% 4.1% Fair Market Value.... $36.0 $27.0 $18.0 $9.0
106 PROPOSALS FOR THE ANNUAL MEETING Proposal 1 Approval of the Merger Agreement The merger will be consummated on the terms and subject to the conditions set forth in the merger agreement. Upon completion of the merger, Nasco will merge with Aristotle. As a result of this merger, the separate corporate existence of Nasco will cease and Aristotle will be the surviving corporation. Accordingly, upon consummation of the merger, all of the property, rights, privileges, powers and franchises of Nasco will vest in Aristotle and all debts, liabilities, obligations, restrictions, disabilities and duties of Nasco will become the debts, liabilities, obligations, restrictions, disabilities and duties of Aristotle, the surviving corporation. You are encouraged to read the entire proxy statement-prospectus, including the sections entitled "The Merger" on page 28 and "Information Concerning Nasco" section on page 93. The members of Aristotle's board of directors, other than Edward Netter and Steven B. Lapin, believe that the merger is fair to Aristotle's stockholders and in their best interest, have approved and declared advisable the merger agreement and transactions contemplated thereby and recommend the approval of the merger agreement including the filing of a second amended and restated certificate of incorporation that incorporates certain corporate governance changes. Messrs. Netter and Lapin recused themselves from the discussions and vote of the board of directors relating to the merger and related proposals. THE AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST TWO-THIRDS OF THE SHARES OF ARISTOTLE'S OUTSTANDING COMMON STOCK AND THE AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST A MAJORITY OF THE OUTSTANDING COMMON STOCK EXCLUDING SHARES HELD BY GENEVE VOTING IN PERSON OR BY PROXY AT THE MEETING ARE REQUIRED TO APPROVE THE MERGER AGREEMENT INCLUDING THE FILING OF A SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION THAT INCORPORATES CERTAIN CORPORATE GOVERNANCE CHANGES. THE ARISTOTLE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" APPROVAL OF THE MERGER AGREEMENT INCLUDING THE FILING OF A SECOND AMENDED AND RESTATED CERTIFICATE OF INCORPORATION THAT INCORPORATES CERTAIN CORPORATE GOVERNANCE CHANGES. 107 Proposal 2 Amendment and Restatement of Aristotle's Certificate of Incorporation On November 21, 2001, the Aristotle board of directors adopted, subject to stockholder approval, an amendment and restatement to its certificate of incorporation which, among other things, increases the amount of Aristotle common stock authorized for issuance and authorizes and sets forth the rights, preferences and privileges of the Series I preferred stock and the Series J preferred stock. The increase in the amount of authorized common stock and the authorization of the Series I and Series J preferred stock is required as a condition to the closing of the merger to enable Aristotle to issue the merger consideration, the dividend of the Series I preferred stock immediately prior to the merger, and the Series J preferred stock under the exchange agreement between Geneve and Aristotle. A summary of the significant changes due to the provisions of the proposed amended and restated certificate of incorporation is contained on page 60 of this proxy statement-prospectus, and the amended and restated certificate of incorporation is attached to this proxy statement-prospectus as Annex B. THE AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST A MAJORITY OF THE OUTSTANDING COMMON STOCK IS REQUIRED TO APPROVE AND ADOPT THE PROPOSED AMENDED AND RESTATED CERTIFICATE OF INCORPORATION. THE BOARD OF DIRECTORS OF ARISTOTLE BELIEVES THAT THE APPROVAL OF THE AMENDMENT AND RESTATEMENT TO THE CERTIFICATE OF INCORPORATION IS ADVISABLE AND IN THE BEST INTEREST OF ARISTOTLE AND ITS STOCKHOLDERS AND THEREFORE RECOMMENDS A VOTE "FOR" THE PROPOSAL. 108 Proposal 3 Adoption of Aristotle's 2002 Employee, Director or Consultant Stock Plan A proposal to approve Aristotle's 2002 Employee, Director and Consultant Stock Plan, or the 2002 Plan, will be presented to stockholders of Aristotle at the Aristotle annual meeting. Subject to stockholder approval and consummation of the merger, the Aristotle board of directors approved the adoption of the 2002 Plan, which is attached to this proxy statement-prospectus as Annex D. The 2002 Plan reserves 1,500,000 shares of Aristotle's common stock for issuance in the form of incentive stock options, non-qualified stock options or grants of shares of Aristotle common stock. Stock options and stock grants are a fundamental tool used by Aristotle and its competitors to recruit and retain key employees, directors and consultants. The board of directors believes that Aristotle must continue to grant options and stock to enable it and its subsidiaries to draw from and employ the best available talent in a very competitive labor market. Consequently, the board of directors considers the adoption of the 2002 Plan to be necessary to ensure the ability of Aristotle to continue to grant options and stock to attract and retain employees of Aristotle and its subsidiaries. Aristotle currently has two option plans outstanding, the 1986 Stock Option Plan, which will be terminated on the effective date of the merger, and the 1997 Employee and Director Stock Plan, under which options to purchase 118,000 shares of common stock have been granted by Aristotle. Since no additional shares remain reserved for issuance under the 1997 Employee and Director Stock Plan, Aristotle believes that it is necessary to create and adopt a new plan to compensate appropriately Aristotle and Nasco employees. Approval of the 2002 Plan requires the affirmative vote of the holders of at least a majority of the shares represented and voting, in person or by proxy, at the Aristotle annual meeting. While Aristotle believes that the description set forth below covers the material terms of the 2002 Plan, this summary may not contain all information which is important to you. You should read the copy of the 2002 Plan attached as Annex D carefully for a more complete understanding of the 2002 Plan. Purpose of the 2002 Plan The purpose of the 2002 Plan is to encourage ownership of shares of Aristotle common stock by employees, directors and certain consultants of Aristotle to: . attract them to Aristotle; . induce them to work at Aristotle; and . provide them with additional incentive to promote the success of Aristotle. Administration The 2002 Plan will be administered by Aristotle's board of directors (unless the board designates any committee of the board as the "administrator" of the 2002 Plan). The board has the final power to construe and interpret the 2002 Plan and make decisions relating to the options and shares of stock granted or issued under it, and, subject to the provisions of the 2002 Plan and applicable laws and regulations, to determine certain matters, including: . the persons to whom options will be granted or shares of Aristotle common stock will be issued under the 2002 Plan; . when and how options or shares of stock will be granted; . whether an option will be an incentive stock option or a non-qualified stock option; . what the terms of a grant of shares of Aristotle common stock will be (which need not be identical), 109 including the number of shares of stock to be issued, the length of any purchase right Aristotle may have to repurchase the shares of stock and all other terms and conditions of the grant of stock; and . the provisions of each option granted (which need not be identical), including the number of shares subject to the option, the exercise price of the option, the period during which the option may be exercised, and all other terms and conditions of the option. Amendment and Termination The 2002 Plan may be amended by the stockholders of Aristotle. The 2002 Plan may also be amended by the board of directors of Aristotle provided that any amendment approved by the board of directors which is of a scope that requires stockholder approval in order to ensure favorable federal income tax treatment for any incentive stock options under Section 422 of the Internal Revenue Code, is subject to obtaining such stockholder approval. Unless sooner terminated, the 2002 Plan will terminate ten years from the earlier of date of adoption by Aristotle's stockholders or the date of the consummation of the merger. Eligibility Incentive stock options may be granted only to employees, including executive officers and directors who are also employees, of Aristotle or any affiliate. Grants of Aristotle common stock and options, other than incentive stock options, may be granted to employees, directors and consultants of Aristotle. Stock Subject to the 2002 Plan Subject to adjustments, the stock that currently may be issued under the 2002 Plan, including the stock underlying options which may be granted, will not exceed 1,500,000 shares in the aggregate. If options granted under the 2002 Plan expire or otherwise terminate without being exercised, the common stock not issued under the options will again become available for issuance under the 2002 Plan. Terms of Options under the 2002 Plan Exercise Price. The exercise price for any incentive stock option granted under the 2002 Plan may not be less than the fair market value of the stock subject to the option on the date of grant. In addition, no option may be granted to a person who, at the time of the grant, owns stock constituting more than 10% of the total combined voting power of all classes of stock of Aristotle or of an affiliate, unless the exercise price is at least 110% of the fair market value of the stock on the date the option is granted. The exercise price of a non-qualified option under the 2002 Plan shall not be less than the par value per share of Aristotle common stock. Consideration. The exercise price of options granted under the 2002 Plan must be paid in cash, or cash equivalent, at the time the option is exercised or, in the sole discretion of the Aristotle's board of directors where permitted by law: . by delivery of shares of Aristotle common stock valued at fair market value owned by the option holder and held for at least six months; . by delivery of an irrevocable direction to a securities broker to sell shares of common stock and deliver proceeds equal to the exercise price to Aristotle; . by having Aristotle retain from the shares otherwise issuable upon exercise of an option, a number of shares having a fair market value equal as of the date of exercise to the exercise price; . by delivery of a promissory note, bearing interest payable not less than annually at not less than 100% of the applicable federal rate, with other terms as required by the board; or . by any combination of the foregoing. Exercise Period. Options granted under the 2002 Plan may be immediately exercisable or may vest upon specified events determined by Aristotle's board of directors; provided, however, that no option shall be exercisable until at least 15 months following the effective date of the merger. 110 Term. The term of any incentive stock option granted under the 2002 Plan may not exceed five years. Termination of Option. Option holders generally earn the right to exercise their options by remaining as employees, independent contractors or consultants to Aristotle or an affiliate. An incentive stock option granted under the 2002 Plan may, at the Aristotle's board's discretion, be exercised after the termination of the option holder's employment with Aristotle (other than by reason of death, disability or termination for cause as defined in the 2002 Plan) to the extent exercisable on the date of such termination, at any time prior to the earlier of the option's specified expiration date or 90 days after such termination. In granting any non-qualified stock option, the Aristotle's board's may specify that such non-qualified stock option shall be subject to such termination or cancellation provisions as the Aristotle's board shall determine. In the event of the option holder's death or disability, both incentive stock options and non-qualified stock options generally may be exercised, to the extent exercisable on the date of death or disability (plus a pro rata portion of the option if the option vests periodically), by the option holder or the option holder's survivors at any time prior to the earlier of the option's specified expiration date or one year from the date of the option holder's death or disability. Generally, in the event of the option holder's termination for cause, all outstanding and unexercised options are forfeited. Nontransferability. An option may not be transferred by the holder other than by will or by the laws of descent and distribution or as approved by the board of directors in its discretion and as set forth in the applicable option agreement. An option may be exercised during the option holder's lifetime only by the option holder or a permitted transferee. Terms of Stock Grants under the 2002 Plan Price. Aristotle's board of directors will determine the purchase price, if any, for any stock grant under the 2002 Plan. The price shall not be less than the minimum consideration required by the Delaware General Corporation Law on the date of the stock grant. Consideration. The price of a stock grant under the 2002 Plan must be paid in cash, or cash equivalent, at the time the option is exercised or, in the sole discretion of Aristotle's board where permitted by law: . by delivery of shares of Aristotle common stock valued at fair market value owned by the grant recipient and held for at least six months; . by delivery of a promissory note, bearing interest payable not less than annually at not less than 100% of the applicable federal rate, with other terms as required by the board; or . by any combination of the foregoing. Nontransferability. The right to purchase shares of stock under the 2002 Plan may not be transferred by the recipient other than by will or by the laws of descent and distribution. Repurchase of Stock Awards. Typically, under the 2002 Plan, an eligible individual may be granted a specified number of shares of Aristotle common stock. However, vested rights to such stock are typically made subject to certain restrictions or are conditioned on the attainment of certain performance goals. If the recipient violates any of the restrictions during the period specified by Aristotle's board or the performance standards fail to be satisfied, the stock is forfeited and repurchased by Aristotle at the original purchase price. Similarly, in the event of a stockholder's death or disability, Aristotle has the right to repurchase such stock to the extent its right to do so has not lapsed on the date of death or disability. Generally, in the event of the stockholder's termination of employment for cause, Aristotle retains the right to repurchase all common stock granted to such stockholder under the 2002 Plan at the original purchase price. Adjustment Provisions of Stock Options under the 2002 Plan If the shares of Aristotle common stock shall be subdivided or combined into a greater or smaller number of shares or if the Aristotle shall issue any shares of common stock as a stock dividend on its outstanding common 111 stock, the number of shares of common stock deliverable upon the exercise of an option granted under the 2002 Plan shall be appropriately increased or decreased proportionately, and appropriate adjustments shall be made in the purchase price per share to reflect such subdivision, combination or stock dividend. If the Aristotle is to be consolidated with or acquired by another entity in a merger, sale of all or substantially all of the Aristotle's assets or otherwise, the Aristotle's board of directors of any entity assuming the obligations of the Aristotle under the 2002 Plan as a successor corporation, shall, as to outstanding options under the 2002 Plan, either: . make appropriate provision for the continuation of such options by substituting on an equitable basis for the shares then subject to such options the consideration payable with respect to the outstanding shares of Aristotle common stock in connection with the transaction or securities of the successor or acquiring entity; or . upon written notice to the participants, provide that all options must be exercised (either to the extent then exercisable or, at the discretion of the board, all options being made fully exercisable for purposes of such transaction) within a specified number of days of the date of such notice, at the end of which period the options shall terminate; or . terminate all options in exchange for a cash payment equal to the excess of the fair market value of the shares subject to each such option (either to the extent then exercisable or, at the discretion of the board, all options being made fully exercisable for purposes of such transaction) over the exercise price thereof. In the event of a recapitalization or reorganization of the Aristotle, pursuant to which securities of the Aristotle or of another corporation are issued with respect to the outstanding shares of Aristotle common stock, an option holder upon exercising an option under the 2002 Plan, shall be entitled to receive for the purchase price paid upon the exercise the securities he or she would have received if he or she had exercised the option prior to such recapitalization or reorganization. Federal Income Tax Consequences Relating to Stock Awards Granted under the 2002 Plan Incentive Stock Options Incentive stock options under the 2002 Plan are intended to be eligible for the federal income tax treatment accorded "incentive stock options" under Section 422 of the Internal Revenue Code. Incentive stock options generally have the following tax consequences: . There are generally no federal income tax consequences to the option holder or Aristotle by reason of the grant or exercise of an incentive stock option. However, the exercise of an incentive stock option may increase the option holder's alternative minimum tax liability, if any. . If an option holder holds stock for more than two years from the date on which the option is granted and more than one year from the date on which the shares are issued to the option holder upon exercise of the option, any gain or loss on a disposition of the stock will be long term capital gain or loss. In this event, Aristotle will not be allowed a business expense deduction with respect to the disposition of shares. However, if the option holder disposes of the stock before the expiration of either of the above-stated holding periods, or a disqualifying disposition, at the time of disposition the option holder will realize taxable ordinary income equal to the lesser of (i) the excess of the fair market value on the date of exercise over the exercise price, or (ii) the option holder's actual gain, if any, on the purchase and sale. In this circumstance, the option holder's additional gain or any loss upon a disposition will be a capital gain or loss which will be long-term or short-term depending on whether the stock was held for more than one year. To the extent the option holder recognizes ordinary income by reason of a disqualifying disposition, Aristotle will be entitled (subject to the requirement of reasonableness and perhaps, in the future, the satisfaction of a withholding obligation) to a corresponding business expense deduction in the tax year in which the disposition occurs. 112 Nonstatutory Stock Options There generally are no tax consequences to the option holder or Aristotle by reason of the grant of a nonstatutory stock option under the 2002 Plan. Upon exercise of a nonstatutory stock option, the option holder will recognize taxable ordinary income equal to the excess of the stock's fair market value on the date of exercise over the exercise price. Generally, with respect to employees, Aristotle is required to withhold from regular wages or supplemental wage payments an amount based on the ordinary income recognized. Aristotle will be entitled to a business expense deduction equal to the taxable ordinary income recognized by the option holder. Upon disposition of the shares, the option holder will recognize a capital gain or loss equal to the difference between the selling price and the sum of the amount paid for the stock plus any amount recognized as ordinary income upon exercise of the option. Such gain or loss will be long or short term depending on whether the stock was held for more than one year. Stock Grants Under the stock grants feature of the 2002 Plan, an eligible individual may be granted a specified number of shares of Aristotle common stock. However, vested rights to such stock are typically made subject to certain restrictions or are conditioned on the attainment of certain performance goals. If the recipient violates any of the restrictions during the period specified by Aristotle's board of directors or the performance standards fail to be satisfied, the stock is forfeited. A recipient of a stock grant will recognize ordinary income equal to the fair market value of the Aristotle common stock at the time the restrictions lapse, less any amount which the recipient paid for the stock. However, instead of postponing the income tax consequences of a stock grant, the recipient may elect to include the fair market value of the Aristotle common stock (less any purchase price paid) in income in the year the award is granted. This election is made under Section 83(b) of the Internal Revenue Code by filing a written notice with the Internal Revenue Service. In general, Aristotle receives a deduction for federal income tax purposes equal to the amount of compensation recognized by the recipient at the time as the recipient recognizes such income. Additional Provisions Similar to provisions contained in Aristotle's 1997 Employee and Director Stock Plan, the 2002 Plan will provide for the automatic grant of non-qualified options to Aristotle's non-employee directors. Each non-employee director, upon first being elected to the board of directors, will be eligible to receive an option to purchase 2,500 shares of Aristotle common stock, which will vest one year after the date of grant of the option. Additionally, the 2002 Plan provides for a grant to each non-employee director on the date of his or her reelection (provided that the director has served as a director since his or her initial election) of an option to purchase 500 shares, which vests one year after the date of grant of the option assuming uninterrupted service on the board of directors. None of the options will be exercisable until at least 15 months following the effective date of the merger. THE AFFIRMATIVE VOTE OF THE HOLDERS OF AT LEAST A MAJORITY OF THE OUTSTANDING COMMON STOCK VOTED AT THE ANNUAL MEETING IS REQUIRED TO ADOPT ARISTOTLE'S 2002 STOCK PLAN. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE ADOPTION OF ARISTOTLE'S 2002 STOCK PLAN. 113 Proposal 4 Election of Directors Aristotle's amended and restated bylaws and current certificate of incorporation provide for a classified board of directors. The board currently consists of nine members, divided into three classes as follows: Robert Fiscus, Betsy Henley-Cohn, and John C. Warfel constitute a class with a term ending in 2003; Steven B. Lapin, Daniel J. Miglio and John Lahey constitute a class with a term ending in 2002; and John J. Crawford, Edward Netter and Sharon M. Oster constitute a class with a term which expires at the upcoming Annual Meeting. Directors are elected for terms of three years, or, in the case of newly created directorships, for a full term for the class of directors in which the new directorship was created and, in any case, until their successors are elected and qualified. If elected, at the annual meeting, Messrs. Crawford and Netter and Ms. Oster will each be elected for three-year terms expiring in 2004. You are encouraged to read the entire proxy statement-prospectus, including the sections entitled "Management of Aristotle Following the Merger" and "Changes to Aristotle's Certificate of Incorporation" for a description of changes to Aristotle's classified board structure after the consummation of the merger. To select Messrs. Crawford and Netter and Ms. Oster for election as directors, the board of directors of Aristotle met on September 13, 2001 and made its nominations for the annual meeting. Aristotle's bylaws provide that nominations of persons for election to the board may be made by the board of directors, or by any stockholder entitled to vote for the election of directors at the meeting who provides timely notice in writing to the secretary of Aristotle and who complies with the requirement to set forth information specified in Article III, Section 13 of Aristotle's bylaws concerning each person the stockholder proposes to nominate for election and the nominating stockholder. To be timely, notice must be delivered to, or mailed to and received at, the principal executive offices of Aristotle not less than 30 days nor more than 90 days prior to the date of the meeting, provided that at least 45 days' notice or prior public disclosure of the date of the meeting is given or made to stockholders. No stockholder nominations for directors have been submitted in connection with the annual meeting. Under a preferred stock purchase agreement dated October 22, 1997, as amended, entered into between Aristotle and Geneve, Geneve agrees that, at any meeting of the holders of Aristotle capital stock through January 1, 2003, it will exercise its voting rights and privileges of those shares that exceed 30% of the then outstanding voting securities for and against any proposal related to the election of directors in the same percentage as all other voting securities in Aristotle were voted for and against the proposal in a preliminary vote taken for this purpose at the meeting. Under the terms of the merger agreement, effective on the date of the consummation of the merger, the preferred stock purchase agreement, and all amendments thereto, will terminate and be of no further force or effect. The board of directors believes that each of Messrs. Crawford and Netter and Ms. Oster will stand for election and will serve if elected. However, if any of the persons nominated by the board of directors fails to stand for election or becomes unable to accept election, the proxies will be voted for the election of any other person or persons as a majority of the board of directors may recommend. THE AFFIRMATIVE VOTE OF A PLURALITY OF THE VOTES CAST FOR DIRECTORS BY THE HOLDERS OF THE COMMON STOCK AT THE ANNUAL MEETING IS REQUIRED TO ELECT A NOMINEE FOR DIRECTOR. THE BOARD OF DIRECTORS UNANIMOUSLY RECOMMENDS THAT STOCKHOLDERS VOTE "FOR" THE ELECTION JOHN J. CRAWFORD, EDWARD NETTER AND SHARON M. OSTER AS DIRECTORS, AND PROXIES SOLICITED BY THE BOARD OF DIRECTORS WILL BE VOTED IN FAVOR THEREOF UNLESS A STOCKHOLDER HAS INDICATED OTHERWISE ON THE PROXY. 114 LEGAL MATTERS The validity of shares of Aristotle stock offered by this proxy statement-prospectus and certain customary legal matters with respect to the federal income tax consequences of the merger will be passed upon for Aristotle by Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C., Boston, Massachusetts. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. served as counsel to Aristotle with regard to general corporate and tax matters relating to the merger. Kramer Levin Naftalis & Frankel LLP served as counsel to Geneve, Nasco and Nasco Holdings with regard to general corporate matters relating to the merger. Roberts & Holland LLP served as counsel to Geneve, Nasco and Nasco Holdings with regard to tax matters relating to the merger. EXPERTS The consolidated financial statements of Aristotle as of June 30, 2001 and 2000, and for the three fiscal years ended June 30, 2001, 2000 and 1999, included in this proxy statement-prospectus in Annex E have been audited by Arthur Andersen LLP, independent public accountants, as indicated in their reports with respect thereto, and are included herein in reliance upon the authority of said firm, as experts in accounting and auditing in giving said reports. The consolidated financial statements of Nasco as of December 31, 2001 and 2000, and for each of the years in the three-year period ended December 31, 2001, have been included herein in reliance upon the report of KPMG LLP, independent accountants, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. The consolidated financial statements of AMEP as of December 31, 2000, and for the year ended December 31, 2000, have been included herein in reliance upon the report of Hein + Associates LLP, independent auditors, appearing elsewhere herein, and upon the authority of said firm as experts in accounting and auditing. STOCKHOLDER PROPOSALS At the closing of the merger, Aristotle will change its accounting fiscal year, which currently ends on June 30th of each year, to a calender accounting fiscal year. Accordingly, if the merger is consummated, pursuant to Rule 14a-8 under the Exchange Act, any proposal intended to be presented by any stockholder for action at the 2002 Annual Meeting of Stockholders of Aristotle must be received by the Secretary of Aristotle at 27 Elm Street, New Haven, Connecticut 06510, not later than January 31, 2003, in order for the proposal to be considered for inclusion in the proxy statement and proxy relating to the 2002 Annual Meeting. If the merger is not consummated, and, therefore, Aristotle does not change its accounting fiscal year, any proposal intended to be presented by any stockholder for action at the 2002 Annual Meeting must be received by the Secretary of Aristotle, not later than June 3, 2002, in order for the proposal to be considered for inclusion in the proxy statement and proxy relating to the 2002 Annual Meeting. To be considered at the annual meeting, although not included in the proxy statement relating to the annual meeting, notice of stockholder proposals and nominations for director must be delivered to the Secretary of Aristotle not less than 30 days nor more than 90 days prior to the date of the Annual Meeting, unless notice or public disclosure of the date of the meeting occurs less than 45 days prior to the date of the meeting, in which event stockholders may deliver the notice not later than the 15th day following the day on which notice of the date of the meeting was mailed or public disclosure thereof was made. Proposals received after that date will not be voted on at the Annual Meeting. If a proposal is received before that date, the proxies that management 115 solicits for the meeting may still exercise discretionary voting authority on the proposal under circumstances consistent with the proxy rules of the Securities and Exchange Commission. Proposals should be sent to the attention of the Secretary at Aristotle's offices at 27 Elm Street, New Haven, Connecticut 06510. WHERE YOU CAN FIND MORE INFORMATION This proxy statement-prospectus is accompanied by a copy of Aristotle's Annual Report on Form 10-K for the fiscal year ended June 30, 2001 (filing date September 28, 2001) and Amendment No. 1 to Aristotle's Annual Report on Form 10-K/A for the fiscal year ended June 30, 2001 (filing date November 26, 2001) attached as Annex E, which are incorporated by reference into this proxy statement-prospectus and contain the following information: . segments, classes of similar products or services, foreign and domestic operations and export sales; . selected financial data and supplementary financial information; . market price of and dividends on Aristotle's common equity and related stockholder matters; . management's discussion and analysis of financial condition and results of operations; . quantitative and qualitative disclosure about market risk. This proxy statement-prospectus is accompanied by a copy of Aristotle's Quarterly Report on Form 10-Q for the quarter period ended December 31, 2001 (filing date February 14, 2002) attached as Annex F, which is incorporated by reference into this proxy statement-prospectus and contains specified financial and other information relevant to Aristotle's business. Additionally, a copy of Aristotle's Current Report on Form 8-K for the event on April 11, 2002 filed with the SEC (SEC file number 000-14669) on April 11, 2002, Aristotle's Current Report on Form 8-K for the event on November 27, 2001 filed with the SEC (SEC file number 000-14669) on November 30, 2001 and Aristotle's Quarterly Report on Form 10-Q for the quarter period ended September 30, 2001 filed with the SEC (SEC file number 000-14669) on November 14, 2001 are incorporated by reference into this proxy statement prospectus. This proxy statement-prospectus incorporates documents by reference which are not presented in or delivered with this proxy statement-prospectus. All documents filed by Aristotle pursuant to Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this proxy statement-prospectus and before the date of Aristotle's annual meeting are incorporated by reference into and are deemed to be a part of this proxy statement-prospectus from the date of filing of those documents. You should rely only on the information contained in this document or information incorporated by reference. Aristotle has not authorized anyone to provide you with any additional information. Any statement contained in a document incorporated or deemed to be incorporated by reference into this proxy statement-prospectus will be deemed to be modified or superseded for purposes of this proxy statement-prospectus to the extent that a statement contained in this proxy statement-prospectus or any other subsequently filed document that is deemed to be incorporated by reference into this proxy statement-prospectus modifies or supersedes the statement. Any statement so modified or superseded will not be deemed, except as so modified or superseded, to constitute a part of this proxy statement- prospectus. The documents incorporated by reference into this proxy statement-prospectus are available from Aristotle upon request. Aristotle will provide a copy of any and all of the information that is incorporated by reference in this proxy statement-prospectus to any person, without charge, upon written or oral request. If exhibits to the documents incorporated by reference in this proxy statement-prospectus are not themselves specifically incorporated by reference in this proxy statement-prospectus, then the exhibits will not be provided. Any request for documents should be made by no later than five days before the annual meeting date to ensure timely delivery of the documents. Requests for documents relating to Aristotle should be directed to: The Aristotle Corporation, 27 Elm Street, New Haven, Connecticut 06511, attention: Paul M. McDonald. 116 Aristotle files reports, proxy statements and other information with the Securities and Exchange Commission. Copies of our reports, proxy statements and other information may be inspected and copied at the public reference facility maintained by the Securities and Exchange Commission at: Judiciary Plaza Room 1024 450 Fifth Street, N.W. Washington, D.C. 20549 Reports, proxy statements and other information concerning Aristotle may be inspected at: The Nasdaq Stock Market, Inc. 1735 K Street, N.W. Washington, DC 20006 Copies of these materials can also be obtained by mail at prescribed rates from the Public Reference Room of the Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, D.C. 20549 or by calling the Securities and Exchange Commission at l-800-SEC-0330. The Securities and Exchange Commission maintains a website that contains reports, proxy statements and other information regarding Aristotle. The address of the Securities and Exchange Commission website is http://www.sec.gov. Aristotle has filed a registration statement on Form S-4 under the Securities Act with the Securities and Exchange Commission with respect to shares of Aristotle's common stock to be issued in the merger, shares of Aristotle's Series I preferred stock to be issued to Aristotle's common stockholders through a stock dividend prior to the consummation of the merger, shares of Aristotle's Series I preferred stock to be issued upon exercise of options to purchase Aristotle common stock under Aristotle's 1997 Employee and Director Stock Plan and shares of common stock to be issued upon conversion of Aristotle's Series I preferred stock. This proxy statement-prospectus constitutes the prospectus of Aristotle filed as part of the registration statement. This proxy statement-prospectus does not contain all of the information set forth in the registration statement because specified parts of the registration statement are omitted in accordance with the rules and regulations of the Securities and Exchange Commission. The registration statement and its exhibits are available for inspection and copying as set forth above. If you have any questions about the merger, please call Aristotle at (203) 867-4090. This proxy statement-prospectus does not constitute an offer to sell, or a solicitation of an offer to purchase, the securities offered by this proxy statement-prospectus, or the solicitation of a proxy, in any jurisdiction to or from any person to whom or from whom it is unlawful to make an offer, solicitation of an offer or proxy solicitation in the jurisdiction. Neither the delivery of this proxy statement-prospectus nor any distribution of securities under this proxy statement-prospectus will, under any circumstances, create any implication that there has been no change in the information set forth or incorporated into this proxy statement-prospectus by reference or in our affairs since the date of this proxy statement-prospectus. The information contained in this proxy statement-prospectus with respect to Aristotle was provided by Aristotle and the information contained in this proxy statement-prospectus with respect to Nasco was provided by Nasco. STATEMENTS REGARDING FORWARD-LOOKING INFORMATION The Securities and Exchange Commission encourages companies to disclose forward-looking information so that investors can better understand a company's future prospects and make informed investment decisions. This proxy statement-prospectus contains such "forward-looking statements" within the meaning of the Private 117 Securities Litigation Reform Act of 1995. These statements may be made directly in this proxy statement-prospectus referring to Aristotle and Nasco, and they may also be made a part of this proxy statement-prospectus by reference to other documents filed with the Securities and Exchange Commission by Aristotle, which is known as "incorporation by reference." These statements may include statements regarding the period following completion of the merger. Words such as "anticipate," "estimate," "expects," "projects," "intends," "plans," "believes" and words and terms of similar substance used in connection with any discussion of future operating or financial performance, or the merger of Aristotle and Nasco, identify forward-looking statements. All forward-looking statements are management's present expectations of future events and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. In addition to the risks related to the businesses of Aristotle and Nasco, the factors relating to the merger discussed under "Risk Factors," among others, could cause actual results to differ materially from those described on the forward-looking statements. Stockholders are cautioned not to place undue reliance in the forward-looking statements, which speak only of the date of this proxy statement-prospectus or the date of the document incorporated by reference in this proxy statement-prospectus. Neither Aristotle nor Nasco is under any obligation, and each expressly disclaims any obligation, to update or alter any forward-looking statements, whether as a result of new information, future events or otherwise. For additional information about factors that could cause results to differ materially from those described in the forward-looking statements, please see the annual reports on Form 10-K that Aristotle has filed with the Securities and Exchange Commission. All subsequent forward-looking statements attributable to Aristotle or Nasco or any person acting on their behalf are expressly qualified in their entirety by the cautionary statements contained or referred to in this section. 118 OTHER MATTERS Aristotle presently does not intend to bring any matters other than those described in this document before its annual meeting. Further, as of the date of this proxy statement-prospectus, the board of directors of Aristotle does not know of any other matters to be presented for action by the stockholders at the annual meeting. If, however, any other matters not now known are properly brought before the annual meeting or any adjournment or postponement of the annual meeting, the persons named in the accompanying proxy will vote such proxy in their discretion. 119 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 20. Indemnification of Directors and Officers. Article 15 of Aristotle's current restated certificate of incorporation provides that personal liability of directors will be eliminated to the fullest extent permitted under Section 102(b)(7) of the Delaware General Corporation Law. Section 102(b)(7) provides that no director will be personally liable to Aristotle or its stockholders for monetary damage for breach of fiduciary duty as a director. However, no provision in a corporation's charter can eliminate or limit the liability of a director for: (1) any breach of the director's duty of loyalty to the corporation or its stockholders; (2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of the law; (3) willful or negligent violation of the laws governing the payment of dividends or the purchase or redemption of stock; or (4) any transaction from which the director devised an improper personal benefit. Article IX of Aristotle's amended and restated bylaws provides that Aristotle will indemnify any person who is or was a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative by reason of the fact that he or she is or was a director, officer or employee of Aristotle or any subsidiary of Aristotle: . against all expenses (including attorneys' fees), judgments, fines, penalties and amounts paid in settlement actually and reasonably incurred in connection with the action, suit or proceeding, and any appeal therein, if the person acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of Aristotle, and, with respect to any criminal action or proceeding, had no reasonable cause to believe his conduct was unlawful; and . against all expenses (including attorneys' fees) and amounts paid in settlement actually and reasonably incurred in connection with any action by or in the right of Aristotle, if the person acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of Aristotle, except that no indemnification will be made with respect to any matter in which such person has been adjudged to be liable to Aristotle or against amounts paid in settlement, unless otherwise authorized by Aristotle or a court of Delaware. Expenses incurred may be advanced to a director or officer at his or her request, provided that such director or officer undertakes to repay the amount advanced if it is determined that he or she is not entitled to indemnification for such expenses. Notwithstanding the foregoing, to the extent that a director or officer has been successful on the merits or otherwise in defense of any action, he or she will be indemnified by Aristotle against all expenses (including attorneys' fees) incurred in connection therewith. Furthermore, Article IX provides that the indemnification provided therein is not exclusive. Section 145 of the Delaware General Corporate Law provides that a corporation has the power to indemnify a director, officer, employee or agent of the corporation and certain other persons serving at the request of the corporation in related capacities against amounts paid and expenses incurred in connection with an action or proceeding to which he or she is or is threatened to be made a party by reason of such position, if such person shall have acted in good faith and in a manner he or she reasonably believed to be in or not opposed to the best interests of the corporation, and, in any criminal proceeding, if such person had no reasonable cause to believe his or her conduct was unlawful; provided that, in the case of actions brought by or in the right of the corporation, no indemnification will be made with respect to any matter as to which such person shall have been adjudged to be liable to the corporation unless and only to the extent that the adjudicating court determines that such indemnification is proper under the circumstances. Aristotle maintains a general liability insurance policy which covers certain liabilities of directors and officers of Aristotle arising out of claims based on acts or omissions in their capacities as directors or officers. II-1 Item 21. Exhibits and Financial Statement Schedules. (a) The following exhibits are filed herewith or incorporated herein by reference:
Exhibit Number Description - ------ ----------- 2.1+ Agreement and Plan of Merger dated as of November 27, 2001 among The Aristotle Corporation, Geneve Corporation, Nasco Holdings, Inc. and Nasco International, Inc. (included as Annex A to the proxy statement-prospectus forming a part of this Registration Statement and incorporated herein by reference). 3.1 Restated Certificate of Incorporation of The Aristotle Corporation, incorporated herein by reference to Exhibit 3.1 of The Aristotle Corporation Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997. 3.2 Amended and Restated Bylaws of The Aristotle Corporation, incorporated herein by reference to Exhibit 3.2 of The Aristotle Corporation Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997. 4.1 Restated Certificate of Incorporation of The Aristotle Corporation and Amended and Restated Bylaws filed as Exhibits 3.1 and 3.2 are incorporated into this item by reference. See Exhibit 3.1 and Exhibit 3.2 above. 4.2 Registration Rights Agreement dated as of April 11, 1994 between The Aristotle Corporation and the shareholders listed on Exhibit A thereto, incorporated herein by reference to an exhibit to The Aristotle Corporation Registration Statement on Form S-3 (File No. 333-4185). 4.3 Preferred Stock Purchase Agreement dated as of October 22, 1997 between The Aristotle Corporation and Geneve Corporation, incorporated herein by reference to Exhibit 10.5 of The Aristotle Corporation Quarterly Report on Form 10-Q for fiscal quarter ended September 30, 1997. 4.4 Registration Rights Agreement dated as of October 22, 1997 between The Aristotle Corporation and Geneve Corporation, incorporated herein by reference to Exhibit 10.6 of The Aristotle Corporation Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997. 4.5 Letter Agreement dated as of September 15, 1997 among The Aristotle Corporation, Aristotle Sub, Inc. and certain stockholders, incorporated herein by reference to Exhibit 10.7 of The Aristotle Corporation Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997. 4.6 Letter Agreement dated as of February 9, 2000 between The Aristotle Corporation and Geneve Corporation regarding certain limitations on voting and the acquisition of additional shares of common stock, incorprated herein by reference to The Aristotle Corporation Report on Form 13D/A dated February 15, 2000. 4.7 Letter Agreement dated as of April 28, 2000 between The Aristotle Corporation and Geneve Corporation, modifying the letter agreement between such parties dated as of February 9, 2000, regarding certain limitations on voting and the acquisition of additional shares of common stock, incorporated herein by reference to The Aristotle Corporation Current Report on Form 8-K dated May 2, 2000. 5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. regarding legality of securities being registered. 8.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. regarding certain U.S. income tax aspects of the merger. 10.1 Stock Option Plan of The Aristotle Corporation, as amended, incorporated herein by reference to Exhibit 10.2 of The Aristotle Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (the "1992 Form 10-K"). 10.2 Settlement and Release Agreement dated as of May 29, 1996 among The Aristotle Corporation, the Federal Deposit Insurance Corporation and certain other interested parties, incorporated herein by reference to Exhibit 10.22 of The Aristotle Corporation Annual Report on Form 10-K for the fiscal year ended June 30, 1996. 10.3 Stipulation and Agreement of Settlement dated as of May 28, 1996 regarding In Re First Constitution Stockholders Litigation, incorporated herein by reference to Exhibit 10.23 of The Aristotle Corporation Annual Report on Form 10-K for the fiscal year ended June 30, 1996.
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Exhibit Number Description - ------ ----------- 10.4 Stock Purchase Agreement between The Aristotle Corporation and Kevin Sweeney dated as of April 30, 1999, incorporated herein by reference to Exhibit 2.1 of The Aristotle Corporation Current Report on form 8-K dated May 4, 1999, as amended. 10.5 The Aristotle Corporation 1997 Employee and Director Stock Plan, incorporated herein by reference to The Aristotle Corporation Registration Statement on Form S-8 dated December 10, 1997. 10.6 The Employment Agreement dated as of February 1, 2001 by and between The Aristotle Corporation and Paul McDonald, incorporated herein by reference to Exhibit 10.8 of The Aristotle Corporation Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2001. 10.7 The Employment Agreement dated as of February 1, 2001 by and between The Aristotle Corporation and John Crawford, incorporated herein by reference to Exhibit 10.9 of The Aristotle Corporation Annual Report on Form 10-K for the fiscal year ended June 30, 2001 (included as Annex E to the proxy statement-prospectus forming a part of this Registration Statement and incorporated herein by reference). 10.8 Amended and Restated Credit Agreement (5 Year) dated as of May 29, 2001 among Nasco International, Inc., Various Financial Institutions now or hereafter parties hereto, Bank One, Wisconsin, and Bank of America, N.A. 10.9 Amended and Restated Credit Agreement (364 Days) dated as of May 29, 2001 among Nasco International, Inc., Various Financial Institutions now or hereafter parties hereto, Bank One, Wisconsin, and Bank of America, N.A. 10.10 The Aristotle Corporation 2002 Stock Option Plan (attached as Annex D to this proxy statement- prospectus forming a part of this Registration Statement and incorporated herein by reference). 10.11 Exchange Agreement, dated as of November 27, 2001, by and between The Aristotle Corporation and Geneve Corporation, incorporated herein by reference to Exhibit 10 of The Aristotle Corporation Current Report on Form 8-K, dated November 30, 2001. 10.12 Second Amended and Restated Mortgage (and Security Agreement and Assignment of Leases and Rents), dated as of August 21, 2001, by and between Nasco International, Inc., as Mortgagor, in favor of Bank of America, N.A., as agent. 10.13 Second Amended and Restated Deed of Trust, Security Agreement, Assignment of Rents and Leases, and Fixture Filing, dated as of August 21, 2001, by Nasco International, Inc., as Mortgagor, in favor of Commonwealth Land Title Insurance Company, as Trustee for the benefit of Bank of America, N.A. 10.14 Deed of Trust, Security Agreement, Assignment of Rents and Leases, and Fixture Filing, dated as of August 21, 2001, by American Educational Products, Inc., as Mortgagor, in favor of The Public Trustee for the County of Larimer, State of Colorado, as Trustee for the benefit of Bank of America, N.A. 10.15 Form of Stockholders Agreement by and among The Aristotle Corporation, Geneve Corporation and Nasco Holdings, Inc., incorporated herein by reference to Exhibit 99.3 of The Aristotle Corporation Current Report on Form 8-K dated November 27, 2001. 13.1 The Aristotle Corporation Annual Report on Form 10-K for the fiscal year ended June 30, 2001 (included as Annex E to the proxy statement-prospectus forming a part of this Registration Statement and incorporated herein by reference). 13.2 The Aristotle Corporation Amended Annual Report on Form 10-K/A for the fiscal year ended June 30, 2001 (included as Annex E to the proxy statement-prospectus forming a part of this Registration Statement and incorporated herein by reference). 13.3 The Aristotle Corporation Quarterly Report on Form 10-Q for the three months ended September 30, 2001 filed with the SEC (SEC file number 000-14669) on November 14, 2001. 13.4 The Aristotle Corporation Quarterly Report on Form 10-Q for the three months ended December 31, 2001 (included as Annex F to the proxy statement-prospectus forming a part of this Registration Statement and incorporated herein by reference).
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Exhibit Number Description - ------ ----------- 21.1 Subsidiaries of The Aristotle Corporation, incorporated herein by reference to Exhibit 21.1 of The Aristotle Corporation Annual Report on Form 10-K for the fiscal year ended June 30, 2001 (included as Annex E to the proxy statement-prospectus forming a part of this Registration Statement and incorporated herein by reference). 23.1 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (included as part of its opinion filed as Exhibit 5.1 and incorporated herein by reference). 23.2 Consent of Duff & Phelps, LLC (included as part of its opinion filed as Exhibit 99.1 and incorporated herein by reference). 23.3 Consent of Arthur Andersen LLP. 23.3.1 Letter regarding Arthur Andersen LLP representations. 23.4 Consent of KPMG LLP. 23.5 Consent of Hein + Associates LLP 24.1 Power of Attorney (included on the signature page of this Form S-4 and incorporated herein by reference). 99.1 Opinion of Duff & Phelps, LLC (included as Annex C to the proxy statement-prospectus forming a part of this Registration Statement and incorporated herein by reference). 99.2 Form of Amended and Restated Certificate of Incorporation of The Aristotle Corporation (included as Annex B to the proxy statement-prospectus forming a part of this Registration Statement and incorporated herein by reference). 99.3 Form of Second Amended and Restated Certificate of Incorporation of The Aristotle Corporation (included as Annex G to the proxy statement-prospectus forming a part of this Registration Statement and incorporated herein by reference). 99.4 Form of Stockholders Agreement between The Aristotle Corporation and Geneve Corporation, incorporated herein by reference to Exhibit 99.3 of The Aristotle Corporation Current Report on Form 8-K, dated November 30, 2001. 99.5** Form of Proxy of Aristotle.
** Previously filed. + In accordance with Item 601(b)(2) of Regulation S-K, the schedules have been omitted and a list briefly describing the schedules is at the end of Annex A. Aristotle will furnish supplementally a copy of any omitted schedule to the Commission upon request. Item 22. Undertakings The undersigned Registrant hereby undertakes: (1) that, for purposes of determining any liability under the Securities Act of 1933, each filing of the registrant's annual report pursuant to Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit plan's annual report pursuant to Section 15(d) of the Securities Exchange Act of 1934) that is incorporated by reference in this registration statement shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (2) that prior to any public reoffering of the securities registered hereunder through use of a prospectus which is a part of this registration statement, by any person or party who is deemed to be an underwriter within the meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus will contain the information called for by the applicable registration form with respect to reofferings by persons who may be deemed underwriters, in addition to the information called for by the other items of the applicable form; (3) that every prospectus (i) that is filed pursuant to paragraph (2) immediately preceding, or (ii) that purports to meet the requirements of Section 10(a)(3) of the Exchange Act of 1934 and is used in connection with an offering of securities subject to Rule 415, will be filed as a part of an amendment to the registration statement II-4 and will not be used until such amendment is effective, and that, for purposes of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof; (4) to respond to requests for information that is incorporated by reference into the prospectus pursuant to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of any such request, and to send the incorporated documents by first class mail or other equally prompt means, including information contained in documents filed after the effective date of this registration statement through the date of responding to such request; and (5) to supply by means of a post-effective amendment all information concerning a transaction, and the company being acquired involved therein, that was not the subject of and included in this registration statement when it became effective. Insofar as indemnification for liabilities under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the provisions described in Item 20 above, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable. If a claim of indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in a successful defense of any action, suit or proceeding) is asserted by such director, officer, or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. II-5 SIGNATURES Pursuant to the requirements of the Securities Act, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New Haven, State of Connecticut, on April 11, 2002. THE ARISTOTLE CORPORATION By: /s/ John J. Crawford ------------------------- Name: John J. Crawford Title: Chief Executive Officer, President and Chairman of the Board POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that each individual whose signature appears below constitutes and appoints John J. Crawford and Paul McDonald and each of them, his or her true and lawful attorneys-in-fact and agents with full power of substitution and resubstitution, for him or her and in his or her name, place and stead, in any and all capacities, to sign any and all amendments (including post-effective amendments) to this registration statement (or any other registration statement for the same offering that is to be effective upon filing pursuant to Rule 462(b) under the Securities Act of 1933) and to file the same with all exhibits thereto, and all documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents or any of them, or their or his or her substitute or substitutes, may lawfully do or cause to be done by virtue hereof. This power of attorney may be executed in counterparts. Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed by the following persons in the capacities held on the dates indicated. Signature Title Date --------- ----- ---- /s/ Paul McDonald Chief Financial Officer (principal April 11, 2002 --------------------- financial and accounting officer) Paul McDonald and Secretary /s/ Betsy Henley-Cohn Director April 11, 2002 --------------------- Betsy Henley-Cohn /s/ Robert L. Fiscus Director April 11, 2002 --------------------- Robert L. Fiscus /s/ John L. Lahey Director April 11, 2002 --------------------- John L. Lahey /s/ Steven B. Lapin Director April 11, 2002 --------------------- Steven B. Lapin /s/ Daniel J. Miglio Director April 11, 2002 --------------------- Daniel J. Miglio II-6 Signature Title Date --------- ----- ---- /s/ Edward Netter Director April 11, 2002 ------------------- Edward Netter /s/ Sharon M. Oster Director April 11, 2002 ------------------- Sharon M. Oster /s/ John C. Warfel Director April 11, 2002 ------------------- John C. Warfel II-7 ANNEX A - -------------------------------------------------------------------------------- AGREEMENT AND PLAN OF MERGER Among THE ARISTOTLE CORPORATION, GENEVE CORPORATION, NASCO HOLDINGS, INC. And NASCO INTERNATIONAL, INC. Dated as of November 27, 2001 - -------------------------------------------------------------------------------- Table of Contents Glossary of Defined Terms......................................................... i ARTICLE I THE MERGER............................................................. A-2 SECTION 1.01. The Merger........................................................ A-2 SECTION 1.02. Effective Time; Closing........................................... A-2 SECTION 1.03. Effect of the Merger.............................................. A-2 SECTION 1.04. Certificate of Incorporation; Bylaws.............................. A-2 SECTION 1.05. Directors and Officers of the Surviving Corporation............... A-2 ARTICLE II CONVERSION OF SECURITIES IN THE MERGER................................ A-3 SECTION 2.01. Effect on Capital Stock; Conversion of Shares; Options to Purchase Company Stock.................................................................. A-3 ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY........................ A-3 SECTION 3.01. Organization and Qualification; Subsidiaries...................... A-3 SECTION 3.02. Certificate ofIncorporation and Bylaws............................ A-3 SECTION 3.03. Capitalization.................................................... A-4 SECTION 3.04. Authority Relative to This Agreement.............................. A-4 SECTION 3.05. No Conflict; Required Filings and Consents........................ A-5 SECTION 3.06. Permits; Compliance............................................... A-5 SECTION 3.07. SEC Filings; Financial Statements................................. A-6 SECTION 3.08. Absence of Certain Changes or Events.............................. A-6 SECTION 3.09. Employee Benefit Plans; Labor Matters............................. A-6 SECTION 3.10. Contracts; Debt Instruments....................................... A-9 SECTION 3.11. Absence of Litigation............................................. A-10 SECTION 3.12. Environmental Matters............................................. A-10 SECTION 3.13. Trademarks, Patents and Copyrights................................ A-11 SECTION 3.14. Taxes............................................................. A-12 SECTION 3.15. Property and Leases............................................... A-12 SECTION 3.16. Insurance......................................................... A-13 SECTION 3.17. Brokers........................................................... A-13 ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT, NASCO HOLDINGS AND NASCO................................................. A-13 SECTION 4.01. Organization and Qualification; Subsidiaries...................... A-13 SECTION 4.02. Certificate of Incorporation and Bylaws........................... A-13 SECTION 4.03. Capitalization.................................................... A-14 SECTION 4.04. Authority Relative to This Agreement.............................. A-14 SECTION 4.05. No Conflict; Required Filings and Consents........................ A-14 SECTION 4.06. Permits; Compliance............................................... A-15 SECTION 4.07. Absence of Certain Changes or Events.............................. A-15 SECTION 4.08. Absence of Litigation............................................. A-15 SECTION 4.09. Financial Statements.............................................. A-15 SECTION 4.10. Employee Benefit Plans; Labor Matters............................. A-16 SECTION 4.11. Contracts; Debt Instruments....................................... A-18 SECTION 4.12. Environmental Matters............................................. A-19 SECTION 4.13. Trademarks, Patents and Copyrights................................ A-20 SECTION 4.14. Taxes............................................................. A-20 SECTION 4.15. Property and Leases............................................... A-20 SECTION 4.16. Insurance......................................................... A-21 SECTION 4.17. Brokers........................................................... A-21
1 ARTICLE V COVENANTS................................................................ A-21 SECTION 5.01. Conduct of Business Pending the Closing............................. A-21 SECTION 5.02. Notices of Certain Events........................................... A-23 SECTION 5.03. Contractual Consents................................................ A-23 SECTION 5.04. Resignation of Directors............................................ A-23 ARTICLE VI ADDITIONAL AGREEMENTS................................................... A-23 SECTION 6.01. Proxy Statement..................................................... A-23 SECTION 6.02. Company Stockholders' Meeting....................................... A-24 SECTION 6.03. Access to Information; Confidentiality.............................. A-24 SECTION 6.04. No Solicitation of Transactions..................................... A-25 SECTION 6.05. Directors' and Officers' Indemnification and Insurance.............. A-25 SECTION 6.06. Further Action; Consents; Filings................................... A-27 SECTION 6.07. Public Announcements................................................ A-27 SECTION 6.08. Issuance of Additional Shares of Company Common Stock............... A-27 SECTION 6.09. Registration of the Series I Preferred Stock........................ A-27 SECTION 6.10. NASDAQ Listing...................................................... A-28 ARTICLE VII CONDITIONS TO THE MERGER............................................... A-28 SECTION 7.01. Conditions to the Obligations of Each Party to Consummate the Merger A-28 SECTION 7.02. Conditions to the Obligations of the Company........................ A-29 SECTION 7.03. Conditions to the Obligations of Parent, Nasco Holdings and Nasco... A-29 ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER..................................... A-30 SECTION 8.01. Termination......................................................... A-30 SECTION 8.02. Notice of Termination; Effect of Termination........................ A-31 SECTION 8.03. Amendment........................................................... A-31 SECTION 8.04. Waiver.............................................................. A-31 SECTION 8.05. Expenses............................................................ A-31 ARTICLE IX GENERAL PROVISIONS...................................................... A-31 SECTION 9.01. Non-Survival of Representations, Warranties and Agreements.......... A-31 SECTION 9.02. Notices............................................................. A-32 SECTION 9.03. Certain Definitions................................................. A-32 SECTION 9.04. Severability........................................................ A-33 SECTION 9.05. Assignment; Binding Effect; Benefit................................. A-33 SECTION 9.06. Incorporation of Exhibits........................................... A-33 SECTION 9.07. Specific Performance................................................ A-33 SECTION 9.08. Governing Law....................................................... A-33 SECTION 9.09. Submission to Jurisdiction; Venue................................... A-34 SECTION 9.10. Headings............................................................ A-34 SECTION 9.11. Counterparts........................................................ A-34 SECTION 9.12. Entire Agreement.................................................... A-34 SECTION 9.13. Waiver of Jury Trial................................................ A-34
2 GLOSSARY OF DEFINED TERMS Affiliate (S)..................... 9.03(a) Agreement......................... Preamble Articles of Merger................ (S) 1.02 beneficial owner.................. 9.03(b) business day...................... 9.03(c) Certificate and Articles of Merger (S) 1.02 Common Stock...................... Recitals Closing........................... 1.02 Closing Date...................... 1.02 Code.............................. 2.02(e) Company........................... Preamble Company Board..................... Recitals Company Certificates.............. 2.02(a) Company Common Stock.............. Recitals Company Option.................... 2.01(b) Company Real Property............. 3.11(ii) Company SEC Reports............... 3.07(a) Company Independent Committee..... Recitals Company Stock Plans............... 2.03(a) Company Stockholders' Meeting..... 6.01(a) Company Subsidiary (ies).......... 3.01(a) Competing Transaction............. (S) 6.04 Confidentiality Agreement......... 6.03(b) Control........................... 9.03(d) Controlled by..................... 9.03(d) Costs............................. 6.06(d) Diluting Issuance................. 6.08 Disclosure Schedule............... 3.01(a) Effective Time.................... (S) 1.02 Environmental Claims.............. 3.12(b) Environmental Laws................ 3.12(b) Environmental Permit.............. 3.12(b) ERISA............................. 3.09(a) Exchange Act...................... 3.05(b)(i) Exchange Agreement................ Preamble Expenses.......................... 8.05(a) Governmental Entity............... 3.05(b) Hazardous Material................ 3.12(b) Indemnified Parties............... 6.06(d) IRS............................... 3.09(a)(iii) Knowledge......................... 9.03(e) Law............................... 3.05(a)(ii) Material Adverse Effect........... 3.01(a) Material Contract................. 3.10(a) Merger............................ Recitals
i Merger Consideration............ 2.01(a) Multiple Employer Plan.......... 3.09(b) Multiple Employer Plan.......... 3.09(b) NASCO........................... Recitals Nasco Balance Sheets............ 4.05(a)(ii) Nasco Common Stock.............. Recitals Nasco Financial Statements...... 4.05 Nasco Holdings, Inc............. Preamble Nasco Interim Balance Sheets.... 4.05(a)(ii) Nasco Interim Balance Sheet Date 4.05(a)(ii) Nasco Real Property............. 4.12(ii) Nasco Subsidiary(ies)........... 4.01 NASDAQ.......................... (S) 3.03 Order........................... 7.01(b) Parent.......................... Preamble Party........................... Preamble Parties......................... Preamble Permits......................... (S) 3.06 Person.......................... 9.03(f) Plans........................... 3.09(a) Preferred Stock................. 3.03(c) Proxy Statement................. 6.01(a) Real Property................... 3.12(a)(ii) Release......................... 3.12(b) Remedial Action................. 3.12(b) Representatives................. 6.02(a) Restated Certificate............ Recitals SEC............................. 3.07(a) Securities Act.................. 5.05 Series I Preferred Stock........ Recitals Series J Preferred Stock........ Recitals Subsidiary(ies)................. 9.03(g) Superior Proposal............... (S) 6.04 Surviving Corporation........... (S) 1.01 Tax Returns..................... (S) 3.14 Taxes........................... (S) 3.14 Third Party Provision........... (S) 9.05 under common control with....... 9.03(d) U.S. GAAP....................... 3.07(b) Waivers......................... 3.23
ii AGREEMENT AND PLAN OF MERGER AGREEMENT AND PLAN OF MERGER, dated as of November 27, 2001 (this "Agreement"), by and among GENEVE CORPORATION, a Delaware corporation ("Parent"), THE ARISTOTLE CORPORATION, a Delaware corporation (the "Company"), NASCO HOLDINGS, INC., a Wisconsin corporation and a subsidiary of Parent ("Nasco Holdings"), and NASCO INTERNATIONAL, INC., a Wisconsin corporation and a wholly-owned subsidiary of Nasco Holdings and an indirect subsidiary of Parent ("Nasco")(each a "Party" and collectively the "Parties" except as otherwise provided in Section 5.01 of this Agreement). The Parties desire to merge Nasco with and into the Company (the "Merger") with the Company to be the Surviving Corporation (as defined herein) of the Merger in order to achieve certain synergies and efficiencies resulting from the combination of their respective businesses. As a preparatory step, immediately prior to the Merger, the Company will file an Amended and Restated Certificate of Incorporation of the Company substantially in the form attached hereto as Exhibit A (the "Restated Certificate") with the Secretary of State of the State of Delaware and will distribute to its common stockholders, pro rata, a dividend of one share of newly issued Series I Convertible Voting Cumulative 11% Preferred Stock, par value $.01, of the Company ("Series I Preferred Stock") for each share of Company common stock, par value $0.01 ("Company Common Stock") then issued and outstanding. Subject to the terms and conditions set forth herein, Nasco will merge with and into the Company. In the Merger, all of the shares of Nasco common stock, par value $0.01 ("Nasco Common Stock") issued and outstanding immediately prior to the Merger shall be converted into shares of Company Common Stock and newly issued Series J Non-Voting Cumulative 12% Preferred Stock, par value $.01, of the Company ("Series J Preferred Stock"). The Board of Directors of the Company, including those Directors who are "Continuing Directors" as such term is defined in the certificate of incorporation of the Company in effect on the date hereof, and excluding directors affiliated with Parent, which directors did not participate in the consideration of the Merger (the "Company Board"), has unanimously (i) approved and deemed the Merger advisable upon the terms and subject to the conditions set forth in this Agreement and (ii) agreed to submit this Agreement to the stockholders of the Company for their approval. The board of directors of Nasco has determined that the Merger is consistent with and in furtherance of the long-term business strategy of Nasco and has approved and adopted this Agreement, the Merger and the other transactions contemplated by this Agreement and the sole stockholder of Nasco has executed a written consent approving this Agreement and the Merger. Immediately after but on the same date as the Merger, pursuant to the Exchange Agreement substantially in the form attached hereto as Exhibit B (the "Exchange Agreement"), the Company will issue to Parent one share of Series J Preferred Stock in exchange for each share of Series I Preferred Stock held by Parent immediately prior to the Merger. A-1 NOW, THEREFORE, in consideration of the foregoing and the mutual covenants and agreements herein contained and intending to be legally bound hereby, the Parties hereto hereby agree as follows: ARTICLE I THE MERGER SECTION 1.01. The Merger. Provided that this Agreement shall not have been terminated in accordance with Section 8.01, upon the terms and subject to the conditions set forth in Article VII, and in accordance with the Delaware General Corporation Law ("DGCL") and the Wisconsin Business Corporation Law ("WBCL"), at the Effective Time (as defined below), Nasco shall be merged with and into the Company. As a result of the Merger, the separate corporate existence of Nasco shall cease and the Company shall continue as the surviving corporation of the Merger (the "Surviving Corporation"). SECTION 1.02. Effective Time; Closing. The closing of the transactions contemplated by this Agreement (the "Closing") shall take place after the close of trading on the Nasdaq Smallcap Market at the offices of Kramer Levin Naftalis & Frankel LLP, 919 Third Avenue, New York, New York as soon as practicable by the later of (i) thirty (30) days after the approval of the Merger Agreement by the Company's stockholders or (ii) five (5) days after the satisfaction or waiver of the conditions set forth in Article 7 hereof or at such other time and place as the Parties shall agree. The date on which the Closing occurs is herein referred to as the "Closing Date." At the Closing, the Parties hereto shall effectuate the transactions provided for in this Agreement and shall cause the Merger to be consummated by first filing (a) the Restated Certificate with the Secretary of State of the State of Delaware and effectuating the declaration and payment of the dividend of Series I Preferred Stock, (b) the certificate of merger with the Secretary of State of the State of Delaware in such form as is required by, and executed in accordance with, the relevant provisions of the DGCL and then (c) filing the articles of merger (collectively with the certificate of merger the "Certificate and Articles of Merger") with the Department of Financial Institutions of the State of Wisconsin in such form as is required by, and executed in accordance with, the relevant provisions of the WBCL (the date and time of such filings, or such later date or time agreed upon by the Parties hereto and set forth herein which in all events shall take place on the Closing Date, the "Effective Time"). SECTION 1.03. Effect of the Merger. At the Effective Time, the effect of the Merger shall be as provided in the applicable provisions of the DGCL and the WBCL. Without limiting the generality of the foregoing, and subject thereto, at the Effective Time, all of the property, (including interests in subsidiaries), rights, privileges, powers and franchises of the Company and Nasco shall vest in the Surviving Corporation, and all debts, liabilities, obligations, restrictions, disabilities and duties of each of the Company and Nasco shall become the debts, liabilities, obligations, restrictions, disabilities and duties of the Surviving Corporation. SECTION 1.04. Certificate of Incorporation; Bylaws. At the Effective Time, (a) the certificate of incorporation of the Surviving Corporation shall be the certificate of incorporation of the Company as amended pursuant to the Certificate of Merger and shall be in the form attached hereto as Exhibit C until thereafter changed or amended as provided therein or by applicable law, and (b) the bylaws of the Company shall be the bylaws of the Surviving Corporation until thereafter changed or amended as provided therein or by applicable law. SECTION 1.05. Directors and Officers of the Surviving Corporation. At the Effective Time, the directors of the Surviving Corporation shall be as set forth on Schedule 1.05 attached hereto until the earlier of their resignation or removal or otherwise ceasing to be a director or until their respective successors are duly elected and qualified. The officers of the Company immediately prior to the Effective Time shall be the officers of the Surviving Corporation at the Effective Time and shall remain as such until the earlier of their resignation or removal or otherwise ceasing to be an officer or until their respective successors are duly elected and qualified. A-2 ARTICLE II CONVERSION OF SECURITIES IN THE MERGER SECTION 2.01. Effect on Capital Stock; Conversion of Shares; Options to Purchase Company Stock (a) At the Effective Time, by virtue of the Merger and without any action on the part of Nasco, Nasco Holdings, Parent, the Company or the holders of any of the following securities: all shares of Nasco Common Stock that are issued and outstanding immediately prior to the Effective Time shall be converted into the right to receive merger consideration (the "Merger Consideration") consisting of an aggregate of 15,000,000 shares of Company Common Stock and 10,000,000 shares of Series J Preferred Stock with an aggregate liquidation value of $60,000,000 on the basis of 150,000 shares of Company Common Stock and 100,000 shares of Series J Preferred Stock for each share of Nasco Common Stock issued and outstanding at the Effective Time. The Series I Preferred Stock and the Series J Preferred Stock shall have the rights, preferences and privileges ascribed thereto in the Restated Certificate. (b) All shares of Company Common Stock and Series I Preferred Stock that are issued and outstanding immediately prior to the Effective Time shall remain outstanding and unchanged by the Merger. (c) At the Effective Time, the Company's 1986 Stock Option Plan and all options to purchase shares of Company Common Stock granted pursuant to such plan shall terminate. (d) From and after the Effective Time, each outstanding option to purchase shares of Company Common Stock granted pursuant to the Company's 1997 Employee and Director Stock Plan ("Company Options") shall remain in full force and effect and each such option to purchase one share of Company Common Stock shall be exercisable into one share of Company Common Stock and one share of Series I Preferred Stock, pursuant to the terms of such options. ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY The Company hereby represents and warrants to Parent, Nasco Holdings and Nasco that: SECTION 3.01. Organization and Qualification; Subsidiaries. (a) Except as set forth in Section 3.01(a) of the Disclosure Schedule attached hereto, dated as of the date hereof and forming a part of this Agreement (the "Disclosure Schedule"), each of the Company and each subsidiary of the Company listed in Section 3.01(a) of the Disclosure Schedule (each a "Company Subsidiary" and collectively the "Company Subsidiaries") has been duly organized, and is validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, as the case may be, and has the requisite power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted. Each of the Company and each Company Subsidiary is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its business makes such qualification or licensing necessary, except for such failures to be so qualified or licensed and in good standing that would not materially delay consummation of the Merger and would not have a Material Adverse Effect. (b) A true and complete list of all the Company Subsidiaries, together with the jurisdiction of incorporation or organization of each Company Subsidiary and the percentage of the outstanding capital stock of each Company Subsidiary owned by the Company and each other Company Subsidiary, is set forth in Section 3.01(a) of the Disclosure Schedule. Except as disclosed in Section 3.01(a) of the Disclosure Schedule, the Company does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for any equity or similar interest in, any Person other than investments in marketable securities. SECTION 3.02. Certificate of Incorporation and Bylaws. The copies of the Company's certificate of incorporation and bylaws, each as amended and restated, that are set forth as exhibits to the Company's Form 10-Q for the quarter ended March 31, 1997 are complete and correct copies thereof. Such charter and bylaws are in full force and effect on the date of this Agreement. The Company is not in violation of any of the provisions of its certificate of incorporation or bylaws. A-3 SECTION 3.03. Capitalization. As of the date of this Agreement, the authorized capital stock of the Company consists of (a) 3,000,000 shares of Company Common Stock and (b) 3,000,000 shares of preferred stock, par value $0.01 (the "Company Preferred Stock"). As of the date of this Agreement, (i) 1,891,625 shares of Company Common Stock were validly issued, fully paid and nonassessable and issued in compliance with all applicable laws including federal and state securities laws and no shares of Company Preferred Stock were issued and outstanding, (ii) 12,988 shares of Company Common Stock were held in the treasury of the Company or by the Company Subsidiaries, and (iii) 200,872 shares of Company Common Stock were reserved for issuance in connection with the exercise of outstanding Company Options in the amounts and at the exercise prices set forth in Section 3.03 of the Disclosure Schedule. Except as set forth in Section 3.03 of the Disclosure Schedule, all publicly traded shares of Company Common Stock are authorized for listing on the NASDAQ Smallcap Market ("NASDAQ"). From June 30, 2001 through the date hereof, the Company has not issued any additional shares of Company Common Stock, nor, except as set forth in Section 3.03 of the Disclosure Schedule, has the Company granted any additional options, warrants or other rights to purchase capital stock or other securities or entered into any agreements, arrangements or commitments of any character relating to the issued or unissued capital stock of the Company or any Company Subsidiary or obligating the Company or any Company Subsidiary to issue or sell any shares of capital stock of, or other equity interests in, the Company or any Company Subsidiary. Except as contemplated by this Agreement, as issued pursuant to the Company Stock Plans (as defined herein), pursuant to agreements or arrangements described in Section 3.03 of the Disclosure Schedule or as set forth in the Company SEC Reports (as defined herein), there are no options, warrants or other rights, agreements, arrangements or commitments of any character to which the Company is a party or by which the Company is bound relating to the issued or unissued capital stock of the Company or any Company Subsidiary or obligating the Company or any Company Subsidiary to issue or sell any shares of capital stock of, or other equity interests in, the Company or any Company Subsidiary. All shares of Company Common Stock subject to issuance as aforesaid, upon issuance prior to the Effective Time on the terms and conditions specified in the instruments pursuant to which they are issuable, will be duly authorized, validly issued, fully paid and nonassessable. Except as set forth in Section 3.03 of the Disclosure Schedule, there are no outstanding contractual obligations of the Company or any Company Subsidiary to repurchase, redeem or otherwise acquire any shares of Company Common Stock or any capital stock of any Company Subsidiary. Each outstanding share of capital stock of each Company Subsidiary is duly authorized, validly issued, fully paid and nonassessable and, except as set forth in Section 3.03 of the Disclosure Schedule, each such share owned by the Company or such Company Subsidiary is free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, agreements, limitations on the Company's or such other Company Subsidiary's voting rights, charges and other encumbrances of any nature whatsoever, except where failure to own such shares free and clear would not, individually or in the aggregate, have a Material Adverse Effect. Except as set forth in Section 3.03 of the Disclosure Schedule, there are no material outstanding contractual obligations of the Company or any Company Subsidiary to provide funds to, or make any investment (in the form of a loan, capital contribution or otherwise) in, any Company Subsidiary or any other person, other than obligations arising in the ordinary course of business, obligations disclosed in the Company SEC Reports and guarantees by the Company of any indebtedness of any Company Subsidiary. SECTION 3.04. Authority Relative to This Agreement. Following the approval of this Agreement by the stockholders of the Company, the Company will have all necessary corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and following the approval of this Agreement by the stockholders of the Company, to consummate the transactions (including, without limitation, the Merger) contemplated herein to be consummated by the Company. The execution and delivery of this Agreement by the Company and the consummation by the Company of such transactions have been duly and validly authorized by all necessary corporate action, including the unanimous approval of the Company Board, and no other corporate proceedings on the part of the Company are necessary to authorize this Agreement or to consummate such transactions (other than the adoption of this Agreement by the affirmative vote of two-thirds of the outstanding shares of Company Common Stock). This Agreement has been duly and validly executed and delivered by the Company and (assuming due authorization, execution and delivery by Parent, Nasco Holdings and Nasco) A-4 constitutes a legal, valid and binding obligation of the Company, enforceable against the Company in accordance with its terms. SECTION 3.05. No Conflict; Required Filings and Consents. (a) The execution and delivery of this Agreement by the Company does not, and the performance of this Agreement by the Company will not, (i) conflict with or violate any provision of the certificate of incorporation or bylaws of the Company or any equivalent organizational documents of the Company or any Company Subsidiary, (ii) assuming that all consents, approvals, authorizations and other actions described in Section 3.05(b) have been obtained and all filings and obligations described in Section 3.05(b) have been made, conflict with or violate any federal, state, local or foreign law, statute, ordinance, rule, regulation, code, executive order, injunction, judgment, decree or other order ("Law") applicable to the Company or any Company Subsidiary or by which any property or asset of the Company or any Company Subsidiary is bound or affected, or (iii) except as set forth in Section 3.05(a)(iii) of the Disclosure Schedule, result in any breach of or constitute a default (or an event which with notice or lapse of time or both would become a default) under, or give to others any right of termination, amendment, acceleration or cancellation of, or result in the creation of a lien or other encumbrance on any property or asset of the Company or any Company Subsidiary pursuant to, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation, except, with respect to clause (iii), for any such conflicts, violations, breaches, defaults, or other occurrences which would not reasonably be expected to (A) have a Material Adverse Effect or (B) prevent or materially delay the performance of this Agreement by the Company. (b) The execution and delivery of this Agreement by the Company does not, and the performance of this Agreement by the Company will not, require any consent, approval, authorization or permit of, or filing with or notification to, any United States federal, state, county or local governmental, regulatory or administrative authority, agency, instrumentality or commission or any court, tribunal or judicial or arbitral body or any foreign government, agency, regulatory or administrative authority ("Governmental Entity"), except (i) for applicable requirements of the Securities Exchange Act of 1934, as amended (together with the rules and regulations promulgated thereunder, the "Exchange Act"), and the NASDAQ; (ii) for applicable requirements relating to the filing and recordation of appropriate merger documents pursuant to the DGCL and as set forth in Section 3.05(b) of the Disclosure Schedule; and (iii) where failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not reasonably be expected to (A) prevent or materially delay consummation of the Merger or (B) have a Material Adverse Effect. SECTION 3.06. Permits; Compliance. Except for environmental matters discussed in Section 3.12 and except as set forth in Section 3.06 of the Disclosure Schedule, each of the Company and each Company Subsidiary is in possession of all franchises, grants, authorizations, licenses, permits, easements, variances, exceptions, consents, certificates, approvals and orders of any Governmental Entity necessary for the Company or any Company Subsidiary to own, lease and operate its properties or to carry on its business as it is now being conducted (the "Permits"), except where the failure to have, or the suspension or cancellation of, any of the Permits would not reasonably be expected to (a) have a Material Adverse Effect or (b) prevent or materially delay the performance of this Agreement by the Company, and no suspension or cancellation of any of the Permits is pending or, to the knowledge of the Company, threatened. Neither the Company nor any Company Subsidiary is in conflict with, or in default or violation of, (i) any Law applicable to the Company or any Company Subsidiary or by which any property or asset of the Company or any Company Subsidiary is bound or affected or (ii) any note, bond, mortgage, indenture, contract, agreement, lease, license, Permit, franchise or other instrument or obligation to which the Company or any Company Subsidiary is a party to or by which the Company or any Company Subsidiary is bound by, except for any such conflicts, defaults or violations that would not reasonably be expected to (A) have a Material Adverse Effect or (B) prevent or materially delay the performance of this Agreement by the Company. A-5 SECTION 3.07. SEC Filings; Financial Statements. (a) The Company has timely filed all forms, reports and documents required to be filed by it with the Securities and Exchange Commission ("SEC") (collectively, the "Company SEC Reports"). The Company SEC Reports (i) were prepared and filed in all material respects in accordance with the requirements of the Exchange Act and the rules and regulations promulgated thereunder, (ii) did not as of their respective dates contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary in order to make the statements made therein, in light of the circumstances under which they were made, not misleading, and (iii) did not omit any document required to be filed as an exhibit thereto. No Company Subsidiary is required to file any form, report or other document with the SEC. (b) Each of the Company's financial statements (including, in each case, any notes thereto) contained in the Company SEC Reports was prepared in accordance with United States generally accepted accounting principles as promulgated by the American Institute of Certified Public Accountants and as interpreted from time to time by the staff of the SEC ("U.S. GAAP"), applied on a consistent basis throughout the periods indicated (except as may be indicated in the notes thereto) and each presented fairly the consolidated financial position, results of operations and cash flow of the Company and the Company Subsidiaries as at the respective dates thereof and for the respective periods indicated therein in all material respects (subject, in the case of unaudited statements, to normal year-end adjustments which were not and are not expected to have a Material Adverse Effect). (c) Except as and to the extent set forth on the consolidated balance sheet of the Company and the Company Subsidiaries as of June 30, 2001, including the notes thereto, or in any of the Company SEC Reports filed subsequent to June 30, 2001 or in Section 3.07(c) of the Disclosure Schedule, neither the Company nor any Company Subsidiary has any liabilities or obligations of any nature (whether accrued, absolute, contingent or otherwise) that would be required to be reflected on a balance sheet or in notes thereto prepared in accordance with U.S. GAAP, except for liabilities or obligations incurred in the ordinary course of business since June 30, 2001 that would not, individually or in the aggregate, (i) have a Material Adverse Effect or (ii) prevent or materially delay the performance of this Agreement by the Company. Since June 30, 2001, neither the Company nor any Company Subsidiary has incurred or suffered to exist any liability, debt or obligation (whether absolute, accrued, contingent or otherwise), except liabilities, debt and obligations incurred in the ordinary course of business, consistent with past practice, none of which will have a Material Adverse Effect. Except as set forth in Section 3.08 of the Disclosure Schedule, since June 30, 2001, there has been no Material Adverse Effect in the business, operations, assets (including intangible assets), condition (financial or otherwise), liabilities or results of operations of the Company or any Company Subsidiary and no event has occurred which will have a Material Adverse Effect. (d) The Company has delivered to Parent or its counsel, correct and complete copies of all correspondence prepared by the Company's auditors in connection with the last audit of the Company's financial statements and any such correspondence since the date of the last such audit. SECTION 3.08. Absence of Certain Changes or Events. Since June 30, 2001, except as set forth in Section 3.08 of the Disclosure Schedule or as expressly contemplated by this Agreement, the Company and the Company Subsidiaries have conducted their businesses only in the ordinary course and in a manner consistent with past practice and, since such date, (a) there has not been any change, condition, event or development that has had or could reasonably be expected to have a Material Adverse Effect, (b) there has not been any event that could reasonably be expected to prevent or materially delay the performance of this Agreement by the Company and (c) none of the Company or any Company Subsidiary has taken any action that, if taken after the date of this Agreement, would constitute a breach of any of the covenants set forth in Section 5.01. SECTION 3.09. Employee Benefit Plans; Labor Matters. (a) Section 3.09(a) of the Disclosure Schedule lists (i) all employee benefit plans (as defined in Section 3(3) of the Employee Retirement Income Security Act of 1974, as amended ("ERISA")) and all bonus, stock option, stock purchase, restricted stock, incentive, deferred compensation, retiree medical or life insurance, A-6 supplemental retirement, severance or other benefit plans, programs or arrangements, and all employment, termination, severance or other contracts or agreements, whether legally enforceable or not, to which the Company or any Company Subsidiary is a party, with respect to which the Company or any Company Subsidiary has any obligation or which are maintained, contributed to or sponsored by the Company or any Company Subsidiary for the benefit of any current or former employee, officer or director of the Company or any Company Subsidiary, (ii) each employee benefit plan for which the Company or any Company Subsidiary could incur liability under Section 4069 of ERISA in the event such plan has been or were to be terminated, (iii) any plan in respect of which the Company or any Company Subsidiary could incur liability under Section 4212(c) of ERISA, and (iv) any contracts, arrangements or understandings between the Company or any Company Subsidiary and any employee of the Company or any Company Subsidiary including, without limitation, any contracts, arrangements or understandings relating in any way to a sale of the Company or any Company Subsidiary (collectively, the "Company Plans"). The Company has furnished or made available to Parent a description of any non-written Company Plan and a true and complete copy of each material Company Plan and has delivered or made available to Parent a true and complete copy of each material document, if applicable, prepared in connection with each such Company Plan, including, without limitation when applicable, (A) a copy of each trust or other funding arrangement, (B) each summary plan description and summary of material modifications, (C) the most recently filed Internal Revenue Service ("IRS") Form 5500, (D) the most recently received IRS determination letter for each such Company Plan, and (E) the most recently prepared actuarial report and financial statement in connection with each such Company Plan. Neither the Company nor any Company Subsidiary has any express or implied commitment, whether legally enforceable or not, (i) to create, incur liability with respect to or cause to exist any other employee benefit plan, program or arrangement, (ii) to enter into any contract or agreement to provide compensation or benefits to any individual, or (iii) to modify, change or terminate any Company Plan, other than with respect to a modification, change or termination required by ERISA, the Code or any other applicable law. (b) None of the Company Plans is a multiemployer plan (within the meaning of Section 3(37) or 4001(a)(3) of ERISA) (a "Multiemployer Plan") or a single employer pension plan (within the meaning of Section 4001(a)(15) of ERISA) for which the Company or any Company Subsidiary could incur liability under Section 4063 or 4064 of ERISA (a "Multiple Employer Plan"). Except as set forth in Section 3.09(b) of the Disclosure Schedule, none of the Company Plans (i) provides for the payment of separation, severance, termination or similar-type benefits to any person, (ii) obligates or obligated the Company or any Company Subsidiary to pay, or segregate any funds to pay (into a trust or otherwise), separation, severance, termination or similar-type benefits solely or partially as a result of any transaction contemplated by this Agreement, or (iii) obligates or obligated the Company or any Company Subsidiary to make any payment, or segregate any funds to pay (into a trust or otherwise), or provide any benefit as a result of a "change in control," within the meaning of such term under Section 280G of the Code solely or partially as a result of any transaction contemplated by this Agreement. Except as set forth in Section 3.09(b) of the Disclosure Schedule, none of the Company Plans provides for or promises retiree medical, disability or life insurance benefits to any current or former employee, officer or director of the Company or any Company Subsidiary. Each of the Company Plans is subject only to the Laws of the United States or a political subdivision thereof. (c) Each Company Plan is now and always has been operated in all material respects in accordance with its terms and the requirements of all applicable Laws including, without limitation, ERISA and the Code. The Company and the Company Subsidiaries have performed all material obligations required to be performed by them under, are not in material default under or in violation of, and have no knowledge of any default or violations by any party to, any Company Plan. No action is pending or, to the knowledge of the Company, threatened with respect to any Company Plan (other than claims for benefits in the ordinary course), and, to the Company's knowledge, no fact or event exists that could reasonably be expected to give rise to any such action. A-7 (d) Each Company Plan that is intended to be qualified under Section 401(a) of the Code has heretofore been determined by the IRS so to qualify, or an opinion of such status has been provided by the IRS and if submitted and assuming all amendments required by the IRS were made, the Company believes that such Company Plans would receive a favorable determination letter from the IRS with respect to the changes required by the Small Business Job Protection Act of 1996, the General Agreement on Tariffs and Trade, the Tax Reform Act of 1997, and the Uniformed Services Employment and Reemployment Rights Act of 1994, and each trust established in connection with any Company Plan which is intended to be exempt from federal income taxation under Section 501(a) of the Code has received a determination letter from the IRS that it is so exempt, and no fact or event has occurred since the date of such determination letter or letters from the IRS that could be reasonably expected to adversely affect the qualified status of any such Plan or the exempt status of any such trust. (e) There has not been any prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code) for which an exemption is not available with respect to any Company Plan. Neither the Company nor any Company Subsidiary has incurred any liability under, arising out of or by operation of Title IV of ERISA (other than liability for premiums to the Pension Benefit Guaranty Corporation arising in the ordinary course), including, without limitation, any liability in connection with (i) the termination or reorganization of any Company Plan subject to Title IV of ERISA or (ii) the withdrawal from any Multiemployer Plan or Multiple Employer Plan, and no fact or event exists which could reasonably be expected to give rise to any such liability. (f) All contributions, premiums or payments required to be made with respect to any Company Plan have been made on or before their due dates. All such contributions have been fully deducted for income tax purposes to the extent permitted by applicable Law and no such deduction has been challenged or disallowed by any Governmental Entity and, to the Company's knowledge, no fact or event exists which could reasonably be expected to give rise to any such challenge or disallowance. (g) Except as set forth in Section 3.09(g) of the Disclosure Schedule, all directors and officers of the Company and the Company Subsidiaries are under written obligation to the Company and the Company Subsidiaries to maintain in confidence all confidential or proprietary information acquired by them in the course of their employment and to assign to the Company and the Company Subsidiaries all inventions made by them within the scope of their employment during such employment and for a reasonable period thereafter. (h) Section 3.09(h) of the Disclosure Schedule sets forth a true and accurate list of all issued and outstanding SAR's or other phantom stock plans or the like, including the amounts and exercise prices related thereto. (i) Except as set forth in Section 3.09(i) of the Disclosure Schedule or as disclosed in the Company SEC Reports, (i) there are no controversies pending or, to the knowledge of the Company, threatened between the Company or any Company Subsidiary and any of their respective employees; (ii) neither the Company nor any Company Subsidiary is a party to any collective bargaining agreement or other labor union contract applicable to persons employed by the Company or any Company Subsidiary, nor, to the knowledge of the Company, are there any activities or proceedings of any labor union to organize any such employees; (iii) neither the Company nor any Company Subsidiary has breached or otherwise failed to comply with any provision of any such agreement or contract, and there are no grievances outstanding against the Company or any Company Subsidiary under any such agreement or contract; (iv) there are no unfair labor practice complaints pending against the Company or any Company Subsidiary before the National Labor Relations Board or any current union representation questions involving employees of the Company or any Company Subsidiary; and (v) there is no strike, slowdown, work stoppage or lockout, or, to the knowledge of the Company, threat thereof, by or with respect to any employees of the Company or any Company Subsidiary. The consent of the labor unions which are a party to the collective bargaining agreements listed in Section 3.09(j) of the Disclosure Schedule is not required to consummate the Merger. A-8 (j) Except as set forth in Section 3.09(j) of the Disclosure Schedule or as disclosed in the Company SEC Reports, the Company and the Company Subsidiaries are in material compliance with all applicable laws relating to the employment of labor, including those relating to wages, hours, collective bargaining and the payment and withholding of taxes and other sums as required by the appropriate Governmental Entity and has withheld and paid to the appropriate Governmental Entity or are holding for payment not yet due to such Governmental Entity all amounts required to be withheld from employees of the Company or any Company Subsidiary and are not liable for any significant arrears of wages, taxes, penalties or other sums for failure to comply with any of the foregoing. The Company and the Company Subsidiaries have paid in full to all employees or adequately accrued for in accordance with U.S. GAAP consistently applied all wages, salaries, commissions, bonuses, benefits and other compensation due to or on behalf of such employees, and there is no claim with respect to payment of wages, salary or overtime pay that has been asserted or is now pending or, to the Company's knowledge, threatened before any Governmental Entity with respect to any persons currently or formerly employed by the Company or any Company Subsidiary. Except as set forth in Section 3.09(j) of the Disclosure Schedule, neither the Company nor any Company Subsidiary is a party to, or otherwise bound by, any consent decree with, or citation by, any Governmental Entity relating to employees or employment practices. Except as set forth in Section 3.09(j) of the Disclosure Schedule, there is no charge or proceeding with respect to a violation of any occupational safety or health standards that has been asserted or is now pending or, to the Company's knowledge, threatened with respect to the Company. Except as set forth in Section 3.09(j) of the Disclosure Schedule or as disclosed in the Company SEC Reports, there is no charge of discrimination in employment or employment practices, for any reason, including, without limitation, age, gender, race, religion or other legally protected category, which has been asserted or is now pending or, to the knowledge of the Company, threatened before the United States Equal Employment Opportunity Commission, or any other Governmental Entity in any jurisdiction in which the Company or any Company Subsidiary has employed or employs any person. SECTION 3.10. Contracts; Debt Instruments. (a) Set forth in subsections (i) through (viii) of Section 3.10(a) of the Disclosure Schedule is a true and accurate list of all contracts and agreements of the types described in such subsections to which the Company or any Company Subsidiary is a party as of the date hereof (such contracts, agreements and arrangements as required to be set forth in Section 3.10(a) of the Disclosure Schedule, together with those listed in Section 3.09(a) of the Disclosure Schedule, and subject to the last paragraph of this Section 3.10 (a) being the "Material Contracts"): (i) each contract and agreement which (A) is likely to involve consideration of more than $50,000, in the aggregate, during the calendar year ending December 31, 2001 or (B) is likely to involve consideration of more than $100,000, in the aggregate, over the remaining term of such contract, except for purchase orders arising in the usual and ordinary course of business and consistent with past practices (provided that in any case and without regard to the proviso at the end of paragraph (a) of this Section 3.10, the top 15 purchase orders are set forth in Section 3.10(a)(i) of the Disclosure Schedule) and which, in either case, cannot be canceled by the Company or any Company Subsidiary without penalty or further payment and without more than 90 days' notice; (ii) all material broker, distributor, dealer, manufacturer's representative, franchise, agency, sales promotion, market research, marketing consulting and advertising contracts and agreements to which the Company or any Company Subsidiary is a party, in each case, not cancelable without penalty on not more than 90 days' notice; (iii) all material management contracts (excluding contracts for employment) and contracts with other consultants, including any contracts involving the payment of royalties or other amounts calculated based upon the revenues or income of the Company or any Company Subsidiary or income or revenues related to any product of the Company or any Company Subsidiary; (iv) all material contracts and agreements evidencing indebtedness of the Company or any Company Subsidiary; (v) all material contracts and agreements with any Governmental Entity; A-9 (vi) all contracts and agreements that materially limit, or purport to materially limit, the ability of the Company or any Company Subsidiary to compete in any line of business or with any person or entity or in any geographic area or during any period of time; (vii) all material contracts or arrangements that result in any person or entity holding a power of attorney from the Company or any Company Subsidiary that relates to the Company, any Company Subsidiary or their respective businesses; and (viii) all other contracts and agreements, whether or not made in the ordinary course of business, which are material to the Company and any Company Subsidiary or the conduct of its businesses, or the absence of which would prevent or materially delay consummation of the Merger or would have a Material Adverse Effect. With respect to Sections 3.10(a)(i) through (v) and Section 3.10(a)(viii) (and without derogating from the immateriality of contracts in excess of the following threshold which are not otherwise material), all contracts involving consideration or the payment of less than $50,000 shall be deemed to be not material and need not be listed on Schedule 3.10(a). (b) Except as would not prevent or materially delay consummation of the Merger or would not have a Material Adverse Effect, (i) each Material Contract is a legal, valid and binding agreement, and, to the Company's knowledge, other party to a Material Contract has canceled such contract; (ii) to the Company's knowledge, no other party is in breach or violation of, or default under, any Material Contract; and (iii) the Company and the Company Subsidiaries are not in receipt of any claim of default under any Material Contract. The Company has furnished or made available to Parent true and complete copies of all Material Contracts, including any amendments thereto. (c) Set forth in Section 3.10(c) of the Disclosure Schedule is a description of any material changes to the amount and material terms of the indebtedness of the Company and the Company Subsidiaries as described in the notes to the financial statements incorporated in, or otherwise disclosed in, the Company's Form 10-K for the fiscal year ended June 30, 2001. SECTION 3.11. Absence of Litigation. Except as set forth in Section 3.11 of the Disclosure Schedule or as specifically disclosed in the Company SEC Reports, there is no litigation, suit, claim, action, proceeding, arbitration, review or investigation pending or, to the knowledge of the Company, threatened against the Company or any Company Subsidiary or any property or asset of the Company or any Company Subsidiary which could, if determined adversely to the Company, have a Material Adverse Effect. SECTION 3.12. Environmental Matters. Except as disclosed in Section 3.12 of the Disclosure Schedule or as disclosed in the Company SEC Reports or as would not reasonably be expected to have a Material Adverse Effect: (i) The Company is in compliance with all applicable Environmental Laws and all Environmental Permits. All past matters of noncompliance with Environmental Laws or Environmental Permits by the Company have been resolved without any pending, ongoing or future obligation, cost or liability; (ii) To the Company's knowledge, there has been no Release of Hazardous Materials in violation of any Environmental Law or Environmental Permit on any of the real property currently owned by the Company or any Company Subsidiary (the "Company Real Property") or, during the Company's ownership or occupancy of such property, on any property formerly owned by the Company; (iii) The Company is not conducting voluntarily, and is not obligated to undertake or complete, any Remedial Action relating to any Release or threatened Release on the Company Real Property or at any other location; (iv) To the Company's knowledge, there is no asbestos or asbestos-containing material on any of the Company Real Property; (v) None of the Company Real Property is listed or, to the Company's knowledge proposed for listing, on the National Priorities List or the Comprehensive Environmental Response, Compensation and Liability Information System under the federal Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA") or any analogous federal, state or local list; A-10 (vi) There are no Environmental Claims pending or, to the Company's knowledge, threatened against the Company or the Company Real Property, and, to the Company's knowledge, there are no facts, conditions, or circumstances that can be reasonably expected to form the basis of any such Environmental Claim and the Company has received no written notice of any pending or threatened Environmental Claim; (vii) To the Company's knowledge, under current Law, the Company can maintain present production levels in compliance with applicable Environmental Laws without a material increase in capital or operating expenditures and without modifying any Environmental Permits or obtaining any additional Environmental Permits; (viii) The Company has provided Parent or made available copies of any environmental assessment or audit reports or other similar studies or analyses in the Company's possession relating to the Company Real Property or the Company; and (ix) Neither the execution of this Agreement nor the consummation of the transactions contemplated herein will require any Remedial Action or notice to or consent of Governmental Entities or third parties pursuant to any applicable Environmental Law or Environmental Permit. (b) For purposes of this Agreement: "Environmental Claims" means any and all actions, suits, demands, demand letters, claims, liens, notices of noncompliance or violation, notices of liability or potential liability, investigations, proceedings, consent orders or consent agreements relating in any way to any Environmental Law, any Environmental Permit or any Hazardous Materials. "Environmental Law" means any Law currently in effect, and any judicial or administrative interpretation thereof, including any judicial or administrative order, consent decree or judgment, relating to pollution or protection of the environment, health, safety or natural resources, including, without limitation, those relating to the use, handling, transportation, treatment, storage, disposal, release or discharge of Hazardous Materials. "Environmental Permit" means any permit, approval, identification number, license or other authorization required under any applicable Environmental Law. "Hazardous Material" means (i) petroleum and petroleum products, by-products or breakdown products, radioactive materials, asbestos-containing materials and polychlorinated biphenyls and (ii) any other chemical, material or substance, all of which are defined or regulated as toxic or hazardous or as a pollutant, contaminant or waste under any applicable Environmental Law. "Release" means disposing, discharging, injecting, spilling, leaking, leaching, dumping, emitting, escaping, emptying, seeping, placing and the like into or upon any land or water or air or otherwise entering into the environment. "Remedial Action" means all action to (i) clean up, remove, or treat Hazardous Materials in the environment; (ii) restore or reclaim the environment or natural resources; (iii) prevent the Release or threat of Release of Hazardous Materials so that they do not migrate or endanger or threaten to endanger public health or the environment; or (iv) perform remedial investigations, feasibility studies, corrective actions, closures and postremedial or postclosure studies, investigations, operations, maintenance and monitoring on, about or in any Company Real Property. SECTION 3.13. Trademarks, Patents and Copyrights. Except to the extent the inaccuracy of any of the following (or the circumstances giving rise to such inaccuracy) would not reasonably be expected to have a Material Adverse Effect, the Company and each of the Company Subsidiaries own or possess adequate licenses A-11 or other legal rights to use all patents, patent rights, trademarks, trademark rights, trade names, trade dress, trade name rights, copyrights, service marks, trade secrets, applications for trademarks and for service marks, know-how and other proprietary rights and information used or held for use in connection with the businesses of the Company and the Company Subsidiaries as currently conducted, and, to the Company's knowledge, there is no assertion or claim challenging the validity of any of the foregoing. To the Company's knowledge, neither the Company nor any of the Company Subsidiaries has infringed or is infringing in any way any patent, patent right, license, trademark, trademark right, trade dress, trade name, trade name right, service mark, mask work or copyright of any third party that would reasonably be expected to have a Material Adverse Effect. To the Company's knowledge, there are no infringements of any proprietary rights owned by or licensed by or to the Company or any Company Subsidiary that could reasonably be expected to have a Material Adverse Effect. SECTION 3.14. Taxes. Except as set forth in Section 3.14 of the Disclosure Schedule, (a) the Company and the Company Subsidiaries have timely filed all federal, state, local and foreign Tax Returns required to be filed by them with any taxing authority with respect to Taxes for any period ending on or before the Effective Time, taking into account any extension of time to file granted to or obtained on behalf of the Company and the Company Subsidiaries, and all such Tax Returns are complete and correct in all material respects; (b) all Taxes that are shown as due on such Tax Returns have been or will be timely paid; (c) no deficiency for any material amount of Tax has been asserted or assessed in writing by a taxing authority against the Company or any of the Company Subsidiaries for which there are not adequate reserves; (d) the Company and the Company Subsidiaries have provided adequate reserves in accordance with U.S. GAAP in their financial statements for any Taxes that have not been paid, whether or not shown as being due on any returns; (e) the Company and the Company Subsidiaries have neither extended nor waived any applicable statute of limitations with respect to Taxes and have not otherwise agreed to any extension of time with respect to Tax assessment or deficiency; (f) none of the Company and the Company Subsidiaries is a party to any Tax sharing agreement or arrangement other than with each other; (g) there are no pending or threatened in writing material audits, examinations, investigations, litigation, or other proceedings in respect of Taxes of the Company or any Company Subsidiary; (h) no liens for Taxes exist with respect to any of the assets or properties of the Company or the Company Subsidiaries, except for statutory liens for Taxes not yet due or payable or that are being contested in good faith for which there are adequate reserves; (i) all Taxes which the Company or any Company Subsidiary are required to withhold or to collect for payment have been duly withheld and collected, and have been paid or accrued, reserved against and entered on the books of the Company; and (j) none of the Company or any Company Subsidiary has been a member of any group or corporation filing Tax Returns on a consolidated, combined, unitary or similar basis other than each such group of which it is currently a member. As used in this Agreement, "Taxes" shall mean any and all taxes, fees, levies, duties, tariffs, imposts, and other charges of any kind (together with any and all interest, penalties, additions to tax and additional amounts imposed with respect thereto) imposed by any Governmental Entity, including, without limitation: taxes or other charges on or with respect to income, franchises, windfall or other profits, gross receipts, property, sales, use, capital stock, payroll, employment, social security, workers' compensation, unemployment compensation, or net worth; taxes or other charges in the nature of excise, withholding, ad valorem, stamp, transfer, value added, or gains taxes; license, registration and documentation fees and customs duties, tariffs, and similar charges. "Tax Returns" shall mean any return, declaration, report, claim for refund or information return or statement relating to Taxes filed with a taxing authority, including any schedule or attachment thereto, and including any amendment thereof. SECTION 3.15. Property and Leases. (a) The Company and the Company Subsidiaries have sufficient title to all their properties and assets to conduct their respective businesses as currently conducted or as contemplated to be conducted, with only such exceptions as would not have a Material Adverse Effect. (b) No Company Real Property is subject to any order requiring that it be sold or is being condemned, expropriated or otherwise taken by any public authority with or without payment of compensation therefor, nor, to the knowledge of the Company, has any such condemnation, expropriation or taking been proposed other than as could not reasonably be expected to have a Material Adverse Affect. A-12 (c) Except as set forth in Section 3.15(c) of the Disclosure Schedule, there are no contractual or legal restrictions that preclude or restrict the ability of the Company or any Company Subsidiary to use the Company Real Property for the purposes for which it is currently being used other than preclusions or restrictions which do not preclude or restrict or otherwise adversely affect the actual use which the Company or Company Subsidiary is making of the Company Real Property on the date of this Agreement but which may or would preclude or restrict any expansion or enhancement or change in such use. There are no material latent defects or material adverse physical conditions affecting the Company Real Property, and improvements thereon, owned or leased by the Company or any Company Subsidiary other than those that would not prevent or materially delay consummation of the Merger and would not have a Material Adverse Effect. SECTION 3.16. Insurance. The Company and the Company Subsidiaries have in effect insurance coverage with reputable insurers or are self-insured, which, in respect of amounts, premiums, types and risks insured, constitutes reasonable coverage for the risks customarily insured against by companies engaged in the industries in which the Company and the Company Subsidiaries are engaged and comparable in size and operations to the Company and the Company Subsidiaries. The Company's current annual premium for directors' and officers' liability insurance is approximately $44,000 per year. The Company has no reason to believe that such insurance will not be renewable by it or the Surviving Corporation on similar or more favorable terms. SECTION 3.17. Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the transactions contemplated hereby based upon arrangements made by or on behalf of the Company. ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PARENT, NASCO HOLDINGS AND NASCO Parent, Nasco Holdings, and Nasco hereby jointly and severally represent and warrant to the Company that: SECTION 4.01. Organization and Qualification; Subsidiaries. (a) Except as set forth in Section 4.01(a) of the Disclosure Schedule, each of Nasco and each subsidiary of Nasco (individually a "Nasco Subsidiary" and collectively the "Nasco Subsidiaries") has been duly organized, and is validly existing and in good standing under the laws of the jurisdiction of its incorporation or organization, as the case may be, and has the requisite power and authority to own, lease and operate its properties and to carry on its business as it is now being conducted. Each of Nasco and each of the Nasco Subsidiaries is duly qualified or licensed as a foreign corporation to do business, and is in good standing, in each jurisdiction where the character of the properties owned, leased or operated by it or the nature of its business makes such qualification or licensing necessary, except where such failures to be so qualified or licensed and in good standing that would not materially delay consummation of the Merger and would not have a Material Adverse Effect. (b) A true and complete list of all of the Nasco Subsidiaries, together with the jurisdiction of incorporation or organization of each Nasco Subsidiary and the percentage of the outstanding capital stock of each Nasco Subsidiary owned by Nasco and each other Nasco Subsidiary, is set forth in Section 4.01(a) of the Disclosure Schedule. Except as disclosed in Section 4.01(a) of the Disclosure Schedule, Nasco does not directly or indirectly own any equity or similar interest in, or any interest convertible into or exchangeable or exercisable for any equity or similar interest in, any corporation, partnership, limited liability company, joint venture or other business association or entity other than investments in marketable securities. SECTION 4.02. Certificate of Incorporation and Bylaws. The copies of Nasco's certificate of incorporation and bylaws, each as amended and restated, that have been provided to the Company are complete and correct copies thereof. Such certificate of incorporation and bylaws are in full force and effect. Nasco is not in violation of any provision of its certificate of incorporation or bylaws. A-13 SECTION 4.03. Capitalization. The authorized capital stock of Nasco consists of 4,500 shares of Nasco Common Stock, $0.01 par value, and 4,500 shares of Preferred Stock, $0.01 par value. At the close of business on June 30, 2001, (i) 100 shares of Nasco Common Stock were validly issued, fully paid and nonassessable, (ii) no shares of Nasco Common Stock were held in the treasury of Nasco or any Nasco Subsidiary, and (iii) no shares of Nasco Common Stock were reserved for issuance in connection with the exercise of outstanding Nasco Options. From June 30, 2001 through the date hereof, Nasco has not issued any additional shares of Nasco Common Stock, nor, except as set forth in Section 4.03 of the Disclosure Schedule, has Nasco granted any additional options, warrants or other rights to purchase capital stock or other securities or entered into any agreements, arrangements or commitments of any character relating to the issued or unissued capital stock of Nasco or any Nasco Subsidiary or obligating Nasco or any Nasco Subsidiary to issue or sell any shares of capital stock of, or other equity interests in, Nasco or any Nasco Subsidiary. Except as contemplated by this Agreement, as issued pursuant to the Nasco Stock Plans, or pursuant to agreements or arrangements described in Section 4.03 of the Disclosure Schedule, there are no options, warrants or other rights, agreements, arrangements or commitments of any character to which Nasco is a party or by which Nasco is bound relating to the issued or unissued capital stock of Nasco or any Nasco Subsidiary or obligating Nasco or any Nasco Subsidiary to issue or sell any shares of capital stock of, or other equity interests in, Nasco or any Nasco Subsidiary. All shares of Nasco Common Stock subject to issuance as aforesaid, upon issuance prior to the Effective Time on the terms and conditions specified in the instruments pursuant to which they are issuable, will be duly authorized, validly issued, fully paid and nonassessable. Except as set forth in Section 4.03 of the Disclosure Schedule, there are no outstanding contractual obligations of Nasco or any Nasco Subsidiary to repurchase, redeem or otherwise acquire any shares of Nasco Common Stock or any capital stock of any Nasco Subsidiary. Each outstanding share of capital stock of each Nasco Subsidiary is duly authorized, validly issued, fully paid and nonassessable and, except as set forth in Section 4.03 of the Disclosure Schedule, each such share owned by Nasco or another Nasco Subsidiary is free and clear of all security interests, liens, claims, pledges, options, rights of first refusal, agreements, limitations on Nasco's or such other Nasco Subsidiary's voting rights, charges and other encumbrances of any nature whatsoever, except where failure to own such shares free and clear would not, individually or in the aggregate, have a Material Adverse Effect. Except as set forth in Section 4.03 of the Disclosure Schedule, there are no material outstanding contractual obligations of Nasco or any Nasco Subsidiary to provide funds to, or make any investment (in the form of a loan, capital contribution or otherwise) in, any Nasco Subsidiary or any other person, other than obligations arising in the ordinary course of business, and guarantees by Nasco of any indebtedness of any Nasco Subsidiary. SECTION 4.04. Authority Relative to This Agreement. Each of Parent, Nasco Holdings and Nasco has all necessary corporate power and authority to execute and deliver this Agreement, to perform its obligations hereunder and to perform its obligations hereunder and to consummate the transactions (including, without limitation, the Merger) contemplated herein. The execution and delivery of this Agreement by Parent, Nasco Holdings, and Nasco and the consummation by Parent, Nasco Holdings, and Nasco of the transactions contemplated herein have been duly and validly authorized by all necessary corporate action, including the unanimous approval of its Board of Directors, and no other corporate proceedings on the part of the Parent, Nasco Holdings, or Nasco are necessary to authorize this Agreement or to consummate such transactions. This Agreement has been duly and validly executed and delivered by Parent, Nasco Holdings, and Nasco and (assuming due authorization, execution and delivery by the Company) constitutes a legal, valid and binding obligation of Parent, Nasco Holdings, and Nasco, enforceable against Parent, Nasco Holdings, and Nasco in accordance with its terms. SECTION 4.05. No Conflict; Required Filings and Consents. (a) Except as set forth in Section 4.05 of the Disclosure Schedule, the execution and delivery of this Agreement by Parent, Nasco Holdings and Nasco does not, and the performance of this Agreement by Parent, Nasco Holdings and Nasco will not, (i) conflict with or violate any provision of the certificate of incorporation and bylaws of Parent, Nasco Holdings, Nasco or any Nasco Subsidiary (ii) assuming that all consents, approvals, authorizations and other actions described in Section 4.05(b) have been obtained and all filings and obligations described in Section 4.05(b) have been made, conflict A-14 with or violate any Law applicable to Nasco or by which any property or asset of Nasco or any Nasco Subsidiary is bound or affected, or (iii) result in any breach of or constitute a default (or an event which with notice or lapse of time or both would become a default) under, any note, bond, mortgage, indenture, contract, agreement, lease, license, permit, franchise or other instrument or obligation, except, with respect to clause (iii), for any such conflicts, violations, breaches, defaults, or other occurrences which would not reasonably be expected to (A) have a Material Adverse Effect prevent or (B) materially delay the performance of this Agreement by Nasco. (b) The execution and delivery of this Agreement by Nasco does not, and the performance of this Agreement by Nasco will not, require any consent, approval, authorization or permit of, or filing with or notification to, any Governmental Entity, except (i) for the filing and recordation of appropriate merger documents as required by the WBCL and (ii) where failure to obtain such consents, approvals, authorizations or permits, or to make such filings or notifications, would not reasonably be expected to prevent or materially delay consummation of the Merger. SECTION 4.06. Permits; Compliance. Except for environmental matters discussed in Section 4.12 and except as set forth in Section 4.06 of the Disclosure Schedule, each of Nasco and each of the Nasco Subsidiaries is in possession of all necessary Permits, except where the failure to have, or the suspension or cancellation of, any of the Permits would not reasonably be expected to (a) have a Material Adverse Effect or (b) prevent or materially delay the performance of this Agreement by Nasco, and no suspension or cancellation of any of the Permits is pending or, to the knowledge of Parent, Nasco Holdings or Nasco, threatened. Neither Nasco nor any Nasco Subsidiary is in conflict with, or in default or violation of, (i) any Law applicable to Nasco or any Nasco Subsidiary or by which any property or asset of Nasco or any Nasco Subsidiary is bound or affected or (ii) any note, bond, mortgage, indenture, contract, agreement, lease, license, Permit, franchise or other instrument or obligation to which Nasco or any Nasco Subsidiary is a party to or by which Nasco or any Nasco Subsidiary is bound by, except for any such conflicts, defaults or violations that would not reasonably be expected to (A) have a Material Adverse Effect or (B) prevent or materially delay the performance of this Agreement by Nasco. SECTION 4.07. Absence of Certain Changes or Events. Since December 31, 2000, except as set forth in Section 4.07 of the Disclosure Schedule or as expressly contemplated by this Agreement, Nasco and each Nasco Subsidiary has conducted its businesses only in the ordinary course and in a manner consistent with past practice and, since such date, (a) there has not been any change, condition, event or development that has had or could reasonably be expected to have a Material Adverse Effect, (b) there has not been any event that could reasonably be expected to prevent or materially delay the performance of this Agreement by Nasco or Parent and (c) none of Nasco or any of the Nasco Subsidiaries have taken any action that, if taken after the date of this Agreement, would constitute a breach of any of the covenants set forth in Section 5.01. SECTION 4.08. Absence of Litigation. Except as set forth in Section 4.08 of the Disclosure Schedule, there is no litigation, suit, claim, action, proceeding or investigation pending or, to the knowledge of Parent, Nasco Holdings and Nasco, threatened against Nasco or any Nasco Subsidiary or any property or asset of Nasco or any Nasco Subsidiary which could, if determined adversely to Nasco or any Nasco Subsidiary, have a Material Adverse Effect. SECTION 4.09. Financial Statements. (a) Nasco has heretofore delivered to the Company complete and correct copies of the following financial statements (the "Nasco Financial Statements"), all of which have been prepared from the books and records of Nasco in accordance with GAAP consistently applied and maintained throughout the periods indicated (except as may be indicated in the notes thereto) and fairly present in all material respects the consolidated financial condition of Nasco and the Nasco Subsidiaries as of the respective dates thereof and the results of its operations and cash flows for the periods covered thereby, except that unaudited interim results that were or are subject to normal and recurring year-end adjustments which were not or are not expected to have a Material Adverse Effect: A-15 (i) audited consolidated balance sheets at December 31, 1999 and 2000 (the "Nasco Balance Sheets") and audited consolidated statements of income, cash flows and stockholder's equity of Nasco for the fiscal years then ended and ended December 31, 1998, audited by KPMG, LLP, independent public accountants; and (ii) unaudited consolidated balance sheet (the "Nasco Interim Balance Sheet") of Nasco for the nine months ended September 30, 2001 (the "Nasco Interim Balance Sheet Date") and unaudited consolidated statements of income, cash flows and stockholder's equity of Nasco for the nine months ended September 30, 1999, September 30, 2000 and September 30, 2001. The statements of income referenced in clauses (i) and (ii) above do not contain any items of special or nonrecurring revenue or income or any revenue or income not earned in the ordinary course of business, except as expressly specified therein. (b) Except as and to the extent reflected or reserved against on the Nasco Balance Sheets and the Nasco Interim Balance Sheet, Nasco did not have, as of the respective dates of those balance sheets, any liabilities, debts or obligations (whether absolute, accrued, contingent or otherwise) of any nature that would be required as of such dates to have been included on a balance sheet prepared in accordance with GAAP, except for liabilities or obligations incurred in the ordinary course of business since the Nasco Interim Balance Sheet Date that would not reasonably be expected to, individually or in the aggregate, (i) have a Material Adverse Effect or (ii) prevent or materially delay the performance of this Agreement by Nasco. Since the Nasco Interim Balance Sheet Date, Nasco has not incurred or suffered to exist any liability, debt or obligation (whether absolute, accrued, contingent or otherwise), except liabilities, debt and obligations incurred in the ordinary course of business, consistent with past practice, none of which will have a Material Adverse Effect upon Nasco. Since the Nasco Interim Balance Sheet Date, there has been no Material Adverse Effect and no event has occurred which is reasonably likely to cause a Material Adverse Effect. (c) Nasco has delivered or made available to the Company or its counsel correct and complete copies of all correspondence prepared by Nasco's auditors in connection with the last audit of Nasco financial statements and any such correspondence since the date of the last such audit. SECTION 4.10. Employee Benefit Plans; Labor Matters. (a) Section 4.10(a) of the Disclosure Schedule lists (i) all employee benefit plans (as defined in Section 3(3) of ERISA) and all bonus, stock option, stock purchase, restricted stock, incentive, deferred compensation, retiree medical or life insurance, supplemental retirement, severance or other benefit plans, programs or arrangements, and all employment, termination, severance or other contracts or agreements, whether legally enforceable or not, to which Nasco or any Nasco Subsidiary is a party, with respect to which Nasco or any Nasco Subsidiary has any obligation or which are maintained, contributed to or sponsored by Parent or Nasco or any Nasco Subsidiary for the benefit of any current or former employee, officer or director of Nasco or any Nasco Subsidiary, (ii) each employee benefit plan for which Nasco or any Nasco Subsidiary could incur liability under Section 4069 of ERISA in the event such plan has been or were to be terminated, (iii) any plan in respect of which Nasco or any Nasco Subsidiary could incur liability under Section 4212(c) of ERISA, and (iv) any contracts, arrangements or understandings between Nasco or any Nasco Subsidiary and any employee of Nasco or any Nasco Subsidiary including, without limitation, any contracts, arrangements or understandings relating in any way to a sale of Nasco or any Nasco Subsidiary (collectively, the "Nasco Plans"). Each Nasco Plan is in writing and Nasco has furnished or made available to the Company a true and complete copy of each material Nasco Plan and has delivered or made available to the Company a true and complete copy of each material document, if applicable, prepared in connection with each such Nasco Plan, including, without limitation, (A) a copy of each trust or other funding arrangement, (B) each summary plan description and summary of material modifications, (C) the most recently filed IRS Form 5500, (D) the most recently received IRS determination letter for each such Nasco Plan, and (E) the most recently prepared actuarial report and financial statement in connection with each such Nasco Plan. Neither Nasco nor any Nasco Subsidiary has any express or implied commitment, whether legally enforceable or not, (i) to create, incur liability with respect to or cause to exist any other employee benefit plan, program or A-16 arrangement, (ii) to enter into any contract or agreement to provide compensation or benefits to any individual, or (iii) to modify, change or terminate any Nasco Plan, other than with respect to a modification, change or termination required by ERISA or the Code. (b) None of the Nasco Plans is a Multiemployer Plan or a single employer pension plan (within the meaning of Section 4001(a)(15) of ERISA) for which Nasco or any Nasco Subsidiary could incur liability under Section 4063 or 4064 of ERISA. Except as set forth in Section 4.10(b) of the Disclosure Schedule, none of the Nasco Plans (i) provides for the payment of separation, severance, termination or similar-type benefits to any person, (ii) obligates or obligated Nasco or any Nasco Subsidiary to pay, or segregate any funds to pay (into a trust or otherwise), separation, severance, termination or similar-type benefits solely or partially as a result of any transaction contemplated by this Agreement, or (iii) obligates or obligated Nasco or any Nasco Subsidiary to make any payment, or segregate any funds to pay (into a trust or otherwise), or provide any benefit as a result of a "change in control", within the meaning of such term under Section 280G of the Code solely or partially as a result of any transaction contemplated by this Agreement. Except as set forth in Section 4.10(b) of the Disclosure Schedule, none of the Nasco Plans provides for or promises retiree medical, disability or life insurance benefits to any current or former employee, officer or director of Nasco or any Nasco Subsidiary. Each of the Nasco Plans is subject only to the Laws of the United States or a political subdivision thereof. (c) Each Nasco Plan is now and always has been operated in all material respects in accordance with its terms and the requirements of all applicable Laws including, without limitation, ERISA and the Code. Each of Nasco and the Nasco Subsidiaries have performed all obligations required to be performed by them under, are not in material default under or in violation of, and have no knowledge of any default or violations by any party to, any Nasco Plan. No action is pending or, to the knowledge of Parent, Nasco Holdings and Nasco, threatened with respect to any Nasco Plan (other than claims for benefits in the ordinary course), and, to Parent's, Nasco Holdings' and Nasco's knowledge, no fact or event exists that could reasonably be expected to give rise to any such action. (d) Each Nasco Plan that is intended to be qualified under Section 401(a) or Section 401(k) of the Code has heretofore been determined by the IRS so to qualify, and if submitted and assuming all amendments required by the IRS were made, Nasco believes that such Nasco Plans would receive a favorable determination letter from the IRS with respect to the changes required by the Small Business Job Protection Act of 1996, the General Agreement on Tariffs and Trade, the Tax Reform Act of 1997, and the Uniformed Services Employment and Reemployment Rights Act of 1994, and each trust established in connection with any Nasco Plan which is intended to be exempt from federal income taxation under Section 501(a) of the Code has received a determination letter from the IRS that it is so exempt, and no fact or event has occurred since the date of such determination letter or letters from the IRS to adversely affect the qualified status of any such Nasco Plan or the exempt status of any such trust. (e) There has not been any prohibited transaction (within the meaning of Section 406 of ERISA or Section 4975 of the Code) for which an exemption is not available with respect to any Nasco Plan. Neither Nasco nor any Nasco Subsidiary has incurred any liability under, arising out of or by operation of Title IV of ERISA (other than liability for premiums to the Pension Benefit Guaranty Corporation arising in the ordinary course), including, without limitation, any liability in connection with (i) the termination or reorganization of any employee benefit plan subject to Title IV of ERISA or (ii) the withdrawal from any Multiemployer Plan or Multiple Employer Plan, and no fact or event exists which could reasonably be expected to give rise to any such liability. (f) All contributions, premiums or payments required to be made with respect to any Nasco Plan have been made on or before their due dates. All such contributions have been fully deducted for income tax purposes to the extent permitted by applicable Law and no such deduction has been challenged or disallowed by any Governmental Entity and, to Parent's, Nasco Holdings' and Nasco's knowledge, no fact or event exists which could reasonably be expected to give rise to any such challenge or disallowance. A-17 (g) Except as set forth in Section 4.10(g) of the Disclosure Schedule, (i) there are no material controversies pending or, to the knowledge of Parent, Nasco Holdings and Nasco, threatened between Nasco or any Nasco Subsidiary and any of their respective employees; (ii) neither Nasco nor any Nasco Subsidiary is a party to any collective bargaining agreement or other labor union contract applicable to persons employed by Nasco or any Nasco Subsidiary, nor, to the knowledge of Parent, Nasco Holdings and Nasco, are there any activities or proceedings of any labor union to organize any such employees; (iii) neither Nasco nor any Nasco Subsidiary has breached or otherwise failed to comply with any provision of any such agreement or contract, and there are no grievances outstanding against Nasco or any Nasco Subsidiary under any such agreement or contract; (iv) there are no unfair labor practice complaints pending against Nasco or any Nasco Subsidiary before the National Labor Relations Board or any current union representation questions involving employees of Nasco or any Nasco Subsidiary; and (v) there is no strike, slowdown, work stoppage or lockout, or, to the knowledge of Parent, Nasco Holdings and Nasco, threat thereof, by or with respect to any employees of Nasco or any Nasco Subsidiary. The consent of the labor unions which are a party to the collective bargaining agreements listed in Section 4.10(g) of the Disclosure Schedule is not required to consummate the Merger. (h) Except as set forth in Section 4.10(h) of the Disclosure Schedule, each of Nasco and the Nasco Subsidiaries are in material compliance with all applicable laws relating to the employment of labor, including those relating to wages, hours, collective bargaining and the payment and withholding of taxes and other sums as required by the appropriate Governmental Entity and has withheld and paid to the appropriate Governmental Entity or are holding for payment not yet due to such Governmental Entity all amounts required to be withheld from employees of each of Nasco and the Nasco Subsidiaries and are not liable for any significant arrears of wages, taxes, penalties or other sums for failure to comply with any of the foregoing. Nasco and the Nasco Subsidiaries have paid in full to all employees or adequately accrued for in accordance with GAAP consistently applied all wages, salaries, commissions, bonuses, benefits and other compensation due to or on behalf of such employees, and there is no claim with respect to payment of wages, salary or overtime pay that has been asserted or is now pending or, to Parent's, Nasco Holdings' or Nasco's knowledge, threatened before any Governmental Entity with respect to any persons currently or formerly employed by Nasco or any Nasco Subsidiary. Neither Nasco nor any Nasco Subsidiary is a party to, or otherwise bound by, any consent decree with, or citation by, any Governmental Entity relating to employees or employment practices. There is no charge or proceeding with respect to a violation of any occupational safety or health standards that has been asserted or is now pending or, to Parent's, Nasco Holdings' or Nasco's knowledge, threatened with respect to Nasco or any Nasco Subsidiary. There is no charge of discrimination in employment or employment practices, for any reason, including, without limitation, age, gender, race, religion or other legally protected category, which has been asserted or is now pending or, to the knowledge of Parent, Nasco Holdings and Nasco, threatened before the United States Equal Employment Opportunity Commission, or any other Governmental Entity in any jurisdiction in which Nasco or any Nasco Subsidiary has employed or employs any person. SECTION 4.11. Contracts; Debt Instruments. (a) Set forth in subsections (i) through (viii) of Section 4.11(a) of the Disclosure Schedule is a true and accurate list of all contracts and agreements of the types described in such subsections to which Nasco or any Nasco Subsidiary is a party as of the date hereof (such contracts, agreements and arrangements as required to be set forth in Section 4.10(a) of the Disclosure Schedule, together with those listed in Section 4.11(a) of the Disclosure Schedule, and subject to the last paragraph of this Section 4.11(a) being the "Material Contracts"): (i) as of the date of this Agreement, each contract and agreement which (A) is likely to involve consideration of more than $50,000, in the aggregate, during the calendar year ending December 31, 2001 or (B) is likely to involve consideration of more than $100,000, in the aggregate, over the remaining term of such contract, except for purchase orders arising in the usual and ordinary course of business and consistent with past practices (provided that in any case and without regard to the proviso at the end of paragraph (a) of this Section 4.11, the top 15 purchase orders are set forth in Section 4.11(a)(i) of the Disclosure Schedule) and which, in either case, cannot be canceled by Nasco or any Nasco Subsidiary without penalty or further payment and without more than 90 days' notice; A-18 (ii) all material broker, distributor, dealer, manufacturer's representative, franchise, agency, sales promotion, market research, marketing consulting and advertising contracts and agreements to which Nasco or any Nasco Subsidiary is a party, in each case, not cancelable without penalty on not more than 90 days' notice; (iii) all material management contracts (excluding contracts for employment) and contracts with other consultants, including any contracts involving the payment of royalties or other amounts calculated based upon the revenues or income of Nasco or any Nasco Subsidiary; (iv) all material contracts and agreements evidencing indebtedness of Nasco or any Nasco Subsidiary; (v) all material contracts and agreements with any Governmental Entity; (vi) all contracts and agreements that materially limit, or purport to materially limit, the ability of Nasco or any Nasco Subsidiary to compete in any line of business or with any person or entity or in any geographic area or during any period of time; (vii) all material contracts or arrangements that result in any person or entity holding a power of attorney from Nasco or any Nasco Subsidiary that relates to Nasco, any Nasco Subsidiary or their respective businesses; and (viii) all other contracts and agreements, whether or not made in the ordinary course of business, which are material to Nasco or any Nasco Subsidiary or the conduct of its businesses, or the absence of which would prevent or materially delay consummation of the Merger or would have a Material Adverse Effect. With respect to Sections 4.11(a)(i) through (v) and Section 4.11(a)(viii) (and without derogating from the immateriality of contracts in excess of the following threshold which are not otherwise material), all contracts involving consideration or the payment of less than $50,000 shall be deemed to be not material and need not be listed on Schedule 4.11(a). (b) Except as would not materially delay Nasco from performing its obligations under this Agreement and would not have a Material Adverse Effect, (i) each Material Contract is a legal, valid and binding agreement, and, to Parent's, Nasco Holdings' and Nasco's knowledge, no other party to a Material Contract has canceled such contract; (ii) to Parent's, Nasco Holdings' and Nasco's knowledge, no other party is in breach or violation of, or default under, any Material Contract; (iii) neither Nasco nor any of the Nasco Subsidiaries are in receipt of any claim of default under any Material Contract. Nasco has furnished or made available to the Company true and complete copies of all Material Contracts, including any amendments thereto. SECTION 4.12. Environmental Matters. (a) Except as disclosed in Section 4.12 of the Disclosure Schedule or as would not reasonably be expected to have a Material Adverse Effect: (i) Nasco is in compliance with all applicable Environmental Laws and all Environmental Permits. All past matters of noncompliance with Environmental Laws or Environmental Permits by Nasco have been resolved without any pending, ongoing or future obligation, cost or liability; (ii) To Nasco's knowledge, there has been no Release of Hazardous Materials on any of the real property currently owned by Nasco or any Nasco Subsidiary, including the property to be transferred to Nasco from NHI, LLC in accordance with this Agreement (the "Nasco Real Property") or, during Nasco's ownership or occupancy of such property, on any property formerly owned by Nasco; (iii) Nasco is not conducting voluntarily, and is not obligated to undertake or complete, any Remedial Action relating to any Release or threatened Release on the Nasco Real Property or at any other location; (iv) To Parent, Nasco Holdings' or Nasco's knowledge, there is no asbestos or asbestos-containing material on any of the Nasco Real Property; (v) None of the Nasco Real Property is listed or proposed for listing, or, to Parent's, Nasco Holdings' or Nasco's knowledge, adjoins any other property that is listed or proposed for listing, on the National Priorities List or the Comprehensive Environmental Response, Compensation and Liability Information System under CERCLA or any analogous federal, state or local list; A-19 (vi) There are no Environmental Claims pending or, to Parent's, Nasco Holdings' or Nasco's knowledge, threatened against Nasco or the Nasco Real Property, and, to Parent's, Nasco Holdings' and Nasco's knowledge, there are no facts, conditions or circumstances that can reasonably be expected to form the basis of any such Environmental Claim and Nasco has received no written notice of any pending or threatened Environmental Claim; (vii) Nasco has provided or made available to the Company copies of any environmental assessment or audit reports or other similar studies or analyses in Nasco's possession relating to the Nasco Real Property or Nasco; and (viii) Neither the execution of this Agreement nor the consummation of the transactions contemplated herein will require any Remedial Action or notice to or consent of Governmental Entities or third parties pursuant to any applicable Environmental Law or Environmental Permit. SECTION 4.13. Trademarks, Patents and Copyrights. Except to the extent the inaccuracy of any of the following (or the circumstances giving rise to such inaccuracy) would not reasonably be expected to have a Material Adverse Effect, Nasco and each of the Nasco Subsidiaries own or possess adequate licenses or other legal rights to use all patents, patent rights, trademarks, trademark rights, trade names, trade dress, trade name rights, copyrights, service marks, trade secrets, applications for trademarks and for service marks, know-how and other proprietary rights and information used or held for use in connection with the businesses of Nasco and the Nasco Subsidiaries as currently conducted or as contemplated to be conducted, and, to Parent's, Nasco Holdings' and Nasco's knowledge, there is no assertion or claim challenging the validity of any of the foregoing. Neither Nasco nor any Nasco Subsidiary has infringed or is infringing in any way any patent, patent right, license, trademark, trademark right, trade dress, trade name, trade name right, service mark, mask work or copyright of any third party that would reasonably be expected to have a Material Adverse Effect. To neither Parent, Nasco Holdings' nor Nasco's knowledge, there are no infringements of any proprietary rights owned by or licensed by or to Nasco or any Nasco Subsidiary that could reasonably be expected to have a Material Adverse Effect. SECTION 4.14. Taxes. Except as set forth in Section 4.14 of the Disclosure Schedule, (a) each of Nasco and the Nasco Subsidiaries have timely filed or will timely file all federal, state, local and foreign Tax Returns required to be filed by them with any taxing authority with respect to Taxes for any period ending on or before the Effective Time, taking into account any extension of time to file granted to or obtained on behalf of Nasco and any Nasco Subsidiary, and all such Tax Returns are complete and correct in all material respects; (b) all Taxes that are shown as due on such Tax Returns have been or will be timely paid; (c) no deficiency for any material amount of Tax has been asserted or assessed in writing by a taxing authority against Nasco or any of its subsidiaries for which there are not adequate reserves; (d) Nasco and the Nasco Subsidiaries have provided adequate reserves in accordance with GAAP in their financial statements for any Taxes that have not been paid, whether or not shown as being due on any returns; (e) Nasco and the Nasco Subsidiaries have neither extended nor waived any applicable statute of limitations with respect to Taxes and have not otherwise agreed to any extension of time with respect to Tax assessment or deficiency; (f) none of Nasco or the Nasco Subsidiaries is a party to any Tax sharing agreement or arrangement other than with each other; (g) there are no pending or threatened in writing material audits, examinations, investigations, litigation, or other proceedings in respect of Taxes of Nasco or any Nasco Subsidiary; (h) no liens for Taxes exist with respect to any of the assets or properties of Nasco or any Nasco Subsidiary, except for statutory liens for Taxes not yet due or payable or that are being contested in good faith for which there are adequate reserves; (i) all Taxes which Nasco or any Nasco Subsidiary are required to withhold or to collect for payment have been duly withheld and collected, and have been paid or accrued, reserved against and entered on the books of Nasco; and (j) neither Nasco nor any Nasco Subsidiary has been a member of any group or corporation filing Tax Returns on a consolidated, combined, unitary or similar basis other than each such group of which it is currently a member. SECTION 4.15. Property and Leases. (a) Each of Nasco and the Nasco Subsidiaries have sufficient title to all their properties and assets to conduct their respective businesses as currently conducted or as contemplated to be conducted, with only such exceptions as would not have a Material Adverse Effect. A-20 (b) No Nasco Real Property is subject to any governmental decree or order to be sold or is being condemned, expropriated or otherwise taken by any public authority with or without payment of compensation therefor, nor, to the knowledge of Parent, Nasco Holdings or Nasco, has any such condemnation, expropriation or taking been proposed other than as could not reasonably be expected to have a Material Adverse Affect. (c) Except as set forth in Section 4.15(c) of the Disclosure Schedule, there are no contractual or legal restrictions that preclude or restrict the ability to use the Nasco Real Property for the purposes for which it is currently being used other than preclusions or restrictions which do not preclude or restrict or otherwise adversely affect the actual use which Nasco or any Nasco Subsidiary is making of the Nasco Real Property on the date of this Agreement but which may or would preclude or restrict any expansion or enhancement or change in such use. There are no material latent defects or material adverse physical conditions affecting the Nasco Real Property, and improvements thereon, owned or leased by Nasco or any Nasco Subsidiary other than those that would not prevent or materially delay consummation of the Merger or and would not have a Material Adverse Effect. SECTION 4.16. Insurance. Nasco and the Nasco Subsidiaries have in effect insurance coverage with reputable insurers or are self-insured, which, in respect of amounts, premiums, types and risks insured, constitutes reasonable coverage for the risks customarily insured against by companies engaged in the industries in which Nasco and the Nasco Subsidiaries are engaged and comparable in size and operations to Nasco and the Nasco Subsidiaries. SECTION 4.17. Brokers. No broker, finder or investment banker is entitled to any brokerage, finder's or other fee or commission in connection with the Merger based upon arrangements made by or on behalf of Nasco. ARTICLE V COVENANTS SECTION 5.01. Conduct of Business Pending the Closing. Each of the Company and Nasco (each a "Party" and collectively the "Parties" for purposes of this Section 5.01) agrees that, between the date of this Agreement and the Effective Time, except as set forth in Section 5.01 of the Disclosure Schedule or as contemplated by any other provision of this Agreement, unless the other Party shall consent in writing, which consent shall not be unreasonably withheld or delayed, (1) the businesses of the Parties and the Company Subsidiaries and the Nasco Subsidiaries (the "Party Subsidiaries") shall be conducted only in, and the Parties and the Party Subsidiaries shall not take any action except in the ordinary course of business consistent with past practice and (2) each Party shall use its reasonable best efforts to keep available the services of such of the current officers, significant employees and consultants of the Parties and the Party Subsidiaries and to preserve the current relationships of the Parties and the Party Subsidiaries with such of the customers, suppliers and other persons with which the Parties or any Party Subsidiary has significant business relations in order to preserve substantially intact its business organization. By way of amplification and not limitation, except as set forth in Section 5.01 of the Disclosure Schedule or as contemplated by any other provision of this Agreement, each Party shall not, and shall neither cause nor permit any of the Party Subsidiaries or any of its affiliates (over which it exercises control), or any of its or their officers, directors, employees and agents (in each case, in their capacities as such) to, between the date of this Agreement and the Effective Time, directly or indirectly, do, or agree to do, any of the following, without the prior written consent of the other Party, which consent shall not be unreasonably withheld or delayed: (a) amend or otherwise change its certificate of incorporation or bylaws or equivalent organizational documents except as set forth in the Restated Certificate which amendment shall be filed to take effect as of the Closing Date and immediately prior to the Effective Time; (b) issue, sell, pledge, dispose of, grant, transfer, lease, license, guarantee, encumber, or authorize the issuance, sale, pledge, disposition, grant, transfer, lease, license, guarantee or encumbrance of, (i) any shares of capital stock of the Party or any Party Subsidiary of any class, or securities convertible or exchangeable or exercisable for any shares of such capital stock, or any options, warrants or other rights of any kind to acquire any shares of such capital stock, or any other ownership interest (including, without A-21 limitation, any phantom interest), of the Party or any Party Subsidiary (except for the issuance of any shares of capital stock issuable pursuant to the exercise of any Company Options outstanding on the date of this Agreement other than as set forth in Section 5.01(b) of the Disclosure Schedule or as otherwise contemplated herein), or (ii) any property or assets of either Party or any Party Subsidiary, except in all cases in the ordinary course of business and in a manner consistent with past practice; provided that the aggregate amount of any such sale or disposition (other than a sale or disposition of products or other inventory in the ordinary course of business consistent with past practice, as to which there shall be no restriction on the aggregate amount), or pledge, grant, transfer, lease, license, guarantee or encumbrance of such property or assets of the Party or any Party Subsidiary shall not exceed $50,000. (c) declare, set aside, make or pay any dividend or other distribution, payable in cash, stock, property or otherwise, with respect to any of its capital stock. (d) reclassify, combine, split, subdivide or redeem, purchase or otherwise acquire, directly or indirectly, any of its capital stock. (e) (i) acquire (including, without limitation, by merger, consolidation, or acquisition of stock or assets) any interest in any corporation, partnership, other business organization, person or any division thereof or any assets, other than (x) acquisitions of any assets in the ordinary course of business consistent with past practice that are not, in the aggregate, in excess of $50,000 or (y) purchases (whether for cash or pursuant to an exchange) of inventory for resale in the ordinary course of business and consistent with past practice; (ii) incur any indebtedness for borrowed money or issue any debt securities or assume, guarantee or endorse, or otherwise as an accommodation become responsible for, the obligations of any person for borrowed money, except for indebtedness for borrowed money incurred in the ordinary course of business and consistent with past practice; provided, however, that in no event shall Nasco incur funded indebtedness which would cause its aggregate funded indebtedness as of the Closing Date to exceed $46 million; (iii) terminate, cancel or request any material change in, or agree to any material change in any Material Contract or enter into any contract or agreement material to the business, results of operations or financial condition of the Party and the Party Subsidiaries taken as a whole, in either case other than in the ordinary course of business, consistent with past practice; (iv) make or authorize any capital expenditure, other than as set forth in Section 5.01(e)(iv) of the Disclosure Schedule; or (v) enter into or amend any contract, agreement, commitment or arrangement that, if fully performed, would not be permitted under this Section 5.01(e); (f) increase the compensation payable or to become payable to its officers or employees, except for increases in accordance with past practices in salaries or wages of employees of the Party or any Party Subsidiary who are not officers of such Party, or grant any rights to severance or termination pay to, or enter into any employment or severance agreement with, any director, officer or other employee of either Party or any Party Subsidiary, or establish, adopt, enter into or amend any collective bargaining, bonus, profit sharing, thrift, compensation, stock option (including, without limitation, the granting of stock options, stock appreciation rights, stock option appreciation unit awards, performance awards or performance restricted stock awards), stock purchase, pension, retirement, deferred compensation, employment, termination, severance or other plan, agreement, trust, fund, policy or arrangement for the benefit of any director, officer or employee, except as set forth on Schedule 5.01(f) and as contemplated by this Agreement or to the extent required by applicable Law or the terms of a collective bargaining agreement or a contractual obligation existing on the date hereof; (g) take any action with respect to modifying accounting policies or procedures, other than actions in the ordinary course of business, consistent with past practice or the requirements of U.S. GAAP or GAAP, as the case may be, and as advised by either Party's regular certified independent public accountants; (h) waive, release, assign, settle or compromise any material claims or litigation involving money damages in excess of $50,000, except for claims asserted by either Party or the applicable Party Subsidiary other than as set forth on Schedule 5.01(h) of the Disclosure Schedule; (i) make any material Tax election or settle or compromise any material federal, state, local or foreign Tax liability other than as set forth on Schedule 5.01(h) of the Disclosure Schedule; A-22 (j) authorize or enter into any formal or informal agreement or otherwise make any commitment to do any of the foregoing; (k) take any action that will be likely to result in the representations and warranties set forth in Article III or Article IV, as the case may be, becoming false or inaccurate in any material respect (or, with respect to any representation and warranty already qualified by materiality, false or inaccurate in any respect); (l) enter into or carry out any other transaction other than in the ordinary and usual course of business or other than as permitted pursuant to the other clauses in this Section 5.01; (m) take any action or fail to take any action that results in a Material Adverse Effect; or (n) permit or cause any Party Subsidiary to do any of the foregoing or agree or commit to do any of the foregoing. SECTION 5.02. Notices of Certain Events. Each of Parent, Nasco Holdings, Nasco and the Company shall give prompt notice to the other of (i) any notice or other communication from any person alleging that the consent of such person is or may be required in connection with the Merger, (ii) any notice or other communication from any Governmental Entity in connection with the Merger, (iii) any actions, suits, claims, investigations or proceedings commenced or, to the best of its knowledge threatened in writing against, relating to or involving or otherwise affecting Parent, Nasco Holdings, Nasco, the Company or their subsidiaries that relate to the consummation of the Merger or the transactions contemplated by this Agreement; (iv) the occurrence of a default or event that, with notice or lapse of time or both, will become a default under any Material Contract; and (v) any change that is reasonably likely to result in a Material Adverse Effect or is likely to delay or impede the ability of either Parent, Nasco Holdings, Nasco or the Company to consummate the transactions contemplated by this Agreement or to fulfill its obligations set forth herein. SECTION 5.03. Contractual Consents. Except as set forth in Section 5.03 of the Disclosure Schedule or as contemplated herein, prior to or at the Effective Time each of the Parties hereto shall use its reasonable best efforts to prevent the occurrence, as a result of the Merger, of the triggering of a change of control or similar clause or any event which constitutes a default (or an event which with notice or lapse of time or both would become a default) under any material contract, agreement, lease, license, permit, franchise or other instrument or obligation to which it or any of its subsidiaries is a party. SECTION 5.04. Resignation of Directors. Prior to the Effective Time, the Company shall use its reasonable best efforts to obtain the resignations of those directors of the Company who will not be serving as directors of the Surviving Corporation as provided in Section 1.05 hereof. ARTICLE VI ADDITIONAL AGREEMENTS SECTION 6.01. Proxy Statement. (a) As promptly as practicable after the execution of this Agreement, (i) the Company shall prepare (in consultation with Parent) and file with the SEC a proxy statement (together with any amendments thereof or supplements thereto, the "Proxy Statement") relating to the meeting of the Company's stockholders (the "Company Stockholders' Meeting") to be held to consider approval of this Agreement and the Merger and the approval of the Restated Certificate. Parent, Nasco and Nasco Holdings shall furnish all information concerning their entities and businesses that the Company may reasonably request in connection with such actions. (b) Subject to the fiduciary duties of the Company Board, as described in the following proviso, the Proxy Statement shall include the unanimous recommendation of the Company Board to the stockholders of the Company to vote in favor of approving the Merger and this Agreement; provided, however, that the Company Board may, at any time prior to the date of the Company Stockholders' Meeting, withdraw, A-23 modify or change any such recommendation to the extent that the Company Board determines in good faith after consultation with independent legal counsel that the failure to so withdraw, modify or change their recommendation could cause the Company Board to breach its fiduciary duties to the Company's stockholders under applicable law. (c) No amendment or supplement to the Proxy Statement will be made or filed with the SEC by the Company without consultation with Parent. The Company will promptly advise Parent after receiving any comments from the SEC relating to the Proxy Statement and provide Parent with copies of any such comments that are in writing. (d) The information supplied by Parent, Nasco and Nasco Holdings and the directors and officers thereof for inclusion in the Proxy Statement shall not, at (i) the time the Proxy Statement (or any amendment thereof or supplement thereto) is first mailed to the stockholders of the Company and (ii) the time of the Company Stockholders' Meeting, contain any untrue statement of a material fact or fail to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. Nasco shall use its reasonable best efforts to cause the Nasco Financial Statements to comply with the requirements of Regulation S-X. If, at any time prior to the date of the Company Stockholders' Meeting, any event or circumstance relating to Parent or Nasco, or its officers or directors, is discovered by Parent that should be set forth in an amendment or a supplement to the Proxy Statement, Parent shall promptly inform the Company. (e) The information supplied by the Company for inclusion in the Proxy Statement shall not, at (i) the time the Proxy Statement (or any amendment thereof or supplement thereto) is first mailed to the stockholders of the Company and (ii) the time of the Company Stockholders' Meeting, contain any untrue statement of a material fact or fail to state any material fact required to be stated therein or necessary in order to make the statements therein, in light of the circumstances under which they were made, not misleading. If, at any time prior to the date of the Company Stockholders' Meeting, any event or circumstance relating to the Company or any Company Subsidiary, or their respective officers or directors, is discovered by the Company that should be set forth in an amendment or a supplement to the Proxy Statement, the Company shall promptly inform Parent. SECTION 6.02. Company Stockholders' Meeting. The Company shall call and hold the Company Stockholders' Meeting as promptly as practicable for the purpose of voting upon the approval of (i) the Restated Certificate and (ii) this Agreement and the Merger. The Company shall use all commercially reasonable efforts to solicit from its stockholders proxies in favor of the approval of (i) the Restated Certificate and (ii) this Agreement and the Merger, and shall take all other action necessary or advisable to secure the vote or consent of its stockholders required by the DGCL and the rules of NASDAQ to obtain such approvals. SECTION 6.03. Access to Information; Confidentiality. (a) Except as required pursuant to any confidentiality agreement or similar agreement or arrangement to which any Party hereto or such Party's Subsidiary is a party or pursuant to applicable Law, from the date of this Agreement to the Effective Time, each Party shall (and shall cause its Subsidiaries to): (i) upon ten (10) days prior notice, provide to the requesting Party (and its respective officers, directors, employees, accountants, consultants, legal counsel, agents and other representatives, collectively, "Representatives") reasonable access at reasonable times to the officers, employees, agents, properties, offices and other facilities of such Party and such Party's Subsidiaries and to the books and records thereof (including, without limitation, access to such Party's accountants, any correspondence between such Party and such accountants and work papers prepared with respect to any Party to this Agreement by such accountants), and (ii) furnish promptly such information concerning its business, properties, contracts, assets, liabilities, personnel and other aspects as the requesting Party or its Representatives may reasonably request. No investigation conducted pursuant to this Section 6.03 shall affect or be deemed to modify any representation or warranty made in this Agreement. (b) The Parties shall comply with, and shall cause their respective Subsidiaries and Representatives to comply with, all of their respective obligations under the Confidentiality Agreement dated July 17, 2001 (the "Confidentiality Agreement") between Parent and the Company, as amended. A-24 SECTION 6.04. No Solicitation of Transactions. Each Party agrees that, from and after the date hereof until the earlier of the Effective Time or the termination of this Agreement in accordance with Article VIII, neither it nor any Party Subsidiary shall, and that it shall cause its Party Subsidiary's representatives not to, except as contemplated by this Agreement, directly or indirectly, initiate, solicit or encourage any inquiries or the making of any proposal or offer with respect to a merger, reorganization, share exchange, consolidation, business combination, recapitalization, liquidation, dissolution or similar transaction involving, or any purchase or sale of all or any significant portion of the assets of the Party (other than Parent) and the Party Subsidiaries, taken as a whole, or 15% or more of the equity securities of the Party (any such proposal or offer being hereinafter referred to as a "Competing Transaction"). Each Party further agrees that neither it nor any Party Subsidiary shall, and that it shall cause its Party Subsidiary's Representatives not to, directly or indirectly, have any discussion with or provide any confidential information or data relating to such Party (other than Parent) or any Party Subsidiary to any person relating to a Competing Transaction or engage in any negotiations concerning a Competing Transaction, or otherwise facilitate any effort or attempt to make or implement a Competing Transaction or accept a Competing Transaction; provided, however, that nothing contained in this Section 6.04 shall prevent the Company or the Company Board from (i) engaging in any discussions or negotiations with, or providing any information to, any person in response to an unsolicited written Competing Transaction by any such person; or (ii) recommending such an unsolicited written Competing Transaction to the holders of Company Common Stock if, in any such case as is referred to in clause (i) or (ii), (A) the Company Board concludes in good faith (after consultation with independent financial advisors) that such Competing Transaction would, if consummated, result in a transaction more favorable to all or substantially all of the holders of Company Common Stock than the transaction contemplated by this Agreement (any such more favorable Competing Transaction being referred to in this Agreement as a "Superior Proposal"), (B) the Company Board determines in good faith after consultation with independent legal counsel that such action is necessary for the Company Board to act in a manner consistent with its fiduciary duties under applicable Law, (C) prior to providing any information or data regarding the Company to any person or any of such person's Representatives in connection with a Superior Proposal by such person, the Company receives from such person an executed confidentiality agreement on terms at least as restrictive on such person as those contained in the Confidentiality Agreement and (D) prior to providing any information or data to any person or any of such person's Representatives or entering into discussions or negotiations with any person or any of such person's Representatives in connection with a Superior Proposal by such person, the Company notifies Parent promptly of the receipt of such Superior Proposal indicating, in connection with such notice, the name of such person and attaching a copy of the proposal or offer or providing a complete written summary thereof. The Company agrees that it shall keep Parent informed, on a current basis, of the status and terms of any discussions or negotiations related to such Superior Proposal. The Company agrees that it will take the necessary steps to promptly inform each Company Subsidiary and each Representative of the Company or any Company Subsidiary of the obligations undertaken in this Section 6.04. Immediately following the execution of this Agreement, the Company shall terminate and cause the Company Subsidiaries to terminate any existing activities, discussions or negotiations with any third parties that may be ongoing with respect to any Competing Transaction and promptly after the public announcement of the execution of this Agreement shall use all reasonable efforts to request that all confidential information previously furnished to any such third parties be returned promptly. Nothing contained in this Agreement shall prohibit the Company or the Company Board from taking or disclosing to its stockholders a position contemplated by Rules 14d-9 and 14e-(2)(a) promulgated under the Exchange Act. SECTION 6.05. Directors' and Officers' Indemnification and Insurance. (a) The certificate of incorporation and bylaws of the Surviving Corporation shall contain the provisions regarding liability of directors and indemnification of directors, officers, employees, fiduciaries or agents of the Company that provide the maximum protection for such persons pursuant to the DGCL, which provisions shall not be amended, repealed or otherwise modified for a period of five years from the Effective Time in any manner that would affect adversely the rights thereunder of individuals who at or at any time prior to the Effective Time were directors, officers, employees, fiduciaries or agents of the Company. (b) For a period of five years after the Effective Time, the Surviving Corporation shall cause to be maintained in effect policies of directors' and officers' liability insurance with coverage in amount and A-25 scope at least as favorable as the Company's existing policies with respect to claims arising from facts or events that occurred prior to the Effective Time. (c) This Section 6.05 is intended to be for the benefit of, and shall be enforceable by, the indemnified parties, their heirs and personal representatives and shall be binding on the Surviving Corporation and its respective successors and assigns. (d) From and after the Effective Time, the Surviving Corporation agrees that it shall indemnify and hold harmless each present and former director and officer of the Company or any other person covered by the Company's directors' and officers' liability insurance, determined as of the Effective Time (the "Indemnified Parties"), from and against any costs, judgments, fines, losses, obligations, claims, damages, liabilities, or expenses (including interest, penalties, reasonable out-of-pocket expenses and reasonable attorneys' fees incurred in the investigation or defense of any of the same or in asserting any of their rights hereunder) (collectively, "Costs") incurred in connection with any claim, action, suit, proceeding or investigation, whether civil, criminal, administrative or investigative, to which the Indemnified Party has been made a party by reason of the fact that such person was a director or officer of the Company, arising out of, resulting from, or pertaining to matters existing or occurring at or prior to the Effective Time (including, without limitation, the transactions contemplated by this Agreement), whether asserted or claimed prior to, at or after the Effective Time, to the fullest extent that the Company would have been permitted or required under Delaware laws and under the Company's charter documents (as in effect on the date hereof) to indemnify such Indemnified Parties (and the Surviving Corporation shall advance expenses as incurred to the fullest extent permitted under applicable Law; provided that the Indemnified Party to whom expenses are advanced provides an undertaking to repay such advances if it is ultimately determined that such Indemnified Party is not entitled to indemnification); provided that any determination required to be made with respect to whether an officer's or director's conduct complies with the standards set forth under Delaware law and the Company's charter documents shall be made by independent counsel selected by the Surviving Corporation. (e) Any Indemnified Party wishing to claim indemnification under paragraph (d) of this Section 6.05, upon learning of any such claim, action, suit, proceeding or investigation, shall promptly notify Parent thereof, but the failure to so notify shall not relieve the Surviving Corporation of any liability it may have to such Indemnified Party, except to the extent that such failure prejudices the Surviving Corporation. In the event of any such claim, action, suit, proceeding or investigation (whether arising before or after the Effective Time), (i) the Surviving Corporation shall have the right to assume the defense thereof, with counsel selected by Parent and reasonably acceptable to the Indemnified Party, and the Surviving Corporation shall not be liable to such Indemnified Parties for any legal expenses of other counsel or any other expenses subsequently incurred by such Indemnified Parties in connection with the defense thereof, except that if the Surviving Corporation elects not to assume such defense or counsel for the Indemnified Parties advises that there are issues which raise conflicts of interest between the Surviving Corporation and the Indemnified Parties, the Indemnified Parties may retain counsel satisfactory to them, and the Surviving Corporation shall pay all reasonable fees and expenses of such counsel for the Indemnified Parties promptly as statements therefor are received; provided, however, that the Surviving Corporation shall be obligated pursuant to this paragraph (e) to pay for only one firm of counsel for all Indemnified Parties in any jurisdiction unless the use of one counsel for such Indemnified Parties would present such counsel with a conflict of interest, (ii) the Indemnified Parties will cooperate in the defense of any such matter and (iii) the Surviving Corporation shall not be liable for any settlement effected without the prior written consent of Parent; and provided further that the Surviving Corporation shall not have any obligation hereunder to any Indemnified Party when and if a court of competent jurisdiction shall ultimately determine, and such determination shall have become final, that the indemnification of such Indemnified Party in the manner contemplated hereby is prohibited by applicable Law. The Surviving Corporation shall not, in the defense of any claim or litigation, except with the consent of the Indemnified Party (which consent shall not be unreasonably withheld or delayed), consent to entry of judgment or enter into any settlement that provides for injunctive or other nonmonetary relief affecting the Indemnified Party or that does not include as an A-26 unconditional term thereof the giving by the claimant or plaintiff to such Indemnified Party of a release from all liability with respect to such claim or litigation. (f) If the Surviving Corporation or any of its successors or assigns shall (i) consolidate with or merge into any other corporation or entity and shall not be the continuing or surviving corporation or entity of such consolidation or merger or (ii) transfer all or substantially all of its properties and assets or outstanding voting securities to any individual, corporation or other entity, then and in each such case, proper provisions shall be made so that the successors and assigns of the Surviving Corporation shall expressly assume all of the obligations set forth in this Section 6.05. SECTION 6.06. Further Action; Consents; Filings. Upon the terms and subject to the conditions hereof, each of the Parties shall use its reasonable best efforts to (i) take, or cause to be taken, all appropriate action, and do, or cause to be done, all things necessary, proper or advisable under applicable Law or otherwise to consummate and make effective the Merger, obtain from Governmental Entities any consents, licenses, permits, waivers, approvals, authorizations or orders required to be obtained or made by Parent or the Company or any of their subsidiaries in connection with the authorization, execution and delivery of this Agreement and the consummation of the Merger, (iii) make all necessary filings, and thereafter make any other submissions either required or deemed appropriate by each of the Parties, with respect to this Agreement and the Merger required under (A) the Exchange Act, (B) the rules of the NASDAQ or (C) any other applicable Law. The Parties hereto shall cooperate and consult with each other in connection with the making of all such filings, including by providing copies of all such documents to the nonfiling Party and its advisors prior to filing, and none of the Parties will file any such document if any of the other parties shall have reasonably objected to the filing of such document. No Party to this Agreement shall consent to any voluntary extension of any statutory deadline or waiting period or to any voluntary delay of the consummation of the Merger at the behest of any Governmental Entity without the consent and agreement of the other Parties to this Agreement, which consent shall not be unreasonably withheld or delayed. Without limiting the foregoing, each of the Parties hereto shall, and shall cause each of its subsidiaries to, use its reasonable best efforts to obtain (and to cooperate and coordinate with the other parties to obtain) any consent, authorization, order or approval of, or any exemption by, any Governmental Entity that is required to be obtained in connection with the Merger and to take all actions reasonably necessary to satisfy any applicable regulatory requirements relating thereto. Each of the Parties shall promptly take, in the event that any permanent or preliminary injunction or other order is entered or becomes reasonably foreseeable to be entered in any proceeding that would make consummation of any transaction contemplated hereby in accordance with the terms of this Agreement unlawful or that would prevent or delay consummation of the transaction contemplated hereby, any and all steps necessary to vacate, modify or suspend such injunction or order so as to permit such consummation prior to the deadline specified in Section 8.01(b). SECTION 6.07. Public Announcements. Parent and the Company shall consult with each other before issuing any press release or otherwise making any public statement with respect to this Agreement or any transaction contemplated hereby and shall not issue any such press release or make any such public statement prior to such consultation, except to the extent required by applicable Law or the requirements of NASDAQ, in which case the issuing party shall use its reasonable best efforts to consult with the other Party before issuing any such release or making any such public statement. SECTION 6.08. Issuance of Additional Shares of Company Common Stock. The Company may issue additional shares of Company Common Stock on or prior to the Closing Date; provided, however, that in the case of any such issuance, Parent shall have the right to purchase, and the Company agrees to issue and sell to Parent on the date of any such issuance, a number of shares of Company Common Stock sufficient to maintain Parent's 50.99 percentage ownership of Company Common Stock. Such sale to Parent shall be at a price equal to the mean of the high and low sales prices of the Company Common Stock on the NASDAQ on the date of such sale or, if there are no sales on that date, the nearest preceding date on which there were one or more sales. SECTION 6.09. Registration of the Series I Preferred Stock. The Company shall file a registration statement (i) on Form S-3 pursuant to Rule 415 of the Securities Act, if eligible or, if not eligible, on such other form as may be required, registering the issuance of the Series I Preferred Stock pursuant to this Agreement and (ii) on Form 8 pursuant to the Exchange Act (collectively the "Registration Statements") registering the Series I A-27 Preferred Stock. The Company shall use its reasonable best efforts to cause the Registration Statements to be declared effective by the SEC as promptly as practicable after the filing thereof. SECTION 6.10. NASDAQ Listing. The Company shall use its reasonable best efforts to have the Series I Preferred Stock approved for listing on NASDAQ as of the Closing Date. ARTICLE VII CONDITIONS TO THE MERGER SECTION 7.01. Conditions to the Obligations of Each Party to Consummate the Merger. The obligations of Parent, the Company, Nasco and Nasco Holdings to effect the Merger shall be subject to the satisfaction or, if permitted by applicable Law, waiver prior to the Closing Date of the following conditions: (a) this Agreement and the transactions contemplated hereby shall have been approved and adopted by the affirmative vote of (1) two-thirds of the outstanding shares of Company Common Stock and (2) a majority of the outstanding shares of Company Common Stock (other than shares held by Parent) voted at the Company Stockholder's Meeting; (b) no preliminary or permanent injunction, decree or other order (an "Order"), issued by any Governmental Entity or other legal restraint or prohibition preventing the consummation of the transactions contemplated by this Agreement shall be in effect, and no Law shall have been enacted or adopted that enjoins, prohibits or makes illegal consummation of any of the transactions contemplated hereby; (c) as of the Closing Date but after the filing of the Restated Certificate with the Secretary of State of the State of Delaware, the value of one share of Company Common Stock shall not exceed $3.00, determined by subtracting from the price of one share of Company Common Stock, determined in accordance with clauses (i) and (ii) below, the value of one share of Series I Preferred Stock on the Closing Date. For purposes of this Section 7.01(c), (A) the price of the Company Common Stock shall be the higher of (i) the mean between the highest and lowest sale price of the Company Common Stock on the NASDAQ on the Closing Date and (ii) the closing sale price of the Company Common Stock on the NASDAQ on the Closing Date; and (B) the value of the Series I Preferred Stock on the Closing Date shall be as determined by Duff & Phelps or any other mutually satisfactory nationally recognized financial advisor, provided, however, that the value of one share of Series I Preferred Stock as valued on the Closing Date shall be no less than $6.00. (d) all consents, approvals, waivers and authorizations required to be obtained to effect the Merger shall have been obtained from all Governmental Entities, except if the failure to obtain any such consents, approvals and authorizations would not result in a Material Adverse Effect; (e) all consents, approvals, waivers and authorizations (including, without limitation, waivers of termination rights) of third parties (other than Governmental Entities) the failure of which to obtain would result in a Material Adverse Effect shall duly have been obtained; (f) the Restated Certificate shall have been filed as provided in this Agreement and in accordance with the DGCL and WBCL; (g) the Series I Preferred Stock dividend shall have been declared and paid as provided in Section 5.01(c) of this Agreement. (h) The Company and Parent shall have entered into a Stockholders Agreement in substantially the form attached as Exhibit D. (i) The Preferred Stock Purchase Agreement, dated as of October 23, 1997, as amended, between the Company and Parent shall have been terminated. A-28 (j) The Management Agreement, dated as of January 1, 1993, as amended, between Nasco Holdings and Nasco shall have been terminated. (k) The fairness opinion previously delivered by Duff & Phelps to the Company's Board of Directors shall not have been revoked or withdrawn. (l) The Company shall have filed a registration statement (1) on Form S-3 pursuant to Rule 415 of the Securities Act, if eligible or, if not eligible, on such other form as may be required, registering the issuance of the Series I Preferred Stock pursuant to this Agreement and (2) on Form 8 pursuant to the Exchange Act (collectively the "Registration Statements") registering the Series I Preferred Stock. The Registration Statements shall have been declared effective by the SEC and the Series I Preferred Stock shall have been approved for listing on NASDAQ. (m) The value of each of the Series I Preferred Stock and the Series J Preferred Stock on the Closing Date shall be as determined by Duff & Phelps or any other mutually satisfactory nationally recognized financial advisor, provided, however, that the value of one share of each of the Series I Preferred Stock and the Series J Preferred Stock as valued on the Closing Date shall be no less than $6.00 and shall have the same value. (n) The holders of all Company Options outstanding after the Merger shall have agreed that they shall not exercise such Company Options for a period of eighteen months following the Closing Date. (o) The employment agreements between the Company and John J. Crawford and Paul M. McDonald shall have been amended to reduce the phantom stock option target price from $7.00 to $1.00. SECTION 7.02. Conditions to the Obligations of the Company. The obligations of the Company to effect the Merger shall be subject to the satisfaction or, if permitted by applicable Law, waiver, prior to the Closing Date, of the following further conditions: (a) each of the representations and warranties of Parent, Nasco Holdings and Nasco contained in this Agreement shall be true and correct in all material respects as of the Closing Date, as though made at and as of the Closing Date, except that those representations and warranties that address matters only as of a particular date shall remain true and correct in all material respects as of such date (provided that any representation or warranty that is qualified by materiality, including, without limitation, qualification by reference to a Material Adverse Effect, shall be true in all respects as of the Closing Date or as of such particular date, as the case may be), and the Company shall have received a certificate of the Chief Operating Officer of Parent to that effect; (b) Parent, Nasco Holdings and Nasco shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by them on or prior to the Closing Date, and the Company shall have received a certificate of the Chief Operating Officer of Parent to that effect. (c) The Company shall have received evidence reasonably satisfactory to it that NHI, LLC and Nasco have entered into a binding agreement providing for the transfer of the parcel of real estate located at 801 Janesville Avenue, Fort Atkinson, Wisconsin, from NHI, LLC to Nasco within three months of the Closing Date for a purchase price equal to NHI LLC's adjusted cost of such property at the time of transfer to Nasco and the Company shall have received a certificate, dated as of the Closing Date, of the Chief Operating Officer of Parent, as to the adjusted cost of such property. (d) The Company shall have received evidence reasonably satisfactory to it that the funded indebtedness of Nasco as of the Closing Date is not greater than $46 million. SECTION 7.03. Conditions to the Obligations of Parent, Nasco Holdings and Nasco. The obligations of Parent, Nasco Holdings and Nasco to effect the Merger shall be subject to the satisfaction or, if permitted by applicable Law, waiver prior to the Closing Date of the following further conditions: A-29 (a) each of the representations and warranties of the Company contained in this Agreement shall be true and correct in all material respects as of the Closing Date, as though made at and as of the Closing Date, except that those representations and warranties that address matters only as of a particular date shall remain true and correct in all material respects as of such date (provided that any representation or warranty that is qualified by materiality, including, without limitation, qualification by reference to a Material Adverse Effect, shall be true in all respects as of the Closing Date or as of such particular date, as the case may be), and Parent shall have received a certificate of the Chief Executive Officer of the Company to that effect; (b) the Company shall have performed or complied in all material respects with all agreements and covenants required by this Agreement to be performed or complied with by it on or prior to the Closing Date, and Parent shall have received a certificate of the Chief Executive Officer of the Company to that effect; (c) The directors of the Company who will not be continuing directors of the Surviving Corporation as provided in Section 1.05 hereof shall have resigned effective as of the Effective Time. (d) The Company and Parent shall have entered into the Exchange Agreement. ARTICLE VIII TERMINATION, AMENDMENT AND WAIVER SECTION 8.01. Termination. This Agreement may be terminated and the Merger may be abandoned at any time prior to the Effective Time, notwithstanding any requisite approval and adoption of this Agreement, as follows: (a) by mutual written consent duly authorized by the Company Board and the Board of Directors of Parent; (b) by either Parent or the Company, if the Effective Time shall not have occurred on or before May 15, 2002; provided, however, that the right to terminate this Agreement under this Section 8.01(b) shall not be available to the party whose failure to fulfill any obligation under this Agreement shall have been the cause of, or resulted in, the failure of the Effective Time to occur on or before such date; (c) by either Parent or the Company, if any final and nonappealable Order or other legal restraint or prohibition preventing the consummation of the Merger shall have been issued by any Governmental Entity or any Law shall have been enacted or adopted that enjoins, prohibits or makes illegal consummation of the Merger; (d) by Parent, if (i) the Company Board withdraws, modifies or changes its recommendation of this Agreement in a manner adverse to Parent, or shall have resolved to do so, (ii) the Company Board shall have refused to affirm its recommendation of this Agreement as promptly as practicable after receiving a bona fide proposal or offer relating to a Competing Transaction, but in any case within ten business days after receipt of any written request from Parent or Nasco, (iii) the Company Board shall have recommended to the stockholders of the Company a Competing Transaction, or shall have resolved to do so, or (iv) a tender offer or exchange offer for 15% or more of the outstanding shares of capital stock of the Company is commenced, and the Company Board fails to recommend against acceptance of such tender offer or exchange offer by its stockholders (including not taking a position with respect to the acceptance of such tender offer or exchange offer by its stockholders); (e) by Parent or the Company, if the Merger shall fail to receive the requisite vote for adoption at the Company Stockholders' Meeting or any adjournment or postponement thereof; (f) by Parent, upon a breach of, or failure to perform in any material respect (which breach or failure cannot be or has not been cured within 30 days after the giving of notice of such breach or failure), any representation, warranty, covenant or agreement on the part of the Company set forth in this Agreement, such that a condition set forth in clause (a) or (b) of Section 7.03 would not be satisfied; or (g) by the Company, upon a breach of, or failure to perform in any material respect (which breach or failure cannot be or has not been cured within 30 days after the giving of notice of such breach or failure), A-30 any representation, warranty, covenant or agreement on the part of Nasco, Nasco Holdings or Parent set forth in this Agreement, such that a condition set forth in Section 7.02 would not be satisfied. SECTION 8.02. Notice of Termination; Effect of Termination. In the event of termination of this Agreement by either Parent or the Company pursuant to Section 8.01 hereof, the terminating party shall give prompt written notice thereof to the nonterminating party. Except as provided in Sections 8.05 and 9.01, in the event of termination of this Agreement pursuant to Section 8.01, this Agreement shall be of no further effect, there shall be no liability under this Agreement on the part of Parent or the Company and all rights and obligations of each party hereto shall cease, provided, however, that nothing herein shall relieve any party from liability for the breach of any of its representations and warranties or the breach of any of its covenants or agreements set forth in this Agreement. SECTION 8.03. Amendment. This Agreement may be amended by mutual agreement of the Parties hereto by action taken by or on behalf of the Company Board and the Parent Board of Directors at any time prior to the Effective Time; provided, however, that after the approval of this Agreement by the stockholders of the Company, no amendment may be made that would increase the Merger Consideration. SECTION 8.04. Waiver. At any time prior to the Effective Time, any Party hereto may (a) extend the time for the performance of any obligation or other act of any other Party hereto, (b) waive any inaccuracy in the representations and warranties contained herein or in any document delivered pursuant hereto, and (c) waive compliance with any agreement or condition contained herein. Any waiver of a condition set forth in Section 7.01 will be effective only if made in writing by each of the Company and Parent and, unless otherwise specified in such writing, shall thereafter operate as a waiver of such condition for any and all purposes of this Agreement. Any such extension or waiver shall be valid if set forth in an instrument in writing signed by the Party or Parties to be bound thereby. SECTION 8.05. Expenses. Except as otherwise set forth in this Section 8.05, all Expenses (as defined below) incurred in connection with this Agreement and the Merger shall be paid by the party incurring such expenses, whether or not the Merger is consummated; provided, however, that in the event this Agreement is terminated pursuant to Section 8.01(f) or (g), the breaching party shall promptly pay to the non-breaching party such non-breaching party's Expenses. The Parties acknowledge that the failure of the Company's Stockholders to approve the Merger Agreement shall not be considered a breach of this Agreement. "Expenses," as used in this Agreement, shall consist of all out-of-pocket expenses (including, without limitation, all fees and expenses of counsel, accountants, investment bankers, experts and consultants to a party hereto and its affiliates) reasonably incurred by a party or on its behalf in connection with, or related to the authorization, preparation, negotiation, execution and performance of, this Agreement, the preparation, printing, filing and mailing of the Proxy Statement, the solicitation of stockholder approvals and all other matters related to the consummation of the Merger. ARTICLE IX GENERAL PROVISIONS SECTION 9.01. Non-Survival of Representations, Warranties and Agreements. The representations, warranties and agreements in this Agreement and in any certificate delivered pursuant hereto shall terminate at the Effective Time or upon the termination of this Agreement pursuant to Section 8.01, as the case may be, except that the agreements set forth in Articles I and II, Section 6.05, Section 6.06 and this Article IX shall survive the Effective Time and those set forth in Sections 6.03(b) and 8.05 and this Article IX shall survive termination. Each party agrees that, except for the representations and warranties contained in this Agreement and the Disclosure Schedule, no party hereto has made any other representations and warranties, and each party hereby disclaims any other representations and warranties made by itself or any of its officers, directors, employees, agents, financial and legal advisors or other representatives with respect to the execution and delivery of this Agreement or the transactions contemplated herein, notwithstanding the delivery or disclosure to any other party or any party's representatives of any documentation or other information with respect to any one or more of the foregoing. A-31 SECTION 9.02. Notices. All notices, requests, claims, demands and other communications hereunder shall be in writing and shall be given (and shall be deemed to have been duly given upon receipt) by delivery in person, by telecopy and facsimile or by registered or certified mail (postage prepaid, return receipt requested) to the respective Parties at the following addresses (or at such other address for a party as shall be specified in a notice given in accordance with this Section 9.02): if to Parent: Geneve Corporation 96 Cummings Point Road Stamford, Connecticut 06902 Attention: Steven B. Lapin Telephone: (203) 358-8000 Facsimile: (203) 348-3103 with a copy (which shall not constitute notice to Parent) to: Kramer Levin Naftalis & Frankel LLP 919 Third Avenue New York, New York 10022 Attention: Ezra G. Levin, Esq. Telephone: (212) 715-9100 Facsimile: (212) 715-8000 if to the Company: The Aristotle Corporation 27 Elm Street New Haven, Connecticut 06510 Attention: John Crawford Telephone: (203) 867-4090 Facsimile: (203) 562-1226 with copies (which shall not constitute notice to the Company) to: Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, PC One Financial Center Boston, MA 02111 Attn: Stanford N. Goldman, Jr. Esq. Telephone: (617) 542-6000 Facsimile: (617) 542-2241 SECTION 9.03. Certain Definitions. For purposes of this Agreement, the term: (a) "affiliate" of a specified person means a person who, directly or indirectly through one or more intermediaries, controls, is controlled by or is under common control with such specified person; (b) "business day" means any day on which the principal offices of the SEC in Washington, D.C. are open to accept filings or, in the case of determining a date when any payment is due, any day on which banks are not required or authorized to close in the State of Connecticut; (c) "control" (including the terms "controlled by" and "under common control with") means the possession, directly or indirectly or as trustee or executor, of the power to direct or cause the direction of the management and policies of a person, whether through the ownership of voting securities, as trustee or executor, by contract or credit arrangement or otherwise; (d) "knowledge" means, with respect to any matter in question, that the executive officers of Parent, Nasco, Nasco Holdings or the Company, as the case may be, (i) have knowledge of such matter, or (ii) after reasonable due investigation, should have known of such matter; A-32 (e) "Material Adverse Effect" shall be a concept applicable only to either Nasco or the Company and as to either of them means any event, change or effect that is materially adverse to the condition (financial or otherwise), properties, assets, liabilities, businesses, operations, results of operations or prospects of either Nasco or the Company and its respective subsidiaries taken as a whole or its ability to perform its obligations as contemplated in this Agreement; provided, however, that any adverse changes or effects relating to or arising from (i) the disallowance by the Internal Revenue Service of any previous tax refunds of the Company or the entering into an agreement with the Internal Revenue Service by the Company to such effect, (ii) any impairment of goodwill resulting from the Company's acquisition of Safe Passage International, Inc., or (iii) events, changes or effects that are consequences of terrorist activity or of the related war against terrorism will not be deemed a Material Adverse Effect; (f) "person" means an individual, corporation, company, limited liability company, partnership, limited partnership, syndicate, person (including, without limitation, a "person" as defined in section 13(d)(3) of the Exchange Act), trust, association or entity or government, political subdivision, agency or instrumentality of a government; and (g) "subsidiary" or "subsidiaries" of any person means any corporation, limited liability company, partnership, joint venture or other legal entity of which such person (either alone or through or together with any other subsidiary) owns, directly or indirectly, more than 50% of the stock or other equity interests, the holders of which are generally entitled to vote for the election of the board of directors or other governing body of such corporation or other legal entity. SECTION 9.04. Severability. If any term or other provision of this Agreement is invalid, illegal or incapable of being enforced by any rule of Law or public policy, all other conditions and provisions of this Agreement shall nevertheless remain in full force and effect, as long as the economic or legal substance of the transactions contemplated hereby is not affected in any manner materially adverse to any party. Upon such determination that any term or other provision is invalid, illegal or incapable of being enforced, the Parties hereto shall negotiate in good faith to modify this Agreement so as to effect the original intent of the Parties as closely as possible, in a mutually acceptable manner, in order that the transactions contemplated hereby be consummated as originally contemplated to the fullest extent possible. SECTION 9.05. Assignment; Binding Effect; Benefit. Neither this Agreement nor any of the rights, interests or obligations hereunder shall be assigned by any of the Parties hereto (whether by operation of Law or otherwise) without the prior written consent of the other Parties. This Agreement shall be binding upon and shall inure to the benefit of the Parties hereto and their respective successors and assigns. Notwithstanding anything contained in this Agreement to the contrary, except for the provisions of Section 6.05 (the "Third Party Provision"), nothing in this Agreement, expressed or implied, is intended to confer on any person other than the Parties hereto or their respective successors and assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement. The Third Party Provision may be enforced by the beneficiaries thereof. SECTION 9.06. Incorporation of Exhibits. The Disclosure Schedule and any exhibits attached hereto and referred to herein are hereby incorporated herein and made a part of this Agreement for all purposes. SECTION 9.07. Specific Performance. The Parties hereto agree that irreparable damage would occur in the event any provision of this Agreement was not performed in accordance with the terms hereof and that the Parties shall be entitled to specific performance of the terms hereof, in addition to any other remedy at law or equity without the need to prove actual damages. SECTION 9.08. Governing Law. Except to the extent that the Merger is mandatorily governed by, or pursuant to the terms of this Agreement that are subject to, the WBCL, this Agreement shall be governed by, and construed in accordance with, the laws of the State of Delaware applicable to contracts executed in and to be performed in that State, without regard to any conflicts of laws principles otherwise applicable. No provision of this Agreement shall be construed to require any of the Parties hereto or any of their respective subsidiaries, affiliates, directors, officers, employees or agents to take any action that would violate any applicable Law. A-33 SECTION 9.09. Submission to Jurisdiction; Venue. Each Party hereto unconditionally and irrevocably agrees and consents to the exclusive jurisdiction of, and service of process and venue in, the Delaware Chancery Court, if applicable, and the courts of the State of Delaware and waive any objection with respect thereto, for the purpose of any action, suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby; the Parties further agree not to commence any such action, suit or proceeding except in any such court. Each Party irrevocably waives any objections or immunities to jurisdiction to which it might otherwise be entitled or become entitled in any legal suit, action or proceeding against it arising out of or relating to this Agreement or the transactions contemplated hereby which is instituted in any such court. SECTION 9.10. Headings. The descriptive headings contained in this Agreement are included for convenience of reference only and shall not affect in any way the meaning or interpretation of this Agreement. SECTION 9.11. Counterparts. This Agreement may be executed and delivered (including by facsimile transmission) in one or more counterparts, and by each Party hereto in separate counterparts, each of which, when executed and delivered, shall be deemed to be an original but all of which, taken together, shall constitute one and the same agreement. SECTION 9.12. Entire Agreement. This Agreement (including the exhibits attached hereto and the Disclosure Schedule) and the Confidentiality Agreement constitute the entire agreement among the Parties hereto with respect to the subject matter hereof and supersede all prior agreements and understandings among the Parties with respect thereto. No addition to or modification of any provision of this Agreement shall be binding upon any Party hereto unless it is made in writing and signed by all Parties hereto. SECTION 9.13. Waiver of Jury Trial. EACH PARTY HERETO HEREBY IRREVOCABLY WAIVES ALL RIGHT TO TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM (WHETHER BASED IN CONTRACT, TORT OR OTHERWISE) ARISING OUT OF OR RELATING TO THIS AGREEMENT OR THE ACTIONS OF ANY PARTY IN THE NEGOTIATION, ADMINISTRATION, PERFORMANCE AND ENFORCEMENT THEREOF. [Remainder of Page Intentionally Left Blank] A-34 IN WITNESS WHEREOF, Parent, the Company, Nasco Holdings and Nasco have caused this Agreement to be executed as of the date first written above by their respective officers thereunto duly authorized. THE ARISTOTLE CORPORATION By:/S/ JOHN J. CRAWFORD __________________________________ Name: John J. Crawford Title: Chairman of the Board, Chief Executive Officer and President NASCO HOLDINGS, INC. By:/S/ STEVEN B. LAPIN __________________________________ Name: Steven B. Lapin Title: President NASCO INTERNATIONAL, INC. By:/S/ STEVEN B. LAPIN __________________________________ Name: Steven B. Lapin Title: Vice President GENEVE CORPORATION By:/S/ STEVEN B. LAPIN __________________________________ Name: Steven B. Lapin Title: President A-35 List of Exhibits to Agreement and Plan of Merger Exhibit A Amended and Restated Certificate of Incorporation of The Artistotle Corporation Exhibit B Exchange Agreement by and between the Artistotle Corporation and Geneve Corporation Exhibit C Certificate of Merger of Nasco International, Inc. into The Aristotle Corporation Exhibit D Stockholders Agreement by and among The Aristotle Corporation, Geneve Corporation and Nasco Holdings, Inc.
A-36 ANNEX B AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF THE ARISTOTLE CORPORATION The Aristotle Corporation (the "Corporation"), a corporation organized and existing under the laws of the State of Delaware, hereby certifies as follows: 1. The name of the Corporation is The Aristotle Corporation. The original certificate of incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on February 25, 1986, under the name FFB Corp. At various times thereafter it was amended and was restated. 2. On April 12, 1994, a certificate of designation was filed with the Secretary of State of the State of Delaware designating the Series A, B, C, and D preferred stock of the Corporation. 3. On November 7, 1997, a certificate of designation was filed with the Secretary of State of the State of Delaware designating the Series E preferred stock of the Corporation. 4. On December 30, 1997, a certificate of designation was filed with the Secretary of State of the State of Delaware designating the Series F, G, and H preferred stock of the Corporation. 5. This amended and restated certificate of incorporation has been duly adopted in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware. 6. The text of the certificate of incorporation, as amended, is hereby restated and further amended to read in its entirety as set forth below: ARTICLE 1 NAME The name of the corporation (the "Corporation") is The Aristotle Corporation. ARTICLE 2 PURPOSE The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE 3 DURATION The Corporation is to have perpetual existence. ARTICLE 4 CAPITAL STOCK A. The total number of shares of capital stock that the Corporation has authority to issue is 40,000,000 shares, consisting of 25,000,000 shares of common stock, par value $.01 per share, and 15,000,000 shares of preferred stock, par value $.01 per share, of which 2,400,000(1) shares are hereby designated Series I preferred stock and 11,200,000 shares are hereby designated Series J preferred stock. - -------- (1) Add to this number any shares falling within clause (iv) of Section 6.08 of the merger agreement. B-1 B. The remaining shares of preferred stock may be issued from time to time in one or more series. The board of directors of the Corporation is expressly authorized to provide for the issuance of all or any of the remaining shares of preferred stock in one or more series, to fix the number of shares, and to determine or alter for each such series such voting powers, full or limited, or no voting powers, and such designations, preferences, and relative, participating, optional, or other rights and such qualifications, limitations, or restrictions thereof, as stated in resolutions adopted by the board of directors providing for the issuance of those shares and as may be permitted by the General Corporation Law of the State of Delaware. The board of directors is also expressly authorized to increase or decrease (but not below the number of shares of that series then outstanding) the number of shares of any series issued after shares of that series are issued. If the number of shares of any such series is so decreased, the shares constituting that decrease will resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of that series. C. The powers, preferences, rights, restrictions, and other matters relating to the Series I preferred stock are as follows: 1. Stated Value. The stated value of each share of Series I preferred stock (the "Series I Stated Value") is $6.00, subject to adjustment for stock dividends, combinations, splits, recapitalizations and the like with respect to the Series I preferred stock. 2. Dividends. (a) Each holder of one or more shares of Series I preferred stock is entitled to receive, if declared by the board of directors but only out of funds that are legally available therefor, cash dividends at the rate of 11% per annum of the Series I Stated Value on each share of Series I preferred stock. These dividends accrue on each share of Series I preferred stock from the date of issuance and accrue daily, whether or not earned or declared. Subject to Section 4(h), these dividends are cumulative and are payable on March 31 and September 30 of each year, if declared by the board of directors. (b) Unless all cumulative dividends on shares of Series I preferred stock (1) have been paid in cash or been declared in full and cash sums set apart to pay those dividends or (2) are, pursuant to Section 4(h), no longer required to be paid, the Corporation may not pay or declare any dividend, whether in cash or property, or make any other distribution, to holders of common stock or any other stock of the Corporation ranking junior to the Series I preferred stock as to dividends or liquidation rights (any such stock, "Series I Junior Stock"), nor may the Corporation purchase, redeem, or otherwise acquire for value any shares of Series I Junior Stock (except for shares of common stock that it acquires (1) under any agreement permitting or requiring the Corporation to purchase shares of common stock held by any Person upon that Person ceasing to provide services to the Corporation or (2) upon exercising a right of first refusal upon proposed transfer by a holder of common stock). (c) For purposes of Section 2(b), the Series I preferred stock ranks on a parity with the Series J preferred stock. If the Corporation pays in cash any dividends on the Series J preferred stock, or declares any dividends on the Series J preferred stock and sets apart cash sums to pay those dividends, it shall also pay in cash, or declare and set apart cash sums to pay, as applicable, dividends on the Series I preferred stock representing a percentage of cumulated Series I dividends that is equal to the percentage of cumulated Series J dividends that is represented by the dividends paid or declared on the Series J preferred stock. 3. Liquidation. (a) Upon occurrence of a liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary (any such event, a "Liquidating Event"), each holder of shares of Series I preferred stock will be entitled to receive out of the remaining assets of the Corporation available for distribution to stockholders, before any distribution of assets is made to holders of Series I Junior Stock, an amount per share of Series I preferred stock (this amount, the "Series I Liquidation Amount") equal to the Series I Stated Value plus an amount equal to all accumulated and unpaid dividends (whether or not declared by the board of directors) on each share up to the date fixed for distribution. After payment of the full Series I Liquidation Amount, holders B-2 of shares of Series I preferred stock will not be entitled to participate any further in any distribution of assets by the Corporation. If upon occurrence of a Liquidating Event the assets of the Corporation available for distribution to its stockholders are insufficient to pay the holders of the Series I preferred stock the full Series I Liquidation Amount, holders of Series I preferred stock will share ratably in any distribution of assets so that each such holder receives, per share, the same percentage of the Series I Liquidation Amount. (b) For purposes of Section 3(a), the Series I preferred stock ranks on a parity with the Series J preferred stock. If the Corporation pays any portion of the Series J Liquidation Amount (as defined below in Section 3(a) of Section D), it shall at the same time also pay a percentage of the Series I Liquidation Amount equal to the percentage of the Series J Liquidation Amount paid by the Corporation. (c) Subject to applicable law, any non-cash assets of the Corporation that are legally available for distribution upon dissolution or winding up of the Corporation must be promptly liquidated by a liquidating trust or similar entity. (d) A reorganization, consolidation or merger of the Corporation or a sale or other disposition of all or substantially all the assets of the Corporation will not constitute liquidation, dissolution, or winding up of the Corporation for purposes of this Section 3. 4. Optional Conversion. (a) Any time during the 90-day period starting at midnight at the beginning of the fifth anniversary of the effective date of the merger of Nasco International, Inc. into the Corporation (the "Fifth Anniversary"; that period, the "Conversion Period"), each share of Series I preferred stock will be convertible at the option of the holder into such number of fully paid and nonassessable shares of common stock as is determined by dividing (x) an amount equal to (1) the Series I Stated Value plus (2) an amount equal to the dividends that have accrued on each share of Series I preferred stock through the Fifth Anniversary and not been paid by (y) the conversion price for the Series I preferred stock (the "Conversion Price") in effect on the date the certificate is surrendered for conversion as provided in Section 4(c). The Conversion Price is initially $12.00, but is subject to adjustment as provided in Section 5. Shares of Series I preferred stock may not be converted into shares of common stock at any time other than during the Conversion Period. (b) By notice sent by first-class certified mail, return receipt requested, postage prepaid, to each holder of shares of Series I preferred stock at its address appearing on the Corporation's records, the Corporation shall give each holder of shares of Series I preferred stock at least 60 days' advance notice, but no more than 90 days' advance notice, of the Fifth Anniversary. This notice must also specify the date upon which the Conversion Period expires and the number of shares of common stock into which shares of Series I preferred stock are convertible. (c) Any holder of one or more shares of Series I preferred stock may exercise the conversion right under Section 4(a) as to any one or more of those shares by delivering to the Corporation during regular business hours during the Conversion Period, at the office of the Corporation or any transfer agent of the Corporation for the Series I preferred stock as may be designated by the Corporation, the one or more certificates for the shares to be converted, duly endorsed or assigned in blank or to the Corporation (if required by it), accompanied by written notice stating that the holder is electing to convert those shares and stating the name or names (with address) in which the one or more certificates for shares of common stock are to be issued. Conversion will be deemed to have been effected on the date when a holder delivers as required by the previous sentence the one or more certificates for the shares to be converted (that date, the "Conversion Date"). As promptly as practicable thereafter, but in any event not later than 10 business days following the Conversion Date, the Corporation shall issue and deliver to or upon the written order of the holder, to the place designated by the holder, the one or more certificates representing the shares of common stock to which the holder is entitled and a check or cash in respect of any fractional interest in a share of common stock as provided in Section 4(d). The person in whose name one or more certificates for common stock are to be issued will be deemed to have become a common stock holder of record on the applicable Conversion Date unless the transfer books of the Corporation are closed on that date, in which event that person will be deemed to have become a holder of record on the next succeeding date on which the transfer B-3 books are open, but the applicable Conversion Price will be that in effect on the Conversion Date. Upon conversion of only a portion of the number of shares covered by a certificate representing shares of Series I preferred stock surrendered for conversion, the Corporation shall at its expense issue and deliver to or upon the written order of the holder of the certificate so surrendered for conversion, in addition to one or more certificates representing the shares of common stock to which shares of Series I preferred stock of the holder were converted, a new certificate (dated so as not to result in any loss of dividends) covering the number of shares of the Series I preferred stock representing the unconverted portion of the certificate so surrendered. (d) The Corporation will not issue any fractional shares of common stock or scrip upon conversion of shares of Series I preferred stock. If more than one share of Series I preferred stock is surrendered for conversion at any one time by the same holder, the number of full shares of common stock issuable upon conversion thereof must be computed on the basis of the aggregate number of shares of Series I preferred stock so surrendered. Instead of any fractional shares of common stock that would otherwise be issuable upon conversion of any shares of Series I preferred stock, the Corporation shall pay a cash amount equal to the then Current Market Price of a share of common stock on the trading day immediately preceding the Conversion Date multiplied by the fractional interest. Fractional interests are not entitled to dividends and holders of fractional interests are not entitled to any rights as stockholders of the Corporation in respect of those fractional interests. If the Corporation cannot legally pay any such cash amount, the Corporation shall pay it as soon thereafter as funds are legally available. (e) The Corporation shall pay all documentary or stamp taxes attributable to issuance or delivery of shares of common stock upon conversion of any shares of Series I preferred stock, if issued in the name of the record holder. (f) The Corporation shall reserve, free from preemptive rights, out of its authorized but unissued shares of common stock and solely for the purpose of effecting conversion of the shares of Series I preferred stock sufficient shares to provide for the conversion of all outstanding shares of Series I preferred stock. (g) All shares of common stock issued upon conversion of shares of Series I preferred stock will, upon issuance by the Corporation, be validly issued, fully paid and non assessable, with no personal liability attaching to the ownership thereof, and free from all taxes, liens or charges with respect thereto. (h) Subsequent to conversion of any shares of Series I preferred stock in accordance with this Section 4, the Corporation will not be required to pay any dividends that have accumulated on those shares. (i) As used in this Article 4, "Current Market Price" means, with respect to the common stock as of any date, the following: (1)the mean between the highest and lowest quoted selling prices on the Nasdaq SmallCap Market (or any other securities exchange or trading market where the common stock is listed or traded) for that date or, if there are no sales on that date, the nearest preceding date on which there were one or more sales; or (2)if the common stock is not listed or traded on any securities exchange or trading market, the fair market value of a share of common stock as determined in good faith by the board of directors of the Corporation. 5. Adjustment to Conversion Price. The Conversion Price is subject to adjustment from time to time as follows: (a) If the Corporation issues, after the date upon which any shares of Series I preferred stock were first issued (the "Original Issue Date"), any shares of common stock other than Excluded Securities (as defined below) ("Additional Stock") without consideration or for a consideration per share less than the Conversion Price (in the case of any such issuance to an Affiliate (as that term is defined in Article 11) of the Corporation) or the Current Market Price (in the case of any other such issuance) on the date of that issuance B-4 of Additional Stock, the Conversion Price in effect immediately prior to each such issuance will automatically be adjusted to a price determined by multiplying the Conversion Price by a fraction, the numerator of which is the number of shares of common stock deemed outstanding immediately prior to that issuance plus the number of shares of common stock that the aggregate consideration received by the Corporation for that issuance would purchase at the Conversion Price in effect immediately prior to that issuance, and the denominator of which is the number of shares of common stock deemed outstanding immediately prior to that issuance plus the number of shares of that Additional Stock. For purposes of any adjustment of the Conversion Price pursuant to this Section 5(a), the following provisions apply: (1)The number of shares of common stock deemed to be outstanding as of a given date will be the sum of (A) the number of shares of common stock actually outstanding (which number excludes shares held in treasury), (B) the number of shares of common stock into which the then-outstanding shares of Series I preferred stock would be converted if fully converted on the day immediately preceding the given date, and (C) the number of shares of common stock that would be obtained through the exercise or conversion of all other rights, options and convertible securities exercisable or convertible on the day immediately preceding the given date. (2)The Conversion Price will not be adjusted in increments of less than one cent per share, provided that any adjustments that as a result are not made will be carried forward and taken into account upon the earlier to occur of (A) conversion and (B) any subsequent adjustment that, together with any one or more immediately preceding adjustments that have not been made, would result in an adjustment of one cent per share or more. Except to the limited extent provided for in Sections 5(a)(5)(C), 5(a)(5)(D) and 5(c), no adjustment of the Conversion Price pursuant to this Section 5(a)(2) will have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to that adjustment. (3)In the case of issuance of Additional Stock for cash, the consideration will be deemed to be the amount of cash paid therefor after deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance. (4)In the case of issuance of Additional Stock for a consideration in whole or in part other than cash, the consideration other than cash will be deemed to be the fair value of the Additional Stock issued, as determined in good faith by the board of directors irrespective of any accounting treatment. (5)In the case of issuance of options to purchase or rights to subscribe for common stock, securities by their terms convertible into or exchangeable for common stock, or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions apply: (A) the aggregate maximum number of shares of common stock deliverable upon exercise of such options to purchase or rights to subscribe for common stock will be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Sections 5(a)(3) and 5(a)(4)), if any, received by the Corporation upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the common stock covered thereby; (B) the aggregate maximum number of shares of common stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for any such convertible or exchangeable securities and subsequent conversion or exchange thereof will be deemed to have been issued at the time those securities were issued or those options or rights were issued and for a consideration equal to the consideration received by the Corporation for those securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Corporation upon the conversion or exchange of those securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in Sections 5(a)(2) and 5(a)(3)); B-5 (C) on any change in the number of shares of common stock deliverable upon exercise of any such options or rights or conversion of or exchange for any such convertible or exchangeable securities or any change in the consideration to be received by the Corporation upon the exercise of any such options or rights or conversion of or exchange for any such convertible or exchangeable securities, other than a change resulting from the antidilution provisions thereof, the Conversion Price will forthwith be readjusted to the Conversion Price as would have obtained had the adjustment made upon the issuance of those options, rights or securities not exercised, converted or exchanged prior to that change or options or rights related to those securities not exercised, converted or exchanged prior to such change been made upon the basis of that change; and (D) on expiration of any such options or rights, termination of any such rights to convert or exchange, or expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price will forthwith be readjusted to the Conversion Price as would have obtained had the adjustment made upon the issuance of such options, rights, securities or options or rights related to such securities been made upon the basis of the issuance of only the number of shares of common stock actually issued upon exercise of those options or rights, upon conversion or exchange of those securities or upon the exercise of the options or rights related to those securities and subsequent conversion or exchange thereof. (b) If, at any time after the Original Issue Date, the number of shares of common stock outstanding is increased by a stock dividend payable in shares of common stock or by a subdivision or split-up of shares of common stock, then, upon the record date fixed for determining holders of common stock entitled to receive that stock dividend or upon the date of that subdivision or split-up, as applicable, the Conversion Price will be appropriately decreased so as to increase the number of shares of common stock issuable on conversion of each share of Series I preferred stock in proportion to that increase in outstanding shares of common stock. (c) If, at any time after the Original Issue Date, the number of shares of common stock outstanding is decreased by a combination or reverse split of the outstanding shares of common stock, then, upon the date of that combination or reverse split, the Conversion Price will be appropriately increased so as to decrease the number of shares of common stock issuable on conversion of each share of Series I preferred stock in proportion to that decrease in outstanding shares of common stock. (d) If, at any time from the Original Issue Date until expiration of the Conversion Period, the Corporation declares or pays any dividend or makes any other distribution to holders of shares of common stock other than a dividend or distribution of shares of common stock and the aggregate value of such dividends and distributions made during any fiscal year exceeds $3,000,000, the Conversion Price will be decreased by the value, per share of outstanding common stock, of the amount by which those dividends or distributions exceed $3,000,000 in that fiscal year. In the case of any such dividend or distribution to holders of common stock that is not a cash payment, the value per share of common stock of that dividend or distribution will be deemed to be the market value per share of common stock of the property so dividended or distributed, as determined in good faith by the board of directors irrespective of any accounting treatment. (e) In the event, at any time after the Original Issue Date, of any capital reorganization or any reclassification of the stock of the Corporation (other than a change in par value or from par value to no par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), or consolidation or merger of the Corporation with or into another person (other than a consolidation or merger in which the Corporation is the continuing corporation and which does not result in any change in or any change in ownership of the common stock) or of sale or other disposition of all or substantially all the properties and assets of the Corporation as an entirety to any other person, each share of Series I preferred stock will after that reorganization, reclassification, consolidation, merger, sale or other disposition be convertible into the kind and number of shares of stock or other securities or property of the Corporation, or of the corporation resulting from that consolidation or surviving that merger or to which those properties and assets were sold or otherwise disposed, to which the holder of the number of shares of B-6 common stock deliverable (immediately prior to the time of that reorganization, reclassification, consolidation, merger, sale or other disposition) upon conversion of those shares would have been entitled upon such reorganization, reclassification, consolidation, merger, sale or other disposition. The provisions of this Section 5 will similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales, or other dispositions. (f) Whenever the Conversion Price is adjusted as provided in this Section 5, the Corporation shall forthwith file, at the office of the Corporation or any transfer agent designated by the Corporation for the Series I preferred stock, a statement, signed by its chief financial officer, showing in detail the facts requiring that adjustment, the Conversion Price then in effect, and computations demonstrating how the adjusted Conversion Price was arrived at. The Corporation shall also cause a copy of such statement to be sent by first-class certified mail, return receipt requested, postage prepaid, to each holder of shares of Series I preferred stock at its address appearing on the Corporation's records. Where appropriate, this copy may be given in advance and may be included as part of a notice required to be mailed under the provisions of Section 5(g). (g) If the Corporation proposes to take any action of the types described in Section 5(e), the Corporation shall give notice to each holder of shares of Series I preferred stock, in the manner set forth in Section 5(f), specifying the record date, if any, with respect to that action and the date on which that action is to take place and setting forth any facts reasonably necessary to indicate the effect of that action (to the extent that effect may be known at the date of that notice) on the Conversion Price and the number, kind, or class of shares or other securities or property deliverable or purchasable upon occurrence of that action or deliverable upon conversion of shares of Series I preferred stock. In the event of any action that would require the fixing of a record date, any notice required under this Section 5(g) must be given at least 20 days prior to the date so fixed, and in case of all other actions, any such notice must be given at least 30 days prior to the action is taken. Failure to give such notice, or any defect therein, will not affect the legality or validity of any such action. (h) As used in this Section 5, "Excluded Securities" means as follows: (1)shares of common stock issued to officers, employees or directors of, or consultants to, the Corporation pursuant to any agreement, plan or arrangement approved by the board of directors, or shares of common stock underlying (A) options to purchase or rights to subscribe for shares of common stock, (B) securities by their terms convertible into or exchangeable for shares of common stock, or (C) options to purchase or rights to subscribe for such convertible or exchangeable securities, in each case as approved by the board of directors; and (2)common stock issued upon the conversion of the Series I preferred stock. 6. Voting Rights. Each holder of shares of Series I preferred stock is entitled to one vote for each share of common stock into which each share of Series I preferred stock could then be converted, but for the restrictions on timing of conversion contained in Section 4(a) (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share), and with respect to that vote, each holder has full voting rights and powers equal to the voting rights and powers of the holders of common stock and is entitled to vote, together with holders of common stock and not as a separate class (except as required by law), with respect to any question upon which holders of common stock have the right to vote. D. The powers, preferences, rights, restrictions, and other matters relating to the Series J preferred stock are as follows: 1. Stated Value. The stated value of each share of Series J preferred stock (the "Series J Stated Value") is $6.00, subject to adjustment for stock dividends, combinations, splits, recapitalizations and the like with respect to the Series J preferred stock. B-7 2. Dividends. (a) Each holder of one or more shares of Series J preferred stock is entitled to receive, when and as declared by the board of directors, but only out of funds that are legally available therefor, cash dividends at the rate of 12% per annum of the Series J Stated Value on each share of Series J preferred stock. These dividends accrue on each share of Series J preferred stock from the date of issuance and accrue daily, whether or not earned or declared. These dividends are cumulative and are payable on March 31 and September 30 of each year, if declared by the board of directors. (b) Unless all cumulative dividends on shares of Series J preferred stock have been paid in cash or been declared in full and cash sums set apart to pay those dividends, the Corporation may not pay or declare any dividend, whether in cash or property, or make any other distribution, to holders of common stock or any other stock of the Corporation ranking junior to the Series J preferred stock as to dividends or liquidation rights (any such stock, "Series J Junior Stock"), nor may the Corporation purchase, redeem, or otherwise acquire for value any shares of Series J Junior Stock (except for shares of common stock that it acquires (1) under any agreement permitting or requiring the Corporation to purchase shares of common stock held by any Person upon that Person ceasing to provide services to the Corporation or (2) upon exercising a right of first refusal upon proposed transfer by a holder of common stock). (c) For purposes of Section 2(b), the Series J preferred stock ranks on a parity with the Series I preferred stock. If the Corporation pays in cash any dividends on the Series I preferred stock, or declares any dividends on the Series I preferred stock and sets apart cash sums to pay those dividends, it shall also pay in cash, or declare and set apart cash sums to pay, as applicable, dividends on the Series J preferred stock representing a percentage of cumulated Series J dividends that is equal to the percentage of cumulated Series I dividends that is represented by the dividends paid or declared on the Series I preferred stock. 3. Liquidation. (a) Upon occurrence of a Liquidating Event, each holder of shares of Series J preferred stock will be entitled to receive out of the remaining assets of the Corporation available for distribution to stockholders, before any distribution of assets is made to holders of Series J Junior Stock, an amount per share of Series J preferred stock (this amount, the "Series J Liquidation Amount") equal to the Series J Stated Value plus an amount equal to all accumulated and unpaid dividends (whether or not declared by the board of directors) on each share up to the date fixed for distribution. After payment of the full amount of the liquidating distribution to which they are entitled, holders of shares of Series J preferred stock will not be entitled to participate any further in any distribution of assets by the Corporation. If upon occurrence of a Liquidating Event the assets of the Corporation available for distribution to its stockholders are insufficient to pay the holders of the Series J preferred stock the full Series J Liquidation Amount, holders of Series I preferred stock will share ratably in any distribution of assets so that each such holder receives, per share, the same percentage of the Series J Liquidation Amount. (b) For purposes of Section 3(a), the Series J preferred stock ranks on a parity with the Series I preferred stock. If the Corporation pays any portion of the Series I Liquidation Amount, it shall at the same time also pay a percentage of the Series J Liquidation Amount equal to the percentage of the Series I Liquidation Amount paid by the Corporation. (c) Subject to applicable law, any non-cash assets of the Corporation that are legally available for distribution upon dissolution or winding up of the Corporation must be promptly liquidated by a liquidating trust or similar entity. (d) A reorganization, consolidation or merger of the Corporation or a sale or other disposition of all or substantially all the assets of the Corporation will not constitute liquidation, dissolution, or winding up of the Corporation for purposes of this Section 3. 4. Voting Rights. Holders of shares of Series J preferred stock are not entitled to a vote with respect to their shares of Series J preferred stock, except as required by law. B-8 E. The rights of the common stock are as follows: 1. Dividend Rights. Whenever the Corporation has paid, or declared and set aside for payment, to the holders of outstanding shares of any class or series of stock having preference over the common stock as to the payment of dividends the full amount of any dividends to which those holders are entitled in preference to the common stock, then the Corporation may pay dividends on the common stock, and on any class or series of stock entitled to participate with the common stock as to dividends, out of any assets legally available for the payment of dividends, but only when declared by the board of directors of the Corporation. 2. Liquidation Rights. In the event of any liquidation, dissolution, or winding up of the Corporation, after payment or provision for payment of all debts and liabilities of the Corporation and after the Corporation has paid, or declared and set aside for payment, to the holders of the outstanding shares of any class or series of stock having preference over the common stock in any such event the full preferential amounts to which they are entitled, the Corporation shall pay the holders of the common stock, and of any class or series of stock entitled to participate with the common stock as to distribution of assets, the remaining assets of the Corporation available for distribution, in cash or in kind. 3. Voting Rights. Each holder of shares of common stock is entitled to one vote for each share of common stock held by that voter. ARTICLE 5 PREEMPTIVE RIGHTS Holders of the capital stock of the Corporation are not entitled to preemptive rights with respect to any shares or other securities that the Corporation may issue. ARTICLE 6 DIRECTORS A. The Corporation shall be under the direction of a board of directors. The board of directors shall consist of not less than seven directors nor more than 15 directors. The number of directors within this range shall be as stated in the Corporation's Bylaws, as may be amended from time to time, and shall initially consist of 13 directors. The board of directors shall divide the directors into three classes and, when the number of directors is changed, shall determine the class or classes to which the increased or decreased number of directors shall be apportioned; provided, that the directors in each class shall be as nearly equal in number as possible; provided, further, that no decrease in the number of directors shall affect the term of any director then in office. B. The classification shall be such that the term of one class shall expire each succeeding year. The Corporation's board of directors shall initially be divided into three classes named Class I, Class II and Class III, with Class I initially consisting of five directors and Class II and III each initially consisting of four directors. The terms, classifications, qualifications and election of the board of directors and the filling of vacancies thereon shall be as provided herein and in the Bylaws. C. Subject to the foregoing, at each annual meeting of shareholders the successors to the class of directors whose term shall then expire shall be elected to hold office for a term expiring at the third succeeding annual meeting and until their successors shall be elected and qualified. D. Any vacancy occurring in the board of directors, including any vacancy created by reason of an increase in the number of directors, shall be filled for the unexpired term by the concurring vote of a majority of the directors then in office, whether or not a quorum, and any director so chosen shall hold office for the remainder of the full term of the class of directors in which the new directorship was created or the vacancy occurred and until such director's successor shall have been elected and qualified. B-9 E. No director may be removed except for cause and then only by an affirmative vote of at least two-thirds of the total votes eligible to be voted by shareholders at a duly constituted meeting of shareholders called for such purpose. At least 30 days prior to such meeting of shareholders, written notice shall be sent to the director or directors whose removal will be considered at such meeting. ARTICLE 7 BYLAWS The board of directors or the shareholders may from time to time amend the bylaws of the Corporation. Such action by the board of directors shall require the affirmative vote of at least two-thirds of the directors then in office at a duly constituted meeting of the board of directors called for such purpose. Such action by the shareholders shall require the affirmative vote of at least two-thirds of the total votes eligible to be voted at a duly constituted meeting of shareholders called for such purpose. ARTICLE 8 SPECIAL MEETINGS Special meetings of shareholders may be called at any time but only by the chairman of the board or the president of the Corporation or by the board of directors of the Corporation. ARTICLE 9 REGISTERED OFFICE The street address of the Corporation's initial registered office in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, and the name of its initial registered agent at such address is The Corporation Trust Company. ARTICLE 10 CRITERIA FOR EVALUATING CERTAIN OFFERS. The board of directors of the Corporation, when evaluating any offer to (i) make a tender or exchange offer for the common stock of the Corporation, (ii) merge or consolidate the Corporation with another institution, or (iii) purchase or otherwise acquire all or substantially all of the properties and assets of the Corporation, shall, in connection with the exercise of its judgment in determining what is in the best interests of the Corporation and its shareholders, give due consideration to all relevant factors, including without limitation the economic effects of acceptance of such offer on (a) depositors, borrowers and employees of the insured institution subsidiary or subsidiaries of the Corporation, and on the communities in which such subsidiary or subsidiaries operate or are located and (b) the ability of such subsidiary or subsidiaries to fulfill the objectives of an insured institution under applicable federal statutes and regulations. ARTICLE 11 CERTAIN BUSINESS COMBINATIONS. The votes of shareholders and directors required to approve any Business Combination shall be as set forth in this Article 11. The term "Business Combination" is used as defined in subsection 1 of this Article 11. All other capitalized terms not otherwise defined in this Article 11 or elsewhere in this Certificate of Incorporation are used as defined in subsection 3 of this Article 11. B-10 Subsection 1. Vote Required for Certain Business Combinations. A. Higher Vote for Certain Business Combinations. In addition to any affirmative vote required by law or this Certificate of Incorporation, and except as otherwise expressly provided in subsection 2 of this Article 11: (i)any merger, consolidation or share exchange of the Corporation or any Subsidiary (as hereinafter defined) with (a) any Interested Shareholder (as hereinafter defined) or (b) any other corporation (whether or not itself an Interested Shareholder) which is, or after the merger, consolidation or share exchange would be, an Affiliate or Associate (as the terms are hereinafter defined) of such Interested Shareholder prior to the transaction; or (ii)any sale, lease, exchange, mortgage, pledge, transfer or other disposition other than in the usual and regular course of business (in one transaction or a series of transactions in any twelve-month period) to any Interested Shareholder or any Affiliate or Associate of such Interested Shareholder, other than the Corporation or any of its Subsidiaries, of any assets of the Corporation or any Subsidiary having, measured at the time the transaction or transactions are approved by the board of directors of the Corporation, an aggregate book value as of the end of the Corporation's most recent fiscal quarter of ten percent or more of the total Market Value (as hereinafter defined) of the outstanding shares of the Corporation or of its net worth as of the end of its most recent fiscal quarter; or (iii)the issuance or transfer by the Corporation, or any Subsidiary (in one transaction or a series of transactions) of any equity securities of the Corporation or any Subsidiary having an aggregate Market Value of five percent or more of the total Market Value of the outstanding shares of the Corporation to any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder, other than the Corporation or any of its Subsidiaries, except pursuant to the exercise of warrants, rights or options to subscribe to or purchase securities offered, issued or granted pro rata to all holders of the Voting Stock (as hereinafter defined) of the Corporation or any other method affording substantially proportionate treatment to the holders of Voting Stock; or (iv)the adoption of any plan or proposal for the liquidation or dissolution of the Corporation or any Subsidiary proposed by or on behalf of an Interested Shareholder or any Affiliate or Associate of such Interested Shareholder, other than the Corporation or any of its Subsidiaries; or (v)any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) which has the effect, directly or indirectly, in one transaction or a series of transactions, of increasing the proportionate amount of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder, other than the Corporation or any of its Subsidiaries; shall be approved by affirmative vote of at least (a) the holders of two-thirds of the total number of outstanding shares of Voting Stock and (b) the holders of a majority of the voting power of the outstanding shares of Voting Stock, excluding for purposes of calculating the affirmative vote and the total number of outstanding shares of Voting Stock under this clause (b), all shares of Voting Stock of which the beneficial owner is the Interested Shareholder involved in the Business Combination or any Affiliate or Associate of such Interested Shareholder. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law. B. Definition of "Business Combination." The term "Business Combination" as used in this Article 11 shall mean any transaction which is referred to in any one or more of clauses (i) through (v) of paragraph A of this subsection 1. B-11 Subsection 2. When Higher Vote Is Not Required. The provisions of subsection 1 of this Article 11 shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and any other provision of this Certificate of Incorporation, if all of the conditions specified in either paragraph A, or paragraph B are met: A. Approval by Continuing Directors. The Business Combination shall have been approved by at least two-thirds of the Continuing Directors (as hereinafter defined) then in office at a duly constituted meeting of the board of directors of the Corporation called for such purpose. B. Price and Procedure Requirements. All of the following conditions shall have been met: (i)The aggregate amount of the cash and the Market Value as of the Valuation Date (as hereinafter defined) of the Business Combination of consideration other than cash to be received per share by holders of common stock in such Business Combination shall be at least equal to the highest of the following: (a) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder for any shares of common stock acquired by it (1) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date") or (2) in the transaction in which it became an Interested Shareholder, whichever is higher; or (b) the Market Value per share of common stock of the same class or series on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder (such latter date is referred to in this Article 11 as the "Determination Date"), whichever is higher; or (c) the price per share equal to the Market Value per share of common stock of the same class or series determined pursuant to subdivision (i)(b) hereof, multiplied by the fraction of (1) the highest per share price (including brokerage commissions, transfer taxes and soliciting dealer's fees) paid by the Interested Shareholder for any shares of common stock of the same class or series acquired by it within the two-year period immediately prior to the Announcement Date, over (2) the Market Value per share of common stock of the same class or series on the first day in such two-year period on which the Interested Shareholder acquired shares of common stock. (ii)The aggregate amount of the cash and the Market Value as of the Valuation Date of consideration other than cash to be received per share by holders of shares of any class or series of outstanding Voting Stock, other than common stock, shall be at least equal to the highest of the following (it being intended that the requirements of this paragraph B(ii) shall be required to be met with respect to every class of outstanding Voting Stock, whether or not the Interested Shareholder has previously acquired any shares of a particular class of Voting Stock): (a) (if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder for any shares of such class or series of Voting Stock acquired by it: (1) within two-year period immediately prior to the Announcement Date or (2) in the transaction in which it became an Interested Shareholder, whichever is higher; or (b) (if applicable) the highest preferential amount per share to which the holders of shares of such class or series of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; or (c) the Market Value per share of such class or series of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher; or B-12 (d) the price per share equal to the Market Value per share of such class or series of stock determined pursuant to subdivision (ii)(c) hereof multiplied by the fraction of (1) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder for any shares of any class or series of Voting Stock acquired by it within the two-year period immediately prior to the Announcement Date over (2) the Market Value per share of the same class or series of Voting Stock on the first day in such two-year period on which the Interested Shareholder acquired any shares of the same class or series of Voting Stock. (iii)The consideration to be received by holders of a particular class or series of outstanding Voting Stock shall be in cash or in the same form as the Interested Shareholder has previously paid for shares of such class or series of Voting Stock. If the Interested Shareholder has paid for shares of any class or series of Voting Stock with varying forms of consideration, the form of consideration for such class or series of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class or series of Voting Stock previously acquired by it. (iv)After such Interested Shareholder has become an Interested Shareholder and prior to the consummation of such Business Combination: (a) there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding preferred stock of the Corporation, unless the failure so to declare and pay such dividends is approved by a majority of the Continuing Directors; (b) there shall have been (1) no reduction in the annual rate of dividends paid on any class or series of the capital stock of the Corporation (except as necessary to reflect any subdivision of the capital stock), except as approved by a majority of the Continuing Directors, and (2) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of common stock, unless the failure so to increase such annual rate is approved by a majority of the Continuing Directors; and (c) such Interested Shareholder shall not have become the beneficial owner of any additional shares of capital stock except as part of the transaction which results in such Interested Shareholder becoming an Interested Shareholder or by virtue of proportionate stock splits or stock dividend. (v)After such Interested Shareholder has become an Interested Shareholder, such Interested Shareholder shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation or any of its Subsidiaries (whether in anticipation of or in connection with such Business Combination or otherwise). (vi)A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to public shareholders of the Corporation at least 20 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). Subsection 3. Certain Definitions. For the purposes of this Article 11: A. "Interested Shareholder" shall mean any person (other than the Corporation or any Subsidiary) who or which: (i)is the beneficial owner, directly or indirectly, of 10 percent or more of the voting power of the then outstanding Voting Stock; or (ii)is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10 percent or more of the voting power of the then outstanding Voting Stock. B-13 B. "Beneficial owner," when used with respect to any Voting Stock, means a person: (i)that, individually or with any of its Affiliates or Associates, beneficially owns Voting Stock directly or indirectly; or (ii)that, individually or with any of its Affiliates or Associates, has (a) the right to acquire Voting Stock (whether such right is exercisable immediately or only after passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; (b) the right to vote or direct the voting of Voting Stock pursuant to any agreement, arrangement or understanding; or (c) the right to dispose of or to direct the disposition of Voting Stock pursuant to any agreement, arrangement or understanding; or (iii)that, individually or with any of its Affiliates or Associates, has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of Voting Stock with any other person that beneficially owns, or whose Affiliates or Associates beneficially own, directly or indirectly, such shares of Voting Stock. C. For the purposes of determining whether a person is an Interested Shareholder pursuant to paragraph A of this subsection 3, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of paragraph B of this subsection 3 but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. D. "Affiliate" means a person that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control, with a specified person. E. "Associate," when used to indicate a relationship with any person, means: (1) any domestic or foreign corporation or organization, other than the Corporation or a subsidiary of the Corporation, of which such person is an officer, director or partner or is, directly or indirectly, the beneficial owner of ten percent or more of any class of equity securities; (2) any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as a trustee or in a similar fiduciary capacity; and (3) any relative or spouse of such person, or any relative of such spouse who has the same home as such person or who is a director or officer of the Corporation or any of its Affiliates. F. "Subsidiary" means any corporation of which Voting Stock having a majority of the votes entitled to be cast is owned, directly or indirectly, by the Corporation. G. "Continuing Director" means any member of the board of directors of the Corporation who is unaffiliated with the Interested Shareholder and was a member of the board of directors of the Corporation prior to the time that the Interested Shareholder (including any Affiliate or Associate of such Interested Shareholder) became an Interested Shareholder, and any successor of a Continuing Director who is unaffiliated with the Interested Shareholder and is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the board of directors of the Corporation. H. "Market Value" means: (i)in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the composite tape for New York Stock Exchange-listed stocks, or, if such stock is not quoted on the composite tape, or the New York Stock Exchange, or, if such stock is not listed on such exchange, the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the B-14 highest closing sales price or bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are available, the fair market value on the date in question of a share of such stock as determined by the board of directors of the Corporation in good faith; and (ii)in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by a majority of the board of directors of the Corporation in good faith. I. "Valuation Date" means: (A) For a business combination voted on by shareholders, the latter of the day prior to the date of the shareholders vote or the date twenty days prior to the consummation of the Business Combination; and (B) for a Business Combination not voted upon by the shareholders, the date of the consummation of the Business Combination. J. "Voting Stock" means the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors. K. In the event of any Business Combination in which the Corporation is the surviving corporation, the phrase "consideration other than cash to be received" as used in paragraphs B(i) and B(ii) of Section 2 of this Article 11 shall include the shares of common stock and/or the shares of any other class or series of outstanding Voting Stock retained by the holder of such shares. Subsection 4. Powers of the Board of Directors. A majority of the Corporation's directors then in office shall have the power and duty to determine for the purpose of this Article 11, on the basis of information known to them after reasonable inquiry, (A) whether a person is an Interested Shareholder, (B) the number of shares of Voting Stock beneficially owned by any person, (C) whether a person is an Affiliate or Associate of another, and (D) whether the requirements of paragraph B of Section 2 have been met with respect to any Business Combination; and the good faith determination of a majority of the board of directors on such matters shall be conclusive and binding for all the purposes of this Article 11. Subsection 5. No Effect on Fiduciary Obligations of Interested Shareholders. Nothing contained in this Article 11 shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law. ARTICLE 12 ANTI-GREENMAIL A. Any direct or indirect purchase or other acquisition by the Corporation of any Voting Stock (as defined in Article 11 hereof) from any Significant Shareholder (as hereinafter defined) who has been the beneficial owner (as defined in Article 11 hereof) of such Voting Stock for less than two years prior to the date of such purchase or other acquisition shall, except as hereinafter expressly provided, require the affirmative vote of the holders of at least a majority of the total number of outstanding shares of Voting Stock, excluding in calculating such affirmative vote and the total number of outstanding shares all Voting Stock beneficially owned by such Significant Shareholder. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law, but no such affirmative vote shall be required with respect to any purchase or other acquisition of Voting Stock made as part of a tender or exchange offer by the Corporation to purchase Voting Stock on the same terms from all holders of the same class of Voting Stock and complying with the applicable requirements of the Securities Exchange Act of 1934 and the rules and regulations hereunder. B-15 B. For the purposes of this Article 12, "Significant Shareholder" shall mean any person (other than the Corporation or any corporation of which a majority of any class of Voting Stock is owned, directly or indirectly, by the Corporation) who or which is the beneficial owner, directly or indirectly, of five percent or more of the voting power of the outstanding Voting Stock. C. Nothing contained in this Article 12 shall be construed to relieve any interested shareholder from any fiduciary obligation imposed by law. ARTICLE 13 SHAREHOLDER ACTION Any action required or permitted to be taken by the shareholders of the Corporation must be effected at a duly called annual or special meeting of such holders and may not be affected by any consent in writing by such holders, unless such consent is unanimous. ARTICLE 14 AMENDMENT OF CERTIFICATE OF INCORPORATION Except as set forth in this Article 14 or as otherwise specifically required by law, no amendment of any provision of this Certificate of Incorporation shall be made unless such amendment has been first proposed by the board of directors of the Corporation upon the affirmative vote of at least two-thirds of the directors then in office at a duly constituted meeting of the board of directors called for such purpose and thereafter approved by the shareholders of the Corporation by the affirmative vote of the holders of at least a majority of the shares entitled to vote thereon at a duly called annual or special meeting; provided, however, that if such amendment is to the provisions set forth in this clause of Article 14 or in Article 6, 7, 8, 10, 11, 12 or 13, such amendment must be approved by the affirmative vote of the holders of at least two-thirds of the shares entitled to vote thereon rather than a majority; provided, further, that if such amendment is to the provisions set forth in this clause of Article 14 or in Article 11, such amendment must be approved by the affirmative vote of the holders of at least 80 percent of the shares entitled to vote thereon rather than a majority. ARTICLE 15 PERSONAL LIABILITY A. The personal liability of the directors of the Corporation is hereby eliminated to the fullest extent permitted by the provisions of paragraph (7) of subsection (b) of Section 102 of the Delaware General Corporation Law. If the Delaware General Corporation Law is hereafter amended to further eliminate or limit the personal liability of directors, then the liability of a director of the Corporation will be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. B. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation will not adversely affect any right or protection of a director of the Corporation existing at the time of that repeal or modification. ARTICLE 16 INDEMNIFICATION A. To the fullest extent permitted by applicable law, the Corporation is authorized to provide indemnification of (and advancement of expenses to) directors, officers and agents (and any other person that Delaware law permits this Corporation to provide indemnification to) through bylaw provisions, agreements with those agents or other persons, vote of stockholders or disinterested directors or otherwise, subject only to limits created by applicable Delaware law (statutory or non-statutory) with respect to action for breach of duty to the Corporation, its stockholders, and others. B-16 B. The indemnification and other rights set forth in this Article 16 are not exclusive of any provisions with respect thereto in the bylaws or any other contract or agreement between the Corporation and any officer, director, employee or agent of the Corporation. C. The Corporation shall indemnify each person who was or is made a party or is threatened to be made a party to or is in any way involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), including any appeal therefrom, by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or a direct or indirect subsidiary of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another entity or enterprise, or was a director or officer of a foreign or domestic corporation which was a predecessor corporation of the Corporation or of another entity or enterprise at the request of that predecessor corporation, and the Corporation shall advance all expenses actually or reasonably incurred by any such person in defense of any such proceeding prior to its final determination, to the fullest extent authorized by the General Corporation Law of the State of Delaware. In any proceeding against the Corporation to enforce these rights, each such person will be presumed to be entitled to indemnification and the Corporation will have the burden of proving that that person has not met the standards of conduct for permissible indemnification set forth in the General Corporation Law of the State of Delaware, except that if the General Corporation Law of the State of Delaware requires the payment of such expenses in advance of the final disposition of a proceeding, the Corporation may only pay such expenses if that person undertakes to repay the Corporation if it is ultimately determined that he or she was not entitled to indemnification. D. It will be presumed that the directors and officers of the Corporation relied upon the rights to indemnification and advancement of expenses conferred by this Article 16 in serving or continuing to serve the Corporation, and those rights are enforceable as contract rights. Any rights to indemnification of any such director or officer will only apply to any loss, liability or expenses incurred by that director or officer in connection with proceedings brought against that person in the capacities in which he or she serves the Corporation. The Corporation may, upon written demand presented by a director or officer of the Corporation or of a direct or indirect subsidiary of the Corporation, or by a person serving at the request of the Corporation as a director or officer of another entity or enterprise, enter into contracts to provide those persons with specified rights to indemnification, which contracts may confer rights and protections to the maximum extent permitted by the General Corporation Law of the State of Delaware, as amended and in effect from time to time. E. If a claim under this Article 16 is not paid in full by the Corporation within 60 days after the Corporation has received a written claim, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of claim and, if successful in whole or in part, the claimant will be entitled also to be paid the expenses of prosecuting that claim. It will be a defense to any such action (other than an action brought to enforce the right to be advanced expenses incurred in defending any proceeding prior to its final disposition where the required undertaking, if any, has been tendered to the Corporation) that the claimant has not met the standards of conduct that make it permissible under the General Corporation Law of the State of Delaware for the Corporation to indemnify the claimant for the amount claimed, but the claimant will be presumed to be entitled to indemnification and the Corporation will have the burden of proving that the claimant has not met the standards of conduct for permissible indemnification set forth in the General Corporation Law of the State of Delaware. F. If the General Corporation Law of the State of Delaware is hereafter amended to permit the Corporation to provided broader indemnification rights than the Corporation was permitted by law to provide prior to that amendment, the indemnification rights conferred by this Article 16 will be broadened to the fullest extend permitted by the General Corporation Law of the State of Delaware, as so amended. No amendment to or repeal of this Article 16 will affect or diminish in any way the rights of any indemnitee to indemnification under the provisions of this Article 16 with respect to any action, suit, proceeding or investigation arising out of or relating to any actions, transactions or facts occurring prior to the final adoption of any such amendment or repeal. B-17 G. Neither amendment nor repeal of this Article 16 nor adoption of any provision of this amended and restated certificate of incorporation inconsistent with this Article 16 will eliminate or reduce the effect of this Article 16 in respect of any matter occurring before that amendment, repeal or adoption of an inconsistent provision or in respect of any cause of action, suit or claim relating to any such matter that would have given rise to a right of indemnification or right to receive expenses pursuant to this Article 16 if that provision had not been so amended or repealed or if a provision inconsistent therewith had not been so adopted. H. The Corporation is entitled to purchase and maintain indemnity insurance to guard against future expenses. ARTICLE 17 CERTAIN RESTRICTIONS ON THE TRANSFER OF STOCK In order to preserve the net operating loss carryovers, net capital loss carryovers, and certain other attributes (the "Tax Benefits") to which the Corporation is entitled pursuant to the Internal Revenue Code of 1986, as amended, or any successor statute (collectively the "Code") and the regulations thereunder, the following restrictions shall apply until December 31, 2008, unless the board of directors of the Corporation shall fix an earlier or later date in accordance with subsection 8 of this Article 17 (such date is sometimes referred to herein as the "Expiration Date"): Subsection 1. Restrictions and Definitions. From and after April 11, 1994, no person other than the Corporation shall transfer any shares of stock of the Corporation (other than stock described in Section 1504(a)(4) of the Code or any successor statute, or stock that is not so described solely because it is entitled to vote as a result of dividend arrearages) to any person to the extent that such transfer, if effective, would cause the Ownership Interest Percentage of the transferee or any other person to increase above 4.9 percent, whether or not said transferee or other person held stock of the Corporation in excess of such percentage before such transfer. For purposes of this Article 17, (a) "person" refers to any individual, corporation, estate, trust, association, company, partnership, joint venture, or similar organization; (b) a person's Ownership Interest Percentage shall be the sum of (i) such person's direct ownership interest in the Corporation as determined under Treasury Regulation Section 1.382-2T(f)(8) or any successor regulation, (ii) such person's indirect ownership interest in the Corporation as determined under Treasury Regulation Section 1.382-2T(f)(15) or any successor regulation, and (iii) such person's additional deemed ownership interest in the Corporation as determined under Proposed Treasury Regulation Section 1.1502-92(c) or any successor regulation, except that, for purposes of determining a person's direct ownership interest in the corporation, any ownership interest held by such person in the Corporation described in Treasury Regulation Section 1.382-2T(f)(18)(iii)(A) or any successor regulation shall be treated as stock of the Corporation, and for purposes of determining a person's indirect ownership interest in the Corporation, Treasury Regulations Sections 1.382-2T(g)(2), 1.382-2T(h)(2)(iii) and 1.382-2T(h)(6)(iii) or any successor regulations shall not apply and any stock that would be attributed to such person pursuant to the option attribution rules of Treasury Regulation Section 1.382-2T(h)(4) and Treasury Regulation Section 1.382-4 or any successor regulations, if to do so would result in an ownership change, shall be attributed to such person without regard to whether such attribution results in an ownership change; (c) "transfer" refers to any means of conveying legal or beneficial ownership of shares of stock of the Corporation, whether such means is direct or indirect, voluntary or involuntary, including, without limitation, the transfer of ownership of any entity that owns shares of stock of the Corporation, and "transferee" means any person to whom stock of the Corporation is transferred. Subsection 2. Exceptions. Any transfer of shares of stock of the Corporation that would otherwise be prohibited pursuant to the preceding subsection shall nonetheless be permitted if information relating to a specific proposed transaction is presented to the board of directors of the Corporation and the board determines (based, at its option, upon an opinion of legal counsel selected by the board to that effect) that such transaction will not jeopardize the Tax Benefits. Nothing in this subsection shall be construed to limit or restrict the board of directors of the Corporation in the exercise of its fiduciary duties under applicable law. B-18 Subsection 3. Attempted Transfer in Violation of Transfer Restrictions. Unless approval of the board of directors of the Corporation is obtained as provided in subsection 2 of this Article 17, any attempted transfer of shares of stock of the Corporation in excess of the shares that could be transferred to the transferee without restriction under subsection 1 of this Article 17 is not effective to transfer ownership of such excess shares (the "Prohibited Shares") to the purported acquiror thereof (the "Purported Acquiror"), who shall not be entitled to any rights as a shareholder of the Corporation with respect to the Prohibited Shares (including, without limitation, the right to vote or to receive dividends with respect thereto). All rights with respect to the Prohibited Shares shall remain the property of the person who initially purported to transfer the Prohibited Shares to the Purported Acquiror (the "Initial Transferor") until such time as the Prohibited Shares are resold as set forth in subsection 3(A) or (B) of this Article 17. The Purported Acquiror, by acquiring ownership of shares of stock of the Corporation that are not Prohibited Shares, shall be deemed to have consented to all the provisions of this Article 17 and to have agreed to act as provided in the following subsection 3(A). (A)Upon demand by the Corporation, the Purported Acquiror shall transfer any certificate or other evidence of purported ownership of the Prohibited Shares within the Purported Acquiror's possession or control, along with any dividends or other distributions paid by the Corporation with respect to the Prohibited Shares that were received by the Purported Acquiror (the "Prohibited Distribution"), to an agent designated by the Corporation (the "Agent"). If the Purported Acquiror has sold the Prohibited Shares to an unrelated party in an arms-length transaction after purportedly acquiring them, the Purported Acquiror shall be deemed to have sold the Prohibited Shares as agent for the Initial Transferor, and in lieu of transferring the Prohibited Shares and Prohibited Distributions to the Agent shall transfer to the Agent the Prohibited Distributions and the proceeds of such sale (the "Resale Proceeds") except to the extent that the Agent grants written permission to the Purported Acquiror to retain a portion of the Resale Proceeds not exceeding the amount that would have been payable by the Agent to the Purported Acquiror pursuant to the following subsection 3(B) if the Prohibited Shares had been sold by the Agent rather than by the Purported Acquiror. Any purported transfer of the Prohibited Shares by the Purported Acquiror other than a transfer described in one of the two preceding sentences shall not be effective to transfer any ownership of the Prohibited Shares. (B)The Agent shall sell in an arms-length transaction (through the Nasdaq Stock Market, if possible) any Prohibited Shares transferred to the Agent by the Purported Acquiror, and the proceeds of such sale (the "Sales Proceeds"), or the Resale Proceeds, if applicable, shall be allocated to the Purported Acquiror up to the following amount: (i) where applicable, the purported purchase price paid or value of consideration surrendered by the Purported Acquiror for the Prohibited Shares, and (ii) where the purported transfer of the Prohibited Shares to the Purported Acquiror was by gift, inheritance, or any similar purported transfer, the fair market value of the Prohibited Shares at the time of such purported transfer. Subject to the succeeding provisions of this subsection, any Resale Proceeds or Sales Proceeds in excess of the amount allocable to the Purported Acquiror pursuant to the preceding sentence, together with any Prohibited Distributions, shall be the property of the Initial Transferor. If the identity of the Initial Transferor cannot be determined by the Agent through inquiry made to the Purported Acquiror, the Agent shall publish appropriate notice (in The Wall Street Journal, if possible) for seven (7) consecutive business days in an attempt to identify the Initial Transferor in order to transmit any Resale Proceeds or Sales Proceeds or Prohibited Distributions due to the Initial Transferor pursuant to this subsection. The Agent may also take, but is not required to take, other reasonable actions to attempt to identify the Initial Transferor. If after ninety (90) days following the final publication of such notice the Initial Transferor has not been identified, any amounts due to the Initial Transferor pursuant to this subsection may be paid over to a court or governmental agency, if applicable law permits, or otherwise shall be transferred to an entity designated by the Corporation that is described in Section 501(c)(3) of the Code. In no event shall any such amounts due to the Initial Transferor inure to the benefit of the Corporation or the Agent, but such amounts may be used to cover expenses (including but not limited to the expenses of publication) incurred by the Agent in attempting to identify the Initial Transferor. Subsection 4. Prompt Enforcement Against Purported Acquiror. Within thirty (30) business days of learning of a purported transfer of Prohibited Shares to a Purported Acquiror, the Corporation through its Secretary shall demand that the Purported Acquiror surrender to the Agent the certificates representing the B-19 Prohibited Shares, or any Resale Proceeds, and any Prohibited Distributions, and if such surrender is not made by the Purported Acquiror within thirty (30) business days from the date of such demand, the Corporation shall institute legal proceedings to compel such transfer, provided, however, that nothing in this subsection 4 shall preclude the Corporation in its discretion from immediately bringing legal proceedings without a prior demand, and also provided that failure of the Corporation to act within the time periods set out in this subsection 4 shall not constitute a waiver of any right of the Corporation to compel any transfer required by subsection 3(A) of this Article 17. Subsection 5. Additional Actions to Prevent Violation or Attempted Violation. Upon a determination by the board of directors of the Corporation that there has been or is threatened a purported transfer of Prohibited Shares to a Purported Acquiror, the board of directors may take such action in addition to any action required by the preceding subsection as it deems advisable to give effect to the provisions of this Article 17, including, without limitation, refusing to give effect on the books of this Corporation to such purported transfer or instituting proceedings to enjoin such purported transfer. Subsection 6. Obligation to Provide Information. The Corporation may require as a condition to the registration of the transfer of any shares of its stock that the proposed transferee furnish to the Corporation all information reasonably requested by the Corporation with respect to all the proposed transferee's direct or indirect ownership interests in, or options to acquire, stock of the Corporation. Subsection 7. Legends. All certificates evidencing ownership of shares of stock of this Corporation that are subject to the restrictions on transfer contained in this Article 17 shall bear a conspicuous legend referencing the restrictions set forth in this Article 17. Subsection 8. Further Actions. Nothing contained in this Article 17 shall limit the authority of the board of directors of the Corporation to take such other action to the extent permitted by law as it deems necessary or advisable to protect the Corporation and the interests of the holders of its securities in preserving the Tax Benefits. Without limiting the generality of the foregoing, in the event of a change in law making one or more of the following actions necessary or desirable, the board of directors of the Corporation may (i) accelerate or extend the Expiration Date, (ii) modify the Ownership Interest Percentage in the Corporation specified in the first sentence of subsection 1, (iii) modify the definitions of any terms set forth in this Article 17 as reasonably necessary or desirable to preserve the Tax Benefits under the Code and the regulations thereunder, or (iv) determine that the continuation of these restrictions is no longer reasonably necessary for the preservation of the Tax Benefits, which determination shall be based upon an opinion of legal counsel to the Corporation and which determination shall be filed with the Secretary of the Corporation and mailed by the Secretary to shareholders of this Corporation within ten (10) days after the date of any such determination. This amended and restated certificate of incorporation is being signed on , 2002. By:_______________________________________ [Name] [Title] B-20 ANNEX C [_] 311 SOUTH WACKER DRIVE, SUITE 4200 [_] CHICAGO, ILLINOIS 60606 [_] 312-697-4600 [_] Fax 312-697-0112 DUFF & PHELPS, LLC November 27, 2001 Board of Directors The Aristotle Corporation 27 Elm St. New Haven, CT 06510 Dear Members of the Board of Directors: Duff & Phelps, LLC ("Duff & Phelps") has been retained as an independent financial advisor to the Board of Directors (the "Board") of The Aristotle Corporation ("Aristotle" or the "Company") to render an opinion (the "Opinion") as to whether the proposed merger (the "Merger" and, together with certain other related actions, the "Proposed Transaction") of Aristotle with Nasco International, Inc. ("Nasco"), an indirect subsidiary of Geneve Corporation ("Geneve"), is fair, from a financial point of view, to the stockholders of the Company other than Geneve. Description of the Proposed Transaction The following are the key provisions of the Proposed Transaction: 1. Just prior to the Merger, the Company will distribute to its common stockholders, pro rata, a dividend of one share of newly issued Series I Convertible Voting Cumulative 11.0% Preferred Stock ("Series I Preferred Stock") for every share of Aristotle common stock outstanding on the date of the Merger. 2. In the Merger, the issued and outstanding shares of Nasco common stock will be converted into 15 million shares of Aristotle common stock and 10 million shares of newly authorized Series J Non-Voting Cumulative 12.0% Preferred Stock ("Series J Preferred Stock"). In addition, the shares of Series I Preferred Stock issued to Geneve will be exchanged for an identical number of shares of Series J Preferred Stock. 3. All stock options issued as part of the Company's 1986 Stock Option Plan shall be exercised or cancelled prior to the Merger. 4. Stock options issued as part of the Company's 1997 Stock Option Plan will not be cancelled as part of the Merger. If these options are exercised after the Merger, the option holder shall be entitled to one share of the Company's common stock and one share of Series I Preferred Stock for each option. 5. Holders of Company stock appreciation rights (SARs) shall have the exercise price of their SARs reduced by $6.00 as a condition of the Merger. Scope of Analysis In conducting our analysis and arriving at our Opinion, we reviewed and analyzed, among other things: . The Agreement and Plan of Merger among The Aristotle Corporation, Geneve Corporation, Nasco Holdings, Inc., and Nasco International, Inc., dated as of November 27, 2001 (the "Merger Agreement"). . The proposed Amended and Restated Certificate of Incorporation of The Aristotle Corporation to be effectuated as part of the Proposed Transaction. . Form 10-K for the Company filed with the Securities and Exchange Commission ("SEC") for the fiscal years ended June 30, 2000 and 2001. . Form 10-Q for the Company filed with the SEC for the three months ended September 30, 2001. . Audited financial statements for Nasco for the fiscal years ended December 31, 1998, 1999 and 2000. C-1 . Interim financial statements for Nasco for the nine months ended September 30, 2000 and 2001, prepared by Nasco management. . Certain operating and financial information provided to us by the management of Aristotle and Nasco, including financial projections. . Historical stock prices and trading volume of the common stock of the Company. . Transactions involving companies deemed similar to Aristotle. . Financial information and market valuations of publicly traded companies that we deemed to be reasonably comparable to Aristotle and Nasco. . Other financial studies, analyses, and investigations as we deemed appropriate. Duff & Phelps held discussions with members of the senior management of Nasco regarding the history, current business operations, financial condition and future prospects of Nasco at its headquarters in Fort Atkinson, Wisconsin. Duff & Phelps also held discussions with members of the senior management of Aristotle regarding the history, current business operations, financial condition and future prospects of the Company. Duff & Phelps took into account our assessment of general economic, market and financial conditions, as well as our experience in securities and business valuation, in general, and with respect to similar transactions, in particular. Duff & Phelps did not make any independent appraisals of the physical assets or liabilities of Aristotle or Nasco. In performing our analysis and rendering our Opinion with respect to the Proposed Transaction, Duff & Phelps relied upon the accuracy and completeness of all information provided to us, whether obtained from public or private sources, including Aristotle and Nasco management, and we did not attempt to independently verify such information. With respect to financial forecasts, we have assumed that these have been reasonably prepared on bases reflecting the best currently available estimates of Aristotle and Nasco. Duff & Phelps's Opinion further assumes that information supplied and representations made by the management of Aristotle and Nasco are substantially accurate regarding the Company, Nasco, and the background and terms of the Proposed Transaction. Neither Company management nor the Board placed any limitation on Duff & Phelps with respect to the procedures we followed or factors we considered in rendering our Opinion. On November 21, 2001, we participated in a meeting at which the Board considered whether to approve the Merger Agreement and the Proposed Transaction. At such meeting, we advised the Board orally that it was our opinion that the Proposed Transaction is fair, from a financial point of view, to the stockholders of the Company other than Geneve. This Opinion is being delivered to the Board to confirm in writing the opinion we expressed orally to the Board at its November 21, 2001, meeting. Duff & Phelps has prepared this Opinion effective as of the date set forth above and the Opinion is necessarily based upon market, economic, financial and other conditions as they exist and can be evaluated as of such date. It is understood that this letter is only for the information of the Board, the Company and its stockholders. Except for its inclusion in the Company's SEC filings (which we understand will include a proxy statement to be distributed to the Company's stockholders), to which we consent, or as required under the disclosure requirements of the securities laws and applicable law or legal process, this letter may not be quoted or referred to, in whole or in part, in any written document or used for any other purpose without our prior consent. Conclusion Based upon and subject to the foregoing, Duff & Phelps is of the opinion that the Proposed Transaction is fair, from a financial point of view, to the stockholders of the Company other than Geneve. Respectfully submitted, /S/ DUFF & PHELPS, LLC DUFF & PHELPS, LLC C-2 ANNEX D THE ARISTOTLE CORPORATION 2002 EMPLOYEE, DIRECTOR AND CONSULTANT STOCK PLAN 1. DEFINITIONS. Unless otherwise specified or unless the context otherwise requires, the following terms, as used in this The Aristotle Corporation 2002 Employee, Director and Consultant Stock Plan, have the following meanings: Administrator means the Board of Directors, unless it has delegated power to act on its behalf to the Committee, in which case the Administrator means the Committee. Affiliate means a corporation which, for purposes of Section 424 of the Code, is a parent or subsidiary of the Company, direct or indirect. Board of Directors means the Board of Directors of the Company. Code means the United States Internal Revenue Code of 1986, as amended. Committee means the committee of the Board of Directors to which the Board of Directors has delegated power to act under or pursuant to the provisions of the Plan. Common Stock means shares of the Company's common stock, $.01 par value per share. Company means The Aristotle Corporation, a Delaware corporation. Disability or Disabled means permanent and total disability as defined in Section 22(e)(3) of the Code. Employee means any employee of the Company or of an Affiliate (including, without limitation, an employee who is also serving as an officer or director of the Company or of an Affiliate), designated by the Administrator to be eligible to be granted one or more Stock Rights under the Plan. Fair Market Value of a Share of Common Stock means: (1)If the Common Stock is listed on a national securities exchange or traded in the over-the-counter market and sales prices are regularly reported for the Common Stock, the closing or last price of the Common Stock on the Composite Tape or other comparable reporting system for the trading day immediately preceding the applicable date; (2)If the Common Stock is not traded on a national securities exchange but is traded on the over-the-counter market, if sales prices are not regularly reported for the Common Stock for the trading day referred to in clause (1), and if bid and asked prices for the Common Stock are regularly reported, the mean between the bid and the asked price for the Common Stock at the close of trading in the over-the-counter market for the trading day on which Common Stock was traded immediately preceding the applicable date; and (3)If the Common Stock is neither listed on a national securities exchange nor traded in the over-the-counter market, such value as the Administrator, in good faith, shall determine. ISO means an option meant to qualify as an incentive stock option under Section 422 of the Code. Non-Qualified Option means an option which is not intended to qualify as an ISO. Option means an ISO or Non-Qualified Option granted under the Plan. Option Agreement means an agreement between the Company and a Participant delivered pursuant to the Plan, in such form as the Administrator shall approve. D-1 Participant means an Employee, director or consultant of the Company or an Affiliate to whom one or more Stock Rights are granted under the Plan. As used herein, "Participant" shall include "Participant's Survivors" where the context requires. Plan means this The Aristotle Corporation 2002 Employee, Director and Consultant Stock Plan. Shares means shares of the Common Stock as to which Stock Rights have been or may be granted under the Plan or any shares of capital stock into which the Shares are changed or for which they are exchanged within the provisions of Paragraph 3 of the Plan. The Shares issued under the Plan may be authorized and unissued shares or shares held by the Company in its treasury, or both. Stock Grant means a grant by the Company of Shares under the Plan. Stock Grant Agreement means an agreement between the Company and a Participant delivered pursuant to the Plan, in such form as the Administrator shall approve. Stock Right means a right to Shares of the Company granted pursuant to the Plan--an ISO, a Non-Qualified Option or a Stock Grant. Survivor means a deceased Participant's legal representatives and/or any person or persons who acquired the Participant's rights to a Stock Right by will or by the laws of descent and distribution. 2. PURPOSES OF THE PLAN. The Plan is intended to encourage ownership of Shares by Employees and directors of and certain consultants to the Company in order to attract such people, to induce them to work for the benefit of the Company or of an Affiliate and to provide additional incentive for them to promote the success of the Company or of an Affiliate. The Plan provides for the granting of ISOs, Non-Qualified Options and Stock Grants. 3. SHARES SUBJECT TO THE PLAN. The number of Shares which may be issued from time to time pursuant to this Plan shall be 1,500,000, or the equivalent of such number of Shares after the Administrator, in its sole discretion, has interpreted the effect of any stock split, stock dividend, combination, recapitalization or similar transaction in accordance with Paragraph 23 of the Plan. If an Option ceases to be "outstanding", in whole or in part, or if the Company shall reacquire any Shares issued pursuant to a Stock Grant, the Shares which were subject to such Option and any Shares so reacquired by the Company shall be available for the granting of other Stock Rights under the Plan. Any Option shall be treated as "outstanding" until such Option is exercised in full, or terminates or expires under the provisions of the Plan, or by agreement of the parties to the pertinent Option Agreement. 4. ADMINISTRATION OF THE PLAN. The Administrator of the Plan will be the Board of Directors, except to the extent the Board of Directors delegates its authority to the Committee, in which case the Committee shall be the Administrator. Subject to the provisions of the Plan, the Administrator is authorized to: a. Interpret the provisions of the Plan or of any Option or Stock Grant and to make all rules and determinations which it deems necessary or advisable for the administration of the Plan; b. Determine which employees of the Company or of an Affiliate shall be designated as Employees and which of the Employees, directors and consultants shall be granted Stock Rights; c. Determine the number of Shares for which a Stock Right or Stock Rights shall be granted; d. Specify the terms and conditions upon which a Stock Right or Stock Rights may be granted; and D-2 e. Adopt any sub-plans applicable to residents of any specified jurisdiction as it deems necessary or appropriate in order to comply with or take advantage of any tax laws applicable to the Company or to Plan Participants or to otherwise facilitate the administration of the Plan, which sub-plans may include additional restrictions or conditions applicable to Options or Shares acquired upon exercise of Options. provided, however, that all such interpretations, rules, determinations, terms and conditions shall be made and prescribed in the context of preserving the tax status under Section 422 of the Code of those Options which are designated as ISOs. Subject to the foregoing, the interpretation and construction by the Administrator of any provisions of the Plan or of any Stock Right granted under it shall be final, unless otherwise determined by the Board of Directors, if the Administrator is the Committee. 5. ELIGIBILITY FOR PARTICIPATION. The Administrator will, in its sole discretion, name the Participants in the Plan, provided, however, that each Participant must be an Employee, director or consultant of the Company or of an Affiliate at the time a Stock Right is granted. Notwithstanding the foregoing, the Administrator may authorize the grant of a Stock Right to a person not then an employee, director or consultant of the Company or of an Affiliate; provided, however, that the actual grant of such Stock Right shall be conditioned upon such person becoming eligible to become a Participant at or prior to the time of the execution of the Agreement evidencing such Stock Right. ISOs may be granted only to Employees. Non-Qualified Options and Stock Grants may be granted to any Employee, director or consultant of the Company or an Affiliate. The granting of any Stock Right to any individual shall neither entitle that individual to, nor disqualify him or her from, participation in any other grant of Stock Rights. 6. TERMS AND CONDITIONS OF OPTIONS. Each Option shall be set forth in writing in an Option Agreement, duly executed by the Company and, to the extent required by law or requested by the Company, by the Participant. The Administrator may provide that Options be granted subject to such terms and conditions, consistent with the terms and conditions specifically required under this Plan, as the Administrator may deem appropriate including, without limitation, subsequent approval by the shareholders of the Company of this Plan or any amendments thereto. The Option Agreements shall be subject to at least the following terms and conditions: A. Non-Qualified Options: Each Option intended to be a Non-Qualified Option shall be subject to the terms and conditions which the Administrator determines to be appropriate and in the best interest of the Company, subject to the following minimum standards for any such Non-Qualified Option: a. Option Price: Each Option Agreement shall state the option price (per share) of the Shares covered by each Option, which option price shall be determined by the Administrator but shall not be less than the par value per share of Common Stock. b. Each Option Agreement shall state the number of Shares to which it pertains. c. Each Option shall terminate not more than five years from the date of grant or at such earlier time as the Option Agreement may provide. d. Each Option Agreement shall state the date or dates on which it first is exercisable and the date after which it may no longer be exercised, and may provide that the Option rights accrue or become exercisable in installments over a period of months or years, or upon the occurrence of certain conditions or the attainment of stated goals or events; and e. Exercise of any Option may be conditioned upon the Participant's execution of a Share purchase agreement in form satisfactory to the Administrator providing for certain protections for the Company and its other shareholders, including requirements that: i. The Participant's or the Participant's Survivors' right to sell or transfer the Shares may be restricted; and D-3 ii.The Participant or the Participant's Survivors may be required to execute letters of investment intent and must also acknowledge that the Shares will bear legends noting any applicable restrictions. f. Directors' Options: i. Each director of the Company who is not an employee of or consultant to the Company or any Affiliate, upon first being elected to the Board of Directors, shall be granted a Non-Qualified Option to purchase 2,500 Shares. Each such Option shall (i) have an exercise price equal to the Fair Market Value (per share) of the Shares on the date of grant of the Option, and (ii) be exercisable in full upon completion of one full year of service on the Board of Directors after the date of grant. ii.On the date of each reelection to the Board of Directors, provided that on such dates the director has been in the continued and uninterrupted service as a director of the Company or any Affiliate since his or her initial election or appointment and is not an employee or consultant to the Company or any Affiliate, each director shall be granted a Non-Qualified Option to purchase 500 Shares. Each such Option shall (i) have an exercise price equal to the Fair Market Value (per share) of the Shares on the date of grant of the Option, and (ii) be exercisable upon completion of one full year of service on the Board of Directors after the date of grant. iii.Any director entitled to receive an Option under this subparagraph may elect to decline the Option. B. ISOs: Each Option intended to be an ISO shall be issued only to an Employee and be subject to the following terms and conditions, with such additional restrictions or changes as the Administrator determines are appropriate but not in conflict with Section 422 of the Code and relevant regulations and rulings of the Internal Revenue Service: a. Minimum standards: The ISO shall meet the minimum standards required of Non-Qualified Options, as described in Paragraph 6(A) above, except clause (a) thereunder. b. Option Price: Immediately before the ISO is granted, if the Participant owns, directly or by reason of the applicable attribution rules in Section 424(d) of the Code: i. 10% or less of the total combined voting power of all classes of stock of the Company or an Affiliate, the Option price per share of the Shares covered by each ISO shall not be less than 100% of the Fair Market Value per share of the Shares on the date of the grant of the Option; or ii.More than 10% of the total combined voting power of all classes of stock of the Company or an Affiliate, the Option price per share of the Shares covered by each ISO shall not be less than 110% of the said Fair Market Value on the date of grant. c. Each ISO shall terminate not more than five years from the date of the grant or at such earlier time as the Option Agreement may provide. d. Limitation on Yearly Exercise: The Option Agreements shall restrict the amount of ISOs which may become exercisable in any calendar year (under this or any other ISO plan of the Company or an Affiliate) so that the aggregate Fair Market Value (determined at the time each ISO is granted) of the stock with respect to which ISOs are exercisable for the first time by the Participant in any calendar year does not exceed $100,000. D-4 7. TERMS AND CONDITIONS OF STOCK GRANTS. Each offer of a Stock Grant to a Participant shall state the date prior to which the Stock Grant must be accepted by the Participant, and the principal terms of each Stock Grant shall be set forth in a Stock Grant Agreement, duly executed by the Company and, to the extent required by law or requested by the Company, by the Participant. The Stock Grant Agreement shall be in a form approved by the Administrator and shall contain terms and conditions which the Administrator determines to be appropriate and in the best interest of the Company, subject to the following minimum standards: (a)Each Stock Grant Agreement shall state the purchase price (per share), if any, of the Shares covered by each Stock Grant, which purchase price shall be determined by the Administrator but shall not be less than the minimum consideration required by the Delaware General Corporation Law on the date of the grant of the Stock Grant; (b)Each Stock Grant Agreement shall state the number of Shares to which the Stock Grant pertains; and (c)Each Stock Grant Agreement shall include the terms of any right of the Company to restrict or reacquire the Shares subject to the Stock Grant, including the time and events upon which such reacquisition rights shall accrue and the purchase price therefor, if any. 8. EXERCISE OF OPTIONS AND ISSUE OF SHARES. An Option (or any part or installment thereof) shall be exercised by giving written notice to the Company or its designee, together with provision for payment of the full purchase price in accordance with this Paragraph for the Shares as to which the Option is being exercised, and upon compliance with any other condition(s) set forth in the Option Agreement. Such notice shall be signed by the person exercising the Option, shall state the number of Shares with respect to which the Option is being exercised and shall contain any representation required by the Plan or the Option Agreement. Payment of the purchase price for the Shares as to which such Option is being exercised shall be made (a) in United States dollars in cash or by check, or (b) at the discretion of the Administrator, through delivery of shares of Common Stock having a Fair Market Value equal as of the date of the exercise to the cash exercise price of the Option and held for at least six months, or (c) at the discretion of the Administrator, by delivery of the grantee's personal note, for full, partial or no recourse, bearing interest payable not less than annually at no less than 100% of the applicable Federal rate, as defined in Section 1274(d) of the Code, with or without the pledge of such Shares as collateral, or (d) at the discretion of the Administrator, in accordance with a cashless exercise program established in a securities brokerage firm, and approved by the Administrator, (e) at the discretion of the Administrator, by having the Company retain from the shares otherwise issuable upon exercise of the Option, a number of shares having the Fair Market Value equal as of the date of exercise to the exercise price of the Option, or (f) at the discretion of the Administrator, by any combination of (a), (b), (c) and (d) above. Notwithstanding the foregoing, the Administrator shall accept only such payment on exercise of an ISO as is permitted by Section 422 of the Code. The Company shall then reasonably promptly deliver the Shares as to which such Option was exercised to the Participant (or to the Participant's Survivors, as the case may be). In determining what constitutes "reasonably promptly," it is expressly understood that the issuance and delivery of the Shares may be delayed by the Company in order to comply with any law or regulation (including, without limitation, state securities or "blue sky" laws) which requires the Company to take any action with respect to the Shares prior to their issuance. The Shares shall, upon delivery, be fully paid, non-assessable Shares. The Administrator shall have the right to accelerate the date of exercise of any installment of any Option; provided that the Administrator shall not accelerate the exercise date of any installment of any Option granted to an Employee as an ISO (and not previously converted into a Non-Qualified Option pursuant to Paragraph 26) if such acceleration would violate the annual vesting limitation contained in Section 422(d) of the Code, as described in Paragraph 6.B.d. D-5 The Administrator may, in its discretion, amend any term or condition of an outstanding Option provided (i) such term or condition as amended is permitted by the Plan, (ii) any such amendment shall be made only with the consent of the Participant to whom the Option was granted, or in the event of the death of the Participant, the Participant's Survivors, if the amendment is adverse to the Participant, and (iii) any such amendment of any ISO shall be made only after the Administrator determines whether such amendment would constitute a "modification" of any Option which is an ISO (as that term is defined in Section 424(h) of the Code) or would cause any adverse tax consequences for the holder of such ISO. 9. ACCEPTANCE OF STOCK GRANT AND ISSUE OF SHARES. A Stock Grant (or any part or installment thereof) shall be accepted by executing the Stock Grant Agreement and delivering it to the Company or its designee, together with provision for payment of the full purchase price, if any, in accordance with this Paragraph for the Shares as to which such Stock Grant is being accepted, and upon compliance with any other conditions set forth in the Stock Grant Agreement. Payment of the purchase price for the Shares as to which such Stock Grant is being accepted shall be made (a) in United States dollars in cash or by check, or (b) at the discretion of the Administrator, through delivery of shares of Common Stock held for at least six months and having a fair market value equal as of the date of acceptance of the Stock Grant to the purchase price of the Stock Grant determined in good faith by the Administrator, or (c) at the discretion of the Administrator, by delivery of the grantee's personal note, for full or partial recourse as determined by the Administrator, bearing interest payable not less than annually at no less than 100% of the applicable Federal rate, as defined in Section 1274(d) of the Code, or (d) at the discretion of the Administrator, by any combination of (a), (b) and (c) above. The Company shall then reasonably promptly deliver the Shares as to which such Stock Grant was accepted to the Participant (or to the Participant's Survivors, as the case may be), subject to any escrow provision set forth in the Stock Grant Agreement. In determining what constitutes "reasonably promptly," it is expressly understood that the issuance and delivery of the Shares may be delayed by the Company in order to comply with any law or regulation (including, without limitation, state securities or "blue sky" laws) which requires the Company to take any action with respect to the Shares prior to their issuance. The Administrator may, in its discretion, amend any term or condition of an outstanding Stock Grant or Stock Grant Agreement provided (i) such term or condition as amended is permitted by the Plan, and (ii) any such amendment shall be made only with the consent of the Participant to whom the Stock Grant was made, if the amendment is adverse to the Participant. 10. RIGHTS AS A SHAREHOLDER. No Participant to whom a Stock Right has been granted shall have rights as a shareholder with respect to any Shares covered by such Stock Right, except after due exercise of the Option or acceptance of the Stock Grant and tender of the full purchase price, if any, for the Shares being purchased pursuant to such exercise or acceptance and registration of the Shares in the Company's share register in the name of the Participant. 11. ASSIGNABILITY AND TRANSFERABILITY OF STOCK RIGHTS. By its terms, a Stock Right granted to a Participant shall not be transferable by the Participant other than (i) by will or by the laws of descent and distribution, or (ii) as approved by the Administrator in its discretion and set forth in the applicable Option Agreement or Stock Grant Agreement. Notwithstanding the foregoing, an ISO transferred except in compliance with clause (i) above shall no longer qualify as an ISO. The designation of a beneficiary of a Stock Right by a Participant, with the prior approval of the Administrator and in such form as the Administrator shall prescribe, shall not be deemed a transfer prohibited by this Paragraph. Except as provided above, a Stock Right shall only be exercisable or may only be accepted, during the Participant's lifetime, only by such Participant (or by his or her legal representative) and shall not be assigned, pledged or hypothecated in any way (whether by operation of law or otherwise) and shall not be subject to execution, attachment or similar process. Any attempted transfer, assignment, pledge, hypothecation or other disposition of any Stock Right or of D-6 any rights granted thereunder contrary to the provisions of this Plan, or the levy of any attachment or similar process upon a Stock Right, shall be null and void. 12. EFFECT ON OPTIONS OF TERMINATION OF SERVICE OTHER THAN "FOR CAUSE" OR DEATH OR DISABILITY. Except as otherwise provided in a Participant's Option Agreement, in the event of a termination of service (whether as an employee, director or consultant) with the Company or an Affiliate before the Participant has exercised an Option, the following rules apply: a. A Participant who ceases to be an employee, director or consultant of the Company or of an Affiliate (for any reason other than termination "for cause", Disability, or death for which events there are special rules in Paragraphs 13, 14, and 15, respectively), may exercise any Option granted to him or her to the extent that the Option is exercisable on the date of such termination of service, but only within such term as the Administrator has designated in a Participant's Option Agreement. b. Except as provided in Subparagraph (c) below, or Paragraph 14 or 15, an Option intended to be an ISO, in no event may be exercised after the earlier of (i) three months after the Participant's termination of employment, or (ii) the date of expiration of the term of the Option. c. The provisions of this Paragraph, and not the provisions of Paragraph 14 or 15, shall apply to a Participant who subsequently becomes Disabled or dies after the termination of employment, director status or consultancy, provided, however, in the case of a Participant's Disability or death within three months after the termination of employment, director status or consultancy, the Participant or the Participant's Survivors may exercise the Option within one year after the date of the Participant's termination of service, but in no event after the date of expiration of the term of the Option. d. Notwithstanding anything herein to the contrary, if subsequent to a Participant's termination of employment, termination of director status or termination of consultancy, but prior to the exercise of an Option, the Board of Directors determines that, either prior or subsequent to the Participant's termination, the Participant engaged in conduct which would constitute "cause", then such Participant shall forthwith cease to have any right to exercise any Option. e. A Participant to whom an Option has been granted under the Plan who is absent from work with the Company or with an Affiliate because of temporary disability (any disability other than a permanent and total Disability as defined in Paragraph 1 hereof), or who is on leave of absence for any purpose, shall not, during the period of any such absence, be deemed, by virtue of such absence alone, to have terminated such Participant's employment, director status or consultancy with the Company or with an Affiliate, except as the Administrator may otherwise expressly provide. f. Except as required by law or as set forth in a Participant's Option Agreement, Options granted under the Plan shall not be affected by any change of a Participant's status within or among the Company and any Affiliates, so long as the Participant continues to be an employee, director or consultant of the Company or any Affiliate. 13. EFFECT ON OPTIONS OF TERMINATION OF SERVICE "FOR CAUSE". Except as otherwise provided in a Participant's Option Agreement, the following rules apply if the Participant's service (whether as an employee, director or consultant) with the Company or an Affiliate is terminated "for cause" prior to the time that all his or her outstanding Options have been exercised: a. All outstanding and unexercised Options as of the time the Participant is notified his or her service is terminated "for cause" will immediately be forfeited. b. For purposes of this Plan, "cause" shall include (and is not limited to) dishonesty with respect to the Company or any Affiliate, insubordination, substantial malfeasance or non-feasance of duty, D-7 unauthorized disclosure of confidential information, breach by the Participant of any provision of any employment, consulting, advisory, nondisclosure, non-competition or similar agreement between the Participant and the Company, and conduct substantially prejudicial to the business of the Company or any Affiliate. The determination of the Administrator as to the existence of "cause" will be conclusive on the Participant and the Company. c. "Cause" is not limited to events which have occurred prior to a Participant's termination of service, nor is it necessary that the Administrator's finding of "cause" occur prior to termination. If the Administrator determines, subsequent to a Participant's termination of service but prior to the exercise of an Option, that either prior or subsequent to the Participant's termination the Participant engaged in conduct which would constitute "cause", then the right to exercise any Option is forfeited. d. Any definition in an agreement between the Participant and the Company or an Affiliate, which contains a conflicting definition of "cause" for termination and which is in effect at the time of such termination, shall supersede the definition in this Plan with respect to that Participant. 14. EFFECT ON OPTIONS OF TERMINATION OF SERVICE FOR DISABILITY. Except as otherwise provided in a Participant's Option Agreement, a Participant who ceases to be an employee, director or consultant of the Company or of an Affiliate by reason of Disability may exercise any Option granted to such Participant: a. To the extent that the Option has become exercisable but has not been exercised on the date of Disability; and b. In the event rights to exercise the Option accrue periodically, to the extent of a pro rata portion through the date of Disability of any additional vesting rights that would have accrued on the next vesting date had the Participant not become Disabled. The proration shall be based upon the number of days accrued in the current vesting period prior to the date of Disability. A Disabled Participant may exercise such rights only within the period ending one year after the date of the Participant's termination of employment, directorship or consultancy, as the case may be, notwithstanding that the Participant might have been able to exercise the Option as to some or all of the Shares on a later date if the Participant had not become Disabled and had continued to be an employee, director or consultant or, if earlier, within the originally prescribed term of the Option. The Administrator shall make the determination both of whether Disability has occurred and the date of its occurrence (unless a procedure for such determination is set forth in another agreement between the Company and such Participant, in which case such procedure shall be used for such determination). If requested, the Participant shall be examined by a physician selected or approved by the Administrator, the cost of which examination shall be paid for by the Company. 15. EFFECT ON OPTIONS OF DEATH WHILE AN EMPLOYEE, DIRECTOR OR CONSULTANT. Except as otherwise provided in a Participant's Option Agreement, in the event of the death of a Participant while the Participant is an employee, director or consultant of the Company or of an Affiliate, such Option may be exercised by the Participant's Survivors: a. To the extent that the Option has become exercisable but has not been exercised on the date of death; and b. In the event rights to exercise the Option accrue periodically, to the extent of a pro rata portion through the date of death of any additional vesting rights that would have accrued on the next vesting date had the Participant not died. The proration shall be based upon the number of days accrued in the current vesting period prior to the Participant's date of death. D-8 If the Participant's Survivors wish to exercise the Option, they must take all necessary steps to exercise the Option within one year after the date of death of such Participant, notwithstanding that the decedent might have been able to exercise the Option as to some or all of the Shares on a later date if he or she had not died and had continued to be an employee, director or consultant or, if earlier, within the originally prescribed term of the Option. 16. EFFECT OF TERMINATION OF SERVICE ON STOCK GRANTS. In the event of a termination of service (whether as an employee, director or consultant) with the Company or an Affiliate for any reason before the Participant has accepted a Stock Grant, such offer shall terminate. For purposes of this Paragraph 16 and Paragraph 17 below, a Participant to whom a Stock Grant has been offered under the Plan who is absent from work with the Company or with an Affiliate because of temporary disability (any disability other than a permanent and total Disability as defined in Paragraph 1 hereof), or who is on leave of absence for any purpose, shall not, during the period of any such absence, be deemed, by virtue of such absence alone, to have terminated such Participant's employment, director status or consultancy with the Company or with an Affiliate, except as the Administrator may otherwise expressly provide. In addition, for purposes of this Paragraph 16 and Paragraph 17 below, any change of employment or other service within or among the Company and any Affiliates shall not be treated as a termination of employment, director status or consultancy so long as the Participant continues to be an employee, director or consultant of the Company or any Affiliate. 17. EFFECT ON STOCK GRANTS OF TERMINATION OF SERVICE OTHER THAN "FOR CAUSE" OR DEATH OR DISABILITY. Except as otherwise provided in a Participant's Stock Grant Agreement, in the event of a termination of service (whether as an employee, director or consultant), other than termination "for cause," Disability, or death for which events there are special rules in Paragraphs 18, 19, and 20, respectively, before all Company rights of repurchase shall have lapsed, then the Company shall have the right to repurchase that number of Shares subject to a Stock Grant as to which the Company's repurchase rights have not lapsed. 18. EFFECT ON STOCK GRANTS OF TERMINATION OF SERVICE "FOR CAUSE". Except as otherwise provided in a Participant's Stock Grant Agreement, the following rules apply if the Participant's service (whether as an employee, director or consultant) with the Company or an Affiliate is terminated "for cause": a. All Shares subject to any Stock Grant shall be immediately subject to repurchase by the Company at the purchase price, if any, thereof. b. For purposes of this Plan, "cause" shall include (and is not limited to) dishonesty with respect to the employer, insubordination, substantial malfeasance or non-feasance of duty, unauthorized disclosure of confidential information, breach by the Participant of any provision of any employment, consulting, advisory, nondisclosure, non-competition or similar agreement between the Participant and the Company, and conduct substantially prejudicial to the business of the Company or any Affiliate. The determination of the Administrator as to the existence of "cause" will be conclusive on the Participant and the Company. c. "Cause" is not limited to events which have occurred prior to a Participant's termination of service, nor is it necessary that the Administrator's finding of "cause" occur prior to termination. If the Administrator determines, subsequent to a Participant's termination of service, that either prior or subsequent to the Participant's termination the Participant engaged in conduct which would constitute "cause," then the Company's right to repurchase all of such Participant's Shares shall apply. D-9 d. Any definition in an agreement between the Participant and the Company or an Affiliate, which contains a conflicting definition of "cause" for termination and which is in effect at the time of such termination, shall supersede the definition in this Plan with respect to that Participant. 19. EFFECT ON STOCK GRANTS OF TERMINATION OF SERVICE FOR DISABILITY. Except as otherwise provided in a Participant's Stock Grant Agreement, the following rules apply if a Participant ceases to be an employee, director or consultant of the Company or of an Affiliate by reason of Disability: to the extent the Company's rights of repurchase have not lapsed on the date of Disability, they shall be exercisable; provided, however, that in the event such rights of repurchase lapse periodically, such rights shall lapse to the extent of a pro rata portion of the Shares subject to such Stock Grant through the date of Disability as would have lapsed had the Participant not become Disabled. The proration shall be based upon the number of days accrued prior to the date of Disability. The Administrator shall make the determination both of whether Disability has occurred and the date of its occurrence (unless a procedure for such determination is set forth in another agreement between the Company and such Participant, in which case such procedure shall be used for such determination). If requested, the Participant shall be examined by a physician selected or approved by the Administrator, the cost of which examination shall be paid for by the Company. 20. EFFECT ON STOCK GRANTS OF DEATH WHILE AN EMPLOYEE, DIRECTOR OR CONSULTANT. Except as otherwise provided in a Participant's Stock Grant Agreement, the following rules apply in the event of the death of a Participant while the Participant is an employee, director or consultant of the Company or of an Affiliate: to the extent the Company's rights of repurchase have not lapsed on the date of death, they shall be exercisable; provided, however, that in the event such rights of repurchase lapse periodically, such rights shall lapse to the extent of a pro rata portion of the Shares subject to such Stock Grant through the date of death as would have lapsed had the Participant not died. The proration shall be based upon the number of days accrued prior to the Participant's death. 21. PURCHASE FOR INVESTMENT. Unless the offering and sale of the Shares to be issued upon the particular exercise or acceptance of a Stock Right shall have been effectively registered under the Securities Act of 1933, as now in force or hereafter amended (the "1933 Act"), the Company shall be under no obligation to issue the Shares covered by such exercise unless and until the following conditions have been fulfilled: a. The person(s) who exercise(s) or accept(s) such Stock Right shall warrant to the Company, prior to the receipt of such Shares, that such person(s) are acquiring such Shares for their own respective accounts, for investment, and not with a view to, or for sale in connection with, the distribution of any such Shares, in which event the person(s) acquiring such Shares shall be bound by the provisions of the following legend which shall be endorsed upon the certificate(s) evidencing their Shares issued pursuant to such exercise or such grant: "The shares represented by this certificate have been taken for investment and they may not be sold or otherwise transferred by any person, including a pledgee, unless (1) either (a) a Registration Statement with respect to such shares shall be effective under the Securities Act of 1933, as amended, or (b) the Company shall have received an opinion of counsel satisfactory to it that an exemption from registration under such Act is then available, and (2) there shall have been compliance with all applicable state securities laws." b. At the discretion of the Administrator, the Company shall have received an opinion of its counsel that the Shares may be issued upon such particular exercise or acceptance in compliance with the 1933 Act without registration thereunder. D-10 22. DISSOLUTION OR LIQUIDATION OF THE COMPANY. Upon the dissolution or liquidation of the Company, all Options granted under this Plan which as of such date shall not have been exercised and all Stock Grants which have not been accepted will terminate and become null and void; provided, however, that if the rights of a Participant or a Participant's Survivors have not otherwise terminated and expired, the Participant or the Participant's Survivors will have the right immediately prior to such dissolution or liquidation to exercise or accept any Stock Right to the extent that the Stock Right is exercisable or subject to acceptance as of the date immediately prior to such dissolution or liquidation. 23. ADJUSTMENTS. Upon the occurrence of any of the following events, a Participant's rights with respect to any Stock Right granted to him or her hereunder shall be adjusted as hereinafter provided, unless otherwise specifically provided in a Participant's Option Agreement or Stock Grant Agreement: A. Stock Dividends and Stock Splits. If (i) the shares of Common Stock shall be subdivided or combined into a greater or smaller number of shares or if the Company shall issue any shares of Common Stock as a stock dividend on its outstanding Common Stock, or (ii) additional shares or new or different shares or other securities of the Company or other non-cash assets are distributed with respect to such shares of Common Stock, the number of shares of Common Stock deliverable upon the exercise or acceptance of such Stock Right may be appropriately increased or decreased proportionately, and appropriate adjustments may be made in the purchase price per share to reflect such events. B. Corporate Transactions. If the Company is to be consolidated with or acquired by another entity in a merger, sale of all or substantially all of the Company's assets other than a transaction to merely change the state of incorporation (a "Corporate Transaction"), the Administrator or the board of directors of any entity assuming the obligations of the Company hereunder (the "Successor Board"), shall, as to outstanding Options, either (i) make appropriate provision for the continuation of such Options by substituting on an equitable basis for the Shares then subject to such Options either the consideration payable with respect to the outstanding shares of Common Stock in connection with the Corporate Transaction or securities of any successor or acquiring entity; or (ii) upon written notice to the Participants, provide that all Options must be exercised (either to the extent then exercisable or, at the discretion of the Administrator, or, upon a change of control of the Company, all Options being made fully exercisable for purposes of this Subparagraph), within a specified number of days of the date of such notice, at the end of which period the Options shall terminate; or (iii) terminate all Options in exchange for a cash payment equal to the excess of the Fair Market Value of the Shares subject to such Options (either to the extent then exercisable or, at the discretion of the Administrator, all Options being made fully exercisable for purposes of this Subparagraph) over the exercise price thereof. With respect to outstanding Stock Grants, the Administrator or the Successor Board, shall either (i) make appropriate provisions for the continuation of such Stock Grants by substituting on an equitable basis for the Shares then subject to such Stock Grants either the consideration payable with respect to the outstanding Shares of Common Stock in connection with the Corporate Transaction or securities of any successor or acquiring entity; or (ii) upon written notice to the Participants, provide that all Stock Grants must be accepted (to the extent then subject to acceptance) within a specified number of days of the date of such notice, at the end of which period the offer of the Stock Grants shall terminate; or (iii) terminate all Stock Grants in exchange for a cash payment equal to the excess of the Fair Market Value of the Shares subject to such Stock Grants over the purchase price thereof, if any. In addition, in the event of a Corporate Transaction, the Administrator may waive any or all Company repurchase rights with respect to outstanding Stock Grants. C. Recapitalization or Reorganization. In the event of a recapitalization or reorganization of the Company other than a Corporate Transaction pursuant to which securities of the Company or of another corporation are issued with respect to the outstanding shares of Common Stock, a Participant upon exercising or accepting a Stock Right after the recapitalization or reorganization shall be entitled to receive for the purchase price paid D-11 upon such exercise or acceptance of the number of replacement securities which would have been received if such Stock Right had been exercised or accepted prior to such recapitalization or reorganization. D. Modification of ISOs. Notwithstanding the foregoing, any adjustments made pursuant to Subparagraph A, B or C above with respect to ISOs shall be made only after the Administrator determines whether such adjustments would constitute a "modification" of such ISOs (as that term is defined in Section 424(h) of the Code) or would cause any adverse tax consequences for the holders of such ISOs. If the Administrator determines that such adjustments made with respect to ISOs would constitute a modification of such ISOs, it may refrain from making such adjustments, unless the holder of an ISO specifically requests in writing that such adjustment be made and such writing indicates that the holder has full knowledge of the consequences of such "modification" on his or her income tax treatment with respect to the ISO. 24. ISSUANCES OF SECURITIES. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of shares subject to Stock Rights. Except as expressly provided herein, no adjustments shall be made for dividends paid in cash or in property (including without limitation, securities) of the Company prior to any issuance of Shares pursuant to a Stock Right. 25. FRACTIONAL SHARES. No fractional shares shall be issued under the Plan and the person exercising a Stock Right shall receive from the Company cash in lieu of such fractional shares equal to the Fair Market Value thereof. 26. CONVERSION OF ISOs INTO NON-QUALIFIED OPTIONS; TERMINATION OF ISOs. The Administrator, at the written request of any Participant, may in its discretion take such actions as may be necessary to convert such Participant's ISOs (or any portions thereof) that have not been exercised on the date of conversion into Non-Qualified Options at any time prior to the expiration of such ISOs, regardless of whether the Participant is an employee of the Company or an Affiliate at the time of such conversion. At the time of such conversion, the Administrator (with the consent of the Participant) may impose such conditions on the exercise of the resulting Non-Qualified Options as the Administrator in its discretion may determine, provided that such conditions shall not be inconsistent with this Plan. Nothing in the Plan shall be deemed to give any Participant the right to have such Participant's ISOs converted into Non-Qualified Options, and no such conversion shall occur until and unless the Administrator takes appropriate action. The Administrator, with the consent of the Participant, may also terminate any portion of any ISO that has not been exercised at the time of such conversion. 27. WITHHOLDING. In the event that any federal, state, or local income taxes, employment taxes, Federal Insurance Contributions Act ("F.I.C.A.") withholdings or other amounts are required by applicable law or governmental regulation to be withheld from the Participant's salary, wages or other remuneration in connection with the exercise or acceptance of a Stock Right or in connection with a Disqualifying Disposition (as defined in Paragraph 28) or upon the lapsing of any right of repurchase, the Company may withhold from the Participant's compensation, if any, or may require that the Participant advance in cash to the Company, or to any Affiliate of the Company which employs or employed the Participant, the statutory minimum amount of such withholdings unless a different withholding arrangement, including the use of shares of the Company's Common Stock or a promissory note, is authorized by the Administrator (and permitted by law). For purposes hereof, the fair market value of the shares withheld for purposes of payroll withholding shall be determined in the manner provided in Paragraph 1 above, as of the most recent practicable date prior to the date of exercise. If the fair market value of the shares withheld is less than the amount of payroll withholdings required, the Participant may be required to D-12 advance the difference in cash to the Company or the Affiliate employer. The Administrator in its discretion may condition the exercise of an Option for less than the then Fair Market Value on the Participant's payment of such additional withholding. 28. NOTICE TO COMPANY OF DISQUALIFYING DISPOSITION. Each Employee who receives an ISO must agree to notify the Company in writing immediately after the Employee makes a Disqualifying Disposition of any shares acquired pursuant to the exercise of an ISO. A Disqualifying Disposition is defined in Section 424(c) of the Code and includes any disposition (including any sale or gift) of such shares before the later of (a) two years after the date the Employee was granted the ISO, or (b) one year after the date the Employee acquired Shares by exercising the ISO, except as otherwise provided in Section 424(c) of the Code. If the Employee has died before such stock is sold, these holding period requirements do not apply and no Disqualifying Disposition can occur thereafter. 29. TERMINATION OF THE PLAN. The Plan will terminate on 10 years after adoption, the date which is ten years from the earlier of the date of its adoption by the Board of Directors and the date of its approval by the shareholders. The Plan may be terminated at an earlier date by vote of the shareholders or the Board of Directors of the Company; provided, however, that any such earlier termination shall not affect any Option Agreements or Stock Grant Agreements executed prior to the effective date of such termination. 30. AMENDMENT OF THE PLAN AND AGREEMENTS. The Plan may be amended by the shareholders of the Company. The Plan may also be amended by the Administrator, including, without limitation, to the extent necessary to qualify any or all outstanding Stock Rights granted under the Plan or Stock Rights to be granted under the Plan for favorable federal income tax treatment (including deferral of taxation upon exercise) as may be afforded incentive stock options under Section 422 of the Code, and to the extent necessary to qualify the shares issuable upon exercise or acceptance of any outstanding Stock Rights granted, or Stock Rights to be granted, under the Plan for listing on any national securities exchange or quotation in any national automated quotation system of securities dealers. Any amendment approved by the Administrator which the Administrator determines is of a scope that requires shareholder approval shall be subject to obtaining such shareholder approval. Any modification or amendment of the Plan shall not, without the consent of a Participant, adversely affect his or her rights under a Stock Right previously granted to him or her. With the consent of the Participant affected, the Administrator may amend outstanding Option Agreements and Stock Grant Agreements in a manner which may be adverse to the Participant but which is not inconsistent with the Plan. In the discretion of the Administrator, outstanding Option Agreements and Stock Grant Agreements may be amended by the Administrator in a manner which is not adverse to the Participant. 31. EMPLOYMENT OR OTHER RELATIONSHIP. Nothing in this Plan or any Option Agreement or Stock Grant Agreement shall be deemed to prevent the Company or an Affiliate from terminating the employment, consultancy or director status of a Participant, nor to prevent a Participant from terminating his or her own employment, consultancy or director status or to give any Participant a right to be retained in employment or other service by the Company or any Affiliate for any period of time. 32. GOVERNING LAW. This Plan shall be construed and enforced in accordance with the law of the State of Delaware. D-13 ANNEX E UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED JUNE 30, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 0-14669 THE ARISTOTLE CORPORATION (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER) DELAWARE 06-1165854 (STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.) 27 ELM STREET, NEW HAVEN, CONNECTICUT (ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) 06510 (ZIP CODE) (203) 867-4090 (REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE) SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NOT APPLICABLE SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK, $.01 PAR VALUE (TITLE OF CLASS) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of September 10, 2001, the aggregate market value of the common stock outstanding of The Aristotle Corporation held by nonaffiliates (without admitting that any person whose shares are not included in such calculation is an affiliate) was approximately $4,622,904, based on the closing price as reported by the Nasdaq Stock Market. The number of shares outstanding of the Registrant's common stock as of September 10, 2001 was approximately 1.9 million. DOCUMENTS INCORPORATED BY REFERENCE None FORM 10-K CROSS REFERENCE INDEX PART I Item 1. Business.................................................................. E-1 Item 2. Properties................................................................ E-3 Item 3. Legal Proceedings......................................................... E-3 Item 4. Submission of Matters to a Vote of Security Holders....................... E-3 PART II Item 5. Market for Registrant's Common Equity and Related Stockholder Matters....................................................... E-4 Item 6. Selected Financial Data................................................... E-5 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................................ E-7 Item 8. Financial Statements and Supplementary Data............................... E-17 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure................................................................ E-55 PART III Item 10. Directors and Executive Officers of the Registrant........................ E-55 Item 11. Executive Compensation.................................................... E-58 Item 12. Security Ownership of Certain Beneficial Owners and Management............ E-60 Item 13. Certain Relationships and Related Transactions............................ E-61 PART IV Item 14. Exhibits, Reports on Form 8-K............................................. E-62
PART I ITEM 1. BUSINESS GENERAL. The Aristotle Corporation ("Aristotle" or the "Company") is a holding company which, through its subsidiaries, develops and manufactures health and medical education teaching aids and computer based training products. Simulaids, Inc. ("Simulaids"), a wholly-owned subsidiary, primarily produces manikins and simulation kits used for training in CPR, emergency rescue and patient care fields. Simulaids' products are sold throughout the United States and internationally via distributors and catalogs to end users such as fire and emergency medical departments and nursing and medical schools. Safe Passage International, Inc. ("Safe Passage"), of which Aristotle owns 80% of the outstanding stock, develops and licenses computer based training products to government and industry clients. (Unless the context indicates otherwise, the "Company" includes Aristotle, Simulaids and Safe Passage.) BUSINESS STRATEGY. Aristotle's business strategy is to position the Company in the fast growing for-profit education and training industry through the development of Simulaids and Safe Passage and through acquisitions of complementary companies. The following discussion pertains to the Subsidiaries during the fiscal year ended June 30, 2001. PRODUCTS. Simulaids designs, manufactures and markets health and medical education teaching aids. Simulaids' proprietary products include manikins and simulation kits used for training in CPR, emergency rescue and patient care. For the most recent year, approximately 71% of Simulaids' total net sales were attributable to manikins and the remaining 29% of total net sales were attributable to simulation kits and other teaching aids. Safe Passage primarily develops and distributes computer based training software focused towards the aviation security and general security industries. MARKETING AND DISTRIBUTION. Simulaids' products are marketed and distributed throughout the United States and internationally via distributors and catalogs to end users such as fire and emergency departments and nursing and medical schools. The Simulaids' sales executives, who are full-time employees of the Company, are responsible for marketing the Simulaids' products in the continental United States and employ the services of an affiliate to market internationally. Safe Passage's software products are marketed and distributed throughout the United States and internationally through sales executives, who are full-time employees of the Company, sales agents and manufacturers representatives. CUSTOMERS. Simulaids currently sells products under its brand names primarily to distributors. One of Simulaids' customers, Armstrong Medical Industries, individually accounted for approximately 20% of total net sales for fiscal 2001. If this customer substantially reduced the amount of products it purchased from Simulaids, Simulaids' financial condition could be adversely affected. Safe Passage licenses software products under its brand names mainly to security companies and U.S. and foreign government agencies. Two of Safe Passage's customers accounted for approximately 50% of total net sales for fiscal 2001. If any of these customers substantially reduced the amount of products it purchased from Safe Passage, Safe Passage's financial condition could be adversely affected. MANUFACTURING AND RAW MATERIALS. Simulaids conducts virtually all manufacturing operations at its facility located in Woodstock, New York. The design and manufacture of the health and medical teaching aids are complex, requiring specialized and sophisticated machinery and tools. Simulaids uses principally plastics in the manufacture of its products. This raw material is generally available from multiple sources and Simulaids currently obtains raw materials from three sources. Simulaids purchases the majority of its raw materials from sources within the United States. In the event that a supplier would no longer be able to supply certain raw materials to Simulaids, Simulaids would have access to substitute raw materials. However, E-1 there can be no assurance that Simulaids would have immediate access to these substitute raw materials on a timely basis. Any delays in obtaining raw materials could cause Simulaids to experience delays in production. Safe Passage does not manufacture products but is engaged in the design and formation of complex computer based training products which are created in its Rochester, New York facility. Some of its design work is dependent upon the hiring of software consultants in the Rochester area. The availability of software consultants can vary dependent upon the employment market in the Rochester area. INTELLECTUAL PROPERTY. Patents, trademarks, and trade secrets are the principal protection sources for Simulaids' products. Simulaids owns two federally registered patents, one for a disposable protective sleeve having a pneumatic action and one for a cardiopulmonary resuscitation manikin with antiseptic cleaning system. Simulaids considers all of the patents, licenses and trademarks to be valuable property rights. Simulaids believes that the protection afforded by these intellectual property rights and the law of trade secrets is adequate protection for its products. However, it is possible for a competitor to develop near imitations of Simulaids' products without violating those rights. Safe Passage protects its courseware by registering its copyrights with the U.S. Patent Office. Currently Safe Passage holds 22 registered copyrights. Additionally the Safe Passage name is a registered trademark in six countries outside the U.S. Safe Passage also has a patent application pending with the U.S. Patent Office. The patent application involves the capture and integration of images for inclusion in various training applications. While Safe Passage believes that the protection afforded by these intellectual property rights and the law of trade secrets is adequate protection for its products, it is possible for a customer or competitor to copy and duplicate courseware in countries where international intellectual property rights are minimally enforced. COMPETITION. The health and medical education teaching aids industry is highly competitive. Simulaids' products compete for customers with numerous manufacturers of well-known brands of teaching products. The principal competitive factors in the health and medical education teaching aids markets are quality, price, and design of products, engineering and customer service. Some of Simulaids' competitors have greater financial and other resources and are, therefore, able to expend more resources and effort than Simulaids in areas such as marketing and product development. The technology-based training industry is diverse and generally highly competitive. Safe Passage products compete primarily in the aviation security and general security (protection) markets. Within these market sectors, Safe Passage has two principal competitors. One Safe Passage competitor has greater financial resources and is, therefore, able to expend more resources and effort than Safe Passage in areas such as marketing and product development. EMPLOYEES. As of June 30, 2001, the Company employed a total of 82 full-time and 2 part-time, non-union employees. Simulaids employed 64 full-time and 2 part-time, non-union employees. Safe Passage employed 15 full-time, non-union employees. Aristotle employed 3 full-time, non-union employees. BANK FINANCING. On September 27, 1999, Simulaids and Citizens Bank of Connecticut ("Citizens") entered into a $2.5 million Credit Agreement. The credit agreement was comprised of three facilities ("Credit Facilities"): (Amounts in Thousands) (a) $1,200 SEVEN-YEAR TERM LOAN--Principal payments are scheduled on a seven-year straight-line amortization. The interest rate is charged at the rate of LIBOR plus 200 basis points on a 30, 60, 90 or 180 day LIBOR rate at Simulaids' election. (b) $800 SEVEN-YEAR MORTGAGE--Principal payments are scheduled on a fifteen-year straight-line amortization, with a balloon payment at the seven-year maturity. The interest rate is charged at the rate of LIBOR plus 200 basis points on a 30, 60, 90 or 180 day LIBOR rate at Simulaids' election. E-2 (c) $500 TWO-YEAR REVOLVING LINE OF CREDIT--Borrowing availability under the line of credit is determined by a borrowing base that is equal to the sum of 80% of eligible accounts receivable and 50% of eligible inventory, with a maximum borrowing of $500. There are no scheduled principal payments. The interest rate is charged at the rate of LIBOR plus 175 basis points on a 30, 60, 90 or 180 day LIBOR rate at Simulaids' election. As of June 30, 2001, the balance outstanding on the term loan was $86 and the balance outstanding on the mortgage was $702. Future monthly principal payments on the term loan and mortgage are $14 and $5, respectively. As of June 30, 2001, Simulaids had not drawn on the line of credit. Subsequent to year-end, Simulaids elected not to extend its line of credit with Citizens. BACKGROUND REGARDING ARISTOTLE. Aristotle was organized in 1986 and is chartered in the State of Delaware. Aristotle is the former holding company of First Constitution Bank (the "Bank"), which was initially Aristotle's only subsidiary and which, on October 2, 1992, was seized by the FDIC. On April 14, 1993, Aristotle changed its name from First Constitution Financial Corporation to "The Aristotle Corporation." On April 11, 1994, Aristotle acquired 97% of The Strouse, Adler Company ("Strouse") through its subsidiary, Aristotle Sub. Inc. ("ASI") pursuant to the terms of a Capital Contribution Agreement and certain other agreements (the "Strouse Acquisition"). As a result of the Strouse Acquisition, Aristotle owned approximately 97% of the issued and outstanding common stock of ASI, which in turn owned all of the outstanding capital stock of Strouse. In May 1994, Aristotle effectuated a one for ten reverse stock split. On January 2, 1998, ASI was merged into Aristotle (the "ASI Merger") and, accordingly, Strouse became a wholly-owned subsidiary of Aristotle. On June 30, 1998, Aristotle sold substantially all the assets of Strouse, which subsequently changed its name to S-A Subsidiary, Inc. ("S-A Subsidiary"). On April 30, 1999, Aristotle acquired all the outstanding stock of Simulaids. On September 14, 2000, Aristotle acquired 80% of the outstanding stock of Safe Passage. ITEM 2. PROPERTIES Aristotle's executive office occupies a 1,500 square foot office in New Haven, Connecticut that is leased from 27 Elm Street, LLC for rent of approximately $10.18 per square foot. Simulaids' office is located at 12 Dixon Avenue, Woodstock, New York and is comprised of two buildings totaling 72,800 square feet. Both buildings are owned by Simulaids and constitute office and manufacturing space. Safe Passage's 6,700 square foot office is located at 333 Metro Park, Rochester, New York which is leased from Metro Business Complex for rent of approximately $10.70 per square foot. ITEM 3. LEGAL PROCEEDINGS Aristotle is not a party to any material legal proceedings. See "Management's Discussion and Analysis of Financial Condition and Results of Operations--Income Taxes" and Note 7--"Income Taxes" to the Consolidated Financial Statements with regard to the status of the Aristotle's claims for tax refunds from the Internal Revenue Service. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS No matters were submitted during the fourth quarter of the year ended June 30, 2001. E-3 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Aristotle's Common Stock is listed for trading on the NASDAQ SmallCap Market under the symbol "ARTL." The table below sets forth the high and low sale prices per share of Common Stock during the fiscal quarters indicated.
Market Price $ High Low ----- ----- FISCAL YEAR ENDED JUNE 30, 2001: June 30...................... 9.000 5.510 March 31..................... 6.625 5.250 December 31.................. 7.625 5.000 September 30................. 7.250 4.875 FISCAL YEAR ENDED JUNE 30, 2000: June 30...................... 9.625 3.500 March 31..................... 5.438 3.000 December 31.................. 5.500 3.750 September 30................. 6.500 5.000
As of September 6, 2001, there were approximately 2,300 stockholders of record and, according to the Company's estimates, 1,600 additional beneficial stockholders. See also "Management's Discussion and Analysis of Financial Condition and Results of Operation" and Note 1 of the Notes to Consolidated Financial Statements. The Company has not paid any cash dividends on its Common Stock since its inception and does not intend to pay any cash dividends on its Common Stock in the foreseeable future. E-4 ITEM 6. SELECTED FINANCIAL DATA SELECTED CONSOLIDATED FINANCIAL DATA OF THE COMPANY (AMOUNTS IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA) The following are selected consolidated financial data for Aristotle and Strouse, (now known as S-A Subsidiary) on a consolidated basis for the fiscal years ended June 30, 1997 and 1998 and also includes Simulaids for the fiscal years ended June 30, 1999, 2000 and 2001, and Safe Passage for the year ended June 30, 2001. Aristotle formed ASI in 1993 and acquired Strouse (the "Strouse Acquisition") in 1994. All references in the following discussion to the "Company" include Aristotle, S-A Subsidiary, ASI, Simulaids and Safe Passage. The selected consolidated financial data presented below should be read in conjunction with the Consolidated Financial Statements of the Company, together with the Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report.
1997 1998 1999 2000 2001 ---------- ---------- ---------- ---------- ---------- CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Net sales................................... $ -- $ -- $ 966 $ 6,887 $ 8,147 Costs and expenses: Costs of goods sold......................... -- -- 789 3,949 4,176 Selling, general and administrative......... 649 685 1,250 2,168 3,507 Goodwill amortization....................... -- -- 39 228 428 Nonrecurring tax claim contingency fee...... -- 480 -- -- -- ---------- ---------- ---------- ---------- ---------- Operating income (loss)..................... (649) (1,165) (1,112) 542 36 Other income (expense): Investment and interest income.............. 146 151 725 337 354 Interest expense............................ (9) (5) (32) (174) (115) Equity loss in unconsolidated subsidiary.... -- -- -- -- (14) ---------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations before income taxes and minority interest... (512) (1,019) (419) 705 261 Provision for (Benefit from) income taxes (1)................................... (32) 1,182 (89) (31) (79) ---------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations before minority interest.................... (544) 163 (508) 674(2) 182 Minority interest........................... (175) (72) -- -- 36 ---------- ---------- ---------- ---------- ---------- Income (loss) from continuing operations.... (719) 91 (508) 674 218 Discontinued operations: Income from operations of Strouse........... 732 624 -- -- -- Gain on sale of Strouse..................... -- 873 911 -- -- ---------- ---------- ---------- ---------- ---------- Net income.................................. 13 1,588 403 674 218 Preferred dividends......................... -- 126 233 439(2) -- ---------- ---------- ---------- ---------- ---------- Net income applicable to common shareholders $ 13 $ 1,462 $ 170 $ 235 $ 218 ========== ========== ========== ========== ========== DILUTED EARNINGS PER COMMON SHARE: Continuing operations....................... $ (0.65) $ (0.03) $ (0.60) $ .16(2) $ .11 Discontinued operations..................... 0.66 0.54 -- -- -- Gain on sale of discontinued operations..... -- 0.75 0.74 -- -- ---------- ---------- ---------- ---------- ---------- Net income.................................. $ 0.01 $ 1.26 $ 0.14 $ .16 $ .11 ========== ========== ========== ========== ========== Weighted average shares..................... 1,100,700 1,151,920 1,226,144 1,506,192 1,921,560 CONSOLIDATED BALANCE SHEET DATA: Total assets................................ $ 20,381 $ 14,582 $ 18,485 $ 15,211 $ 14,908 Stockholders' equity........................ 6,511 8,455 8,608 11,947 12,368 Long-term debt.............................. 1,670 -- 111 1,672 702
- -------- (1)Income tax benefit for the year ended June 30, 1998 includes a tax refund received resulting from a tax loss carryback claim. (2)Subsequent to the issuance of Aristotle's consolidated financial statements, the Company determined that the $330 note issued to Geneve Corporation (See Note 5 at Annex E) should have been reflected as an additional dividend. Accordingly, the diluted earnings per common share reflects the recognition of such dividend. E-5 SELECTED FINANCIAL DATA OF SIMULAIDS (AMOUNTS IN THOUSANDS) The following are selected financial data for Simulaids, on a stand alone basis, for the fiscal years ended December 31, 1998 and June 30, 1998, 1999, 2000, and 2001. The selected financial data for the fiscal years ended June 30, 1998 and 1999 have not been audited. The selected financial data presented below should be read in conjunction with the Consolidated Financial Statements of the Company, together with the Notes to Consolidated Financial Statements and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this report.
FISCAL YEAR ENDED DECEMBER 31, FISCAL YEARS ENDED JUNE 30, ------------ ------------------------------ 1998 1998 1999 2000 2001 ------------ ------ ------ ------ ------ (UNAUDITED) CONSOLIDATED STATEMENTS OF OPERATIONS DATA: Net sales $5,860 $5,527 $5,944 $6,887 $7,595 Costs and expenses: Costs of goods sold.................................. 3,266 3,121 3,381 3,949 4,153 Selling, general and administrative.................. 1,433 1,418 1,486 1,502 1,651 Goodwill amortization................................ -- -- 39 228 228 ------ ------ ------ ------ ------ Operating income..................................... 1,161 988 1,038 1,208 1,563 Other income (expense): Interest and other income-net........................ 27 40 12 13 38 Interest expense..................................... (11) (13) (12) (165) (113) ------ ------ ------ ------ ------ Income from continuing operations before income taxes 1,177 1,015 1,038 1,056 1,488 Provision for income taxes........................... (14) (9) (101) (492) (673) ------ ------ ------ ------ ------ Net income........................................... $1,163 $1,006 $ 937 $ 564 $ 815 ====== ====== ====== ====== ====== CONSOLIDATED BALANCE SHEET DATA: Total assets......................................... $3,213 $3,139 $8,743 $9,208 $8,388 Stockholders' equity................................. 3,081 2,871 8,350 6,885 7,079 Long-term debt....................................... $ -- $ 96 $ 111 1,672 702
Interest and other income-net includes the Video Store business of Simulaids through April 30, 1999 even though the Video Store business was not purchased by Aristotle. The Video Store Business and related assets were distributed to the former stockholder of Simulaids on April 30, 1999. E-6 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS) General This discussion and analysis of financial condition and results of operations reviews the results of operations of the Company, on a consolidated basis, for the fiscal year ended June 30, 2001, as compared to the fiscal year ended June 30, 2000, and the fiscal year ended June 30, 2000, as compared to the fiscal year ended June 30, 1999. This discussion and analysis of financial condition and results of operations have been derived from, and should be read in conjunction with, the Consolidated Financial Statements and Notes to Consolidated Financial Statements contained elsewhere in this report on Form 10-K. On April 30, 1999, Aristotle acquired all of the outstanding stock of Simulaids. Simulaids was Aristotle's only operating subsidiary during the period ended June 30, 2000. On September 14, 2000, Aristotle acquired 80% of the outstanding stock of Safe Passage. Aristotle ended the June 30, 2001 fiscal year with net sales of $8,147 and net income of $218 versus prior year net sales of $6,887, an increase of $1,260 or 18.3%, and net income of $235, a decrease of $17 or 7.2%. Excluding the impact of the amortization of goodwill, fiscal 2001 earnings would have been $646 compared with $463, for fiscal 2000, an increase of $183 or 39.5%. During the fiscal year ended June 30, 2001, Simulaids continued to perform well with net sales of $7,595 and net income of $815 versus prior year net sales of $6,887, an increase of $708 or 10.3%, and net income of $564, an increase of $251 or 44.5%. Excluding the impact of the amortization of goodwill, the fiscal 2001 net income would have been $1,043 compared with $792, an increase of $251 or 31.7%. The Simulaids' sales growth was experienced with both domestic and export distributors and across most major product categories. Safe Passage performed significantly below expectations with net revenues of $552 and a net loss of $905 in fiscal 2001. Excluding the impact of the amortization of goodwill, the total year loss would have been $705. Safe Passage's negative fiscal 2001 operating results were a result of significantly lower revenues than originally forecasted. In particular, actual revenues derived from transactions with the Federal Aviation Administration ("FAA"), a primary customer of Safe Passage, were negatively impacted by delays in the awarding of certain FAA contracts. Safe Passage currently anticipates that certain of such contracts will be awarded in the quarter ended December 31, 2001. If there are additional delays in the awarding of such contracts, or if the amount of such contracts awarded to Safe Passage is significantly less than anticipated, the fiscal 2002 operating results of Safe Passage could be materially impacted and additional operating losses may be recognized. Results Of Operations Of The Company Fiscal Year Ended June 30, 2001 As Compared To The Fiscal Year Ended June 30, 2000 The Company's net sales of $8,147 for the fiscal year ended June 30, 2001 increased 18.3% or $1,260 as compared to net sales of $6,887 for the fiscal year ended June 30, 2000. The increase in revenues principally reflect revenue growth at Simulaids of $708, which experienced increases with both domestic and export distributors and increased revenues across most major product categories. In addition, during the fiscal year 2001, the acquisition of Safe Passage resulted in additional revenues of $552. Gross profit for the fiscal year ended June 30, 2001 of $3,971 increased 35.2% or $1,033 versus gross profit for the prior fiscal year of $2,938. The increase in gross profit reflected higher sales and improved plant efficiency for Simulaids, which generated $504 of increased gross profit, and nine months of gross profit of $529 for Safe Passage that was acquired in September of 2000. In addition, the gross margin in fiscal 2001 improved from 42.7% in the prior year to 48.7% in the current fiscal year. This improvement reflected improved manufacturing efficiency for Simulaids and high margins generated by the Safe Passage business. E-7 The Company's selling, product development, general and administrative expenses for the fiscal year ended June 30, 2001 increased by 61.8% or $1,339 to $3,507 compared to $2,168 for the prior fiscal year. The increase principally reflected expenses of Safe Passage of $1,269, which included $499 of product development costs, since the date of acquisition, commission expenses of $89 paid to an affiliate for sales to international customers and increased advertising of $36, partially offset by decreased professional fees of $65. Goodwill amortization of $428 for the current fiscal year increased by $200, or 87.7%, as compared to fiscal 2000 goodwill amortization of $228. The increase in goodwill amortization resulted from the acquisition of Safe Passage in September 2000. Effective July 1, 2001, the Company adopted Statement of Financial Accounting Standard ("SFAS") No 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill is no longer subject to amortization over its estimated useful life. Instead, SFAS 142 requires that goodwill be evaluated at least annually for impairment by applying a fair value based test and, if impairment occurs, the amount of impaired goodwill must be written off immediately. The timing and amount, if any, of FAA contract awards to Safe Passage, anticipated to be awarded in the quarter ended December 31, 2001, will be a significant consideration in assessing any potential Safe Passage goodwill impairment during fiscal 2002. Investment and interest income was $354 and $337 for the twelve months ended June 30, 2001 and 2000, respectively. The increase in 2001 mainly reflects higher returns on investment balances and gains on the sale of marketable securities. The income for the twelve months ended June 30, 2001 and 2000 was principally generated by short-term cash investments and corporate bonds. Interest expense for the twelve months ended June 30, 2001 decreased to $115 from $174 in the corresponding twelve months ended June 30, 2000. The decrease reflected lower debt levels due to principal payments made during the prior twelve months. The equity loss in an unconsolidated subsidiary of $14 in the current fiscal year represented the Company's 50% portion of the results of an on-line continuing medical education joint venture with Quinnipiac University. The income tax provision for the twelve months ended June 30, 2001 was $79 compared to $31 for the twelve months ended June 30, 2000. The tax provision primarily represents state taxes due to the utilization of federal net operating loss carryforwards to offset federal taxable income. There were no preferred dividends for the twelve months ended June 30, 2001 compared to $439 for the twelve months ended June 30, 2000. The decrease was due to the conversion of all shares of Aristotle Preferred Stock into shares of Common Stock from February 2000 through May 2000 and the corresponding prepayment of 2000 and 2001 dividends in fiscal 2000. Results Of Operations Of The Company Fiscal Year Ended June 30, 2000 As Compared To The Fiscal Year Ended June 30, 1999 The Company's net sales of $6,887 for the fiscal year ended June 30, 2000 increased by $5,921 as compared to net sales of $966 for the fiscal year ended June 30, 1999. The increase in sales reflects twelve months of sales for Simulaids in the current fiscal year versus two months of sales for Simulaids in the prior year. Gross profit for the current fiscal year of $2,938 increased by $2,761 versus gross profit for the prior fiscal year of $177. The increase in gross profit reflects twelve months of gross profit for Simulaids in the current fiscal year versus two months of gross profit for Simulaids in the prior year. In addition, the gross margin in fiscal 1999 reflects a nonrecurring impact of the application of purchase accounting at the date of the acquisition that resulted in a $259 fair value adjustment to the purchased inventory. This purchase accounting adjustment was expensed in the period ended June 30, 1999 as the corresponding inventory was sold. The Company's selling, product development, general and administrative expenses for the fiscal year ended June 30, 2000 increased by $918 to $2,168 compared to $1,250 for the prior fiscal year. The increase principally E-8 reflects twelve months of expenses for Simulaids in the current fiscal year versus two months of expenses for Simulaids in the prior year, partially offset by a reduction in professional fees. Goodwill amortization for the current fiscal year of $228 increased by $189 versus goodwill amortization for the prior fiscal year of $39. The increase in goodwill amortization reflects twelve months of amortization in the current fiscal year versus two months of amortization in the prior year. Investment and interest income was $337 and $725 for the twelve months ended June 30, 2000 and 1999, respectively. The decrease in fiscal year 2000 mainly reflects redemption of marketable securities in which the proceeds were used to partially finance the acquisition of Simulaids in April 1999. The income for the twelve months ended June 30, 2000 and 1999 was principally generated by short-term cash investments and corporate bonds. Interest expense for the twelve months ended June 30, 2000 increased to $174 from $32 in the corresponding twelve months ended June 30, 1999. The increase reflected interest expense on the bank funds used in the acquisition of Simulaids that were utilized for twelve months in the current fiscal year versus two months in the prior year. The income tax provision for the twelve months ended June 30, 2000 was $31 compared to $89 for the twelve months ended June 30, 1999. During the twelve months ended June 30, 2000, the Company recorded a tax provision related to state taxes. During the twelve months ended June 30, 1999, the Company recorded a tax provision related to state taxes and a provision for taxes due on the built-in gain on assets purchased in the acquisition of Simulaids. Preferred dividends were $439 for the twelve months ended June 30, 2000 compared to $233 for the twelve months ended June 30, 1999. The increase was principally due to the prepayment of 2000 and 2001 dividends related to the conversion of all shares of Aristotle Preferred Stock into shares of Common Stock from February 2000 to May 2000. Preferred dividends represented dividends paid or accrued on outstanding Series E, F, G and H Aristotle Preferred Stock. The shares of Series E Aristotle Preferred Stock were issued to Geneve Corporation, Aristotle's principal shareholder, in January 1998, and shares of the Series F, G and H Aristotle Preferred Stock were issued in 1998 in connection with the acquisition of Strouse, which company was subsequently sold to The Sara Lee Corporation in June 1998. Results Of Discontinued Operations Of The Company Fiscal Year Ended June 30, 2000 As Compared To The Fiscal Year Ended June 30, 1999 Gain on the sale of Strouse of $911 for the year ended June 30, 1999 reflects adjustments which resulted from a $48 charge related to a final purchase price adjustment based on the net book value of net assets acquired by Sara Lee, a $41 charge related to additional transaction costs in excess of management's original estimate and $1,000 of additional gain resulting from the final determination of the ultimate tax obligations resulting from the sale. Results Of Operations Of Simulaids, On A Stand Alone Basis Twelve Months Ended June 30, 2001 As Compared To The Twelve Months Ended June 30, 2000 Simulaids' net sales for the twelve months ended June 30, 2001 increased 10.3% to $7,595, compared to net sales of $6,887 for the prior year. The increase was primarily due to growth with both domestic and export distributors and across most major product categories. Price increases initiated during the year increased sales by $50. E-9 Simulaids' gross profit for the twelve months ended June 30, 2001 increased 17.2% to $3,442 from $2,938 for the prior year, and the gross margin percentage increased to 45.3% from 42.7%. The increase in gross profit and gross margin was principally due to the sales increase and improved plant efficiency. Operating expenses include selling, general and administrative and product development expenses. Operating expenses for the twelve months ended June 30, 2001 were $1,651 versus $1,502 for the twelve months ended June 30, 2000. The $149, or 9.9%, increase was principally a result of commission expenses of $89 to an affiliate for sales to international customers and increased advertising of $36. Investment and interest income was $37 and $13 for the twelve months ended June 30, 2001 and 2000, respectively. Fluctuations in investment and interest income generated each year were a direct result of the cash balances maintained in the business. Interest expense for the twelve months ended June 30, 2001 decreased to $113 from $165 in the prior year. The decrease reflected lower debt levels due to principal payments made during the prior twelve months. The provision for income taxes for the twelve months ended June 30, 2001 was $673 versus $492 for the prior year. Income taxes represent provisions made pursuant to the tax sharing agreement with its parent, Aristotle. The increase in the income tax provision reflects higher income in 2001 versus 2000. Twelve Months Ended June 30, 2000 As Compared To The Twelve Months Ended June 30, 1999 Simulaids' net sales for the twelve months ended June 30, 2000 increased 15.9% to $6,887, compared to net sales of $5,944 for the prior year. The increase was primarily due to higher volume of manikin sales to existing domestic and international distributors. Simulaids' gross profit for the twelve months ended June 30, 2000 increased to $2,938 from $2,563 for the prior year (a 14.6% increase), and the gross margin percentage decreased to 42.7% from 43.1%. The increase in gross profit was principally due to the sales increase. Operating expenses include selling, general and administrative and product development expenses. Operating expenses for the twelve months ended June 30, 2000 were $1,502 versus $1,486 for the twelve months ended June 30, 1999. The $16, or 1.1%, increase was principally a result of increases in advertising, sales promotion, and selling compensation partially offset by reductions in administrative compensation. Goodwill amortization for the twelve months ended June 30, 2000 of $228 increased by $189 versus goodwill amortization for the twelve months ended June 30, 1999 of $39. The increase in goodwill reflects twelve months of amortization in the twelve months ended June 30, 2000 versus two months of amortization in the prior year. Investment and interest income was $13 and $12 for the twelve months ended June 30, 2000 and 1999, respectively. Fluctuations in investment and interest income generated each year were a direct result of the cash balances maintained in the business. Interest expense for the twelve months ended June 30, 2000 increased to $165 from $12 in the prior year. The increase in interest expense primarily resulted from increased borrowing levels under bank loans established as part of the acquisition of Simulaids. The provision for income taxes for the twelve months ended June 30, 2000 was $492 versus $101 for the prior year. Income taxes represent provisions made pursuant to the tax sharing agreement with its parent, Aristotle. The increase in the income tax provision reflects twelve months with a tax sharing agreement with its parent for the twelve months ended June 30, 2000 versus two months with a tax sharing agreement with its parent and ten months as a "S" Corporation in the prior year. E-10 Liquidity And Capital Resources At June 30, 2001, Aristotle had $4,149 in cash and cash equivalents versus $4,951 at June 30, 2000, a decline of 16.2%. Cash consumed during the twelve months ended June 30, 2001 was principally used to fund the Safe Passage acquisition of $1,927 and to reduce debt by $1,149, partially offset by cash provided by the sale of marketable securities of $1,173 and operating activities of $1,368. The overall decrease in cash and cash equivalents of $802 is detailed below. The Company generated cash of $1,368 from operations during the fiscal year ended June 30, 2001 and provided net cash of $1,757 from operations for the fiscal year ended June 30, 2000. During fiscal 2001, the generation of cash from operations was principally the result of earnings plus depreciation and amortization of $881, increased accounts payable and accrued expenses of $146 and the receipt of tax refunds totaling $123. During fiscal 2000, the generation of cash from operations was principally the result of earnings plus depreciation and amortization of $1,100 and the receipt of tax refunds totaling $1,027. The Company used $1,062 in investing activities for the fiscal year ended June 30, 2001 and generated $910 from investing activities in the fiscal year ended June 30, 2000. During fiscal 2001, the utilization of cash was principally due to the acquisition of Safe Passage of $1,927, capital expenditures of $297, and the net investment of $11 for the development of an on-line continuing medical education program with Quinnipiac University, partially offset by the sale of marketable securities of $1,173. During fiscal 2000, the generation of cash principally reflected the redemption of marketable securities of $991. Financing activities utilized cash of $1,125 for the fiscal year ended June 30, 2001 and of $3,565 for the fiscal year ended June 30, 2000. Funds used in fiscal 2001 primarily reflect the reduction of debt by $1,149. Funds used in fiscal 2000 were primarily for the repayment of borrowings of $3,212, the repurchase of shares of Aristotle Preferred Stock of $136 and the payment of dividends on Aristotle Preferred Stock of $163. Capital resources in the future are expected to be used for the development of the Simulaids and Safe Passage businesses and to acquire additional companies. The Company anticipates that there will be sufficient financial resources to meet projected working capital and other cash requirements at least for the next twelve months. Income Taxes At June 30, 2001, Aristotle had $49,500 of federal net operating loss carryforwards, which expire through 2011, and $1,300 of state net operating loss carryforwards, which expire through 2004. In September 1996, the Company filed an amended Federal income tax return for the year ending December 31, 1992 claiming a worthless stock deduction of approximately $54,000 with respect to its stock in the First Constitution Bank (the "Bank") which previously was Aristotle's only subsidiary and which, on October 2, 1992, was seized by the FDIC. As a result of such amended return, the Company has also claimed tax refunds of approximately $10,000 resulting from the carryback of the Company's net operating loss from 1992 to prior years. Pending final review by the Internal Revenue Service, the Company has not recorded the $10,000 refund claim in its consolidated financial statements. After consideration of such carryback claim, the Company's remaining Federal net operating loss carryforward related to the worthless stock deduction would be approximately $25,300 and the Company's aggregate Federal net operating loss carryforwards would be reduced from $49,500 to $27,500. During 1997, the Company filed a carryback claim related to its 1996 tax year. In connection therewith, the Company received $1,919 for which the Company recorded an income tax benefit of $1,199, which is net of a $720 reserve. In addition, upon receipt of such refund, the Company was obligated to pay $480 as a result of a contingent fee arrangement entered into in connection with this income tax refund claim. E-11 On its return for 1992 as originally filed, the Company made elections under provisions set forth in regulations proposed by the Internal Revenue Service in April 1992 as guidance for the application of Section 597 of the Internal Revenue Code of 1986, as amended and under Section 1.1502-20(g)(1) of the Federal Income Tax Regulations to (i) disaffiliate from the former Bank for Federal income tax purposes and (ii) reattribute net operating losses of the former Bank in excess of $81,000 to the Company. The application of the tax law with respect to the Company's election to disaffiliate from the former Bank and to reattribute the former Bank's net operating losses to the Company is not certain and, therefore, there is no assurance that the Company could succeed to any of the former Bank's net operating losses. Moreover, the reattribution to the Company of the former Bank's net operating losses may be limited if the position taken by the Company on its amended returns is allowed. As anticipated and as discussed in the Company's Annual Report on Form 10-K for the year ended June 30, 1999, the Company received from the Internal Revenue Service a letter disallowing the two carryback claims filed on its amended 1992 return and on its 1996 return. This disallowance at the field examination level was not unexpected by the Company. The Company continues to believe the claims have merit and, therefore, the Company will continue to pursue its case at the Internal Revenue Service Appellate level. The ultimate outcome of this proceeding is uncertain at this time. Notwithstanding the Company being entitled to a net operating loss carryforward arising from, or with respect to its interest in, the former Bank, its ability to utilize such carryforward is dependent upon many factors including (i) the realization of taxable income by the Company, and (ii) avoiding a fifty percent "ownership change" as defined in Section 382 of the Internal Revenue Code. If there is an "ownership change," the tax loss carryforwards available to the Company would be significantly reduced or eliminated. Accordingly, neither the refund claim nor the future benefit of these remaining net operating loss carryforwards have been reflected as tax assets in the accompanying consolidated financial statements. The Company believes, assuming that the former Strouse stockholders currently own the maximum number of shares of Common Stock of Aristotle they could acquire through the exercise of their various rights and options and that Geneve Corporation currently owns the maximum number of shares of Common Stock it could acquire, that the Company has not undergone an ownership change within the meaning of Section 382 of the Code. During the period which the Company has an unutilized federal net operating loss carryforward, which may be for many years into the future, particularly if the Company does succeed to a significant portion of the former Bank's net operating loss carryforward, it will be necessary for the Company to determine whether an ownership change has occurred each time a new or existing stockholder becomes a 5% stockholder or an existing 5% stockholder increases its ownership interest. Except with respect to the former Strouse stockholders and Geneve Corporation, the Company does not know of any stockholders who currently own or would own, upon the exercise of options or warrants, 5% or more of the Common Stock. At a special meeting of stockholders held on April 8, 1994, the stockholders voted to restrict certain share transfers because they could affect the Company's ability to use its net operating losses under Section 382. Recent Developments Discussions between Geneve Corporation ("Geneve") and the Company are continuing concerning a possible stock merger of the Company with Nasco International, Inc. ("Nasco"), a large operating subsidiary of Geneve. Nasco is a manufacturer and worldwide distributor of products primarily to the education and health markets. Nasco is headquartered in Fort Atkinson, Wisconsin. There is no assurance that a merger transaction will be consumated. Geneve, a privately held entity, currently owns approximately 51% of Aristotle's Common Stock. Two principals of Geneve are currently directors of Aristotle. Certain Factors That May Affect Future Results Of Operations Aristotle believes that this report may contain forward-looking statements within the meaning of the "safe-harbor" provisions of the Private Securities Litigation Reform Act of 1995. E-12 These forward-looking statements include statements regarding Aristotle's liquidity and are based on management's current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Aristotle cautions investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors as more fully detailed below. As a result, Aristotle's future development efforts and operations involve a high degree of risk. For further information, refer to the more specific risks and uncertainties below and discussed throughout this report. Risks Relating To Aristotle's And Its Subsidiaries' Business, Industry, Strategy And Operations INFLUENCE BY EXISTING STOCKHOLDERS. Geneve and certain of its affiliates beneficially own approximately 51% of the issued and outstanding capital stock of Aristotle. Geneve is subject to certain voting limitations through January 1, 2003, including the obligation to exercise its voting rights and privileges of those shares that exceed 30% of the then outstanding voting securities for and against any proposal related to the election of directors or the appointment of auditors in the same percentage as all other voting securities in Aristotle were voted for and against such proposal in a preliminary vote taken for this purpose. Geneve and its affiliates collectively have the ability to determine the outcome of certain other corporate actions requiring stockholder approval, including the merger of Aristotle with or into another company, a sale of substantially all of Aristotle's assets and amendments to Aristotle's Certificate of Incorporation. MAINTENANCE OF PRESENT GROWTH. Aristotle's revenue growth rate in the future may not approach the level attained in prior years. Operating expenses are expected to increase from historical levels. Because of the fixed nature of a significant portion of such expenses, coupled with the possibility of slower revenue growth, operating margins may decrease from historical levels. DEPENDENCE ON KEY PERSONNEL. Aristotle provides oversight and minimal operating support to its subsidiaries and limits its services principally to supplying accounting and administration services to its subsidiaries. For this reason, Aristotle has not needed the services of additional management beyond its two executive officers. As Aristotle continues to grow, it may require the services of additional executives. The performance of Aristotle's subsidiaries is substantially dependent on the continued services and performance of their senior management and other key personnel, particularly John T. McNeff, Vice President of Simulaids, and James S. Viscardi, President of Safe Passage. Neither Simulaids nor Safe Passage maintains key man life insurance on its senior management or key personnel. Aristotle's performance also depends upon its ability to continue to retain and motivate other officers and key employees. The loss of the services of, and the failure to promptly replace, any of executive officers or other key employees could have a material adverse effect on the business, prospects, financial condition and results of operations of either Simulaids or Safe Passage, as the case may be. The future success of each subsidiary also depends on the subsidiary's ability to continue to identify, attract, hire, train, retain and motivate other highly skilled managerial and marketing personnel. Competition for such personnel is intense, and there can be no assurance that Aristotle or its subsidiaries will be able to continue to successfully attract, integrate or retain sufficiently qualified personnel. The failure to attract and retain the necessary personnel could have a material adverse effect on the business, prospects, financial condition and results of operations of each subsidiary and, accordingly, Aristotle. DEPENDENCE ON MAJOR CUSTOMERS. Aristotle's revenues have been, and for a substantial period of time in the future likely will be, largely derived from the sale of its subsidiaries' products and services to a small number of major customers. During the last two fiscal years, Simulaids had two major customers, who accounted for approximately 40% of its sales. Similarly, Safe Passage had one major customer over the last two years, the FAA, which accounted for approximately 25% of its sales. Sales to the FAA in fiscal year 2001 declined by 72%. The FAA has delayed the award of new contracts for Safe Passage's computer-based security training products. E-13 No assurances can be given that such customers will continue to do business with Simulaids and Safe Passage, respectively, or that the volume of their orders for such products and services will increase or remain constant. The loss of any major customer, or a significant reduction in the volume of its orders for the products and services of, or such customer's inability to pay its obligations to, the subsidiaries, will have a material adverse impact on the operations of each subsidiary and, accordingly, Aristotle. In addition, if the FAA does not award new contracts to Safe Passage, it could have a material impact on the operating results of the Company, as well as having a negative impact on the Company's assessment of any potential impairment of the goodwill resulting from the Safe Passage acquisition. COMPETITION. The market for the products and services of each of the subsidiaries is constantly evolving and growing rapidly. Barriers to entry are relatively insubstantial. Some of both Simulaids' and Safe Passage's existing and potential competitors have longer operating histories, greater name recognition, larger customer bases and significantly greater financial, technical and marketing resources. Such competitors are able to commit operating resources to product development and enhancement, engage in more thorough marketing campaigns for their products and services, be more aggressive from a pricing standpoint and make more attractive offers to potential employees and partners. Furthermore, growing competition may result in reduced revenue, gross margins or market share for the subsidiaries, any one of which could have a material adverse effect on Aristotle's business and results of operations. CHANGING TECHNOLOGY. Aristotle's success depends on the ability of Simulaids and Safe Passage to enhance existing products, develop new products and technologies that address the increasingly sophisticated and varied needs of customers and its ability to respond to technological advances and emerging industry standards and practices on a cost-effective and timely basis. There can be no assurance that Simulaids and Safe Passage will successfully develop, license or acquire and implement new technologies or adapt its proprietary technology and products to customer requirements or emerging industry standards. If Aristotle's subsidiaries are unable, for technical, legal, financial or other reasons, to adapt in a timely manner in response to changing market conditions or customer requirements, Aristotle's business, prospects, financial condition and results of operations would be materially adversely affected. INTELLECTUAL PROPERTY AND OTHER PROPRIETARY RIGHTS. Each of Simulaids and Safe Passage relies upon trade secrets, know-how, copyrights and continuing technological innovations to develop and maintain its respective competitive position. Simulaids and Safe Passage seek to protect such information, in part, by confidentiality agreements with their corporate partners, collaborators, employees and consultants. These agreements provide that all confidential information developed or made known during the course of the individual's or entity's relationship with Simulaids or Safe Passage is to be kept confidential and not disclosed to third parties except in specific circumstances. Simulaids and Safe Passage have endeavored to cause their respective employees to execute Confidentiality and Inventions Agreements, which provide that, to the extent permitted by applicable law, all inventions conceived by the individual during the individual's employment are the exclusive property of the respective company. There can be no assurance that these agreements will not be breached, that there exists adequate remedies for any breach, or that the trade secrets of Simulaids and Safe Passage will not otherwise become known or be independently discovered by competitors. Further, there can be no assurance that the subsidiaries will be able to protect their respective trade secrets and copyrights, or that others will not independently develop substantially equivalent proprietary information and techniques. Furthermore, the laws of some of the countries that the subsidiaries compete in may not protect our intellectual property rights to the same extent, as do the laws of the United States. PRODUCT LIABILITY. The manufacture and sale of training aids for emergency, medical and rescue personnel by Simulaids entails an inherent risk of product liability. Furthermore, as a provider of security service training, Safe Passage could face potential liability claims in the event of any actions or negligence of security personnel which could be linked to Safe Passage training procedures. There can be no assurance that product liability insurance is adequate to cover potential claims or that Simulaids or Safe Passage, as the case may be, will be able to obtain product liability insurance on acceptable terms in the future or that any product liability E-14 insurance subsequently obtained will provide adequate coverage against all potential claims. A successful claim brought against either Simulaids or Safe Passage in excess of its insurance coverage, or any material claim for which insurance coverage was denied or limited, could have material adverse effect on Simulaids' or Safe Passage's business, results of operations, and financial condition. RISKS ASSOCIATED WITH INTERNATIONAL SALES. International sales are subject to certain risks not inherent in the domestic sales of Simulaids and Safe Passage, including political and economic instability in foreign markets, restrictive trade policies of foreign governments, local economic conditions in foreign markets, potentially adverse tax consequences, difficulties or delays in developing and supporting non-English language versions of certain products and services and the burdens on customers of complying with a variety of applicable laws. All of these factors may suppress demand for the services and products of the subsidiaries. The impact of such factors on business is inherently unpredictable. There can be no assurance that these factors will not have a material adverse effect upon the subsidiaries' revenues from international sales and, consequently, the business, prospects, financial condition and results of operations. NEW PRODUCT OFFERING. Safe Passage has recently begun the product launch of a hosted Internet-based learning solution. Accordingly, Safe Passage is in the initial phase of rolling out its new Web-based services and is subject to certain risks inherent in launching new products and services. Safe Passage has relatively limited experience with these Web-based products, which makes its historical results of limited value in predicting the potential success of this initiative. The ultimate success of this initiative will depend on Safe Passage's ability to build-out and maintain its on-line learning infrastructure, to market and sell the new Web-based solutions to existing and prospective customers, to create a significant subscriber base for Web-based educational programs, to host, operate and manage its destination site, and to attract and retain key management and technical personnel. Sage Passage's decision to develop, market and support a Web-based version of its software training products is predicated on the assumption that the demand for such services will be large enough to permit Safe Passage to operate profitably. There can be no assurance that its assumption will be correct or that it will be able to successfully compete as a provider of such Web-based service. If its assumption is not accurate, or if it is unable to compete as a provider of Web-based training services, Safe Passage's, and Aristotle's business, prospects, financial condition and results of operations may be materially adversely affected. Moreover, to the extent that Safe Passage is successful in its efforts to enter into agreements with customers for the purchase of its new Web-based solution, those arrangements are expected to have accounting and operating consequences that would be materially different from Safe Passage's traditional software licensing arrangements. RELIANCE ON KEY SUPPLIERS. Simulaids currently purchases several key raw materials, including petroleum, used in its products from single or limited sources of supply. Simulaids has no guaranteed supply arrangements for any of these materials, which it generally purchases through purchase orders. As a result, these suppliers could terminate the supply of these materials at any time without penalty. Simulaids' failure to obtain these materials or other single or limited-source materials could delay or reduce its product shipments, which could result in lost orders, increased costs, and reduced control over quality and delivery schedules. A failure to obtain these materials also could require Simulaids to redesign its products. If a significant supplier became unable or unwilling to continue to ship materials in required volumes, Simulaids would have to identify and qualify an acceptable replacement. A delay or reduction in shipments caused by a need to identify and qualify replacement suppliers or a significant increase in Simulaids' need for material that cannot be met on acceptable terms could cause customers to cancel orders and would harm Simulaids' and accordingly Aristotle's business. ABSENCE OF DIVIDENDS. Aristotle has not, in recent years, paid dividends with respect to its Common Stock, and it is unlikely that Aristotle will pay any dividends with respect to its Common Stock in the foreseeable future. ANTI-TAKEOVER PROVISIONS. Certain provisions of Aristotle's charter documents, such as authorization of "blank check" preferred stock, restrictions on certain transfers of Common Stock and election of E-15 a classified board of directors to staggered three year terms, could have the effect of discouraging certain attempts to acquire Aristotle or remove directors even if some of Aristotle's stockholders deem such an attempt to be in Aristotle's and their best interests. Management and the affiliates of Aristotle's may be deemed to have effective control of Aristotle, which may give management and such affiliates the ability to influence the election of directors and other stockholder actions. TAX REFUND CLAIM. In 1997, the Company received a refund in the amount of $1.9 million for a net operating loss carryback claim related to its 1996 tax year. The refund is currently being reviewed by the Internal Revenue Service. The Company has recorded a cash asset, net of reserves, with regard to such refund of $719,000. To the extent that any portion of the refund in excess of the amount reserved is disallowed by the Internal Revenue Service, or the Company enters into an agreement with the Internal Revenue Service to such effect, the Company's cash position, net worth, and earnings would be adversely affected. ITEM 7A- QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MATERIAL RISK As described below, credit risk and interest rate risk are the primary sources of market risk to the Company in its marketable securities and short-term borrowings. Qualitative Interest Rate Risk: Changes in interest rates can potentially impact the Company's profitability and its ability to realize assets and satisfy liabilities. Interest rate risk is resident primarily in the Company's marketable securities and short-term borrowings, which have fixed coupon or interest rates. Credit Risk: The Company's marketable securities are invested in investment grade corporate bonds and closed-end bond funds, both domestic and international, which have various maturities. Quantitative The Company's marketable securities and short-term borrowings as of June 30, 2001 are as follows:
Maturity Maturity Less Greater Than Than One One Year Year -------- -------- Marketable securities Cost value..................... $ -- $901 Weighted average return........ -- 7.0% Fair market value.............. $ -- $795 Short-term borrowings Amount......................... $169 $702 Weighted average interest rate. 6.1% 6.1% Fair market value.............. $169 $702
New Accounting Standards In July 2001, the Financial Accounting Standards Board FASB issued SFAS No. 141, "Business Combinations" ("SFAS No. 141") which will eliminate the pooling of interest method of accounting for acquisitions. SFAS No. 141 is effective for all acquisitions initiated after June 30, 2001. In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets" to be effective for fiscal years beginning after December 15, 2001. The Company will adopt SFAS No. 142 on July 1, 2001. Under SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Instead, SFAS No. 142 requires that goodwill be evaluated at least annually for impairment by applying a fair-value-based test E-16 and, if impairment occurs, the amount of impaired goodwill must be written off immediately. Upon the adoption of SFAS No. 142, the Company will no longer record amortization of goodwill. For the year ended June 30, 2001, the Company recorded $428 of goodwill amortization. The Company is required to apply the initial fair value test by December 31, 2001. The Company has not yet determined whether the initial fair value test of the goodwill reflected in the accompanying consolidated balance sheets will result in any impairment charges. The Emerging Issues Task Force ("EITF") of the FASB reached a consensus on EITF 00-10 "Accounting for Shipping and Handling Fees and Costs" ("EITF 00-10"). EITF 00-10 requires that all amounts billed to a customer in a sales transaction related to shipping and handling represent revenues earned for the goods provided and should be classified as revenue. The Company adopted EITF 00-10 in the fourth quarter of fiscal 2001 and has reclassified approximately $177, $174 and $19 to revenue for the years ended June 30, 2001, 2000 and 1999, respectively. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of the Company and its subsidiaries, together with the related Notes to Consolidated Financial Statements and the report of independent accountants; the Financial Statements of Simulaids for the four months ended April 30, 1999, together with the related Notes to Financial Statements and the report of independent accountants; the Financial Statements of Simulaids for the years ended December 31, 1998, 1997, and 1996, together with the related Notes to Financial Statements and the report of independent accountants, are set forth below. E-17 THE ARISTOTLE CORPORATION AND SUBSIDIARIES CONSOLIDATED FINANCIAL STATEMENTS AS OF JUNE 30, 2001 AND 2000 TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS E-18 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Stockholders of The Aristotle Corporation: We have audited the accompanying consolidated balance sheets of The Aristotle Corporation (a Delaware corporation) and subsidiaries as of June 30, 2001 and 2000, and the related consolidated statements of operations, changes in stockholders' equity and comprehensive income and cash flows for each of the three years ended June 30, 2001, as restated (See Note 2). These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Aristotle Corporation and subsidiaries as of June 30, 2001 and 2000, and the results of their operations and their cash flows for each of the three years ended June 30, 2001 in conformity with accounting principles generally accepted in the United States. /s/ Arthur Andersen LLP Hartford, Connecticut August 31, 2001, except for the item noted in footnote 2 for which the date is April 9, 2002 E-19 THE ARISTOTLE CORPORATION AND SUBSIDIARIES Consolidated Balance Sheets As of June 30, 2001 and 2000 (dollars in thousands, except for share data)
2001 2000 --------- --------- ASSETS Current assets: Cash and cash equivalents......................................... $ 4,149 $ 4,951 Marketable securities, at market value............................ 795 1,806 Accounts receivable............................................... 651 465 Inventories....................................................... 854 928 Tax receivable.................................................... -- 123 Other current assets.............................................. 121 128 --------- --------- Total current assets....................................... 6,570 8,401 --------- --------- Property, plant and equipment, net................................ 1,547 1,365 --------- --------- Other assets: Goodwill, net of accumulated amortization of $695 and $267 in 2001 and 2000, respectively........................................... 6,768 5,428 Other noncurrent assets........................................... 23 17 --------- --------- 6,791 5,445 --------- --------- $ 14,908 $ 15,211 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long-term debt.............................. $ 139 $ 225 Current maturities of capital lease obligations................... 30 28 Accounts payable.................................................. 340 127 Accrued expenses.................................................. 510 492 Accrued tax reserves.............................................. 720 720 Deferred revenue.................................................. 99 -- --------- --------- Total current liabilities.................................. 1,838 1,592 --------- --------- Long-term debt, net of current maturities......................... 649 1,589 Capital lease obligations, net of current maturities.............. 53 83 --------- --------- Total long-term liabilities................................ 702 1,672 --------- --------- Commitments and contingencies (Note 10) Stockholders' equity: Common stock, $.01 par value, 3,000,000 shares authorized; 1,904,613 shares issued in 2001 and 2000......................... 19 19 Additional paid-in capital........................................ 163,654 163,654 Accumulated deficit............................................... (151,147) (151,365) Treasury stock, at cost, 12,988 shares and 17,834 shares in 2001 and 2000, respectively...................................... (69) (93) Foreign currency translation...................................... 17 -- Net unrealized investment losses.................................. (106) (268) --------- --------- Total stockholders' equity................................. 12,368 11,947 --------- --------- $ 14,908 $ 15,211 ========= =========
The accompanying notes are an integral part of these consolidated financial statements. E-20 THE ARISTOTLE CORPORATION AND SUBSIDIARIES Consolidated Statements of Operations For the Years Ended June 30, 2001, 2000 and 1999 (dollars in thousands, except per share data)
2001 2000 1999 ------ ------ ------- Net sales.................................................................... $8,147 $6,887 $ 966 Cost of goods sold........................................................... 4,176 3,949 789 ------ ------ ------- Gross profit.......................................................... 3,971 2,938 177 ------ ------ ------- Selling expenses............................................................. 942 454 46 Product development expenses................................................. 560 58 8 General and administrative expenses.......................................... 2,005 1,656 1,196 Goodwill amortization........................................................ 428 228 39 ------ ------ ------- Operating income (loss)............................................... 36 542 (1,112) ------ ------ ------- Other income (expense): Investment and interest income............................................... 354 337 725 Interest expense............................................................. (115) (174) (32) Equity loss in unconsolidated subsidiary..................................... (14) -- -- ------ ------ ------- Income (loss) from continuing operations before income taxes and minority interest................................................... 261 705 (419) Provision for income taxes................................................... 79 31 89 ------ ------ ------- Income (loss) from continuing operations before minority interest..... 182 674 (508) Minority interest............................................................ 36 -- -- ------ ------ ------- Income (loss) from continuing operations.............................. 218 674 (508) Discontinued operations: Gain on sale of The Strouse, Adler Company................................... -- -- 911 ------ ------ ------- Net income............................................................ 218 674 403 Preferred dividends.......................................................... -- 439 233 ------ ------ ------- Net income applicable to common shareholders.......................... $ 218 $ 235 $ 170 ====== ====== ======= Basic earnings (loss) per common share: Continuing operations........................................................ $ 0.12 $ 0.16 $ (0.60) Gain on sale of discontinued operations...................................... -- -- 0.74 ------ ------ ------- $ 0.12 $ 0.16 $ 0.14 ====== ====== ======= Diluted earnings (loss) per common share: Continuing operations........................................................ $ 0.11 $ 0.16 $ (0.60) Gain on sale of discontinued operations...................................... -- -- 0.74 ------ ------ ------- $ 0.11 $ 0.16 $ 0.14 ====== ====== =======
The accompanying notes are an integral part of these consolidated financial statements. E-21 THE ARISTOTLE CORPORATION AND SUBSIDIARIES Consolidated Statements of Changes in Stockholders' Equity and Comprehensive Income For the Years Ended June 30, 2001, 2000 and 1999 (dollars in thousands)
Net Unrealized Additional Investment Foreign Total Common Paid-in Accumulated Treasury Gains Currency Stockholders' Comprehensive Stock Capital Deficit Stock (Losses) Translation Equity Income ------ ---------- ----------- -------- ---------- ----------- ------------- ------------- Balance, June 30, 1998................. $11 $160,248 3$(151,770) $(30) $ (4) $ - $ 8,455 Preferred dividends.................... -- -- (233) -- -- -- (233) Issuance of common stock to directors.. 2 155 -- -- -- -- 157 Purchase of treasury stock............. -- -- -- (17) -- -- (17) Net unrealized investment (loss) gain.. -- -- -- -- (157) -- (157) $(157) Net income............................. -- -- 403 -- -- -- 403 403 --- -------- ---------- ---- ----- --- ------- ----- Total comprehensive income............. $ 246 Balance, June 30, 1999................. 13 160,403 (151,600) (47) (161) -- 8,608 Preferred dividends.................... -- -- (439) -- -- -- (439) Issuance of commo-n stock to directors andemployees.......................... -- 46 -- 8 -- -- 54 Conversion of preferred stock.......... 6 2,869 -- -- -- -- 2,875 Issuance of common stock............... -- 336 -- -- -- -- 336 Purchase of treasury stock............. -- -- -- (54) -- -- (54) Net unrealized investment (loss) gain.. -- -- -- -- (107) -- (107) $(107) Net income............................. -- -- 674 -- -- -- 674 674 --- -------- ---------- ---- ----- --- ------- ----- Total comprehensive income............. $ 567 Balance, June 30, 2000................. 19 163,654 (151,365) (93) (268) -- 11,947 Issuance of common stock to directors and employees............... -- -- -- 24 -- -- 24 Foreign currency translation adjustment -- -- -- -- -- 17 17 $ 17 Net unrealized investment gain (loss).. -- -- -- -- 162 -- 162 162 Net income............................. -- -- 218 -- -- -- 218 218 --- -------- ---------- ---- ----- --- ------- ----- Total comprehensive income............. $ 397 Balance, June 30, 2001................. $19 $163,654 $(151,147) $(69) $(106) $17 $12,368 === ======== ========== ==== ===== === =======
The accompanying notes are an integral part of these consolidated financial statements. E-22 THE ARISTOTLE CORPORATION AND SUBSIDIARIES Consolidated Statements of Cash Flows For the Years Ended June 30, 2001, 2000 and 1999 (dollars in thousands)
2001 2000 1999 ------- ------- -------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income............................................................ $ 218 $ 674 $ 403 Adjustments to reconcile net income to net cash provided by (used in) operating activities: Depreciation and amortization..................................... 663 426 59 Minority interest................................................. (36) -- -- Non-cash deferred compensation.................................... 18 -- -- Loss on disposal of property and equipment........................ -- 14 9 Gain from sale of discontinued operations......................... -- -- (911) Changes in assets and liabilities, net of business acquired: Accounts receivable............................................ 98 (166) 92 Inventories.................................................... 74 61 203 Tax receivable................................................. 123 1,027 (1,150) Other assets................................................... 56 17 482 Accounts payable and accrued expenses.......................... 146 (296) 52 Deferred revenue............................................... 8 -- -- Net cash provided by (used in) operating activities......... 1,368 1,757 (761) ------- ------- -------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment.................................... (297) (81) (17) Redemption of marketable securities................................... 1,173 991 -- Investment in unconsolidated subsidiary............................... (11) -- -- Purchase of Safe Passage, net of $16 of cash acquired................. (1,927) -- -- Purchase of marketable securities..................................... -- -- (1,285) Proceeds from disposal of discontinued operations..................... -- -- 911 Accrued transaction costs............................................. -- -- (1,704) Purchase of Simulaids, net of $237 of cash acquired................... -- -- (8,463) Net cash provided by (used in) investing activities......... (1,062) 910 (10,558) ------- ------- -------- CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from short-term borrowings................................... -- -- 5,000 Repayment of short-term borrowings.................................... -- (5,000) -- Proceeds from credit agreement........................................ -- 2,000 -- Principle debt payments............................................... (1,121) (187) -- Repayment of capital lease obligations................................ (28) (25) (4) Repurchase of preferred stock......................................... -- (136) (6) Proceeds from exercise of stock options............................... -- -- 157 Payment of dividends on preferred stock............................... -- (163) (233) Issuance of treasury stock............................................ 24 -- -- Purchase of treasury stock............................................ -- (54) (17) Net cash provided by (used in) financing activities......... (1,125) (3,565) 4,897 ------- ------- -------- EFFECT OF EXCHANGE RATE CHANGES....................................... 17 -- -- ------- ------- -------- DECREASE IN CASH AND CASH EQUIVALENTS................................. (802) (898) (6,422) CASH AND CASH EQUIVALENTS, beginning of period........................ 4,951 5,849 12,271 ------- ------- -------- CASH AND CASH EQUIVALENTS, end of period.............................. $ 4,149 $ 4,951 $ 5,849 ======= ======= ======== SUPPLEMENTAL DISCLOSURES: Cash paid during the year for: Interest.............................................................. $ 115 $ 180 $ 28 ======= ======= ======== Income taxes.......................................................... $ 131 $ 28 $ 1,259 ======= ======= ========
The accompanying notes are an integral part of these consolidated financial statements. E-23 THE ARISTOTLE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS June 30, 2001 and 2000 (Amounts in thousands, except share and per share data) (1) NATURE OF OPERATIONS Organization The Aristotle Corporation ("Aristotle" or "the Company") is a holding company which, through its wholly-owned subsidiaries, Simulaids, Inc. ("Simulaids") and Safe Passage International Inc. ("Safe Passage"), currently conducts business in two segments, the health and medical educational products market and the computer-based training market. Simulaids' primary products include manikins and simulation kits used for training in CPR, emergency rescue and patient care fields. Simulaids' products are sold throughout the United States and internationally via distributors and catalogs to end users such as fire and emergency medical departments and nursing and medical schools. Safe Passage, which operates in Rochester, New York and England (through a wholly owned subsidiary Safe Passage Limited), develops and licenses computer-based training products for the international security and transportation industries. Acquisition Of Safe Passage International, Inc. On September 14, 2000, Aristotle acquired 80% of the outstanding shares of common stock (the "Safe Passage Acquisition") of Safe Passage, a privately-held Rochester, New York-based company, pursuant to a Stock Purchase Agreement dated as of September 13, 2000 between Aristotle and the Safe Passage shareholders (the "Sellers"). Accordingly, the Company's consolidated statement of operations includes the results of operations of Safe Passage since the date of the Safe Passage Acquisition. The Safe Passage Acquisition purchase price of approximately $1,943, which included approximately $318 of transaction costs, was paid utilizing cash on hand. The fair value of assets acquired and liabilities assumed amounted to $462 and $268, respectively. The excess of the purchase price over the fair value of the net assets acquired amounted to $1,749 and is reflected as goodwill in the accompanying financial statements, net of amortization based on a straight-line basis over seven years (see Note 3). In addition, the Company and the Sellers entered into an agreement whereby the Company may be required to pay to the Sellers an additional consideration up to a maximum of $2.3 million based on the operating performance of Safe Passage during calendar 2000 and 2001. If and when such additional consideration is earned, the payments will be recognized as additional purchase price consideration and goodwill will be adjusted accordingly. As of June 30, 2001, no additional consideration was due to the Sellers. The Safe Passage Acquisition has been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets and liabilities acquired based on their fair market values at the date of the acquisition. The following summarizes the allocation of the purchase price of Safe Passage: Cash................................. $ 16 Accounts receivable.................. 284 Property and equipment............... 118 Other assets......................... 44 Goodwill............................. 1,749 Accounts payable and accrued expenses (169) Other liabilities.................... (99) ------ $1,943 ======
E-24 THE ARISTOTLE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Operating results for the year ended June 30, 2001 and 2000 on a pro forma basis, as though Safe Passage was acquired as of July 1, 2000, are as follows:
2001 2000 ----------- ----------- (UNAUDITED) (UNAUDITED) Net sales................................... $8,834 $8,666 Net income applicable to common shareholders $ 404 $ 33 Basic earnings per common share............. $ 0.21 $ 0.02
The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the Safe Passage Acquisition been consummated as of the above date, nor are they necessarily indicative of future operating results. The pro forma adjustments include amortization of intangibles and decreased interest income. Acquisition Of Simulaids, Inc. Effective April 30, 1999, pursuant to a Stock Purchase Agreement dated as of April 30, 1999, Aristotle acquired all of the outstanding stock (the "Simulaids Acquisition") of Simulaids, a privately-held New York corporation. As a result, the Company's consolidated statements of operations include the results of operations of Simulaids since the date of the Simulaids Acquisition. The Simulaids Acquisition purchase price of approximately $8,700, which included $300 of transaction costs and tax obligations resulting from the Simulaids Acquisition, was paid utilizing approximately $3,700 of cash and $5,000 of bank financing. The fair value of assets acquired and liabilities assumed amounted to $3,419 and $412, respectively. The excess cost over the fair value of net assets acquired amounted to $5,693 and is reflected as goodwill in the accompanying financial statements, net of amortization based on a straight-line basis over 25 years (see Note 3). The Simulaids Acquisition has been accounted for using the purchase method of accounting and, accordingly, the purchase price has been allocated to the assets and liabilities acquired based on their fair market values at the date of the Simulaids Acquisition. The following summarizes the final allocation of the purchase price of Simulaids: Cash................................. $ 237 Accounts receivable.................. 391 Inventories (Note 2)................. 1,192 Property, plant and equipment........ 1,486 Other assets......................... 113 Goodwill............................. 5,693 Accounts payable and accrued expenses (156) Other liabilities.................... (256) ------ $8,700 ======
E-25 THE ARISTOTLE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Operating results for the year ended June 30, 1999 on a pro forma basis, excluding the discontinued operations of The Strouse, Adler Company, as though Simulaids was acquired as of July 1, 1998 are:
1999 ----------- (UNAUDITED) Net sales............................................. $5,820 Net income (loss) from continuing operations available to common shareholders.............................. $ (422) Net income (loss) from continuing operations available to common shareholders per basic share.............. $(0.34)
The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the Simulaids Acquisition been consummated as of the above dates, nor are they necessarily indicative of the future operating results. The pro forma adjustments include amortization of intangibles, decreased interest income, increased interest expense and state income taxes on the income of Simulaids. Sale Of The Strouse, Adler Company Effective June 30, 1998, Aristotle sold substantially all of the assets and certain specified liabilities of its wholly-owned subsidiary The Strouse, Adler Company ("Strouse") to the Sara Lee Corporation ("Sara Lee"). Strouse, which was Aristotle's only operating subsidiary during fiscal 1998, designed, manufactured and marketed specialty bra and shapewear products. The final consideration received by Aristotle from Sara Lee was $21,452, and the net cash proceeds from the sale were approximately $9,600. The ultimate gain recognized by the Company in connection with the sale of Strouse was $1,784, of which a gain of $873 was recorded in fiscal 1998 and a gain of $911 was recorded in fiscal 1999. (2) RESTATEMENT Subsequent to the issuance of its fiscal 2000 financial statements, the Company determined that the $330 note issued to Geneve Corporation (see Note 5) should have been reflected as an additional dividend. The accompanying financial statements reflect the recognition of such dividend, and the resulting impact on earnings per common shareholder. (3) SIGNIFICANT ACCOUNTING POLICIES Principles Of Consolidation The consolidated financial statements include the accounts of Aristotle and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Revenue Recognition Simulaids revenue is recorded when goods are shipped to the Company's customers. Safe Passage generates revenues from licensing the rights to use its software products to end users. The Company also generates revenues from sales of software maintenance contracts. Revenue from software license agreements is recognized upon delivery of the software to the customer if there are no significant post delivery obligations and collection is probable. If a significant vendor obligation remains, then revenue is recognized under the percentage of completion method of accounting, whereby revenues and profit are recognized as work is E-26 THE ARISTOTLE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) performed based on the relationship between actual costs incurred and total estimated costs to complete. The cumulative impact of any revision in the estimate of the cost to complete is reflected in the period in which the changes become known. Software maintenance fees are recognized over the term of the maintenance period. Advance billings of license and software maintenance contracts are reflected as deferred revenue in the accompanying consolidated balance sheet. Foreign Currency Translation The operations and cash flows of Safe Passage Limited are translated at average exchange rates during the period, and assets and liabilities are translated at end-of-period exchange rates. Translation adjustments are included as a separate component of comprehensive loss within stockholders' equity. Cash And Cash Equivalents Cash and cash equivalents include cash and highly liquid investments with an original maturity of three months or less. Marketable Securities The Company accounts for marketable securities under Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("SFAS No. 115"). This statement requires that marketable securities be carried at their fair values. The Company has classified its marketable securities as "available-for-sale" in accordance with SFAS No. 115. Accordingly, all unrealized holding gains and losses are recorded as a separate component of stockholders' equity. The Company utilized the specific identification method in determining cost and fair value. Inventories Inventories were valued at the lower of cost, using the first-in, first-out method ("FIFO"), or market. At June 30, 2001 and 2000, inventories consisted of the following:
2001 2000 ---- ---- Raw materials.. $413 $458 Work-in-process 37 50 Finished goods. 414 450 ---- ---- 864 958 Reserve........ (10) (30) ---- ---- $854 $928 ==== ====
In connection with the Simulaids Acquisition (see Note 1), and in accordance with the purchase method of accounting, at the date of acquisition the purchased inventories were valued at a fair value which was approximately $259 greater than its historic cost. This purchase accounting adjustment was expensed as the associated inventories were sold and was therefore included in cost of sales in the accompanying 1999 consolidated statement of operations. Property, Plant and Equipment Property, plant and equipment are recorded at cost and are depreciated or amortized, using the straight-line method, over the estimated useful lives of the assets, as follows: Buildings..................... 40 Machinery, equipment and other 5-7 Leasehold improvements........ various
E-27 THE ARISTOTLE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At June 30, 2001 and 2000, property, plant and equipment consisted of the following:
2001 2000 ------ ------ Land.......................................... $ 220 $ 220 Buildings and improvements.................... 896 835 Machinery, equipment and other................ 866 512 ------ ------ 1,982 1,567 Less accumulated depreciation and amortization (435) (202) ------ ------ $1,547 $1,365 ====== ======
Expenditures for repairs and maintenance are charged against income as incurred. Renewals and betterments are capitalized. LONG-LIVED ASSETS The Company has adopted the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of." This statement requires a company to review long-lived assets for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Future realization of the Company's property, plant and equipment and intangible assets is dependent upon the ability of the Company to generate future profitable operating results in accordance with its operating plans. Based upon management's evaluations of expected future cash flows, no impairment was indicated. E-28 THE ARISTOTLE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) EARNINGS PER COMMON SHARE The Company has adopted the provisions of SFAS No. 128, "Earnings Per Share." For the years ended June 30, 2001, 2000 and 1999, Basic and Diluted Earnings Per Share are calculated as follows:
2001 2000 1999 ---------- ---------- ---------- BASIC EARNINGS PER SHARE: Numerator Income (loss) from continuing operations.................................. $ 218 $ 674 $ (508) Preferred dividends....................................................... -- (439) (233) ---------- ---------- ---------- Income (loss) from continuing operations applicable to common shareholders 218 235 (741) Gain on sale of discontinued operations................................... -- -- 911 ---------- ---------- ---------- Net income applicable to common shareholders.............................. $ 218 $ 235 $ 170 ========== ========== ========== Denominator Weighted average shares outstanding................................... 1,888,501 1,464,465 1,226,144 Basic Earnings Per Share Continuing operations................................................. $ 0.12 0.16 $ (0.60) Gain on sale of discontinued operations............................... -- -- 0.74 ---------- ---------- ---------- Net income............................................................ $ 0.12 $ 0.16 $ 0.14 ========== ========== ========== DILUTED EARNINGS PER SHARE: Numerator Income (loss) from continuing operations.............................. $ 218 $ 674 $ (508) Preferred dividends................................................... -- (439) (233) ---------- ---------- ---------- Income (loss) from continuing operations applicable to common shareholders................................... 218 235 (741) Gain on sale of discontinued operations............................... -- -- 911 ---------- ---------- ---------- Net income applicable to common shareholders.......................... $ 218 $ 235 $ 170 ========== ========== ========== Denominator Weighted average shares outstanding................................... 1,888,501 1,464,465 1,226,144 Options to purchase common stock...................................... 33,059 2,206 -- Convertible preferred stock........................................... -- 39,521 -- ---------- ---------- ---------- 1,921,560 1,506,192 1,226,144 ========== ========== ========= DILUTED EARNINGS PER SHARE Continuing operations................................................. $ 0.11 $ 0.16 $ (0.60) Gain on sale of discontinued operations............................... -- -- 0.74 ---------- ---------- ---------- Net income............................................................ $ 0.11 $ 0.16 $ 0.14 ========== ========== ==========
For the years ended June 30, 2001 and 2000, respectively, there were an additional 27,769 and 134,637 options exercisable (prior to the application of the treasury stock method) whose exercise price exceeded the average market price for the year and were therefore excluded in the computation of diluted earnings per share. In addition, for the year ended June 30, 1999, options to purchase shares of common stock and convertible preferred stock of the Company were outstanding but were not included in the computation of diluted earnings per share as such inclusion would be anti-dilutive or because the options' exercise price was greater than the average market price of the common shares. Other Comprehensive Income The Company has adopted the provisions of SFAS No. 130, "Reporting Comprehensive Income," which establishes standards for the reporting and display of comprehensive income and its components in a full set of general-purpose financial statements. Accordingly, the Company has included this presentation as a component of the statements of changes in stockholders' equity and comprehensive income. The objective of the statement is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners ("comprehensive income"). This statement requires that E-29 THE ARISTOTLE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) financial statements report net unrealized investment gains (losses) and foreign currency translation adjustments as a component of comprehensive income or loss. Investments In Unconsolidated Subsidiaries During the year, the Company invested $25 for a 50% interest in the capital stock of QU Online Continuing Medical Education, LLC ("QUCME"), a joint venture formed with Quinnipiac University for the purpose of developing on-line continuing medical education programs. The investment in QUCME's capital stock is recorded under the equity method of accounting. As of June 30, 2001, the initial investment of $25 was reduced to $11 to reflect the Company's share of QUCME's losses. Safe Passage owns a 50% interest in CerTrac, Inc., a joint venture established to develop and market computer-based training programs related to alcohol training and awareness. Safe Passage has not been required to make any initial investments in the joint venture but has subsequently performed certain services for CerTrac (see Note 10). Concentration Of Credit Risk At June 30, 2001 and 2000, accounts receivable from two customers accounted for 22.4% and 28.3% of the outstanding balance, respectively. No other customers had balances in excess of 10% of the outstanding balance. Sales to those two customers accounted for 39.7% and 29.9% of net sales, respectively during the years ended June 30, 2001 and 2000. Goodwill Goodwill resulting from the excess of cost over the fair value of net assets acquired in the acquisitions of Simulaids and Safe Passage (see Note 1) is being amortized on a straight-line basis over 25 years and 7 years, respectively. New Accounting Standards In July 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations" ("SFAS No. 141") which will eliminate the pooling of interest method of accounting for acquisitions. SFAS No. 141 is effective for all acquisitions initiated after June 30, 2001. In July 2001, the FASB also issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142") to be effective for fiscal years beginning after December 15, 2001. The Company will adopt SFAS No. 142 on July 1, 2001. Under SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Instead, SFAS No. 142 requires that goodwill be evaluated at least annually for impairment by applying a fair-value-based test and, if impairment occurs, the amount of impaired goodwill must be written off immediately. Upon the adoption of SFAS No. 142, the Company will no longer record amortization of goodwill. For the year ended June 30, 2001, the Company recorded $428 of goodwill amortization. The Company is required to apply the initial fair value test by December 31, 2001. The Company has not yet determined whether the initial fair value test of the goodwill reflected in the accompanying consolidated balance sheets will result in any impairment charges. The Emerging Issues Task Force ("EITF") of the FASB reached a consensus on EITF 00-10 "Accounting for Shipping and Handling Fees and Costs" ("EITF 00-10"). EITF 00-10 requires that all amounts billed to a customer in a sales transaction related to shipping and handling represent revenues earned for the goods provided and should be classified as revenue. The Company adopted EITF 00-10 in the fourth quarter of fiscal 2001 and has reclassified approximately $177, $174 and $19 to revenue for the years ended June 30, 2001, 2000 and 1999, respectively. E-30 THE ARISTOTLE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Use Of Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (4) MARKETABLE SECURITIES As of June 30, 2001 and 2000, the Company had funds invested in high-grade corporate debentures which have been classified as available-for-sale. As of June 30, 2001 and 2000, the fair value of these securities were $795 and $1,806, respectively, and the amortized cost associated with the securities was $901 and $2,074, respectively. A total unrealized holding loss, related to all investment securities, of $106 and $268 is recorded as a component of stockholders' equity as of June 30, 2001 and 2000, respectively. (5) LONG TERM DEBT On September 27, 1999, Simulaids and Citizens Bank of Connecticut ("Citizens") entered into a $2.5 million Credit Agreement. The credit agreement is comprised of three facilities ("Credit Facilities"): (a)$1,200 SEVEN-YEAR TERM LOAN--Principal payments are scheduled on a seven-year straight-line amortization. The interest rate is charged at the rate of LIBOR plus 200 basis points on a 30, 60, 90 or 180 day LIBOR rate at the Company's election. (b)$800 SEVEN-YEAR MORTGAGE--Principal payments are scheduled on a fifteen-year straight-line amortization, with a balloon payment at the seven-year maturity. The interest rate is charged at the rate of LIBOR plus 200 basis points on a 30, 60, 90 or 180 day LIBOR rate at the Company's election. (c)$500 TWO-YEAR REVOLVING LINE OF CREDIT--Borrowing availability under the line of credit is determined by a borrowing base which is equal to the sum of 80% of eligible accounts receivable and 50% of eligible inventory, with a maximum borrowing of $500. There are no scheduled principal payments. The interest rate is charged at the rate of LIBOR plus 175 basis points on a 30, 60, 90 or 180 day LIBOR rate at the Company's election. As of June 30, 2001, the balance outstanding on the term loan was $86 and the balance outstanding on the mortgage was $702. Future monthly principal payments on the term loan and mortgage are $14 and $5, respectively. As of June 30, 2001, Simulaids had not drawn on the line of credit. Subsequent to year-end, Simulaids elected not to extend its line of credit with Citizens. Repayments of long-term debt for each of the next five years and thereafter are as follows:
Year Ending June 30, Amount -------- ------ 2002.... $139 2003.... 53 2004.... 53 2005.... 53 2006.... 53 Thereafter. 437 ----- $ 788 =====
E-31 THE ARISTOTLE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Simulaids is required to maintain certain financial ratios, including maintaining a debt service coverage ratio of 1.25 to 1, as defined, and satisfy various other covenants in connection with the Credit Facilities. As of June 30, 2001, Simulaids was in compliance with all financial ratios and covenants. The Credit Facilities are secured by a lien on all assets of Simulaids. (6) PREFERRED STOCK During fiscal 2000, Geneve Corporation ("Geneve") elected to convert its 489,131 shares of Series E Redeemable Preferred Stock ("Series E") into 489,131 shares of common stock and a promissory note issued by the Company in the amount of $330 due December 31, 2001 and bearing interest at 8% per annum. In June 2000, the Company repaid the $330 note, plus accrued interest of approximately $6, by issuing 56,100 shares of common stock. The $330 note is reflected as additional preferred dividends in the accompanying 2000 consolidated financial statements (See Note 2). Prior to conversion of the Series E into common, the Series E earned dividends of 8% per annum. During fiscal 2000, 13,617 shares of the Company's Series F, G and H Redeemable Preferred Stock ("Series F, G and H") was redeemed for $136 and the remaining 66,266 shares were acquired by Geneve, directly from the shareholders, and subsequently converted into 110,441 shares of common stock at the then applicable 1.667 conversion rate. Prior to redemption and conversion, the Series F, G and H earned dividends of 8.9% per annum. (7) STOCKHOLDERS' EQUITY The Company had the following shares of common and treasury stock issued and outstanding at June 30, 2001, 2000 and 1999:
Common Treasury Stock Stock --------- -------- June 30, 1998................................... 1,209,027 7,287 Exercise of options............................. 32,322 (7,178) Fractional shares............................... (622) -- Purchase of treasury stock...................... -- 7,500 --------- ------ June 30, 1999................................... 1,240,727 7,609 Purchase of treasury stock...................... -- 11,900 Issuance of stock............................... 8,214 (1,675) Conversion of Series E, F, G & H preferred stock 599,572 -- Issuance of shares for repayment of note........ 56,100 -- --------- ------ June 30, 2000................................... 1,904,613 17,834 Issuance of stock............................... -- 4,846 --------- ------ June 30, 2001................................... 1,904,613 12,988 ========= ======
E-32 THE ARISTOTLE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Aristotle common shares reserved for future issuance consist of the following:
2001 2000 ------- ------- Exercise of options issued to Former Strouse Stockholders (Note 9) 35,208 35,208 Exercise of stock options granted under the Plan (Note 9)......... 148,164 130,429 Exercise of stock options granted outside of the Plan (Note 9).... 20,000 20,000 ------- ------- Total............................................................. 203,372 185,637 ======= =======
(8) INCOME TAXES The Company accounts for income taxes under the provisions of SFAS No. 109, "Accounting for Income Taxes" ("SFAS 109"). SFAS 109 utilizes the liability method and deferred taxes are determined based on the estimated future tax effects of differences between the financial statement and tax basis of assets and liabilities given the provisions of enacted tax laws. At June 30, 2001 and 2000, the principal components of deferred tax assets, liabilities and the valuation allowance were as follows:
2001 ---------------------------- Current Asset Long-Term Asset (Liability) (Liability) Federal net operating loss carryforwards............. $-- $ 17,124 State of Connecticut net operating loss carryforwards -- 98 ---- ------------ 17,222 Valuation allowance.................................. -- (17,222) ---- ------------ $-- $ -- ==== ============ Federal net operating loss carryforwards............. $-- $ 17,505 State of Connecticut net operating loss carryforwards -- 120 ---- ------------ -- 17,625 Valuation allowance.................................. -- (17,625) ---- ------------ $-- $ -- ==== ============
A valuation allowance has been recorded for the deferred tax assets as a result of uncertainties regarding the realization of the asset, including the lack of profitability to date and the variability of operating results. Provision for income taxes are comprised of the following for the years ended June 30, 2001, 2000 and 1999:
2001 2000 1999 ---- ---- ---- Current: Federal. $ 6 $ 5 $-- State... 73 26 89 ---- --- --- $79. $31 $89 ==== === ===
E-33 THE ARISTOTLE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) During 1998 the Company filed a tax loss carryback claim related to its 1996 tax year. In connection therewith, the Company recorded a $720 reserve which is included in the accompanying consolidated balance sheets. At June 30, 2001, without giving consideration to the 1992 carryback claim (see below), the Company had $49,500 of federal net operating loss carryforwards which expire through 2011 and $1,300 of state net operating loss carryforwards which expire through 2004. Prior to October 2, 1992, Aristotle was the holding Company of First Constitution Bank ("the Bank"). On October 2, 1992, the Federal Deposit Insurance Company ("FDIC") was appointed as receiver of the Bank and Aristotle wrote off its investment in the Bank. On its return for 1992 as originally filed, the Company made elections under provisions set forth in regulations proposed by the Internal Revenue Service in April 1992 as guidance for the application of Section 597 of the Internal Revenue Code of 1986, as amended and under Section 1.1502.20(g)(1) of the Federal Income Tax Regulations to (i) disaffiliate from the Bank for Federal income tax purposes and (ii) reattribute net operating losses of the Bank in excess of $81,000 to the Company. The application of the tax law with respect to the Company's election to disaffiliate from the Bank and to reattribute the Bank's net operating losses to the Company is not certain and, therefore, there is no assurance that the Company could succeed to any of the Bank's net operating losses. In September, 1996, the Company filed an amended Federal income tax return for the year ending December 31, 1992 claiming a worthless stock deduction of approximately $54,000 with respect to its stock in the Bank. As a result of such amended returns, the Company has also claimed tax refunds of approximately $10,000 resulting from the carryback of the Company's net operating loss from 1992 to prior years. Pending final review by the Internal Revenue Service, the Company has not recorded the $10,000 refund claim in its consolidated financial statements. After consideration of such carryback claim, the Company's remaining Federal net operating loss carryforward related to the worthless stock deduction would be approximately $25,300 and the Company's aggregate Federal net operating loss deduction would be reduced from $49,500 to $27,500. During 2000, the Company received from the Internal Revenue Service a letter disallowing the two carryback claims filed on its amended 1992 and 1996 returns (see above). This disallowance at the field examination level was not unexpected by the Company. The Company and its advisors continue to believe the claims have merit and therefore, the Company is pursuing its case at the Internal Revenue Service appellate level. There is no assurance that the Company will be entitled to any net operating loss carryforwards arising from, or with respect to, its interest in the Bank. Even if the Company is entitled to any net operating loss carryforward arising from, or with respect to, its interest in the Bank, its ability to utilize such carryforward is dependent upon many factors including: (1) the acquisition by the Company of profitable investments, and (2) avoiding a fifty percent "ownership change" as defined in Section 382 of the Internal Revenue Code. If there is an "ownership change," the tax loss carryforwards available to the Company would be significantly reduced or eliminated. At a special stockholders meeting held on April 8, 1994, the stockholders voted to restrict certain stockholder transfers. (9) STOCK OPTION PLANS During fiscal 1997, the Board of Directors adopted the 1997 Stock Option Plan, ("the 1997 Plan"). The 1997 Plan provides for granting up to 150,000 options to purchase shares of common stock of the Company. The term of the options and vesting requirements shall be for such period as the Stock Option Committee designates. E-34 THE ARISTOTLE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company established a Stock Option Plan in 1986 ("the 1986 Plan"), which provided for the granting of nonincentive and incentive stock options to directors and officers of the Company for the purchase of Aristotle common stock. Nonincentive stock options and certain incentive stock options granted under the Plan are generally exercisable after one year but within ten years as of the date of the grant. Additionally, certain nonincentive stock options granted under the Plan may be accompanied by stock appreciation rights ("SAR"). The granting of such SARs entitles the holder to surrender an option and receive cash equal to the increase in the fair market value of the common stock from the date of grant to the date of exercise. In addition to the options outstanding under the foregoing plans, the Company has granted directors and employees of the Company stock options to purchase 20,000 common stock shares exercisable through December 3, 2004. Also, in connection with the prior acquisition of Strouse (see Note 1), the Company granted 35,208 options to purchase shares of Aristotle common stock. In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 requires the measurement of the fair value of stock options or warrants to be included in the statement of operations or disclosed in the notes to financial statements. The Company has determined that it will continue to account for stock-based compensation for employees under Accounting Principles Board Opinion No. 25 and elect the disclosure-only alternative under SFAS 123. The Company has computed the pro forma disclosures required under SFAS 123 for options granted in 2001, 2000 and 1999 using the Black-Scholes option pricing model prescribed by SFAS 123. The weighted average assumptions used as of June 30, 2001, 2000 and 1999 are as follows:
2001 2000 1999 ------- ------- ------- Risk free interest rate 6.0% 6.18% 4.76% Expected dividend yield None None None Expected lives......... 5 years 5 years 5 years Expected volatility.... 60.9% 62.3% 69.6%
Had compensation cost for the Company's stock option plans been determined based on the fair value of the grant dates of awards under these plans consistent with the method of SFAS 123, the Company's income (loss) from continuing operations applicable to common shareholders would have been adjusted to reflect the following pro forma amounts as of June 30, 2001, 2000 and 1999:
2001 2000 1999 ----- ----- ------ Income (loss) from continuing operations applicable to common shareholders: As reported.................................... $ 218 $ 235 $ (741) Pro forma...................................... $ 157 $ 199 $ (888) Pro forma income (loss) from continuing operations: Basic earnings (loss) per share: As reported.................................... $0.12 $0.16 $(0.60) Pro forma...................................... 0.08 $0.16 $(0.72) Pro forma income (loss) from continuing operations: Diluted earnings (loss) per share: As reported.................................... $0.11 $0.16 $(0.60) Pro forma...................................... 0.08 $0.16 $(0.72)
E-35 THE ARISTOTLE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) A summary of the status of the Company's stock option plans and other options as of June 30, 2001, 2000 and 1999, and changes during the years then ended, is presented below:
2001 2000 1999 ------------------------- ------------------------ ------------------------- Weighted-average Weighted-average Weighted-average Shares Exercise Price Shares Exercise Price Shares Exercise Price ------- ---------------- ------- ---------------- ------- ---------------- Outstanding at beginning of year 185,637 6.05 173,637 $6.42 173,137 $6.15 Granted.......................... 21,000 5.79 12,000 5.05 40,000 5.88 Expired.......................... (3,265) 21.92 -- -- -- -- Exercised........................ -- -- -- -- (39,500) 4.66 ------- ------ ------- ----- ------- ----- Outstanding at end of year....... 203,372 6.03 185,637 $6.05 173,637 $6.42 ======= ====== ======= ===== ======= ===== Options exercisable at year-end 180,872 6.06 164,637 $6.46 138,637 $6.70 Weighted-average fair value of options granted during the year....................... $ 3.46 $2.97 $3.61
The following table summarizes information about stock options outstanding at June 30, 2001:
Options Outstanding Options Exercisable ------------------------------------------ -------------------- Number Weighted Average Number Exercise Outstanding Remaining Contractual Exercise Exercisable Price At 6/30/01 Life (Months) Price At 6/30/01 -------- ----------- --------------------- -------- ----------- $4.63 30,000 78.5 4.63 30,000 4.64 3,500 109.1 4.64 3,500 5.00 21,210 72.9 5.00 16,210 5.30 2,395 33.5 5.30 2,395 5.40 20,000 47.2 5.40 20,000 5.45 24,998 33.4 5.45 24,998 5.63 15,000 76.0 5.63 15,000 5.88 40,000 88.5 5.88 40,000 5.99 1,000 88.7 5.99 1,000 6.00 17,500 110.3 6.00 -- 10.00 27,769 23.0 10.00 27,769 ----- ------- ----- ----- ------- 203,372 66.3 6.06 180,872 ======= ===== ===== =======
Stock Appreciation Rights During fiscal 2001, the Company entered into employment agreements with certain key employees. In connection with these employment agreements, the Company granted a total of 80,000 SARs to these employees, of which 36,000 vest on January 1, 2002, with the remainder vesting ratably each quarter through December 31, 2003. In connection with FASB Interpretation No. 28 "Accounting for Stock Appreciation Rights and Other Variable Stock Option or Award Plans," the SARs will require interim calculations and the Company will record a compensation charge for the difference between the $7.00 exercise price and the fair market value of the Company's common stock, which is defined as the average closing price for the 90 day period immediately prior to the settlement date. For the year ended June 30, 2001, approximately $18 was recorded as a compensation charge in the accompanying consolidated statements of operations relating to these SARs. (10) RELATED PARTY TRANSACTIONS During the years ended June 30, 2001, 2000 and 1999, the Company paid its directors $178, $175 and $189, respectively, as compensation for services as directors of the Company. E-36 THE ARISTOTLE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Simulaids has entered into a management services agreement with an affiliate of a stockholder to provide Simulaids with strategic and operational assistance for $100 per annum. During each of the years ended June 30, 2001 and 2000, the Company recorded approximately $100 of expense as part of this agreement. In the ordinary course of business, Simulaids sells its products to an affiliate of a stockholder. Sales to this affiliate by Simulaids for the years ended June 30, 2001 and 2000 were $1,483 and $350, respectively, and accounts receivable from this affiliate at June 30, 2001 and 2000 were $58 and $14, respectively. In the ordinary course of business, Safe Passage performs certain services and licenses certain technology to CerTrac. Revenues related to CerTrac during fiscal 2001 were approximately $125 and accounts receivable at June 30, 2001 were approximately $65. (11) COMMITMENTS AND CONTINGENCIES Simulaids maintains a 401(k) Plan ("the Plan") for eligible employees. Employees are eligible to participate in the Plan when they reach 21 years of age and have completed one year of service. Simulaids matching contribution is discretionary and can change from year to year. For fiscal year 2001, Simulaids elected to match 25% of employee contributions up to the first 5% of pay deferred. Simulaids contributions to the Plan were $13, $12 and $12 in 2001, 2000 and 1999, respectively. (12) QUARTERLY DATA--UNAUDITED
2001 ------------------------------ 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Net Sales............ $1,828 $1,982 $2,184 $2,153 Gross profit......... 828 985 1,046 1,112 Operating gain (loss) 158 48 (22) (148) Net income (loss).... 228 122 18 (150) Earnings per share: Basic............. $ 0.12 $ 0.06 $ 0.01 $(0.07) Diluted........... $ 0.12 $ 0.06 $ 0.01 $(0.08)
2000 ------------------------------- 1ST 2ND 3RD 4TH QUARTER QUARTER QUARTER QUARTER ------- ------- ------- ------- Net Sales.......... $1,677 $1,733 $1,628 $1,849 Gross profit....... 671 708 776 783 Operating gain..... 151 118 148 125 Net income......... 156 168 (149) 169 Earnings per share: Basic........... $ 0.08 $ 0.09 $(0.10) $ 0.10 Diluted......... $ 0.08 $ 0.09 $(0.10) $ 0.10
(13) SEGMENT DATA Operating segments are defined as components of an enterprise about which financial information is available that is evaluated regularly by the Company's management in deciding how to allocate resources and in assessing performance. The operating segments are managed separately because each operating segment represents a strategic business unit that offers different products and serves different markets. E-37 THE ARISTOTLE CORPORATION AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Commencing in 2001, the Company has two reportable segments identified as Medical Education and Training Products (since April 30, 1999) and Computer-Based Training (since September 14, 2000). During fiscal 2000 and 1999, the Company had only one reporting segment. The major proprietary products of the Medical Education Training Products segment include manikins and simulation kits used for training in the CPR, emergency rescue and patient care fields. The major products of the Computer-Based Training segment are the development and sale of computer based training products to government, industry and educational clients. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates the performance of these segments based on segment profit or loss after income taxes. The Company allocates certain administrative expenses to segments. OPERATIONS IN DIFFERENT INDUSTRIES Year Ended June 30, 2001
Medical Education And Computer- Training Based Products Training Corporate Total --------- --------- --------- ------- Net sales........................... $7,595 $ 552 $ -- $ 8,147 ====== ====== ====== ======= Operating income (loss)............. $1,563 $ (940) $ (587) $ 36 ====== ====== ====== ======= Depreciation and amortization....... $ 383 $ 277 $ 3 $ 663 ====== ====== ====== ======= Identifiable assets................. $8,388 $1,887 $4,633 $14,908 ====== ====== ====== ======= Identifiable liabilities..... $1,309 $ 302 $ 929 $ 2,540 ====== ====== ====== =======
E-38 SIMULAIDS, INC. FINANCIAL STATEMENTS FOR THE FOUR MONTHS ENDED APRIL 30, 1999 TOGETHER WITH REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS The accompanying notes are an integral part of this financial statement. E-39 SIMULAIDS, INC. BALANCE SHEET AS OF APRIL 30, 1999 ASSETS Current assets: Cash and cash equivalents.............................. $ 237,068 Trade accounts receivable.............................. 391,281 Inventories (Note 2)................................... 933,454 Prepaid expenses and other current assets.............. 147,392 ---------- Total current assets............................ 1,709,195 ---------- Property, plant and equipment: Land................................................... 61,944 Buildings and improvements............................. 1,020,599 Machinery and equipment................................ 1,298,975 Office furniture, fixtures and equipment............... 77,401 Computer equipment..................................... 243,291 Vehicles............................................... 46,164 ---------- 2,748,374 Less: accumulated depreciation and amortization................................ 1,557,552 ---------- 1,190,822 Other assets: Patent costs, net of accumulated amortization of $2,877 3,937 Deposits............................................... 2,786 ---------- Total other assets.............................. 6,723 ---------- $2,906,740 ==========
LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Trade accounts payable................................................................ $ 78,922 Accrued expenses...................................................................... 148,236 Current maturities of capital lease obligation........................................ 24,990 ---------- Total current liabilities...................................................... 252,148 ---------- Capital lease obligation, net of current maturities................................... 115,056 ---------- Commitments and contingencies (Notes 3 and 4) Shareholder's equity: Common stock, $1 par value, 2,000 shares authorized; 100 shares issued and outstanding 100 Additional paid-in capital............................................................ 5,741 Retained earnings..................................................................... 2,533,695 ---------- Total shareholder's equity..................................................... 2,539,536 ---------- $2,906,740 ==========
The accompanying notes are an integral part of this financial statement. E-40 SIMULAIDS, INC. STATEMENT OF INCOME FOR THE FOUR MONTHS ENDED APRIL 30, 1999 Net sales...................................................... $1,896,860 Cost of goods sold............................................. 1,123,012 ---------- Gross profit............................................ 773,848 Selling expenses............................................... 81,313 General and administrative expenses............................ 374,316 ---------- Income from operations--manufacturing division 318,219 ---------- Operating loss--video division................................. (2,082) ---------- Other income (expense): Interest income................................................ 3,420 Interest expense............................................... (3,110) ---------- 310 ---------- Income before income taxes and shareholder's salary..... 316,447 State income tax provision..................................... 7,104 ---------- Income before shareholder's salary...................... 309,343 Shareholder's salary........................................... 77,196 ---------- Net income.............................................. $ 232,147 ==========
E-41 SIMULAIDS, INC. STATEMENT OF SHAREHOLDER'S EQUITY FOR THE FOUR MONTHS ENDED APRIL 30, 1999
Additional Common Paid-in Retained Stock Capital Earnings Total ------ ---------- ---------- ---------- BALANCE, January 1, 1999.... $100 $5,741 $3,075,268 $3,081,109 Net income.................. -- -- 232,147 232,147 Distributions to shareholder -- -- (773,720) (773,720) ---- ------ ---------- ---------- BALANCE, April 30, 1999..... $100 $5,741 $2,533,695 $2,539,536 ==== ====== ========== ==========
The accompanying notes are an integral part of this financial statement. E-42 SIMULAIDS, INC. STATEMENT OF CASH FLOWS FOR THE FOUR MONTHS ENDED APRIL 30, 1999 CASH FLOWS FROM OPERATING ACTIVITIES: Net income....................................................................... $ 232,147 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization.................................................... 83,027 Changes in operating assets and liabilities: Accounts receivable........................................................... (169,331) Inventories................................................................... 51,789 Prepaid expenses and other current assets..................................... (98,651) Deposits...................................................................... 13,023 Trade accounts payable........................................................ 3,590 Accrued expenses and other payables........................................... 88,953 --------- Net cash provided by operating activities................................. 204,547 --------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchases of property, plant and equipment....................................... (37,380) --------- CASH FLOWS FROM FINANCING ACTIVITIES: Capital lease repayments......................................................... (5,989) Cash distributions to shareholder................................................ (423,211) --------- Net cash used in financing activities..................................... (429,200) --------- Net decrease in cash and cash equivalents................................. (262,033) CASH AND CASH EQUIVALENTS, beginning of year..................................... 499,101 --------- CASH AND CASH EQUIVALENTS, end of year........................................... $ 237,068 ========= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: Cash paid during the period for: Interest......................................................................... $ 3,140 ========= Income taxes..................................................................... $ -- ========= SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITY: Non-cash asset distributions to shareholder...................................... $ 350,509 ========= Equipment acquired pursuant to capital lease obligations......................... $ 146,035 =========
The accompanying notes are an integral part of this financial statement. E-43 SIMULAIDS, INC. NOTES TO FINANCIAL STATEMENTS APRIL 30, 1999 1. Organization and Significant Accounting Policies: Description of business-- Simulaids, Inc. (the "Company"), a New York subchapter S Corporation, operates two plants in Woodstock, N.Y. engaged in the manufacturing of manikins and related products. The Company sells both domestically and internationally and creates training aids for emergency medical, rescue and law enforcement personnel. The Company's raw materials are readily available, and the Company is not dependent on a single supplier or only a few suppliers. In addition, the Company operates a local retail video rental facility in Saugerties, N.Y. The retail video rental facility and associated assets were distributed to the owner in anticipation of the sale of the Company (see Notes 4 and 6). Cash and cash equivalents-- Cash equivalents consist of overnight repurchase agreement and money market accounts with an initial term of three months or less at date of purchase. For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments with original maturities of three months or less to be cash equivalents. Concentration of credit risk-- At April 30, 1999, accounts receivable from two customers accounted for 35% of the outstanding balance. No other customers had balances in excess of 10% of the outstanding balance. Sales to those two customers accounted for 34% of net sales during the four months ended April 30, 1999. Inventories-- Inventories are stated at the lower of cost or market using the first-in, first-out method. Property, plant and equipment-- Deprecation on plant and equipment is calculated on the straight-line or declining balance methods over the estimated useful lives of the assets. Buildings............................... 40 Machinery and equipment................. 7 Vehicles................................ 5 Computer equipment...................... 5-7 Office furniture, fixtures and equipment 7 Improvements............................ various
Expenditures for maintenance and repairs are charged to operations as incurred. Renewals and betterments are capitalized. Income taxes-- The Company is a subchapter S corporation and, accordingly, no provision has been made for Federal income taxes since the tax is the responsibility of the individual owner and not the Company. Income tax expense reflects state income taxes at the Subchapter S rate. Impairment of long-lived assets on long-lived assets to be disposed of-- The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceed the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. E-44 Use of estimates-- Management of the Company has made a number of estimates and assumptions relating to the reporting of assets and liabilities, revenues and expenses and the disclosure of contingent assets and liabilities to prepare these financial statements in conformity with generally accepted accounting principles. Actual results could differ from those estimates. 2. Inventories: At April 30, 1999 inventories consisted of the following: Raw materials... $280,036 Work-in-progress 112,014 Finished goods.. 541,404 -------- $933,454 ========
3. Capital Lease Obligations: The Company entered into a capital lease for computer equipment in January 1999. The outstanding capital lease obligation at April 30, 1999 is as follows: Capital lease for computer equipment payable in 60 monthly installments of $2,999, including interest at a 8.54% rate.............................. $140,046 Less--current maturities.................................................. (24,990) -------- $115,056 ========
Future capital lease principal payments for each twelve-month period ended April 30 are as follows: 2000 $ 24,990 2001 27,210 2002 29,628 2003 32,260 2004 25,958 -------- $140,046 ========
4. Distributions to Shareholder: Included in the accompanying statement of shareholder's equity are distributions to shareholder of $773,720, which represents $423,211 of cash distributions and $350,509 of other asset distributions made in contemplation of the sale of the Company (see Note 6). The $350,509 of other asset distributions reflects the distribution of property and associated assets related to the video business as well as the cash surrender value of an officers life insurance policy, a vehicle and certain artwork. 5. Commitments and Contingencies: Operating leases-- The Company leases two of its facilities from the owner of the Company on a month-to-month basis. Rent expense related to these facilities recorded in the accompanying statement of income was approximately $3,000. 6. Subsequent Event: Pursuant to a Stock Purchase Agreement dated April 30, 1999, the owner sold all of its outstanding stock to the Aristotle Corporation for $8,400,000. E-45 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS To the Board of Directors and Shareholders of Simulaids, Inc. We have audited the accompanying balance sheet of Simulaids, Inc. (a New York Subchapter S corporation) as of April 30, 1999 and the related statements of income, shareholder's equity and cash flows for the four-month period then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Simulaids, Inc. as of April 30, 1999, and the results of its operations and its cash flows for the four-month period then ended in conformity with generally accepted accounting principles. /s/ Arthur Andersen Hartford, Connecticut September 13, 1999 E-46 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT BOARD OF DIRECTORS Aristotle's Amended and Restated Bylaws (the "Bylaws") provide that the number of directors shall not be less than seven (7) nor more than fifteen (15), as fixed by the Board of Directors. The Amended and Restated Certificate of Incorporation (the "Charter") and the Bylaws provide that the directors be divided into three classes, as equal in number as possible, with terms expiring in successive years. Directors are elected by the stockholders, other than in the case of newly created directorships, in which case a majority of the directors then in office appoint an individual to fill the newly created directorship. Directors are elected for terms of three years, or, in the case of newly created directorships, for a full term for the class of directors in which the new directorship was created and, in any case, until their successors are elected and qualified. As of June 30, 2001, there were nine (9) directorships. Set forth below are the names of each member of the Board of Directors, their ages at September 1, 2001, the periods during which each served as a director of Aristotle and the positions currently held with Aristotle. Following the table is biographical information about each director, including each director's principal occupation or employment during the past five years. Some of this information has been obtained from Aristotle's records and some has been supplied by the directors.
Director of the Positions Held With Name Age Company Since the Company - ---- --- --------------- ------------------------- DIRECTORS WITH TERMS EXPIRING AT THE FY 2001 ANNUAL MEETING: John J. Crawford....................... 56 1989 Director, President, Chief Executive Officer and Chairman of the Board Edward Netter.......................... 68 1998 Director Sharon M. Oster........................ 53 1992 Director DIRECTORS WITH TERMS EXPIRING AT THE FY 2002 ANNUAL MEETING: Steven B. Lapin........................ 55 1998 Director Daniel J. Miglio....................... 60 1990 Director John Lahey............................. 54 1999 Director DIRECTORS WITH TERMS EXPIRING AT THE FY 2003 ANNUAL MEETING: Robert Fiscus.......................... 64 1991 Director Betsy Henley-Cohn...................... 48 1993 Director John C. Warfel......................... 49 1994 Director
JOHN J. CRAWFORD has been President and Chief Executive Officer of Aristotle since April 1990 and Chairman of the Board since April 1993. Mr. Crawford also serves as Chairman of Simulaids and Safe Passage, subsidiaries of Aristotle. Mr. Crawford was formerly the Chief Executive Officer of the Regional Water E-47 Authority until December 2000, a utility located in New Haven, Connecticut. Mr. Crawford is also a member of the Board of Directors of Webster Financial Corporation. EDWARD NETTER has been Chairman, Chief Executive Officer and a director of Geneve Corporation, a private diversified holding company, for more than five years. Mr. Netter is also Chairman and a director of Independence Holding Company, a holding company engaged principally in the life and health insurance business. SHARON M. OSTER has been a Professor of Economics at the School of Organization and Management, Yale University since 1982. Ms. Oster is a director of two publicly-held companies, Health Care REIT, a real estate investment company, and TransPro, Inc., a manufacturer of automotive/industrial-related products. STEVEN B. LAPIN has been President, Chief Operating Officer and a director of Geneve Corporation, a private diversified holding company, for more than five years. Mr. Lapin is also Vice Chairman and a director of Independence Holding Company, a holding company engaged principally in the life and health insurance business. DANIEL J. MIGLIO was formerly Chairman, President and Chief Executive Officer of Southern New England Telecommunications Corporation ("SNET"), a publicly-held telecommunications company. He had been employed by SNET from 1962 through 1998. Mr. Miglio also serves as a director of UIL Holdings Corporation and The United Illuminating Company. JOHN LAHEY is the President of Quinnipiac University, a private university located in Hamden, Connecticut. Dr. Lahey has been the President for the past 14 years. He also serves on the Board of Trustees of Yale-New Haven Hospital and on the Board of Directors of UIL Holdings Corporation and The United Illuminating Company. ROBERT L. FISCUS is Vice Chairman and Chief Financial Officer of UIL Holdings Corporation, the publicly-held holding company parent of The United Illuminating Company, an electric utility company, and several smaller non-utility companies. Mr. Fiscus is also Vice Chairman and Chief Financial Officer of The United Illuminating Company, where he previously served as President and Chief Financial Officer. Mr. Fiscus has been employed by The United Illuminating Company since 1972 and also serves as a director of UIL Holdings Corporation and The United Illuminating Company. BETSY HENLEY-COHN is Chairperson of Birmingham Utilities, Inc., a water utility in Ansonia, Connecticut, and Joseph Cohn & Son, Inc., in New Haven, Connecticut. Ms. Henley-Cohn has been employed by Birmingham Utilities, Inc. since 1993 and by Joseph Cohn & Son, Inc. since 1978. She also serves as a director of UIL Holdings Corporation and The United Illuminating Company. JOHN C. WARFEL has been the Vice President and Chief Financial Officer of FYC International, Inc., a privately held manufacturer of women's apparel since October 1999. Prior to that, Mr. Warfel was the Senior Vice President, Administration and Finance and Chief Financial Officer of Starter Corporation, a leading sports apparel manufacturer. Starter Corporation had employed Mr. Warfel since 1988. COMMITTEES OF THE BOARD OF DIRECTORS AND MEETINGS BOARD OF DIRECTORS MEETING ATTENDANCE. During the fiscal year ended June 30, 2001, the Board of Directors of Aristotle held five (5) meetings. During fiscal 2001, none of the directors attended less than 80% of the total number of meetings of the Board of Directors and committees of which they were members, except for Betsy Henley-Cohn who attended 40% of such meetings. E-48 AUDIT COMMITTEE. The Board of Directors has appointed a standing Audit Committee, which during the year ended June 30, 2001, conducted four (4) meetings. The members of the Audit Committee were Messrs. Fiscus, Lahey, Lapin and Warfel. The duties of the Audit Committee include reviewing the financial statements of the Company and the scope of the independent annual audit and internal audits. It also reviews the independent accountants' letter to management concerning the effectiveness of the Company's internal financial and accounting controls, and reviews and recommends to the Board of Directors the firm to be engaged as the Company's independent accountants. The Audit Committee may also examine and consider such other matters relating to the financial affairs and operations of the Company as it determines to be appropriate. HUMAN RESOURCES AND STOCK OPTION COMMITTEE. The Board of Directors of Aristotle also has appointed a Human Resources and Stock Option Committee comprised of three directors, which during the fiscal year ended June 30, 2001 conducted one (1) meeting. The Human Resources and Stock Option Committee reviews the salary structure and policies of Aristotle and its subsidiaries, administers Aristotle's 1997 Employee and Director Stock Option Plan (the "1997 Stock Option Plan"), selects the eligible persons to whom stock options or stock appreciation rights will be granted, and prescribes the terms and provisions of each such option or right. The members of the Human Resources and Stock Option Committee during the fiscal year ended June 30, 2001 were Ms. Oster and Messrs. Fiscus and Miglio. COMPENSATION OF DIRECTORS Effective January 1, 1998, directors of Aristotle, other than officers, each receive a retainer of $7,500, payable semi-annually in 50% Common Stock and 50% cash. The Common Stock is payable in six month intervals and is valued based on its average market value during the ten days preceding the determination date. In addition to the retainer, the Chairperson and the members of board committees receive $550 or $500, respectively, for each committee meeting attended. As of June 30, 2001, Aristotle had not paid the entire amount of the retainers due to directors. Accordingly, Aristotle has accrued an aggregate of $136,583 for the payment of such retainers to directors. Non-employee directors are eligible to receive grants of stock options under the 1997 Stock Option Plan. The 1997 Stock Option Plan provides for the automatic grant of non-qualified options to non-employee directors of the Company. Each non-employee director, upon first being elected to the Board of Directors, is eligible to receive an option to purchase 2,500 shares, which will vest after completion of one year of service on the Board of Directors. Additionally, the 1997 Stock Option Plan provides for a grant to each non-employee director on the date of his or her reelection (provided that the director has served as a director since his or her initial election) of an option to purchase 1,000 shares, which vests upon completion of one year of service on the Board of Directors. EXECUTIVE OFFICERS The following table sets forth the name of the Company's current executive officer who is not a director, his age, and all positions held with the Company as of September 1, 2001. The executive officer serves at the discretion of the Board of Directors, subject to an Employment Agreement that the Company has entered into with the executive officer.
Name Age Position With the Company - ---- --- ------------------------------------- Paul M. McDonald 48 Chief Financial Officer and Secretary
The principal occupations of the executive officer for the last five years are set forth below. PAUL M. MCDONALD has been the Chief Financial Officer of Aristotle since November 1994. Mr. McDonald has been the Secretary of Aristotle since April 1994. Mr. McDonald also serves as Vice Chairman, Treasurer and Secretary of Simulaids and Safe Passage, Aristotle's subsidiaries. E-49 SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE Section 16 (a) of the Securities Exchange Act of 1934, as amended, requires Aristotle's executive officers and directors, and persons who beneficially own more than ten percent (10%) of the Common Stock, to file with the Securities and Exchange Commission (the "SEC") and any national securities exchange on which Aristotle's securities are registered initial reports of beneficial ownership and reports of changes in beneficial ownership of the Common Stock or other equity securities of Aristotle. Executive officers, directors and greater than ten percent (10%) beneficial owners are required by SEC regulations to furnish Aristotle with copies of all Section 16(a) forms they file. To Aristotle's knowledge, based solely on a review of the copies of such reports furnished to Aristotle, all Section 16(a) filing requirements applicable to its executive officers, directors and greater than ten percent (10%) beneficial owners were complied with for the fiscal year ended June 30, 2001. ITEM 11. EXECUTIVE COMPENSATION SUMMARY COMPENSATION TABLE The following table sets forth certain information for the periods indicated regarding cash and other compensation paid to, earned by, or awarded to the Company's Chief Executive Officer and certain other executive officers of the Company (collectively, the "Named Officers") whose salary and bonus exceeded $100,000 during the last three fiscal years ended June 30, 2001.
LONG TERM COMPENSATION - - ANNUAL COMPENSATION ------------------------ - - ------------------ OPTIONS/SARS ALL OTHER NAME AND PRINCIPAL POSITION YEAR SALARY $BONUS $AWARDED # COMPENSATION $ - --------------------------- ---- ------- ------- ------------ -------------- John J. Crawford.................... 2001 $117,500 $ 0 50,000 $ 909 (3) President, Chief Executive Officer and Chairman of the Board 2000 80,000(1) 0 20,000 0 1999 100,000(1) 0 20,000 0 Paul McDonald....................... 2001 $150,000 $ 0 33,500 $2,506 (4) Chief Financial Officer and Secretary 2000 149,000 0 10,000 3,324 (4) 1999 149,000 24,213( 2) 20,000 2,622 (4)
(1)In fiscal 2000, salary includes $20,000 in shares of Common Stock and in fiscal 1999, salary includes $40,000 in shares of Common Stock. (2)In fiscal 1999, the Company paid Mr. McDonald a $24,213 performance bonus for meeting management objectives. (3)In fiscal 2001, other compensation for Mr. Crawford included $190 for term life, AD&D and disability insurance premiums and $719 for business dues. (4)Other compensation for Mr. McDonald is comprised of the following: in fiscal 2001, $644 for term life, AD&D and disability insurance premiums and $1,862 as a contribution to the 401K Plan; in fiscal 2000, $176 for term life insurance premiums and $3,148 as a contribution pursuant to the SEP Plan: in fiscal 1999, $373 for term life insurance premiums and $2,249 as a contribution pursuant to the SEP Plan. E-50 OPTION GRANTS IN LAST FISCAL YEAR The following table sets forth information regarding each stock option granted to a Named Officer during the fiscal year ended June 30, 2001.
NUMBER OF% SECURITIES OF TOTAL UNDERLYING OPTIONS/SARS OPTIONS (1)/ AWARDED TO SARS (2)\ EMPLOYEES IN FISCAL NAME GRANTED YEAR 2001 EXERCISE PRICES ($/SHARE) EXPIRATION DATE - ---- ------------ ------------------- ------------------------- --------------- Paul McDonald 3,500 (3) 3.6% $6.000 August 31, 2010 30,000 (2) 30.8% $7.000 June 30, 2004 John Crawford 50,000 (2) 51.3% $7.000 June 30, 2004
(1)All stock options were granted under the 1997 Stock Option Plan. (2)Stock Appreciation Rights (SARs) granted under an employment agreement vest over a period of three years. (3)The options granted to the named executive officer are non-qualified stock options and may be exercised after August 31, 2001. AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES The following table sets forth certain information regarding unexercised stock options held as of June 30, 2001, by the Named Officers. No stock options were exercised by the Named Officers during the fiscal year ended June 30, 2001.
NUMBER OF SECURITIES VALUE OF UNEXERCISED UNDERLYING UNEXERCISED IN-THE-MONEY OPTIONS OPTIONS AT JUNE 30, 2001 (#) AT JUNE 30, 2001 ($)(1) - ---------------------------- ------------------------ NAME EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE ---- ----------- ------------- ----------- ------------- John J. Crawford. 72,500 50,000 $147,000 (2) $37,500 (3) Paul McDonald.... 39,139 38,500 $ 92,786 (4) $42,375 (5)
(1)The value of unexercised, "in-the-money" options at June 30, 2001 is the difference between (a) the closing price of Common Stock on June 29, 2001 as reported by NASDAQ ($7.75)--the assumed fair market value--and (b) the per share option exercise price, multiplied by the number of shares of Common Stock underlying such options. (2)Mr. Crawford holds exercisable options to purchase 12,500 shares of Common Stock that have an exercise price of $10.00 per option which is greater than the fair market value of the Common Stock as of June 30, 2001 ($7.75). Such options are not "in-the-money" and their value, therefore, is zero. The exercise price of Mr. Crawford's remaining 60,000 exercisable options averages $5.30. (3)Mr. Crawford holds 50,000 unexercisable stock appreciation rights that have an average price of $7.00. (4)Mr. McDonald holds exercisable options to purchase 39,139 shares, at an average price of $5.38. (5)Mr. McDonald holds unexercisable options to purchase 8,500 shares of Common Stock that have an average exercise price of $5.41 per option. In addition, Mr. McDonald holds 30,000 unexercisable stock appreciation rights that have an average price of $7.00. E-51 EMPLOYMENT AGREEMENTS The Company entered into an employment agreement with Mr. Crawford effective February 1, 2001 for a term expiring December 31, 2003, pursuant to which he will serve as the Company's President and Chief Executive Officer. The agreement provides for an annual base salary of $175,000 and such stock options and bonuses, as the Board of Directors in its sole discretion shall award, including 50,000 stock appreciation rights vesting over the term of the agreement. The Company entered into an employment agreement with Mr. McDonald effective February 1, 2001 for a term expiring December 31, 2003, pursuant to which he will serve as the Company's Vice President and Chief Financial Officer. The agreement provides for an annual base salary of $150,000 and such stock options and bonuses, as the Board of Directors in its sole discretion shall award, including 30,000 stock appreciation rights vesting over the term of the agreement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth, as of September 1, 2001, certain information regarding beneficial ownership of the Common Stock by: (i) each person who is known to Aristotle to own beneficially more than 5% of the outstanding shares of Common Stock; (ii) each director of Aristotle; (iii) each executive officer of Aristotle who is named in the Summary Compensation Table in Item 11; and (iv) all executive officers and directors of Aristotle as a group. Unless otherwise indicated, all persons listed below have sole voting and investment power with respect to their shares and the address for each such person is The Aristotle Corporation, 27 Elm Street, New Haven, Connecticut. In preparing the following table, Aristotle has relied on information furnished by such persons.
NUMBER OF SHARES OF COMMON STOCK VOTING 5% STOCKHOLDERS, DIRECTORS BENEFICIALLY OWNED (1) POWER (2) AND EXECUTIVE OFFICERS ---------------------- --------- 5% STOCKHOLDERS: Geneve Corporation (3)................... 964,596 50.99% DIRECTORS: John J. Crawford......................... 123,329 (4) 6.28% Robert L. Fiscus......................... 13,275 (5) * Betsy Henley-Cohn........................ 29,794 (6) 1.57% John Lahey............................... 4,241 (7) * Steven B. Lapin.......................... 0 (8) * Daniel J. Miglio......................... 20,075 (9) 1.08% Edward Netter............................ 0(10) * Sharon M. Oster.......................... 49,274(11) 2.60% John C. Warfel........................... 10,847(12) * NAMED OFFICERS (EXCLUDING MR. CRAWFORD) Paul McDonald............................ 39,139(13) 2.03% ALL EXECUTIVE OFFICERS AND DIRECTORS AS A GROUP (10 PERSONS)..................... 290,932 14.36%
- -------- * Less than 1% (1)Includes as part of the total number of issued and outstanding shares of Common Stock those stock options which are currently exercisable by the individual whose share ownership percentage is being calculated, in accordance with the applicable securities regulations. (2)Percentages are calculated based on the total number of shares of Common Stock (on a fully converted basis) outstanding. Includes as part of the total number of issued and outstanding shares of Common Stock E-52 those stock options which are currently exercisable by the individual whose share ownership percentage is being calculated, in accordance with the applicable securities regulations. (3)Geneve Corporation's address is 96 Cummings Point Road, Stamford, Connecticut. Director Steven B. Lapin is the President and Chief Operating Officer of Geneve Corporation and Director Edward Netter is the Chairman and Chief Executive Officer of Geneve Corporation. (4)Includes 46,199 shares held by Mr. Crawford directly; 4,580 shares held in his wife's name; 50 shares held in the name of his daughter; and stock options, which are currently exercisable, to purchase 72,500 shares. (5)Includes 9,417 shares held by Mr. Fiscus directly and 400 shares held jointly with his wife; and stock options, which are currently exercisable, to purchase 3,458 shares. (6)Includes 8,996 shares held by Ms. Henley-Cohn directly; 11,840 shares held in trusts in which Mrs. Henley-Cohn has the power to vote the shares; 5,500 shares held equally by Ms. Henley-Cohn's son and daughter; and stock options, which are currently exercisable, to purchase 3,458 shares. (7)Includes 1,741 shares held by Mr. Lahey directly, and stock options, which are currently exercisable, to purchase 2,500 shares. (8)Does not include any shares owned by Geneve Corporation. Mr. Lapin is the President and Chief Operating Officer of Geneve Corporation. (9)Includes 15,617 shares held by Mr. Miglio directly; and stock options, which are currently exercisable, to purchase 4,458 shares. (10)Does not include any shares owned by Geneve Corporation. Mr. Netter is the Chairman and Chief Executive Officer of Geneve Corporation. (11)Includes 12,437 shares held by Ms. Oster directly and 31,900 held by Ms. Oster's husband; and stock options, which are currently exercisable, to purchase 4,937 shares. Ms. Oster disclaims control over shares owned by her husband. (12)Includes 7,868 shares held by Mr. Warfel directly; and stock options, which are currently exercisable, to purchase 2,979 shares. (13)Includes stock options, which are currently exercisable, to purchase 39,139 shares. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS On September 14, 2000, the Company acquired 80% of the outstanding shares of common stock (the "Acquisition") of Safe Passage, a privately-held Rochester, New York-based company, pursuant to a Stock Purchase Agreement dated as of September 13, 2000 between the Company and the Safe Passage shareholders (the "Sellers"). In consideration for such shares, the Company paid an aggregate purchase price of $1.625 million in cash to the Sellers plus possible additional future consideration of up to a maximum of $2.3 million based on the operating performance of Safe Passage during calendar years 2000 and 2001. If and when such additional consideration is earned, the Company will record the payment as additional purchase price consideration. At June 30, 2001, no such consideration was earned. In addition, the Company has incurred approximately $.3 million of transaction and other related costs associated with the Acquisition. The Company has entered into employment agreements with two executive officers, John Crawford and Paul McDonald. See Item 11--"Executive Compensation--Employment Agreements." E-53 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a) The following are filed as part of this report: (1) and (2) Financial Statements: Consolidated Balance Sheets................................. 20 Consolidated Statements of Operations....................... 21 Consolidated Statements of Changes in Stockholders' Equity.. 22 Consolidated Statements of Cash Flows....................... 23 Notes to Consolidated Financial Statements.................. 24 Report of Independent Public Accountants.................... 19
All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto. (3) Exhibits:
Exhibit Number Description ------ ----------- Exhibit 2.1 Capital Contribution Agreement dated as of November 19, 1993 by and among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse, Adler Company and the Stockholders of Strouse, incorporated herein by reference to Exhibit 2.1 of The Aristotle Corporation Current Report on Form 8-K dated April 14, 1994, as amended (the "1994 Current Report"). Exhibit 2.2 Agreement and Plan of Reorganization, dated as of September 13, 2000 (closed on September 14, 2000), by and among the Registrant, Aristotle Acquisition Sub, Inc., Safe Passage International, Inc., James S. Viscardi, Michael R. Rooksby, Howard C. Rooksby and Andrew M. Figiel, incorporated herein by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K dated September 27, 2000. Exhibit 2.3 Agreement and Plan of Merger, dated as of September 13, 2000 (closed on September 14, 2000), by and between Aristotle Acquisition Sub, Inc. and Safe Passage International, Inc., incorporated herein by reference to Exhibit 2.2 of the Registrant's Current Report on Form 8-K dated September 27, 2000. Exhibit 3.1 Restated Certificate of Incorporation of The Aristotle Corporation, incorporated herein by reference to Exhibit 3.1 of The Aristotle Corporation Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997. Exhibit 3.2 Amended and Restated Bylaws, incorporated herein by reference to Exhibit 3.2 of The Aristotle Corporation Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997. Exhibit 4.1 Restated Certificate of Incorporation of The Aristotle Corporation and Amended and Restated Bylaws filed as Exhibits 3.1 and 3.2 are incorporated into this item by reference. See Exhibit 3.1 and Exhibit 3.2 above. Exhibit 4.2 Registration Rights Agreement dated as of April 11, 1994 between the Registrant and the shareholders listed on Exhibit A thereto, incorporated by reference to an exhibit to the Registrant's Registration Statement on Form S-3 (File No. 333-4185). Exhibit 4.3 Preferred Stock Purchase Agreement dated as of October 22, 1997 between The Aristotle Corporation and Geneve Corporation, incorporated herein by reference to Exhibit 10.5 of the Registrant's Quarterly Report on Form 10-Q for fiscal quarter ended September 30, 1997.
E-54
Exhibit Number Description ------ ----------- Exhibit 4.4 Registration Rights Agreement dated as of October 22, 1997 between The Aristotle Corporation and Geneve Corporation, incorporated herein by reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997. Exhibit 4.5 Letter Agreement dated as of September 15, 1997 among The Aristotle Corporation, Aristotle Sub, Inc. and certain stockholders, incorporated herein by reference to Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997. Exhibit 4.6 Letter Agreement dated as of February 9, 2000 between The Aristotle Corporation and the Geneve Corporation regarding certain limitations on voting and the acquisition of additional shares of common stock, incorporated herein by reference to the Registrant's Report on Form 13D/A dated February 15, 2000. Exhibit 4.7 Letter Agreement dated as of April 28, 2000 between The Aristotle Corporation and the Geneve Corporation, modifying the letter agreement between such parties dated as of February 9, 2000, regarding certain limitations on voting and the acquisition of additional shares of common stock, incorporated herein by reference to the Registrant's Report on Form 8-K dated May 2, 2000. Exhibit 10.1 Stock Option Plan of The Aristotle Corporation, as amended, incorporated herein by reference to Exhibit 10.2 of The Aristotle Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (the "1992 Form 10-K"). Exhibit 10.2 Form of Stock Option Agreement (for non-employee directors), incorporated herein by reference to Exhibit 10.3 of the 1992 Form 10-K. Exhibit 10.3 Form of Incentive Stock Option Agreement (for employees), incorporated herein by reference to Exhibit 10.4 of the 1992 Form 10-K. Exhibit 10.4 Settlement and Release Agreement dated as of May 29, 1996 among The Aristotle Corporation, the Federal Deposit Insurance Corporation and certain other interested parties, incorporated herein by reference to Exhibit 10.22 of The Aristotle Corporation Annual Report on Form 10-K for the fiscal year ended June 30, 1996. Exhibit 10.5 Stipulation and Agreement of Settlement dated as of May 28, 1996 regarding In Re First Constitution Stockholders Litigation, incorporated herein by reference to Exhibit 10.23 of The Aristotle Corporation Annual Report on Form 10-K for the fiscal year ended June 30, 1996. Exhibit 10.6 Stock Purchase Agreement between The Aristotle Corporation and Kevin Sweeney dated as of April 30, 1999, incorporated herein by reference to Exhibit 2.1 of The Aristotle Corporation Current Report on form 8-K dated May 4, 1999, as amended. Exhibit 10.7 The Aristotle Corporation 1997 Employee and Director Stock Plan, incorporated herein by reference to The Aristotle Corporation Registration Statement on Form S-8 dated December 10, 1997. Exhibit 10.8 The Employment Agreement dated as of February 1, 2001 by and between The Aristotle Corporation and Paul McDonald, incorporated herein by reference to Exhibit 10.8 of the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2001. Exhibit 10.9 The Employment Agreement dated as of February 1, 2001 by and between The Aristotle Corporation and John Crawford is attached hereto as Exhibit 10.9. Exhibit 21.1 Subsidiaries of The Aristotle Corporation is attached hereto as Exhibit 21.1.
(b) Reports on Form 8-K: None (c) See (a)(3) above (d) See (a)(2) above E-55 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED. THE ARISTOTLE CORPORATION /s/ JOHN J. CRAWFORD -------------------------------------- John J. Crawford Its President, Chief Executive Officer and Chairman of the Board Date: September 27, 2001 /s/ PAUL MCDONALD -------------------------------------- Paul McDonald Its Chief Financial Officer and Secretary (Principal Financial and Chief Accounting Officer) Date: September 27, 2001 PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED. SIGNATURE TITLE DATE --------- ----------------------------------- ------------------ /s/ JOHN J. CRAWFORD President, Chief Executive Officer, September 27, 2001 ---------------------- Chairman of the Board and John J. Crawford Director (principal executive officer) /s/ PAUL MCDONALD Chief Financial Officer and September 27, 2001 ---------------------- Secretary (principal financial Paul McDonald and accounting officer) /s/ BETSY HENLEY-COHN Director September 27, 2001 ---------------------- Betsy Henley-Cohn /s/ ROBERT L. FISCUS Director September 27, 2001 ---------------------- Robert L. Fiscus /s/ JOHN L. LAHEY Director September 27, 2001 ---------------------- John L. Lahey /s/ STEVEN B. LAPIN Director September 27, 2001 ---------------------- Steven B. Lapin /s/ DANIEL J. MIGLIO Director September 27, 2001 ---------------------- Daniel J. Miglio /s/ EDWARD NETTER Director September 27, 2001 ---------------------- Edward Netter /s/ SHARON M. OSTER Director September 27, 2001 ---------------------- Sharon M. Oster /s/ JOHN C. WARFEL Director September 27, 2001 ---------------------- John C. Warfel E-56 EXHIBIT INDEX Exhibit 10.9 -- TheEmployment Agreement dated as of February 1, 2001 by and between The Aristotle Corporation and John Crawford Exhibit 21.1 -- Subsidiariesof The Aristotle Corporation
E-57 EXHIBIT 10.9 THE ARISTOTLE CORPORATION 27 ELM STREET NEW HAVEN CONNECTICUT 06510 February 1, 2001 Mr. John Crawford 70 Indian Road Guilford, Connecticut 06437 Dear John: We are pleased that you have agreed to remain with The Aristotle Corporation (the Company) as President and Chief Executive Officer. This letter (hereafter, "Agreement") will serve to memorialize some of the terms of your employment by the Company. I. EMPLOYMENT. You shall be employed by the Company as its President and Chief Executive Officer. During your employment you will devote your full time efforts and attention to the business and affairs of the Company and perform such duties as may be assigned to you by the Board of Directors of the Company. II. TERM; TERMINATION. A. Your employment hereunder shall commence as of February 1, 2001 (the "Effective Date") and shall continue until December 31, 2003 (the "Expiration Date") unless sooner terminated as provided herein. B. The Company may terminate your employment (1) without cause on not less than thirty (30) days' prior written notice or (2) for good cause (as defined in Paragraph VI below). C. You may terminate your employment with the Company (1) at any time after January 1, 2002 for any reason on not less than thirty (30) days' prior written notice or (2) at any time during the term of this Agreement due to the material breach of this Agreement by the Company in the event that the Company does not cure such breach within thirty (30) days of its receipt of written notice from you setting forth the nature of the breach and your intent to terminate the Agreement pursuant to this Paragraph. III. COMPENSATION. Your base salary will be One Hundred Seventy Five Thousand Dollars ($175,000) per annum (the "Base Salary") payable in equal semi-monthly installments. You shall be entitled to such stock options and bonuses as the Board of Directors in its sole discretion shall award, including the phantom stock rights ("Rights") described in Paragraph IV below. IV. PHANTOM STOCK OPTIONS. A. GRANT; VESTING; CASH OUT. The Company hereby grants you 50,000 Rights, of which 26,000 shall vest on January 1, 2002. Thereafter, 3,000 Rights shall vest at the end of each calendar quarter until a total of 50,000 have vested on December 31, 2003. If your employment is terminated by the Company prior to the Expiration Date for any reason other than for good cause, or if you terminate employment because of a material breach by the Company, all 50,000 Rights shall vest immediately and you shall have the option of choosing to cash out the Rights at the end of any subsequent calendar quarter up to and including June 30, 2004. If you voluntarily terminate your employment with the Company prior to the Expiration Date, you may cash out the number of shares then vested at the end of either of the next two calendar quarters. If your employment is terminated on the Expiration Date, you shall have the right to cash out the Rights at the end of either of the next two calendar quarters following the Expiration Date. E-58 B. PURCHASE PRICE. Rights shall be cashed out by the Company paying to you the difference between Seven Dollars ($7.00) and the fair market value price of the Company's common stock (the "Purchase Price"). Fair market value shall be calculated by averaging the closing price for the ninety (90) days immediately prior to the date of the cash out election if such average closing price is greater than $7.00 for such period. If the average closing price for such period is less than $7.00, no payment will be made. C. PAYMENT OF THE PURCHASE PRICE; CLOSING. After the fair market value has been determined, if you still desire to exercise your option pursuant to Paragraph IV.A above, then you shall give the Company notice that you are exercising such option (the "Notice of Exercise"). Upon the giving of the Notice of Exercise, you shall be obligated to exercise the Rights and the Company shall be obligated to deliver the Purchase Price at a closing to be held at the principal office of the Company within thirty (30) calendar days after the sending of the Notice of Exercise. The Company shall deliver the amount payable to you in United States dollars by certified or bank check or by the wire transfer of immediately available federal funds. D. NATURE OF RIGHTS. The Rights are solely a device for the measurement and determination of the amount to be paid to you. The Rights shall not constitute or be treated as property or as a trust fund of any kind. All amounts at any time attributable to the Rights shall be and remain the sole property of the Company and your rights hereunder are limited to the rights to receive cash or property as provided in this Agreement. Neither you nor any person entitled to exercise the Rights shall have any rights as a stockholder with respect to the Rights. E. RECAPITALIZATION. In the event of a stock split, stock dividend, reclassification, reorganization, or other capital adjustment of shares of the Company's capital stock, the number of Rights granted hereunder and the price thereof, shall be adjusted in the same manner as shares of the Company's capital stock reflected by those Rights would be adjusted. V. BENEFITS. You shall be entitled to the same benefits i.e., vacation, sick time, 401k retirement, disability, life and health insurance) as are provided to other Executive Officers of the Company. In addition, Aristotle will pay for membership in a luncheon club of your choice in New Haven. VI. SEVERANCE. In the event that your employment is terminated by the Company for any reason other than good cause (as defined below), or if you terminate your employment due to a material breach by the Company, you shall be entitled to receive, as severance, the continuation of your Base Salary for the remaining term of this Agreement. For purposes of this Agreement, a finding of "good cause" shall be made by the Board of Directors in good faith and shall mean only the following: A.. willful misconduct, in the course of your employment, B. gross negligence, to the material detriment of the Company in carrying out your duties as an employee, or C. conviction of a crime or any other similar activity which will have a materially adverse effect on the business or reputation of the Company or you. For purposes of this definition, all references to commissions of acts shall be deemed to include omissions to take actions necessary or appropriate under the circumstances.
VII. CONFIDENTIAL INFORMATION. During the course of your employment, you will have access to certain confidential information, including but not limited to certain business plans or prospects, records, files, memoranda, reports and the like, concerning the Company and its business or prospective businesses, or disclosed to the Company by others under an obligation of the Company to hold the same confidential ("Confidential Information"). You shall hold all Confidential Information as property of the Company and hereby agree to maintain Confidential Information as confidential. At such time as your employment by the Company is terminated, you agree to promptly return to the Company, at its request, all Confidential Information (and any copies, reproductions, digests, abstracts or the like of such Confidential Information), including any E-59 material stored on computer disks or tapes, in your possession or control and to destroy any computer entries or storage files relating thereto. You hereby agree that you will not, during the term of your employment with the Company or afterwards, use the Confidential Information for yourself or for others (other than the Company), copy such information or disclose it to any person or entity; PROVIDED, THAT after the termination of your employment with the Company, the foregoing restrictions shall not apply to Confidential Information which, at the time of its disclosure by you, is public knowledge through no action or omission by you or on your behalf and which has not been disclosed to the public by any third party in violation of any obligation to maintain its confidentiality. VIII. NON-COMPETITION. For one year after the voluntary termination of your employment, you shall not, other than on behalf of the Company or its affiliates and except as a passive investor in less than 5% of the securities of a publicly-held company, directly or indirectly, own, manage, operate, control or participate in the ownership, management, operation or control of, serve as an officer, director, partner, employee, agent, consultant, advisor, developer or in any similar capacity with, or have any financial interest in, or aid or assist anyone else in, the conduct of, any business or business activity which is competitive with any operating business which the Company is involved in, in any jurisdiction in which the Company conducts or solicits business. As used in this Paragraph VIII, the "Company" shall include any entity that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the Company. IX. REMEDIES. You recognize and agree that the Company will suffer irreparable harm as a result of a breach by you of Paragraphs VII or VIII of this Agreement for which money damages would be inadequate. Accordingly, in the event of any actual or threatened breach by you of any of such provisions, the Company shall, in addition to any other legal remedies permitted by applicable law, be entitled to equitable remedies, including, without limitation, specific performance, a temporary restraining order or a permanent injunction, in any court of competent jurisdiction to prevent or otherwise restrain a breach hereof without the necessity of proving damages and to recover all costs and expenses, including, without limitation, reasonable attorneys' fees, incurred in enforcing this Agreement. Such relief shall be in addition to and not in substitution for any other remedies available to the Company. You further acknowledge and agree that the provisions of Paragraphs VII or VIII of this Agreement are reasonable, both with respect to length of duration and geographic scope and scope of restricted activities. You and the Company mutually agree that the provisions of this Agreement are severable and separate and that the unenforceability of any specific provision shall not affect the validity of any other provision hereof. In the event that a court of competent jurisdiction should determine that the time or geographic restrictions or scope of restricted activities are unreasonable in their scope, then, and in that event, the parties hereby authorize and empower such court to insert reasonable limitations and enforce the restrictions in accordance therewith so as to achieve as nearly as possible the business purpose and intent of such restrictions. X. MISCELLANEOUS. This Agreement shall inure to the benefit of the Company, its successors, assigns and designees, and is binding upon your assigns, executors and administrators and other legal representatives. This Agreement may not be assigned by either party without the consent of the other party. This Agreement shall be governed by and interpreted in accordance with the laws of the State of Connecticut. Other than seeking a temporary restraining order or permanent injunction to enforce your obligations under Paragraphs VII or VIII hereof any dispute in connection with this contract or related to or arising out of your employment with the Company shall be submitted to binding arbitration in New Haven, Connecticut before a single arbitrator under the rules of the American Arbitration Association. Please acknowledge your acceptance of the foregoing in the space provided below. THE ARISTOTLE CORPORATION By: Sharon Oster, Its: Compensation/Option Committee Chairperson Accepted By: John J. Crawford E-60 EXHIBIT 21.1 SUBSIDIARIES OF THE ARISTOTLE CORPORATION Simulaids, Inc. Safe Passage International, Inc. E-61 SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K/A (Amendment No. 1 to Form 10-K) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended June 30, 2001 [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from to Commission file number 0-14669 THE ARISTOTLE CORPORATION (Exact name of registrant as specified in its charter) Delaware 06-1165854 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 27 Elm Street, New Haven, Connecticut 06510 (Address of principal executive offices and zip code) (203) 867-4090 (Registrant's telephone number, including area code) Securities registered pursuant to section 12(b) of the Exchange Act: Not applicable Securities registered pursuant to section 12(g) of the Exchange Act: Common Stock, Par Value $.01 Per Share (Title Of Class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] As of November 19, 2001, the aggregate market value of the Common Stock outstanding of The Aristotle Corporation held by nonaffiliates (without admitting that any person whose shares are not included in such calculation is an affiliate) was approximately $4,769,296, based on the closing price as reported by the Nasdaq Stock Market. As of November 19, 2001, 1,891,625 shares of Common Stock were outstanding. AMENDMENT TO THE ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED JUNE 30, 2001. The Amendment to the Annual Report on Form 10-K for The Aristotle Corporation is being filed to add an item to the exhibit list provided in Part IV, Item 14 to the Annual Report on Form 10-K as filed with the Securities and Exchange Commission on September 28, 2001. DOCUMENTS INCORPORATED BY REFERENCE None. E-62 Part IV--OTHER INFORMATION ITEM 14. EXHIBITS, FINANCIAL STATEMENT AND REPORTS ON FORM 8-K. (a) The following are filed as part of this report: (1) and (2) Financial Statements: Consolidated Balance Sheets................................. 20 Consolidated Statements of Operations....................... 21 Consolidated Statements of Changes in Stockholders' Equity.. 22 Consolidated Statements of Cash Flows....................... 23 Notes to Consolidated Financial Statements.................. 24 Report of Independent Public Accountants.................... 19
All other schedules are omitted because they are not applicable, or not required, or because the required information is included in the consolidated financial statements or notes thereto. (3) Exhibits
Exhibit Number Description ------ ----------- Exhibit 2.1 Capital Contribution Agreement dated as of November 19, 1993 by and among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse, Adler Company and the Stockholders of Strouse, incorporated herein by reference to Exhibit 2.1 of The Aristotle Corporation Current Report on Form 8-K dated April 14, 1994, as amended (the "1994 Current Report"). Exhibit 2.2 Agreement and Plan of Reorganization, dated as of September 13, 2000 (closed on September 14, 2000), buy and among the Registrant, Aristotle Acquisition Sub, Inc., Safe Passage International, Inc., James S. Viscardi, Michael R. Rooksby, Howard C. Rooksby and Andrew M. Fiegiel, incorporated herein by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K dated September 27, 2000. Exhibit 2.3 Agreement and Plan of Merger, dated as of September 13, 2000 (closed on September 14, 2000), by and between Aristotle Acquisition Sub, Inc. and Safe Passage International, Inc., incorporated herein by reference to Exhibit 2.2 of the Registrant's Current Report on Form 8-K dated September 27, 2000. Exhibit 3.1 Restated Certificate of Incorporation of The Aristotle Corporation, incorporated herein by reference to Exhibit 3.1 of The Aristotle Corporation Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997. Exhibit 3.2 Amended and Restated Bylaws, incorporated herein by reference to Exhibit 3.2 of The Aristotle Corporation Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997. Exhibit 4.1 Restated Certificate of Incorporation of The Aristotle Corporation and Amended and Restated Bylaws as Exhibits 3.1 and 3.2 are incorporated into this item by reference. See Exhibit 3.1 and Exhibit 3.2 above. Exhibit 4.2 Registration Rights Agreement dated as of April 11, 1994 between the Registrant and the shareholders listed on Exhibit A thereto, incorporated by reference to an exhibit to the Registrants' Registration Statement on Form S-3 (File No. 333-4185). Exhibit 4.3 Preferred Stock Purchase Agreement dated as of October 22, 1997 between The Aristotle Corporation and Geneve Corporation, incorporated herein by reference to Exhibit 10.5 of the Registrant's Quarterly Report on Form 10-Q for fiscal quarter ended September 30, 1997. Exhibit 4.4 Registration Rights Agreement dated as of October 22, 1997 between The Aristotle Corporation and Geneve Corporation, incorporated herein by reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997. Exhibit 4.5 Letter Agreement dated as of September 15, 1997 among The Aristotle Corporation, Aristotle Sub, Inc. and certain stockholders, incorporated herein by reference to Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997.
E-63
Exhibit Number Description ------ ----------- Exhibit 4.6 Letter Agreement dated as of February 9, 2000 between The Aristotle Corporation and the Geneve Corporation regarding certain limitations on voting and the acquisition of additional shares of common stock, incorporated herein by reference to the Registrant's Report on Form 13D/A dated February 15, 2000. Exhibit 4.7 Letter Agreement dated as of April 28, 2000 between The Aristotle Corporation and the Geneve Corporation, modifying the letter agreement between such parties dated as of February 9, 2000, regarding certain limitations on voting and the acquisition of additional shares of common stock, incorporated herein by reference to the Registrant's Report on Form 8-K dated May 2, 2000. Exhibit 10.1 Stock Option Plan of The Aristotle Corporation, as amended, incorporated herein by reference to Exhibit 10.2 of The Aristotle Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (the "1992 Form 10-K"). Exhibit 10.2 Form of Stock Option Agreement (for non-employee directors), incorporated herein by reference to Exhibit 10.3 of the 1992 Form 10-K. Exhibit 10.3 Form of Incentive Stock Option Agreement (for employees), incorporated herein by reference to Exhibit 10.4 of the 1992 Form 10-K. Exhibit 10.4 Settlement and Release Agreement dated as of May 29, 1996 amount The Aristotle Corporation, the Federal Deposit Insurance Corporation and certain other interested parties, incorporated herein by reference to Exhibit 10.22 of The Aristotle Corporation Annual Report on Form 10-K for the fiscal year ended June 30, 1996. Exhibit 10.5 Stipulation and Agreement of Settlement dated as of May 28, 1996 regarding In Re First Constitution Stockholders Litigation, incorporated herein by reference to Exhibit 10.23 of The Aristotle Corporation Annual Report on Form 10-K for the fiscal year ended June 30, 1996. Exhibit 10.6 Stock Purchase Agreement between The Aristotle Corporation and Kevin Sweeney dated as of April 30, 1999, incorporated herein by reference to Exhibit 2.1 of The Aristotle Corporation Current Report on Form 8-K dated May 4, 1999, as amended. Exhibit 10.7 The Aristotle Corporation 1997 Employee and Director Stock Plan, incorporated herein by reference to The Aristotle Corporation Registration Statement on Form S-8 dated December 10, 1997. Exhibit 10.8 The Employment Agreement dated as of February 1, 2001 by and between The Aristotle Corporation and Paul McDonald, incorporated herein by reference to Exhibit 10.8 of the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2001. Exhibit 10.9 The Employment Agreement dated as of February 1, 2001 by and between The Aristotle Corporation and John Crawford, incorporated herein by reference to Exhibit 10.9 of the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2001. Exhibit 21.1 Subsidiaries of The Aristotle Corporation, incorporated herein by reference to Exhibit 21.1 of the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2001. Exhibit 23.2 Consent of Arthur Andersen LLP as to incorporation of certain reports is attached hereto as Exhibit 23.2.
(b) Reports on Form 8-K: None (c) See (a)(3) above (d) See (a)(2) above. E-64 SIGNATURES PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS AMENDMENT NO. 1 TO ITS ANNUAL REPORT ON FORM 10-K TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED HEREUNTO DULY AUTHORIZED. THE ARISTOTLE CORPORATION /s/ JOHN J. CRAWFORD -------------------------------------- John J. Crawford Its President, Chief Executive Officer and Chairman of the Board Dated: November 19, 2001 E-65 EXHIBIT INDEX
Exhibit No. Description - ----------- ----------- 23.2 Consent of Arthur Andersen LLP as to incorporation of certain reports
E-66 EXHIBIT 23.2 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS As independent public accountants, we hereby consent to the incorporation of our reports included in this Form 10-K, into the Company's previously filed Registration Statement File No. 333-41845 (Registration Rights Agreement) and File No. 333-41841 (1997 Employee and Director Stock Plan). /s/ ARTHUR ANDERSEN LLP Hartford, Connecticut August 31, 2001 E-67 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 Form 10-Q (Mark One) [X]QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended December 31, 2001 [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from__________ to__________ Commission file number 0-14669 The Aristotle Corporation (Exact name of registrant as specified in its charter) Delaware (State or other jurisdiction of incorporation or organization) 27 Elm Street, New Haven, Connecticut (Address of principal executive offices) 06-1165854 (I.R.S. Employer Identification No.) 06510 (Zip Code) Registrant's telephone number, including area code: (203) 867-4090 ----------------- Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No As of February 10, 2002, 1,931,581 shares of Common Stock, $.01 par value per share, were outstanding. F-1 THE ARISTOTLE CORPORATION INDEX OF INFORMATION CONTAINED IN FORM 10-Q FOR THE QUARTER ENDED DECEMBER 31, 2001 Part I - Financial Information
Page Item 1 - Financial Statements (Unaudited) ---- Condensed Consolidated Balance Sheets at December 31, 2001 and June 30, 2001.............. 3 Condensed Consolidated Statements of Operations for the Three and Six Months Ended December 31, 2001 and 2000.............................................................. 4 Condensed Consolidated Statements of Cash Flows for the Six Months Ended December 31, 2001 and 2000........................................................................... 5 Notes to Condensed Consolidated Financial Statements...................................... 6 Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations... 10 Item 3 - Quantitative and Qualitative Disclosure About Market Risk............................... 12 Part II - Other Information Item 1 - Legal Proceedings....................................................................... 14 Item 2 - Changes in Securities................................................................... 14 Item 3 - Defaults Upon Senior Securities......................................................... 14 Item 4 - Submission of Matters to a Vote of Security Holders..................................... 14 Item 5 - Other Information....................................................................... 14 Item 6 - Exhibits and Reports on form 8-K........................................................ 14 Signatures....................................................................................... 15 Exhibit Index.................................................................................... 16
F-2 THE ARISTOTLE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (dollars in thousands, except for share data)
December 31, June 30, 2001 2001 ------------ --------- ASSETS (Unaudited) Current assets: Cash and cash equivalents................................................... $ 4,388 $ 4,149 Marketable securities....................................................... 794 795 Accounts receivable, net.................................................... 716 651 Inventories................................................................. 847 854 Other current assets........................................................ 154 121 ----------- --------- Total current assets.................................................... 6,899 6,570 ----------- --------- Property, plant and equipment, net............................................. 1,544 1,547 ----------- --------- Other assets: Goodwill.................................................................... 6,768 6,768 Other noncurrent assets..................................................... 529 23 ----------- --------- 7,297 6,791 ----------- --------- $ 15,740 $ 14,908 =========== ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Current maturities of long term debt........................................ $ 85 $ 169 Accounts payable............................................................ 497 340 Accrued expenses............................................................ 482 510 Deferred revenue............................................................ 73 99 Accrued tax reserves........................................................ 720 720 ----------- --------- Total current liabilities............................................... 1,857 1,838 ----------- --------- Long term debt, net of current maturities...................................... 659 702 ----------- --------- Stockholders' equity: Common stock, $.01 par value, 3,000,000 shares authorized, 1,944,569 shares issued and 1997........................................................... 20 19 Additional paid-in capital.................................................. 163,904 163,654 Accumulated deficit......................................................... (150,541) (150,147) Treasury stock, at cost, 12,988 shares...................................... (69) (69) Foreign currency translation................................................ 16 17 Net unrealized investment losses............................................ (106) (106) ----------- --------- Total stockholders' equity.............................................. 13,224 12,368 ----------- --------- $ 15,740 $ 14,908 =========== =========
The accompanying notes are an integral part of these condensed consolidated finanical statements. F-3 THE ARISTOTLE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Unaudited) (dollars in thousands, except share and per share data)
Three Months Ended Six Months Ended December 31, December 31, ---------------------- ---------------------- 2001 2000 2001 2000 ---------- ---------- ---------- ---------- Net revenue......................................... $ 2,498 $ 1,982 $ 4,866 $ 3,810 Cost of goods sold.................................. 1,253 997 2,459 1,996 ---------- ---------- ---------- ---------- Gross profit................................. 1,245 985 2,407 1,814 ---------- ---------- ---------- ---------- Selling expenses.................................... 240 279 470 392 Product development................................. 110 147 315 161 General and administrative expenses................. 590 390 1,056 866 Goodwill amortization............................... -- 121 -- 189 ---------- ---------- ---------- ---------- Operating income............................. 305 48 566 206 ---------- ---------- ---------- ---------- Other income (expense): Investment and interest income................... 39 93 92 201 Interest expense................................. (12) (33) (25) (71) Equity loss in on-line university................ (8) -- (13) -- ---------- ---------- ---------- ---------- Income from continuing operations before income taxes............................... 324 108 620 336 Provision for income taxes.......................... (7) (5) (14) (22) ---------- ---------- ---------- ---------- Income from continuing operations............ 317 103 606 314 Minority interest................................... -- 19 -- 35 ---------- ---------- ---------- ---------- Net income................................... $ 317 $ 122 $ 606 $ 349 ---------- ---------- ---------- ---------- Basic earnings per common share..................... $ .17 $ .06 $ .32 $ .19 ---------- ---------- ---------- ---------- Diluted earnings per common share................... $ .16 $ .06 $ .31 $ .18 ---------- ---------- ---------- ---------- Weighted average shares outstanding: Basic shares................................. 1,896,837 1,886,922 1,894,231 1,886,851 Diluted shares............................... 1,928,682 1,920,789 1,926,077 1,914,507
The accompanying notes are an integral part of these condensed consolidated financial statements. F-4 THE ARISTOTLE CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (dollars in thousands)
Six Months Ended December 31, --------------- 2001 2000 ------ ------- CASH FLOWS FROM OPERATING ACTIVITIES: Net income........................................................................ $ 606 $ 349 Adjustments to reconcile net income to net cash provided by operating activities: Goodwill amortization......................................................... -- 189 Depreciation and amortization................................................. 157 99 Minority interest............................................................. -- (35) Non-cash deferred compensation................................................ (6) -- Equity loss in on-line university............................................. 13 -- Changes in assets and liabilities: Accounts receivable........................................................ (65) 295 Inventories................................................................ 6 (11) Other assets............................................................... (38) 89 Accounts payable........................................................... 157 (38) Accrued expenses........................................................... 37 (7) Deferred revenue........................................................... 26 (14) ------ ------- Net cash provided by operating activities.............................. 893 916 ------ ------- CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of Safe Passage, net of $20 of cash acquired............................. -- (1,746) Investment in on-line university.................................................. (25) (28) Transaction costs related to the proposed Nasco merger............................ (490) -- Purchase of property and equipment................................................ (155) (121) ------ ------- Net cash used in investing activities.................................. (670) (1,895) ------ ------- CASH FLOWS FROM FINANCING ACTIVITIES: Repayment of revolving loan....................................................... -- (116) Principal debt payments........................................................... (112) (412) Repayment of capital lease obligations............................................ (15) (15) Issuance of new shares of common stock............................................ 143 -- ------ ------- Net cash provided by (used in) financing activities.................... 16 (543) ------ ------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..................................... 239 (1,522) CASH AND CASH EQUIVALENTS, beginning of period....................................... 4,149 4,951 ------ ------- CASH AND CASH EQUIVALENTS, end of period............................................. $4,388 $ 3,429 ====== =======
The accompanying notes are an integral part of these condensed consolidated financial statements. F-5 THE ARISTOTLE CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001 (Unaudited) 1. Nature of Operations and Basis of Presentation The Aristotle Corporation ("Aristotle" or the "Company") is a holding company which, through its subsidiaries, Simulaids, Inc. ("Simulaids") and Safe Passage International, Inc. ("Safe Passage"), currently conducts business in two segments, the medical education and training products market and the computer-based training market. Simulaids' primary products include manikins and simulation kits used for training in CPR, emergency rescue and patient care fields. Simulaids' products are sold throughout the United States and internationally via distributors and catalogs to end users such as fire and emergency medical departments and nursing and medical schools. Safe Passage develops and licenses computer-based training products to government and industry clients. On September 14, 2000, Aristotle acquired 80% of the outstanding shares of common stock (the "Acquisition") of Safe Passage, a privately-held Rochester, New York-based company, pursuant to a Stock Purchase Agreement dated as of September 13, 2000 between Aristotle and the Safe Passage shareholders (the "Sellers"). In consideration for such shares, the Company paid an aggregate purchase price of $1.625 million in cash to the Sellers. In addition, the Company has incurred approximately $318,000 of transaction and other related costs associated with the Acquisition. The Acquisition was accounted for using the purchase method of accounting and, accordingly, the purchase price was allocated to the assets and liabilities acquired based on their fair market values at the date of the Acquisition. The excess cost over the fair value of net assets acquired, which amounted to approximately $1.8 million, is reflected as goodwill. Operating results for the six months ended December 31, 2001 and 2000, on a pro forma basis as though Safe Passage was acquired as of the first day of each period are as follows (dollars in thousands except share data): Six Months Ended December 31
2001 2000 ----------- ----------- (unaudited) (unaudited) Net revenue...................... $4,866 $4,497 Net income....................... 606 536 Basic earnings per common share.. .32 .28 Diluted earnings per common share .31 .28
The pro forma financial information is presented for informational purposes only and is not necessarily indicative of the operating results that would have occurred had the Acquisition been consummated as of the above dates, nor are they necessarily indicative of the future operating results. The pro forma adjustments include amortization of intangibles, decreased interest income and state income taxes on the income of Safe Passage. F-6 On November 28, 2001, Aristotle announced it had signed an agreement to merge with Nasco International, Inc. (Nasco), an indirect subsidiary of the privately held Geneve Corporation. Aristotle will be the surviving corporation and will continue to be a publicly held company listed on the Nasdaq SmallCap Market. Because Geneve will own a significant majority of the outstanding shares of Aristotle common stock upon completion of the merger, the merger will be accounted for as a reverse acquisition of entities under common control. Accordingly, for accounting purposes, Aristotle will be treated as the acquired company and Nasco will be considered to be the acquiring company and, therefore, the purchase price, as defined, will be allocated to the assets and liabilities of Aristotle as acquired by Nasco based on their fair market value at the date of the merger. The merger is subject to approval, at a meeting of Aristotle's stockholders, by a two-thirds affirmative vote of Aristotle's outstanding common shares, and also by a majority of shares voted, excluding those held by Geneve. Other conditions to closing are contained in the Agreement and Plan of Merger filed with the Securities and Exchange Commission on November 30, 2001 as an exhibit to its Current Report on Form 8-K reporting the merger. The Company calculates earnings per share in accordance with the provisions of SFAS No. 128 "Earnings Per Share." Options to purchase 27,769 and 30,164 of common stock were not included in the computations of earnings per share for the periods ended December 31, 2001 and 2000, respectively, because the option exercise prices were greater than the average market price of the common stock. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q and do not include all of the information and notes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the six months ended December 31, 2001 are not necessarily indicative of results that may be expected for the year ending June 30, 2002. For further information, refer to the consolidated financial statements and notes included in Aristotle's Annual Report on Form 10-K for the year ended June 30, 2001. 2. New Accounting Pronouncements As of July 1, 2001, the Company adopted Statement of Financial Accounting Standard ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS No 142"). Under SFAS No. 142, goodwill is no longer subject to amortization over its estimated useful life. Instead, SFAS No. 142 requires that goodwill be evaluated at least annually for impairment by applying a fair-value-based test and, if impairment occurs, the amount of impaired goodwill must be written off immediately. Accordingly, the Company no longer records amortization of goodwill. For the three months and six months ended December 31, 2000, the Company recorded $121 and $189 of goodwill amortization, respectively. The Company has determined that no impairment of goodwill exists as of December 31, 2001. The performance of Safe Passage has been negatively impacted by delays in the awarding of certain contracts by a primary customer, the Federal Aviation Administration ("FAA"). The timing and amount, if any, of FAA or the newly formed Transportation Security Administration ("TSA") contract awards to Safe Passage, anticipated to be awarded during the next few months, will be a significant consideration in assessing any future potential Safe Passage goodwill impairment during fiscal 2002. F-7 A reconciliation of reported net income to adjusted net income before amortization of goodwill is as follows (dollars in thousands, except per share data):
Three Months Six Months Ended Ended December 31, December 31, ------------ ------------ 2001 2000 2001 2000 ----- ----- ----- ----- Net income as reported............ $ 317 $ 122 $ 606 $ 349 Amortization of goodwill.......... -- 121 -- 189 ----- ----- ----- ----- Adjusted net income............... $ 317 $ 243 $ 606 $ 538 ----- ----- ----- ----- Basic earnings per common share: Net income as reported............ $ .17 $ .06 $ .32 $ .19 Amortization of goodwill.......... -- .07 -- .10 ----- ----- ----- ----- Adjusted net income............... $ .17 $ .13 $ .32 $ .29 ----- ----- ----- ----- Diluted earnings per common share: Net income as reported............ $ .16 $ .06 $ .31 $ .18 Amortization of goodwill.......... -- .07 -- .10 ----- ----- ----- ----- Adjusted net income............... $ .16 $ .13 $ .31 $ .28 ----- ----- ----- -----
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 modifies the rules for accounting for the impairment or disposal of long-lived assets. The new rules become effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. The Company has not yet quantified the impact of implementing SFAS No. 144 on the Company's consolidated financial statements. 3. Debt Agreement On September 27, 1999, Simulaids and Citizens Bank of Connecticut ("Citizens") entered into a $2.0 million credit agreement. The credit agreement is currently comprised of two facilities ("Credit Facilities") (dollars in thousands): (a)$1,200 Seven-Year Term Loan - Principal payments are scheduled on a seven-year straight-line amortization. The interest rate is charged at the rate of LIBOR plus 200 basis points on a 30, 60, 90 or 180 day LIBOR rate at Simulaids' election. (b)$800 Seven-Year Mortgage - Principal payments are scheduled on a fifteen-year straight-line amortization, with a balloon payment at the seven-year maturity. The interest rate is charged at the rate of LIBOR plus 200 basis points on a 30, 60, 90 or 180 day LIBOR rate at Simulaids' election. As of December 31, 2001, the balance outstanding on the mortgage was $675 and there was no balance outstanding on the term loan. Future principal payments on the mortgage are $5 per month until September 2006, at which time the remaining balance will be due. F-8 4. Comprehensive Income The Company reports comprehensive income in accordance with SFAS No. 130 in which the Company discloses changes in equity that result from transactions and economic events from non-owner sources. Comprehensive income for the three and six months ended December 31, 2001 and 2000 is as follows:
(unaudited) - -------------------------------------- (in thousands of dollars) Three Months Six Months Ended December 31, Ended December 31, ------------------- ------------------ 2001 2000 2001 2000 - ---- ---- ---- ---- ---- ---- ---- ---- Net income............................. $317 $122 $606 $349 Foreign currency translation adjustment 3 -- 189 ---- ---- ---- ---- Net unrealized investment gain (loss).. (25) 78 -- 106 ---- ---- ---- ---- Comprehensive income................... $295 $200 $605 $455 ==== ==== ==== ====
5. Segment Reporting The Company has two reportable segments: the medical education and training products segment and the computer based training segment. The medical education and training products segment produces manikins and simulation kits used for training in CPR, emergency rescue and patient care fields. The computer-based training segment develops and sells computer-based training products to government and industry clients. The Company's reportable segments are strategic business units that offer different products and services. They are managed separately because each business requires different technology and marketing strategies. Each of the businesses was acquired as a unit, and the management at the time of the acquisition was retained. The results of each segment for the three and six months ended December 31, 2001 and 2000 are as follows:
(unaudited) - --------------------------------------- (in thousands of dollars) Three Months Six Months Ended December 31, Ended December 31, - -------------------- ------------------ 2001 2000 2001 2000 - ------------ -------- ------ ------ Net revenue: Medical education & training products $ 2,423 $ 1,796 $4,676 $3,610 Computer based training 75 186 190 200 ------- ------- ------ ------ Net revenue $ 2,498 $ 1,982 $4,866 $3,810 ======= ======= ====== ====== Operating income (loss): Medical education & training products $ 699 $ 374 $1,373 $ 747 Computer based training (195) (225) (461) (314) Corporate. (199) (101) (346) (227) ------- ------- ------ ------ Operating income $ 305 $ 48 $ 566 $ 206 ======= ======= ====== ====== Net Income (loss): Medical education & training products $ 414 $ 196 $ 813 $ 391 Computer based training (196) (198) (462) (272) Corporate 99 124 255 230 ------- ------- ------ ------ Net income $ 317 $ 122 $ 606 $ 349 ======= ======= ====== ====== ------- ------- ------ ------ December 31, June 30, 2001 2001 ------------ -------- Indentifiable assets: Medical education & training products $ 8,902 $ 8,388 Computer based training 1,771 1,887 Corporate 5,067 4,633 ------- ------- Identifiable assets $15,740 $14,908 ======= =======
F-9 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations. General This discussion and analysis of financial condition and results of operations reviews the results of operations of the Company, on a consolidated basis, for the three and six months ended December 31, 2001, as compared to the three and six months ended December 31, 2000. This discussion and analysis of financial condition and results of operations have been derived from, and should be read in conjunction with, the unaudited Consolidated Financial Statements and Notes to Consolidated Financial Statements contained elsewhere in this report. Results of Operations of the Company Three Months Ended December 31, 2001 As Compared to the Three Months Ended December 31, 2000. Net revenue for the three months ended December 31, 2001 increased 26.0% to $2,498 compared to net revenue of $1,982 for the same period in the prior year. The increase in revenue principally reflects revenue growth at Simulaids of $627, which experienced increases through both its domestic and export distributors and increased revenue across most major product categories. The Simulaids increase was partially offset by decreased revenue of $111 at Safe Passage that reflected the downturn in the economy and in the technology sector in particular. Gross profit for the three months ended December 31, 2001 increased 26.4% to $1,245 from $985 for the same period in the prior year and the gross margin percentage increased to 49.8% from 49.7%. The increase in gross profit reflected higher sales and improved plant efficiency for Simulaids, which generated $384 of increased gross profit, partially offset by a $124 decrease for Safe Passage due mainly to the decline in net revenue. Selling expense for the three months ended December 31, 2001 decreased 14.0% to $240 from $279 for the same period in the prior year. The decrease mainly reflected reductions in staffing levels at Safe Passage partially offset by increased commission expenses paid by Simulaids to an affiliate for sales to international customers. Product development expenses for the three months ended December 31, 2001 decreased 25.2% to $110 from $147 for the three months ended December 31, 2000. The decrease principally reflected lower staffing levels at Safe Passage partially offset by increased staffing at Simulaids. The Company's general and administrative expenses for the three months ended December 31, 2001 increased 51.3% to $590 compared to $390 for the comparable 2000 fiscal quarter. The increase was primarily due to increased professional fees and higher staffing costs at Aristotle. There was no goodwill amortization for the current fiscal quarter versus $121 of goodwill amortization in the prior year's quarter. Effective July 1, 2001, the Company adopted SFAS No 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill is no longer subject to amortization over its estimated useful life. Instead, SFAS 142 requires that goodwill be evaluated at least annually for impairment by applying a fair value based test and, if impairment occurs, the amount of impaired goodwill must be written off immediately. F-10 The Company has determined that no impairment of goodwill exists as of December 31, 2001. The performance of Safe Passage has been negatively impacted by delays in the awarding of certain contracts by a primary customer, the Federal Aviation Administration ("FAA"). The timing and amount, if any, of FAA or the Transportation Security Administration contract awards to Safe Passage, anticipated to be awarded during the next few months, will be a significant consideration in assessing any future potential Safe Passage goodwill impairment during fiscal 2002. Investment and interest income was $39 and $93 for the three months ended December 31, 2001 and 2000, respectively. The decrease in 2001 mainly reflects lower returns on investment balances. Interest expense for the three months ended December 31, 2001 decreased to $12 from $33 in the corresponding three months ended December 31, 2000. The decrease primarily reflected lower debt levels due to principal payments made during the prior twelve months. The income tax provision for the three months ended December 31, 2001 was $7 compared to $5 for the three months ended December 31, 2000. The tax provision primarily represents state taxes as federal income taxes are offset by the utilization of net operating loss carryforwards. Six Months Ended December 31, 2001 As Compared to the Six Months Ended December 31, 2000. Net revenue for the six months ended December 31, 2001 increased 27.7% to $4,866 compared to net revenue of $3,810 for the same period in the prior year. The increase in revenue principally reflects revenue growth at Simulaids of $1,066, which experienced increases through both its domestic and export distributors and increased revenue across most major product categories. Gross profit for the six months ended December 31, 2001 increased 32.7% to $2,407 from $1,814 for the same period in the prior year and the gross margin percentage increased to 49.5% from 47.6%. The increase in gross profit mainly reflected higher sales and the gross margin increase principally reflected improved manufacturing efficiency for Simulaids. Selling expense for the six months ended December 31, 2001 increased 19.9% to $470 from $392 for the same period in the prior year. The increase mainly reflected higher commission expenses paid by Simulaids to an affiliate for sales to international customers, catalog costs, and travel expenses partially offset by reductions in staffing levels at Safe Passage. Product development expenses for the six months ended December 31, 2001 increased 95.7% to $315 from $161 for the six months ended December 31, 2000. The increase principally reflected the inclusion of a full six month's impact of Safe Passage and higher staffing levels at Simulaids. The Company's general and administrative expenses for the six months ended December 31, 2001 increased 21.9% to $1,056 compared to $866 for the comparable period in 2000. The increase was primarily due to the inclusion of a full six month's impact of Safe Passage, increased professional fees and higher staffing costs at Aristotle partially offset by lower shareholder expenses. There was no goodwill amortization for the six months ended December 31, 2001 compared to $189 for the comparable period in the prior year. Effective July 1, 2001, the Company adopted SFAS No 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Under SFAS 142, goodwill is no longer subject to amortization over its estimated useful life. Instead, SFAS 142 requires that goodwill be evaluated at least annually for impairment by applying a fair value based test and, if impairment occurs, the amount of impaired goodwill must be written off immediately. The Company has determined that no impairment of goodwill exists as of December 31, 2001. The performance of Safe Passage has been negatively impacted by delays in the awarding of certain contracts by a primary customer, the Federal Aviation Administration ("FAA"). The timing and amount, if any, of FAA contract awards to Safe Passage, anticipated to be awarded during the next few months, will be a significant consideration in assessing any future potential Safe Passage goodwill impairment during fiscal 2002. F-11 Investment and interest income was $92 and $201 for the six months ended December 31, 2001 and 2000, respectively. The decrease in 2001 mainly reflects lower returns on investment balances. Interest expense for the six months ended December 31, 2001 decreased to $25 from $71 in the corresponding six months ended December 31, 2000. The decrease primarily reflected lower debt levels due to principal payments made during the prior twelve months. The income tax provision for the six months ended December 31, 2001 was $14 compared to $22 for the six months ended December 31, 2000. The tax provision primarily represents state taxes as federal income taxes are offset by the utilization of net operating loss carryforwards. Liquidity and Capital Resources Aristotle ended the December 31, 2001 quarter with $4,388 in cash and cash equivalents versus cash and cash equivalents of $4,149 at June 30, 2001. The increase in cash for the six months ended December 31, 2001 was principally generated by operating activities of $893 partially offset by cash used for transaction costs of $490 related to the proposed merger with Nasco and capital expenditures of $155. The overall increase in cash and cash equivalents of $239 is detailed below. The Company generated cash from operations of $893 during the six months ended December 31, 2001 and $916 from operations during the six months ended December 31, 2000. During the six months ended December 31, 2001, the generation of cash from operations was principally the result of net income before depreciation and amortization of $763 and the increase of accounts payable of $157. During the six months ended December 31, 2000, the generation of cash from operations was principally the result of net income before depreciation and amortization of $637 and the reduction of accounts receivable of $295. The Company used cash for investing activities of $670 during the six months ended December 31, 2001 and $1,895 during the six months ended December 31, 2000. During the six months ended December 31, 2001, the utilization of cash was principally for transaction costs of $490 related to the proposed merger with Nasco and capital expenditures of $155. During the six months ended December 31, 2000, the utilization of cash was principally due to the acquisition of Safe Passage of $1,746, capital expenditures of $121 and initial expenditures for the development of an on-line university with Quinnipiac University. The Company generated cash of $16 from financing activities during the six months ended December 31, 2001 and used cash of $543 in financing activities during the six months ended December 31, 2000. During the six months ended December 31, 2001, the generation of cash was mainly from the sale of common shares to Geneve of $143 partially offset by the reduction of debt by $127. Funds utilized in the six months ended December 31, 2000 reflected the reduction of debt by $543. Capital resources in the future are expected to be used for the development of the Simulaids and Safe Passage businesses, for additional costs anticipated for the proposed merger with Nasco and to pursue additional acquisitions. Aristotle anticipates that there will be sufficient financial resources to meet Aristotle's projected working capital and other cash requirements for at least the next twelve months. Item 3. Quantitative & Qualitative Disclosures About Market Risk As described below, credit risk and interest rate risk are the primary sources of market risk to the Company in its marketable securities and short-term borrowings. F-12 Qualitative Interest Rate Risk: Changes in interest rates can potentially impact the Company's profitability and its ability to realize assets and satisfy liabilities. Interest rate risk is resident primarily in the Company's marketable securities and short-term borrowings, which have fixed coupon or interest rates. Credit Risk: The Company's marketable securities are invested in investment grade corporate bonds and closed-end bond funds, both domestic and international, which have various maturities. Quantitative The Company's marketable securities and long-term borrowings as of December 31, 2001 are as follows:
Maturity less Maturity greater than one year than one year ------------- ---------------- Marketable securities............. Cost value..................... $ -- $ 900 Weighted average return........ -- 6.97% Fair market value.............. $ -- $ 794 Long-term borrowings.............. Amount......................... $ 85 $ 659 Weighted average interest rate. 5.5% 5.5% Fair market value.............. $ 85 $ 659
Recent Developments On November 28, 2001, Aristotle announced it had signed an agreement to merge with Nasco International, Inc. (Nasco), an indirect subsidiary of the privately held Geneve Corporation. Aristotle will be the surviving corporation and will continue to be a publicly held company listed on the Nasdaq SmallCap Market. Because Geneve will own a significant majority of the outstanding shares of Aristotle common stock upon completion of the merger, the merger will be accounted for as a reverse acquisition of entities under common control. Accordingly, for accounting purposes, Aristotle will be treated as the acquired company and Nasco will be considered to be the acquiring company. The merger is subject to approval, at a meeting of Aristotle's stockholders, by a two-thirds affirmative vote of Aristotle's outstanding common shares, and also by a majority of shares voted, excluding those held by Geneve. Other conditions to closing are contained in the Agreement and Plan of Merger filed with the Securities and Exchange Commission on November 30, 2001 as an exhibit to its Current Report on Form 8-K reporting the merger. Certain Factors That May Affect Future Results of Operations Aristotle believes that this report may contain forward-looking statements within the meaning of the "safe-harbor" provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include statements regarding Aristotle's liquidity and are based on management's current expectations and are subject to a number of factors and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. Aristotle cautions investors that there can be no assurance that actual results or business conditions will not differ materially from those projected or suggested in such forward-looking statements as a result of various factors including, but not limited to, the following: (i) the ability of Aristotle to obtain financing and additional capital to fund its business strategy on acceptable terms, if at all; (ii) the ability of Aristotle on a timely basis to find, prudently negotiate and consummate one or more additional acquisitions; (iii) the ability of Aristotle to retain and take advantage of its net operating tax loss carryforward position; (iv) Aristotle's ability to manage Simulaids, Safe Passage and any other acquired or to be acquired companies; and (v) general economic conditions. As a result, the Company's future development efforts and operations involve a high degree of risk. For further information, refer to the more specific risks and uncertainties discussed in our Annual Report on Form 10-K. F-13 PART II--OTHER INFORMATION Item 1 - Legal Proceedings. The Registrant is not a party to any material legal proceedings. See the following sections of the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2001: "Management's Discussion and Analysis of Financial Conditions and Result of Operations - Income Taxes" and Note 7 - "Income Taxes" to the Consolidated Financial Statements with regard to Registrant's claims for tax refunds with the Internal Revenue Service. Item 2 - Changes in Securities. None Item 3 - Defaults Upon Senior Securities. None Item 4 - Submission of Matters to a Vote of Security Holder. None Item 5 - Other Information. None Item 6 - Exhibits and Reports on Form 8-K. (a)Exhibits - None. See Exhibit Index attached to this Report. (b)Reports on Form 8-K. On November 30, 2001, we filed a Current Report on Form 8-K under Item 5 regarding the proposed merger with Nasco International, Inc. F-14 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THEARISTOTLE CORPORATION /s/ John J. Crawford ___________________________________________ John J. Crawford Its President, Chief Executive Officer and Chairman of the Board Date:February 13, 2002 /s/ Paul McDonald ___________________________________________ Paul McDonald Its Chief Financial Officer and Secretary (principal financial and chief accounting officer) Date:February 13, 2002 F-15 EXHIBIT INDEX Exhibit Number Description Exhibit 2.1--Capital Contribution Agreement dated as of November 19, 1993 by and among The Aristotle Corporation, Aristotle Sub, Inc., The Strouse, Adler Company and the Stockholders of Strouse, incorporated herein by reference to Exhibit 2.1 of The Aristotle Corporation Current Report on Form 8-K dated April 14, 1994, as amended (the "1994 Current Report"). Exhibit 2.2--Agreement and Plan of Reorganization, dated as of September 13, 2000 (closed on September 14, 2000), by and among the Registrant, Aristotle Acquisition Sub, Inc., Safe Passage International, Inc., James S. Viscardi, Michael R. Rooksby, Howard C. Rooksby and Andrew M. Figiel, incorporated herein by reference to Exhibit 2.1 of the Registrant's Current Report on Form 8-K dated September 27, 2000. Exhibit 2.3--Agreement and Plan of Merger, dated as of September 13, 2000 (closed on September 14, 2000), by and between Aristotle Acquisition Sub, Inc. and Safe Passage International, Inc., incorporated herein by reference to Exhibit 2.2 of the Registrant's Current Report on Form 8-K dated September 27, 2000. Exhibit 2.4--Agreement and Plan of Merger, dated as of November 27, 2001, among The Aristotle Corporation, Geneve Corporation, Nasco Holdings, Inc. and Nasco International, Inc. incorporated herein by reference to Exhibit 2 of The Aristotle Corporation Current Report on Form 8-K dated November 30, 2001. Exhibit 3.1--Restated Certificate of Incorporation of The Aristotle Corporation, incorporated herein by reference to Exhibit 3.1 of The Aristotle Corporation Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997. Exhibit 3.2--Amended and Restated Bylaws, incorporated herein by reference to Exhibit 3.2 of The Aristotle Corporation Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997. Exhibit 4.1--Restated Certificate of Incorporation of The Aristotle Corporation and Amended and Restated Bylaws filed as Exhibits 3.1 and 3.2 are incorporated into this item by reference. See Exhibit 3.1 and Exhibit 3.2 above. Exhibit 4.2--Registration Rights Agreement dated as of April 11, 1994 between the Registrant and the shareholders listed on Exhibit A thereto, incorporated by reference to an exhibit to the Registrant's Registration Statement on Form S-3 (File No. 333-4185). Exhibit 4.3--Preferred Stock Purchase Agreement dated as of October 22, 1997 between The Aristotle Corporation and Geneve Corporation, incorporated herein by reference to Exhibit 10.5 of the Registrant's Quarterly Report on Form 10-Q for fiscal quarter ended September 30, 1997. Exhibit 4.4--Registration Rights Agreement dated as of October 22, 1997 between The Aristotle Corporation and Geneve Corporation, incorporated herein by reference to Exhibit 10.6 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997. Exhibit 4.5--Letter Agreement dated as of September 15, 1997 among The Aristotle Corporation, Aristotle Sub, Inc. and certain stockholders, incorporated herein by reference to Exhibit 10.7 to the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997. F-16 Exhibit 4.6--Letter Agreement dated as of February 9, 2000 between The Aristotle Corporation and the Geneve Corporation regarding certain limitations on voting and the acquisition of additional shares of common stock, incorporated herein by reference to the Registrant's Report on Form 13D/A dated February 15, 2000. Exhibit 4.7--Letter Agreement dated as of April 28, 2000 between The Aristotle Corporation and the Geneve Corporation, modifying the letter agreement between such parties dated as of February 9, 2000, regarding certain limitations on voting and the acquisition of additional shares of common stock, incorporated herein by reference to the Registrant's Report on Form 8-K dated May 2, 2000. Exhibit 10.1--Stock Option Plan of The Aristotle Corporation, as amended, incorporated herein by reference to Exhibit 10.2 of The Aristotle Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (the "1992 Form 10-K"). Exhibit 10.2--Form of Stock Option Agreement (for non-employee directors), incorporated herein by reference to Exhibit 10.3 of the 1992 Form 10-K. Exhibit 10.3--Form of Incentive Stock Option Agreement (for employees), incorporated herein by reference to Exhibit 10.4 of the 1992 Form 10-K. Exhibit 10.4--Settlement and Release Agreement dated as of May 29, 1996 among The Aristotle Corporation, the Federal Deposit Insurance Corporation and certain other interested parties, incorporated herein by reference to Exhibit 10.22 of The Aristotle Corporation Annual Report on Form 10-K for the fiscal year ended June 30, 1996. Exhibit 10.5--Stipulation and Agreement of Settlement dated as of May 28, 1996 regarding In Re First Constitution Stockholders Litigation, incorporated herein by reference to Exhibit 10.23 of The Aristotle Corporation Annual Report on Form 10-K for the fiscal year ended June 30, 1996. Exhibit 10.6--Stock Purchase Agreement between The Aristotle Corporation and Kevin Sweeney dated as of April 30, 1999, incorporated herein by reference to Exhibit 2.1 of The Aristotle Corporation Current Report on form 8-K dated May 4, 1999, as amended. Exhibit 10.7--The Aristotle Corporation 1997 Employee and Director Stock Plan, incorporated herein by reference to The Aristotle Corporation Registration Statement on Form S-8 dated December 10, 1997. Exhibit 10.8--The Employment Agreement dated as of February 1, 2001 by and between The Aristotle Corporation and Paul McDonald, incorporated herein by reference to Exhibit 10.8 of the Registrant's Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2001. Exhibit 10.9--The Employment Agreement dated as of February 1, 2001 by and between The Aristotle Corporation and John Crawford, incorporated herein by reference to Exhibit 10.9 of the Registrant's Annual Report on Form 10-K for the fiscal year ended June 30, 2001. Exhibit 10.10--Exchange Agreement, dated as of November 27, 2001, between The Aristotle Corporation and Geneve Corporation, incorporated herein by reference to Exhibit 10 of The Aristotle Corporation Current Report on Form 8-K dated November 30, 2001. F-17 ANNEX G AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF THE ARISTOTLE CORPORATION 1. The name of the Corporation is The Aristotle Corporation. The original certificate of incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on February 25, 1986, under the name FFB Corp. At various times thereafter it was amended and was restated. 2. This amended and restated certificate of incorporation has been duly adopted in accordance with Sections 242 and 245 of the General Corporation Law of the State of Delaware. 3. The text of the certificate of incorporation, as amended, is hereby restated and further amended to read in its entirety as set forth below: ARTICLE 1 NAME The name of the corporation (the "Corporation") is The Aristotle Corporation. ARTICLE 2 PURPOSE The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the General Corporation Law of the State of Delaware. ARTICLE 3 DURATION The Corporation is to have perpetual existence. ARTICLE 4 CAPITAL STOCK A. The total number of shares of capital stock that the Corporation has authority to issue is 40,000,000 shares, consisting of 25,000,000 shares of common stock, par value $.01 per share, and 15,000,000 shares of preferred stock, par value $.01 per share, of which 2,400,000 shares are hereby designated Series I preferred stock and 11,200,000 shares are hereby designated Series J preferred stock. B. The remaining shares of preferred stock may be issued from time to time in one or more series. The board of directors of the Corporation is expressly authorized to provide for the issuance of all or any of the remaining shares of preferred stock in one or more series, to fix the number of shares, and to determine or alter for each such series such voting powers, full or limited, or no voting powers, and such designations, preferences, and relative, participating, optional, or other rights and such qualifications, limitations, or restrictions thereof, as G-1 stated in resolutions adopted by the board of directors providing for the issuance of those shares and as may be permitted by the General Corporation Law of the State of Delaware. The board of directors is also expressly authorized to increase or decrease (but not below the number of shares of that series then outstanding) the number of shares of any series issued after shares of that series are issued. If the number of shares of any such series is so decreased, the shares constituting that decrease will resume the status that they had prior to the adoption of the resolution originally fixing the number of shares of that series. C. The powers, preferences, rights, restrictions, and other matters relating to the Series I preferred stock are as follows: 1. Stated Value. The stated value of each share of Series I preferred stock (the "Series I Stated Value") is $6.00, subject to adjustment for stock dividends, combinations, splits, recapitalizations and the like with respect to the Series I preferred stock. 2. Dividends. (a) Each holder of one or more shares of Series I preferred stock is entitled to receive, if declared by the board of directors but only out of funds that are legally available therefor, cash dividends at the rate of 11% per annum of the Series I Stated Value on each share of Series I preferred stock. These dividends accrue on each share of Series I preferred stock from the date of issuance and accrue daily, whether or not earned or declared. Subject to Section 4(h), these dividends are cumulative and are payable on March 31 and September 30 of each year, if declared by the board of directors. (b) Unless all cumulative dividends on shares of Series I preferred stock (1) have been paid in cash or been declared in full and cash sums set apart to pay those dividends or (2) are, pursuant to Section 4(h), no longer required to be paid, the Corporation may not pay or declare any dividend, whether in cash or property, or make any other distribution, to holders of common stock or any other stock of the Corporation ranking junior to the Series I preferred stock as to dividends or liquidation rights (any such stock, "Series I Junior Stock"), nor may the Corporation purchase, redeem, or otherwise acquire for value any shares of Series I Junior Stock (except for shares of common stock that it acquires (1) under any agreement permitting or requiring the Corporation to purchase shares of common stock held by any Person upon that Person ceasing to provide services to the Corporation or (2) upon exercising a right of first refusal upon proposed transfer by a holder of common stock). (c) For purposes of Section 2(b), the Series I preferred stock ranks on a parity with the Series J preferred stock. If the Corporation pays in cash any dividends on the Series J preferred stock, or declares any dividends on the Series J preferred stock and sets apart cash sums to pay those dividends, it shall also pay in cash, or declare and set apart cash sums to pay, as applicable, dividends on the Series I preferred stock representing a percentage of cumulated Series I dividends that is equal to the percentage of cumulated Series J dividends that is represented by the dividends paid or declared on the Series J preferred stock. 3. Liquidation. (a) Upon occurrence of a liquidation, dissolution, or winding up of the Corporation, whether voluntary or involuntary (any such event, a "Liquidating Event"), each holder of shares of Series I preferred stock will be entitled to receive out of the remaining assets of the Corporation available for distribution to stockholders, before any distribution of assets is made to holders of Series I Junior Stock, an amount per share of Series I preferred stock (this amount, the "Series I Liquidation Amount") equal to the Series I Stated Value plus an amount equal to all accumulated and unpaid dividends (whether or not declared by the board of directors) on each share up to the date fixed for distribution. After payment of the full Series I Liquidation Amount, holders of shares of Series I preferred stock will not be entitled to participate any further in any distribution of assets by the Corporation. If upon occurrence of a Liquidating Event the assets of the Corporation available for distribution to its stockholders are insufficient to pay the holders of the Series I preferred stock the full Series I Liquidation Amount, holders of Series I preferred stock will share ratably in any distribution of assets so that each such holder receives, per share, the same percentage of the Series I Liquidation Amount. G-2 (b) For purposes of Section 3(a), the Series I preferred stock ranks on a parity with the Series J preferred stock. If the Corporation pays any portion of the Series J Liquidation Amount (as defined below in Section 3(a) of Section D), it shall at the same time also pay a percentage of the Series I Liquidation Amount equal to the percentage of the Series J Liquidation Amount paid by the Corporation. (c) Subject to applicable law, any non-cash assets of the Corporation that are legally available for distribution upon dissolution or winding up of the Corporation must be promptly liquidated by a liquidating trust or similar entity. (d) A reorganization, consolidation or merger of the Corporation or a sale or other disposition of all or substantially all the assets of the Corporation will not constitute liquidation, dissolution, or winding up of the Corporation for purposes of this Section 3. 4. Optional Conversion. (a) Any time during the 90-day period starting at midnight at the beginning of the fifth anniversary of the effective date of the merger of Nasco International, Inc. into the Corporation (the "Fifth Anniversary"; that period, the "Conversion Period"), each share of Series I preferred stock will be convertible at the option of the holder into such number of fully paid and nonassessable shares of common stock as is determined by dividing (x) an amount equal to (1) the Series I Stated Value plus (2) an amount equal to the dividends that have accrued on each share of Series I preferred stock through the Fifth Anniversary and not been paid by (y) the conversion price for the Series I preferred stock (the "Conversion Price") in effect on the date the certificate is surrendered for conversion as provided in Section 4(c). The Conversion Price is initially $12.00, but is subject to adjustment as provided in Section 5. Shares of Series I preferred stock may not be converted into shares of common stock at any time other than during the Conversion Period. (b) By notice sent by first-class certified mail, return receipt requested, postage prepaid, to each holder of shares of Series I preferred stock at its address appearing on the Corporation's records, the Corporation shall give each holder of shares of Series I preferred stock at least 60 days' advance notice, but no more than 90 days' advance notice, of the Fifth Anniversary. This notice must also specify the date upon which the Conversion Period expires and the number of shares of common stock into which shares of Series I preferred stock are convertible. (c) Any holder of one or more shares of Series I preferred stock may exercise the conversion right under Section 4(a) as to any one or more of those shares by delivering to the Corporation during regular business hours during the Conversion Period, at the office of the Corporation or any transfer agent of the Corporation for the Series I preferred stock as may be designated by the Corporation, the one or more certificates for the shares to be converted, duly endorsed or assigned in blank or to the Corporation (if required by it), accompanied by written notice stating that the holder is electing to convert those shares and stating the name or names (with address) in which the one or more certificates for shares of common stock are to be issued. Conversion will be deemed to have been effected on the date when a holder delivers as required by the previous sentence the one or more certificates for the shares to be converted (that date, the "Conversion Date"). As promptly as practicable thereafter, but in any event not later than 10 business days following the Conversion Date, the Corporation shall issue and deliver to or upon the written order of the holder, to the place designated by the holder, the one or more certificates representing the shares of common stock to which the holder is entitled and a check or cash in respect of any fractional interest in a share of common stock as provided in Section 4(d). The person in whose name one or more certificates for common stock are to be issued will be deemed to have become a common stock holder of record on the applicable Conversion Date unless the transfer books of the Corporation are closed on that date, in which event that person will be deemed to have become a holder of record on the next succeeding date on which the transfer books are open, but the applicable Conversion Price will be that in effect on the Conversion Date. Upon conversion of only a portion of the number of shares covered by a certificate representing shares of Series I preferred stock surrendered for conversion, the Corporation shall at its expense issue and deliver to or upon the written order of the holder of the certificate so surrendered for conversion, in addition to one or more certificates representing the shares of common stock to which shares of Series I preferred stock of the holder were converted, G-3 a new certificate (dated so as not to result in any loss of dividends) covering the number of shares of the Series I preferred stock representing the unconverted portion of the certificate so surrendered. (d) The Corporation will not issue any fractional shares of common stock or scrip upon conversion of shares of Series I preferred stock. If more than one share of Series I preferred stock is surrendered for conversion at any one time by the same holder, the number of full shares of common stock issuable upon conversion thereof must be computed on the basis of the aggregate number of shares of Series I preferred stock so surrendered. Instead of any fractional shares of common stock that would otherwise be issuable upon conversion of any shares of Series I preferred stock, the Corporation shall pay a cash amount equal to the then Current Market Price of a share of common stock on the trading day immediately preceding the Conversion Date multiplied by the fractional interest. Fractional interests are not entitled to dividends and holders of fractional interests are not entitled to any rights as stockholders of the Corporation in respect of those fractional interests. If the Corporation cannot legally pay any such cash amount, the Corporation shall pay it as soon thereafter as funds are legally available. (e) The Corporation shall pay all documentary or stamp taxes attributable to issuance or delivery of shares of common stock upon conversion of any shares of Series I preferred stock, if issued in the name of the record holder. (f) The Corporation shall reserve, free from preemptive rights, out of its authorized but unissued shares of common stock and solely for the purpose of effecting conversion of the shares of Series I preferred stock sufficient shares to provide for the conversion of all outstanding shares of Series I preferred stock. (g) All shares of common stock issued upon conversion of shares of Series I preferred stock will, upon issuance by the Corporation, be validly issued, fully paid and nonassessable, with no personal liability attaching to the ownership thereof, and free from all taxes, liens or charges with respect thereto. (h) Subsequent to conversion of any shares of Series I preferred stock in accordance with this Section 4, the Corporation will not be required to pay any dividends that have accumulated on those shares. (i) As used in this Article 4, "Current Market Price" means, with respect to the common stock as of any date, the following: (1)the mean between the highest and lowest quoted selling prices on the Nasdaq SmallCap Market (or any other securities exchange or trading market where the common stock is listed or traded) for that date or, if there are no sales on that date, the nearest preceding date on which there were one or more sales; or (2)if the common stock is not listed or traded on any securities exchange or trading market, the fair market value of a share of common stock as determined in good faith by the board of directors of the Corporation. 5. Adjustment to Conversion Price. The Conversion Price is subject to adjustment from time to time as follows: (a) If the Corporation issues, after the date upon which any shares of Series I preferred stock were first issued (the "Original Issue Date"), any shares of common stock other than Excluded Securities (as defined below) ("Additional Stock") without consideration or for a consideration per share less than the Conversion Price (in the case of any such issuance to an Affiliate (as that term is defined in Article 8) of the Corporation) or the Current Market Price (in the case of any other such issuance) on the date of that issuance of Additional Stock, the Conversion Price in effect immediately prior to each such issuance will automatically be adjusted to a price determined by multiplying the Conversion Price by a fraction, the numerator of which is the number of shares of common stock deemed outstanding immediately prior to that issuance plus the number of shares of common stock that the aggregate consideration received by the Corporation for that issuance would purchase at the G-4 Conversion Price in effect immediately prior to that issuance, and the denominator of which is the number of shares of common stock deemed outstanding immediately prior to that issuance plus the number of shares of that Additional Stock. For purposes of any adjustment of the Conversion Price pursuant to this Section 5(a), the following provisions apply: (1)The number of shares of common stock deemed to be outstanding as of a given date will be the sum of (A) the number of shares of common stock actually outstanding (which number excludes shares held in treasury), (B) the number of shares of common stock into which the then-outstanding shares of Series I preferred stock would be converted if fully converted on the day immediately preceding the given date, and (C) the number of shares of common stock that would be obtained through the exercise or conversion of all other rights, options and convertible securities exercisable or convertible on the day immediately preceding the given date. (2)The Conversion Price will not be adjusted in increments of less than one cent per share, provided that any adjustments that as a result are not made will be carried forward and taken into account upon the earlier to occur of (A) conversion and (B) any subsequent adjustment that, together with any one or more immediately preceding adjustments that have not been made, would result in an adjustment of one cent per share or more. Except to the limited extent provided for in Sections 5(a)(5)(C), 5(a)(5)(D) and 5(c), no adjustment of the Conversion Price pursuant to this Section 5(a)(2) will have the effect of increasing the Conversion Price above the Conversion Price in effect immediately prior to that adjustment. (3)In the case of issuance of Additional Stock for cash, the consideration will be deemed to be the amount of cash paid therefor after deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance. (4)In the case of issuance of Additional Stock for a consideration in whole or in part other than cash, the consideration other than cash will be deemed to be the fair value of the Additional Stock issued, as determined in good faith by the board of directors irrespective of any accounting treatment. (5)In the case of issuance of options to purchase or rights to subscribe for common stock, securities by their terms convertible into or exchangeable for common stock, or options to purchase or rights to subscribe for such convertible or exchangeable securities, the following provisions apply: (A)the aggregate maximum number of shares of common stock deliverable upon exercise of such options to purchase or rights to subscribe for common stock will be deemed to have been issued at the time such options or rights were issued and for a consideration equal to the consideration (determined in the manner provided in Sections 5(a)(3) and 5(a)(4)), if any, received by the Corporation upon the issuance of such options or rights plus the minimum purchase price provided in such options or rights for the common stock covered thereby; (B)the aggregate maximum number of shares of common stock deliverable upon conversion of or in exchange for any such convertible or exchangeable securities or upon the exercise of options to purchase or rights to subscribe for any such convertible or exchangeable securities and subsequent conversion or exchange thereof will be deemed to have been issued at the time those securities were issued or those options or rights were issued and for a consideration equal to the consideration received by the Corporation for those securities and related options or rights (excluding any cash received on account of accrued interest or accrued dividends), plus the additional consideration, if any, to be received by the Corporation upon the conversion or exchange of those securities or the exercise of any related options or rights (the consideration in each case to be determined in the manner provided in Sections 5(a)(2) and 5(a)(3)); (C)on any change in the number of shares of common stock deliverable upon exercise of any such options or rights or conversion of or exchange for any such convertible or exchangeable securities or any change in the consideration to be received by the Corporation upon the exercise of any such options or rights or conversion of or exchange for any such convertible or exchangeable securities, G-5 other than a change resulting from the antidilution provisions thereof, the Conversion Price will forthwith be readjusted to the Conversion Price as would have obtained had the adjustment made upon the issuance of those options, rights or securities not exercised, converted or exchanged prior to that change or options or rights related to those securities not exercised, converted or exchanged prior to such change been made upon the basis of that change; and (D)on expiration of any such options or rights, termination of any such rights to convert or exchange, or expiration of any options or rights related to such convertible or exchangeable securities, the Conversion Price will forthwith be readjusted to the Conversion Price as would have obtained had the adjustment made upon the issuance of such options, rights, securities or options or rights related to such securities been made upon the basis of the issuance of only the number of shares of common stock actually issued upon exercise of those options or rights, upon conversion or exchange of those securities or upon the exercise of the options or rights related to those securities and subsequent conversion or exchange thereof. (b) If, at any time after the Original Issue Date, the number of shares of common stock outstanding is increased by a stock dividend payable in shares of common stock or by a subdivision or split-up of shares of common stock, then, upon the record date fixed for determining holders of common stock entitled to receive that stock dividend or upon the date of that subdivision or split-up, as applicable, the Conversion Price will be appropriately decreased so as to increase the number of shares of common stock issuable on conversion of each share of Series I preferred stock in proportion to that increase in outstanding shares of common stock. (c) If, at any time after the Original Issue Date, the number of shares of common stock outstanding is decreased by a combination or reverse split of the outstanding shares of common stock, then, upon the date of that combination or reverse split, the Conversion Price will be appropriately increased so as to decrease the number of shares of common stock issuable on conversion of each share of Series I preferred stock in proportion to that decrease in outstanding shares of common stock. (d) If, at any time from the Original Issue Date until expiration of the Conversion Period, the Corporation declares or pays any dividend or makes any other distribution to holders of shares of common stock other than a dividend or distribution of shares of common stock and the aggregate value of such dividends and distributions made during any fiscal year exceeds $3,000,000, the Conversion Price will be decreased by the value, per share of outstanding common stock, of the amount by which those dividends or distributions exceed $3,000,000 in that fiscal year. In the case of any such dividend or distribution to holders of common stock that is not a cash payment, the value per share of common stock of that dividend or distribution will be deemed to be the market value per share of common stock of the property so dividended or distributed, as determined in good faith by the board of directors irrespective of any accounting treatment. (e) In the event, at any time after the Original Issue Date, of any capital reorganization or any reclassification of the stock of the Corporation (other than a change in par value or from par value to no par value or from no par value to par value or as a result of a stock dividend or subdivision, split-up or combination of shares), or consolidation or merger of the Corporation with or into another person (other than a consolidation or merger in which the Corporation is the continuing corporation and which does not result in any change in or any change in ownership of the common stock) or of sale or other disposition of all or substantially all the properties and assets of the Corporation as an entirety to any other person, each share of Series I preferred stock will after that reorganization, reclassification, consolidation, merger, sale or other disposition be convertible into the kind and number of shares of stock or other securities or property of the Corporation, or of the corporation resulting from that consolidation or surviving that merger or to which those properties and assets were sold or otherwise disposed, to which the holder of the number of shares of common stock deliverable (immediately prior to the time of that reorganization, reclassification, consolidation, merger, sale or other disposition) upon conversion of those shares would have been entitled upon such reorganization, reclassification, consolidation, merger, sale or other disposition. The provisions of this Section 5 will similarly apply to successive reorganizations, reclassifications, consolidations, mergers, sales, or other dispositions. G-6 (f) Whenever the Conversion Price is adjusted as provided in this Section 5, the Corporation shall forthwith file, at the office of the Corporation or any transfer agent designated by the Corporation for the Series I preferred stock, a statement, signed by its chief financial officer, showing in detail the facts requiring that adjustment, the Conversion Price then in effect, and computations demonstrating how the adjusted Conversion Price was arrived at. The Corporation shall also cause a copy of such statement to be sent by first-class certified mail, return receipt requested, postage prepaid, to each holder of shares of Series I preferred stock at its address appearing on the Corporation's records. Where appropriate, this copy may be given in advance and may be included as part of a notice required to be mailed under the provisions of Section 5(g). (g) If the Corporation proposes to take any action of the types described in Section 5(e), the Corporation shall give notice to each holder of shares of Series I preferred stock, in the manner set forth in Section 5(f), specifying the record date, if any, with respect to that action and the date on which that action is to take place and setting forth any facts reasonably necessary to indicate the effect of that action (to the extent that effect may be known at the date of that notice) on the Conversion Price and the number, kind, or class of shares or other securities or property deliverable or purchasable upon occurrence of that action or deliverable upon conversion of shares of Series I preferred stock. In the event of any action that would require the fixing of a record date, any notice required under this Section 5(g) must be given at least 20 days prior to the date so fixed, and in case of all other actions, any such notice must be given at least 30 days prior to the action is taken. Failure to give such notice, or any defect therein, will not affect the legality or validity of any such action. (h) As used in this Section 5, "Excluded Securities" means as follows: (1)shares of common stock issued to officers, employees or directors of, or consultants to, the Corporation pursuant to any agreement, plan or arrangement approved by the board of directors, or shares of common stock underlying (A) options to purchase or rights to subscribe for shares of common stock, (B) securities by their terms convertible into or exchangeable for shares of common stock, or (C) options to purchase or rights to subscribe for such convertible or exchangeable securities, in each case as approved by the board of directors; and (2)common stock issued upon the conversion of the Series I preferred stock. 6. Voting Rights. Each holder of shares of Series I preferred stock is entitled to one vote for each share of common stock into which each share of Series I preferred stock could then be converted, but for the restrictions on timing of conversion contained in Section 4(a) (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share), and with respect to that vote, each holder has full voting rights and powers equal to the voting rights and powers of the holders of common stock and is entitled to vote, together with holders of common stock and not as a separate class (except as required by law), with respect to any question upon which holders of common stock have the right to vote. D. The powers, preferences, rights, restrictions, and other matters relating to the Series J preferred stock are as follows: 1. Stated Value. The stated value of each share of Series J preferred stock (the "Series J Stated Value") is $6.00, subject to adjustment for stock dividends, combinations, splits, recapitalizations and the like with respect to the Series J preferred stock. 2. Dividends. (a) Each holder of one or more shares of Series J preferred stock is entitled to receive, when and as declared by the board of directors, but only out of funds that are legally available therefor, cash dividends at the rate of 12% per annum of the Series J Stated Value on each share of Series J preferred stock. These dividends accrue on each share of Series J preferred stock from the date of issuance, and accrue daily, whether or not earned or declared. These dividends are cumulative and are payable on March 31 and September 30 of each year, if declared by the board of directors. G-7 (b) Unless all cumulative dividends on shares of Series J preferred stock have been paid in cash or been declared in full and cash sums set apart to pay those dividends, the Corporation may not pay or declare any dividend, whether in cash or property, or make any other distribution, to holders of common stock or any other stock of the Corporation ranking junior to the Series J preferred stock as to dividends or liquidation rights (any such stock, "Series J Junior Stock"), nor may the Corporation purchase, redeem, or otherwise acquire for value any shares of Series J Junior Stock (except for shares of common stock that it acquires (1) under any agreement permitting or requiring the Corporation to purchase shares of common stock held by any Person upon that Person ceasing to provide services to the Corporation or (2) upon exercising a right of first refusal upon proposed transfer by a holder of common stock). (c) For purposes of Section 2(b), the Series J preferred stock ranks on a parity with the Series I preferred stock. If the Corporation pays in cash any dividends on the Series I preferred stock, or declares any dividends on the Series I preferred stock and sets apart cash sums to pay those dividends, it shall also pay in cash, or declare and set apart cash sums to pay, as applicable, dividends on the Series J preferred stock representing a percentage of cumulated Series J dividends that is equal to the percentage of cumulated Series I dividends that is represented by the dividends paid or declared on the Series I preferred stock. 3. Liquidation. (a) Upon occurrence of a Liquidating Event, each holder of shares of Series J preferred stock will be entitled to receive out of the remaining assets of the Corporation available for distribution to stockholders, before any distribution of assets is made to holders of Series J Junior Stock, an amount per share of Series J preferred stock (this amount, the "Series J Liquidation Amount") equal to the Series J Stated Value plus an amount equal to all accumulated and unpaid dividends (whether or not declared by the board of directors) on each share up to the date fixed for distribution. After payment of the full amount of the liquidating distribution to which they are entitled, holders of shares of Series J preferred stock will not be entitled to participate any further in any distribution of assets by the Corporation. If upon occurrence of a Liquidating Event the assets of the Corporation available for distribution to its stockholders are insufficient to pay the holders of the Series J preferred stock the full Series J Liquidation Amount, holders of Series I preferred stock will share ratably in any distribution of assets so that each such holder receives, per share, the same percentage of the Series J Liquidation Amount. (b) For purposes of Section 3(a), the Series J preferred stock ranks on a parity with the Series I preferred stock. If the Corporation pays any portion of the Series I Liquidation Amount, it shall at the same time also pay a percentage of the Series J Liquidation Amount equal to the percentage of the Series I Liquidation Amount paid by the Corporation. (c) Subject to applicable law, any non-cash assets of the Corporation that are legally available for distribution upon dissolution or winding up of the Corporation must be promptly liquidated by a liquidating trust or similar entity. (d) A reorganization, consolidation or merger of the Corporation or a sale or other disposition of all or substantially all the assets of the Corporation will not constitute liquidation, dissolution, or winding up of the Corporation for purposes of this Section 3. 4. Voting Rights. Holders of shares of Series J preferred stock are not entitled to a vote with respect to their shares of Series J preferred stock, except as required by law. E. The rights of the common stock are as follows: 1. Dividend Rights. Whenever the Corporation has paid, or declared and set aside for payment, to the holders of outstanding shares of any class or series of stock having preference over the common stock as to the payment of dividends the full amount of any dividends to which those holders are entitled in preference to the common stock, then the Corporation may pay dividends on the common stock, and on any class or series of stock G-8 entitled to participate with the common stock as to dividends, out of any assets legally available for the payment of dividends, but only when declared by the board of directors of the Corporation. 2. Liquidation Rights. In the event of any liquidation, dissolution, or winding up of the Corporation, after payment or provision for payment of all debts and liabilities of the Corporation and after the Corporation has paid, or declared and set aside for payment, to the holders of the outstanding shares of any class or series of stock having preference over the common stock in any such event the full preferential amounts to which they are entitled, the Corporation shall pay the holders of the common stock, and of any class or series of stock entitled to participate with the common stock as to distribution of assets, the remaining assets of the Corporation available for distribution, in cash or in kind. 3. Voting Rights. Each holder of shares of common stock is entitled to one vote for each share of common stock held by that voter. ARTICLE 5 PREEMPTIVE RIGHTS Holders of the capital stock of the Corporation are not entitled to preemptive rights with respect to any shares or other securities that the Corporation may issue. ARTICLE 6 BYLAWS The board of directors of the Corporation has the power to adopt, amend, or repeal bylaws of the Corporation, subject to the power of the stockholders of the Corporation to adopt by-laws and to amend or repeal bylaws adopted by the board of directors. ARTICLE 7 REGISTERED OFFICE The street address of the Corporation's initial registered office in the State of Delaware is 1209 Orange Street, City of Wilmington, County of New Castle, and the name of its initial registered agent at such address is The Corporation Trust Company. ARTICLE 8 CERTAIN BUSINESS COMBINATIONS. The votes of shareholders and directors required to approve any Business Combination shall be as set forth in this Article 8. The term "Business Combination" is used as defined in subsection 1 of this Article 8. All other capitalized terms not otherwise defined in this Article 8 or elsewhere in this Certificate of Incorporation are used as defined in subsection 3 of this Article 8. Subsection 1. Vote Required for Certain Business Combinations. A. Higher Vote for Certain Business Combinations. In addition to any affirmative vote required by law or this Certificate of Incorporation, and except as otherwise expressly provided in subsection 2 of this Article 8: (i)any merger, consolidation or share exchange of the Corporation or any Subsidiary (as hereinafter defined) with (a) any Interested Shareholder (as hereinafter defined) or (b) any other corporation (whether or not itself an Interested Shareholder) which is, or after the merger, consolidation or share G-9 exchange would be, an Affiliate or Associate (as the terms are hereinafter defined) of such Interested Shareholder prior to the transaction; or (ii)any sale, lease, exchange, mortgage, pledge, transfer or other disposition other than in the usual and regular course of business (in one transaction or a series of transactions in any twelve-month period) to any Interested Shareholder or any Affiliate or Associate of such Interested Shareholder, other than the Corporation or any of its Subsidiaries, of any assets of the Corporation or any Subsidiary having, measured at the time the transaction or transactions are approved by the board of directors of the Corporation, an aggregate book value as of the end of the Corporation's most recent fiscal quarter of ten percent or more of the total Market Value (as hereinafter defined) of the outstanding shares of the Corporation or of its net worth as of the end of its most recent fiscal quarter; or (iii)the issuance or transfer by the Corporation, or any Subsidiary (in one transaction or a series of transactions) of any equity securities of the Corporation or any Subsidiary having an aggregate Market Value of five percent or more of the total Market Value of the outstanding shares of the Corporation to any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder, other than the Corporation or any of its Subsidiaries, except pursuant to the exercise of warrants, rights or options to subscribe to or purchase securities offered, issued or granted pro rata to all holders of the Voting Stock (as hereinafter defined) of the Corporation or any other method affording substantially proportionate treatment to the holders of Voting Stock; or (iv)the adoption of any plan or proposal for the liquidation or dissolution of the Corporation or any Subsidiary proposed by or on behalf of an Interested Shareholder or any Affiliate or Associate of such Interested Shareholder, other than the Corporation or any of its Subsidiaries; or (v)any reclassification of securities (including any reverse stock split), or recapitalization of the Corporation, or any merger or consolidation of the Corporation with any of its Subsidiaries or any other transaction (whether or not with or into or otherwise involving an Interested Shareholder) which has the effect, directly or indirectly, in one transaction or a series of transactions, of increasing the proportionate amount of the outstanding shares of any class of equity or convertible securities of the Corporation or any Subsidiary which is directly or indirectly owned by any Interested Shareholder or any Affiliate or Associate of any Interested Shareholder, other than the Corporation or any of its Subsidiaries; shall be approved by affirmative vote of at least (a) the holders of two-thirds of the total number of outstanding shares of Voting Stock and (b) the holders of a majority of the voting power of the outstanding shares of Voting Stock, excluding for purposes of calculating the affirmative vote and the total number of outstanding shares of Voting Stock under this clause (b), all shares of Voting Stock of which the beneficial owner is the Interested Shareholder involved in the Business Combination or any Affiliate or Associate of such Interested Shareholder. Such affirmative vote shall be required notwithstanding the fact that no vote may be required, or that a lesser percentage may be specified, by law. B. Definition of "Business Combination." The term "Business Combination" as used in this Article 8 shall mean any transaction which is referred to in any one or more of clauses (i) through (v) of paragraph A of this subsection 1. Subsection 2. When Higher Vote Is Not Required. The provisions of subsection 1 of this Article 8 shall not be applicable to any particular Business Combination, and such Business Combination shall require only such affirmative vote as is required by law and G-10 any other provision of this Certificate of Incorporation, if all of the conditions specified in either paragraph A, or paragraph B are met: A. Approval by Continuing Directors. The Business Combination shall have been approved by at least two-thirds of the Continuing Directors (as hereinafter defined) then in office at a duly constituted meeting of the board of directors of the Corporation called for such purpose. B. Price and Procedure Requirements. All of the following conditions shall have been met: (i)The aggregate amount of the cash and the Market Value as of the Valuation Date (as hereinafter defined) of the Business Combination of consideration other than cash to be received per share by holders of common stock in such Business Combination shall be at least equal to the highest of the following: (a)(if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder for any shares of common stock acquired by it (1) within the two-year period immediately prior to the first public announcement of the proposal of the Business Combination (the "Announcement Date") or (2) in the transaction in which it became an Interested Shareholder, whichever is higher; or (b)the Market Value per share of common stock of the same class or series on the Announcement Date or on the date on which the Interested Shareholder became an Interested Shareholder (such latter date is referred to in this Article 8 as the "Determination Date"), whichever is higher; or (c)the price per share equal to the Market Value per share of common stock of the same class or series determined pursuant to subdivision (i)(b) hereof, multiplied by the fraction of (1) the highest per share price (including brokerage commissions, transfer taxes and soliciting dealer's fees) paid by the Interested Shareholder for any shares of common stock of the same class or series acquired by it within the two-year period immediately prior to the Announcement Date, over (2) the Market Value per share of common stock of the same class or series on the first day in such two-year period on which the Interested Shareholder acquired shares of common stock. (ii)The aggregate amount of the cash and the Market Value as of the Valuation Date of consideration other than cash to be received per share by holders of shares of any class or series of outstanding Voting Stock, other than common stock, shall be at least equal to the highest of the following (it being intended that the requirements of this paragraph B(ii) shall be required to be met with respect to every class of outstanding Voting Stock, whether or not the Interested Shareholder has previously acquired any shares of a particular class of Voting Stock): (a)(if applicable) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the Interested Shareholder for any shares of such class or series of Voting Stock acquired by it: (1) within two-year period immediately prior to the Announcement Date or (2) in the transaction in which it became an Interested Shareholder, whichever is higher; or (b)(if applicable) the highest preferential amount per share to which the holders of shares of such class or series of Voting Stock are entitled in the event of any voluntary or involuntary liquidation, dissolution or winding up of the Corporation; or (c)the Market Value per share of such class or series of Voting Stock on the Announcement Date or on the Determination Date, whichever is higher; or (d)the price per share equal to the Market Value per share of such class or series of stock determined pursuant to subdivision (ii)(c) hereof multiplied by the fraction of (1) the highest per share price (including any brokerage commissions, transfer taxes and soliciting dealers' fees) paid by the G-11 Interested Shareholder for any shares of any class or series of Voting Stock acquired by it within the two-year period immediately prior to the Announcement Date over (2) the Market Value per share of the same class or series of Voting Stock on the first day in such two-year period on which the Interested Shareholder acquired any shares of the same class or series of Voting Stock. (iii)The consideration to be received by holders of a particular class or series of outstanding Voting Stock shall be in cash or in the same form as the Interested Shareholder has previously paid for shares of such class or series of Voting Stock. If the Interested Shareholder has paid for shares of any class or series of Voting Stock with varying forms of consideration, the form of consideration for such class or series of Voting Stock shall be either cash or the form used to acquire the largest number of shares of such class or series of Voting Stock previously acquired by it. (iv)After such Interested Shareholder has become an Interested Shareholder and prior to the consummation of such Business Combination: (a) there shall have been no failure to declare and pay at the regular date therefor any full quarterly dividends (whether or not cumulative) on any outstanding preferred stock of the Corporation, unless the failure so to declare and pay such dividends is approved by a majority of the Continuing Directors; (b) there shall have been (1) no reduction in the annual rate of dividends paid on any class or series of the capital stock of the Corporation (except as necessary to reflect any subdivision of the capital stock), except as approved by a majority of the Continuing Directors, and (2) an increase in such annual rate of dividends as necessary to reflect any reclassification (including any reverse stock split), recapitalization, reorganization or any similar transaction which has the effect of reducing the number of outstanding shares of common stock, unless the failure so to increase such annual rate is approved by a majority of the Continuing Directors; and (c) such Interested Shareholder shall not have become the beneficial owner of any additional shares of capital stock except as part of the transaction which results in such Interested Shareholder becoming an Interested Shareholder or by virtue of proportionate stock splits or stock dividend. (v)After such Interested Shareholder has become an Interested Shareholder, such Interested Shareholder shall not have received the benefit, directly or indirectly (except proportionately as a shareholder), of any loans, advances, guarantees, pledges or other financial assistance or any tax credits or other tax advantages provided by the Corporation or any of its Subsidiaries (whether in anticipation of or in connection with such Business Combination or otherwise). (vi)A proxy or information statement describing the proposed Business Combination and complying with the requirements of the Securities Exchange Act of 1934 and the rules and regulations thereunder (or any subsequent provisions replacing such Act, rules or regulations) shall be mailed to public shareholders of the Corporation at least 20 days prior to the consummation of such Business Combination (whether or not such proxy or information statement is required to be mailed pursuant to such Act or subsequent provisions). Subsection 3. Certain Definitions. For the purposes of this Article 8: A. "Interested Shareholder" shall mean any person (other than the Corporation or any Subsidiary) who or which: (i)is the beneficial owner, directly or indirectly, of 10 percent or more of the voting power of the then outstanding Voting Stock; or (ii)is an Affiliate of the Corporation and at any time within the two-year period immediately prior to the date in question was the beneficial owner, directly or indirectly, of 10 percent or more of the voting power of the then outstanding Voting Stock. G-12 B. "Beneficial owner," when used with respect to any Voting Stock, means a person: (i)that, individually or with any of its Affiliates or Associates, beneficially owns Voting Stock directly or indirectly; or (ii)that, individually or with any of its Affiliates or Associates, has (a) the right to acquire Voting Stock (whether such right is exercisable immediately or only after passage of time), pursuant to any agreement, arrangement or understanding or upon the exercise of conversion rights, exchange rights, warrants or options, or otherwise; (b) the right to vote or direct the voting of Voting Stock pursuant to any agreement, arrangement or understanding; or (c) the right to dispose of or to direct the disposition of Voting Stock pursuant to any agreement, arrangement or understanding; or (iii)that, individually or with any of its Affiliates or Associates, has any agreement, arrangement or understanding for the purpose of acquiring, holding, voting or disposing of Voting Stock with any other person that beneficially owns, or whose Affiliates or Associates beneficially own, directly or indirectly, such shares of Voting Stock. C. For the purposes of determining whether a person is an Interested Shareholder pursuant to paragraph A of this subsection 3, the number of shares of Voting Stock deemed to be outstanding shall include shares deemed owned through application of paragraph B of this subsection 3 but shall not include any other shares of Voting Stock which may be issuable pursuant to any agreement, arrangement or understanding, or upon exercise of conversion rights, warrants or options, or otherwise. D. "Affiliate" means a person that directly or indirectly through one or more intermediaries controls, or is controlled by, or is under common control, with a specified person. E. "Associate," when used to indicate a relationship with any person, means: (1) any domestic or foreign corporation or organization, other than the Corporation or a subsidiary of the Corporation, of which such person is an officer, director or partner or is, directly or indirectly, the beneficial owner of ten percent or more of any class of equity securities; (2) any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as a trustee or in a similar fiduciary capacity; and (3) any relative or spouse of such person, or any relative of such spouse who has the same home as such person or who is a director or officer of the Corporation or any of its Affiliates. F. "Subsidiary" means any corporation of which Voting Stock having a majority of the votes entitled to be cast is owned, directly or indirectly, by the Corporation. G. "Continuing Director" means any member of the board of directors of the Corporation who is unaffiliated with the Interested Shareholder and was a member of the board of directors of the Corporation prior to the time that the Interested Shareholder (including any Affiliate or Associate of such Interested Shareholder) became an Interested Shareholder, and any successor of a Continuing Director who is unaffiliated with the Interested Shareholder and is recommended to succeed a Continuing Director by a majority of Continuing Directors then on the board of directors of the Corporation. H. "Market Value" means: (i)in the case of stock, the highest closing sale price during the 30-day period immediately preceding the date in question of a share of such stock on the composite tape for New York Stock Exchange-listed stocks, or, if such stock is not quoted on the composite tape, or the New York Stock Exchange, or, if such stock is not listed on such exchange, the principal United States securities exchange registered under the Securities Exchange Act of 1934 on which such stock is listed, or, if such stock is not listed on any such exchange, the highest closing sales price or bid quotation with respect to a share of such stock during the 30-day period preceding the date in question on the National Association of Securities Dealers, Inc. Automated Quotations System or any system then in use, or if no such quotations are G-13 available, the fair market value on the date in question of a share of such stock as determined by the board of directors of the Corporation in good faith; and (ii)in the case of property other than cash or stock, the fair market value of such property on the date in question as determined by a majority of the board of directors of the Corporation in good faith. I. "Valuation Date" means: (A) For a business combination voted on by shareholders, the latter of the day prior to the date of the shareholders vote or the date twenty days prior to the consummation of the Business Combination; and (B) for a Business Combination not voted upon by the shareholders, the date of the consummation of the Business Combination. J. "Voting Stock" means the then outstanding shares of capital stock of the Corporation entitled to vote generally in the election of directors. K. In the event of any Business Combination in which the Corporation is the surviving corporation, the phrase "consideration other than cash to be received" as used in paragraphs B(i) and B(ii) of Section 2 of this Article 8 shall include the shares of common stock and/or the shares of any other class or series of outstanding Voting Stock retained by the holder of such shares. Subsection 4. Powers of the Board of Directors. A majority of the Corporation's directors then in office shall have the power and duty to determine for the purpose of this Article 8, on the basis of information known to them after reasonable inquiry, (A) whether a person is an Interested Shareholder, (B) the number of shares of Voting Stock beneficially owned by any person, (C) whether a person is an Affiliate or Associate of another, and (D) whether the requirements of paragraph B of Section 2 have been met with respect to any Business Combination; and the good faith determination of a majority of the board of directors on such matters shall be conclusive and binding for all the purposes of this Article 8. Subsection 5. No Effect on Fiduciary Obligations of Interested Shareholders. Nothing contained in this Article 8 shall be construed to relieve any Interested Shareholder from any fiduciary obligation imposed by law. ARTICLE 9 AMENDMENT OF CERTIFICATE OF INCORPORATION Any repeal, alteration, amendment, or rescission of any provision contained in this certificate of incorporation must be adopted by resolution of at least a majority of the board of directors, and may only be effected by the affirmative vote of the holders of at least a majority of the voting power of the outstanding voting stock of the Corporation cast at a meeting called for that purpose (provided that notice of such proposed adoption, repeal, alteration, amendment or rescission is included in the notice of such meeting), except that if any such amendment is to the provisions set forth in this clause of Article 9 or in Article 8, that amendment must be approved by the affirmative vote of the holders of at least 80 percent of the shares entitled to vote thereon rather than a majority. ARTICLE 10 PERSONAL LIABILITY A. The personal liability of the directors of the Corporation is hereby eliminated to the fullest extent permitted by the provisions of paragraph (7) of subsection (b) of Section 102 of the Delaware General Corporation Law. If the Delaware General Corporation Law is hereafter amended to further eliminate or limit the personal liability of directors, then the liability of a director of the Corporation will be eliminated or limited to the fullest extent permitted by the Delaware General Corporation Law, as so amended. G-14 B. Any repeal or modification of the foregoing paragraph by the stockholders of the Corporation will not adversely affect any right or protection of a director of the Corporation existing at the time of that repeal or modification. ARTICLE 11 INDEMNIFICATION A. To the fullest extent permitted by applicable law, the Corporation is authorized to provide indemnification of (and advancement of expenses to) directors, officers and agents (and any other person that Delaware law permits this Corporation to provide indemnification to) through bylaw provisions, agreements with those agents or other persons, vote of stockholders or disinterested directors or otherwise, subject only to limits created by applicable Delaware law (statutory or non-statutory) with respect to action for breach of duty to the Corporation, its stockholders, and others. B. The indemnification and other rights set forth in this Article 11 are not exclusive of any provisions with respect thereto in the bylaws or any other contract or agreement between the Corporation and any officer, director, employee or agent of the Corporation. C. The Corporation shall indemnify each person who was or is made a party or is threatened to be made a party to or is in any way involved in any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a "proceeding"), including any appeal therefrom, by reason of the fact that he or she, or a person of whom he or she is the legal representative, is or was a director or officer of the Corporation or a direct or indirect subsidiary of the Corporation, or is or was serving at the request of the Corporation as a director or officer of another entity or enterprise, or was a director or officer of a foreign or domestic corporation which was a predecessor corporation of the Corporation or of another entity or enterprise at the request of that predecessor corporation, and the Corporation shall advance all expenses actually or reasonably incurred by any such person in defense of any such proceeding prior to its final determination, to the fullest extent authorized by the General Corporation Law of the State of Delaware. In any proceeding against the Corporation to enforce these rights, each such person will be presumed to be entitled to indemnification and the Corporation will have the burden of proving that that person has not met the standards of conduct for permissible indemnification set forth in the General Corporation Law of the State of Delaware, except that if the General Corporation Law of the State of Delaware requires the payment of such expenses in advance of the final disposition of a proceeding, the Corporation may only pay such expenses if that person undertakes to repay the Corporation if it is ultimately determined that he or she was not entitled to indemnification. D. It will be presumed that the directors and officers of the Corporation relied upon the rights to indemnification and advancement of expenses conferred by this Article 11 in serving or continuing to serve the Corporation, and those rights are enforceable as contract rights. Any rights to indemnification of any such director or officer will only apply to any loss, liability or expenses incurred by that director or officer in connection with proceedings brought against that person in the capacities in which he or she serves the Corporation. The Corporation may, upon written demand presented by a director or officer of the Corporation or of a direct or indirect subsidiary of the Corporation, or by a person serving at the request of the Corporation as a director or officer of another entity or enterprise, enter into contracts to provide those persons with specified rights to indemnification, which contracts may confer rights and protections to the maximum extent permitted by the General Corporation Law of the State of Delaware, as amended and in effect from time to time. E. If a claim under this Article 11 is not paid in full by the Corporation within 60 days after the Corporation has received a written claim, the claimant may at any time thereafter bring suit against the Corporation to recover the unpaid amount of claim and, if successful in whole or in part, the claimant will be entitled also to be paid the expenses of prosecuting that claim. It will be a defense to any such action (other than an action brought to enforce the right to be advanced expenses incurred in defending any proceeding prior to its G-15 final disposition where the required undertaking, if any, has been tendered to the Corporation) that the claimant has not met the standards of conduct that make it permissible under the General Corporation Law of the State of Delaware for the Corporation to indemnify the claimant for the amount claimed, but the claimant will be presumed to be entitled to indemnification and the Corporation will have the burden of proving that the claimant has not met the standards of conduct for permissible indemnification set forth in the General Corporation Law of the State of Delaware. F. If the General Corporation Law of the State of Delaware is hereafter amended to permit the Corporation to provided broader indemnification rights than the Corporation was permitted by law to provide prior to that amendment, the indemnification rights conferred by this Article 11 will be broadened to the fullest extend permitted by the General Corporation Law of the State of Delaware, as so amended. No amendment to or repeal of this Article 11 will affect or diminish in any way the rights of any indemnitee to indemnification under the provisions of this Article 11 with respect to any action, suit, proceeding or investigation arising out of or relating to any actions, transactions or facts occurring prior to the final adoption of any such amendment or repeal. G. Neither amendment nor repeal of this Article 11 nor adoption of any provision of this amended and restated certificate of incorporation inconsistent with this Article 11 will eliminate or reduce the effect of this Article 11 in respect of any matter occurring before that amendment, repeal or adoption of an inconsistent provision or in respect of any cause of action, suit or claim relating to any such matter that would have given rise to a right of indemnification or right to receive expenses pursuant to this Article 11 if that provision had not been so amended or repealed or if a provision inconsistent therewith had not been so adopted. H. The Corporation is entitled to purchase and maintain indemnity insurance to guard against future expenses. ARTICLE 12 CERTAIN RESTRICTIONS ON THE TRANSFER OF STOCK In order to preserve the net operating loss carryovers, net capital loss carryovers, and certain other attributes (the "Tax Benefits") to which the Corporation is entitled pursuant to the Internal Revenue Code of 1986, as amended, or any successor statute (collectively the "Code") and the regulations thereunder, the following restrictions shall apply until December 31, 2008, unless the board of directors of the Corporation shall fix an earlier or later date in accordance with subsection 8 of this Article 12 (such date is sometimes referred to herein as the "Expiration Date"): Subsection 1. Restrictions and Definitions. From and after April 11, 1994, no person other than the Corporation shall transfer any shares of stock of the Corporation (other than stock described in Section 1504(a)(4) of the Code or any successor statute, or stock that is not so described solely because it is entitled to vote as a result of dividend arrearages) to any person to the extent that such transfer, if effective, would cause the Ownership Interest Percentage of the transferee or any other person to increase above 4.9 percent, whether or not said transferee or other person held stock of the Corporation in excess of such percentage before such transfer. For purposes of this Article 12, (a) "person" refers to any individual, corporation, estate, trust, association, company, partnership, joint venture, or similar organization; (b) a person's Ownership Interest Percentage shall be the sum of (i) such person's direct ownership interest in the Corporation as determined under Treasury Regulation Section 1.382-2T(f)(8) or any successor regulation, (ii) such person's indirect ownership interest in the Corporation as determined under Treasury Regulation Section 1.382-2T(f)(15) or any successor regulation, and (iii) such person's additional deemed ownership interest in the Corporation as determined under Proposed Treasury Regulation Section 1.1502-92(c) or any successor regulation, except that, for purposes of determining a person's direct ownership interest in the corporation, any ownership interest held by such person in the Corporation described in Treasury Regulation Section 1.382-2T(f)(18)(iii)(A) or any successor regulation shall be treated as stock of the Corporation, and for purposes of determining a person's indirect ownership interest in G-16 the Corporation, Treasury Regulations Sections 1.382-2T(g)(2), 1.382-2T(h)(2)(iii) and 1.382-2T(h)(6)(iii) or any successor regulations shall not apply and any stock that would be attributed to such person pursuant to the option attribution rules of Treasury Regulation Section 1.382-2T(h)(4) and Treasury Regulation Section 1.382-4 or any successor regulations, if to do so would result in an ownership change, shall be attributed to such person without regard to whether such attribution results in an ownership change; (c) "transfer" refers to any means of conveying legal or beneficial ownership of shares of stock of the Corporation, whether such means is direct or indirect, voluntary or involuntary, including, without limitation, the transfer of ownership of any entity that owns shares of stock of the Corporation, and "transferee" means any person to whom stock of the Corporation is transferred. Subsection 2. Exceptions. Any transfer of shares of stock of the Corporation that would otherwise be prohibited pursuant to the preceding subsection shall nonetheless be permitted if information relating to a specific proposed transaction is presented to the board of directors of the Corporation and the board determines (based, at its option, upon an opinion of legal counsel selected by the board to that effect) that such transaction will not jeopardize the Tax Benefits. Nothing in this subsection shall be construed to limit or restrict the board of directors of the Corporation in the exercise of its fiduciary duties under applicable law. Subsection 3. Attempted Transfer in Violation of Transfer Restrictions. Unless approval of the board of directors of the Corporation is obtained as provided in subsection 2 of this Article 12, any attempted transfer of shares of stock of the Corporation in excess of the shares that could be transferred to the transferee without restriction under subsection 1 of this Article 12 is not effective to transfer ownership of such excess shares (the "Prohibited Shares") to the purported acquiror thereof (the "Purported Acquiror"), who shall not be entitled to any rights as a shareholder of the Corporation with respect to the Prohibited Shares (including, without limitation, the right to vote or to receive dividends with respect thereto). All rights with respect to the Prohibited Shares shall remain the property of the person who initially purported to transfer the Prohibited Shares to the Purported Acquiror (the "Initial Transferor") until such time as the Prohibited Shares are resold as set forth in subsection 3(A) or (B) of this Article 12. The Purported Acquiror, by acquiring ownership of shares of stock of the Corporation that are not Prohibited Shares, shall be deemed to have consented to all the provisions of this Article 12 and to have agreed to act as provided in the following subsection 3(A). (A)Upon demand by the Corporation, the Purported Acquiror shall transfer any certificate or other evidence of purported ownership of the Prohibited Shares within the Purported Acquiror's possession or control, along with any dividends or other distributions paid by the Corporation with respect to the Prohibited Shares that were received by the Purported Acquiror (the "Prohibited Distribution"), to an agent designated by the Corporation (the "Agent"). If the Purported Acquiror has sold the Prohibited Shares to an unrelated party in an arms-length transaction after purportedly acquiring them, the Purported Acquiror shall be deemed to have sold the Prohibited Shares as agent for the Initial Transferor, and in lieu of transferring the Prohibited Shares and Prohibited Distributions to the Agent shall transfer to the Agent the Prohibited Distributions and the proceeds of such sale (the "Resale Proceeds") except to the extent that the Agent grants written permission to the Purported Acquiror to retain a portion of the Resale Proceeds not exceeding the amount that would have been payable by the Agent to the Purported Acquiror pursuant to the following subsection 3(B) if the Prohibited Shares had been sold by the Agent rather than by the Purported Acquiror. Any purported transfer of the Prohibited Shares by the Purported Acquiror other than a transfer described in one of the two preceding sentences shall not be effective to transfer any ownership of the Prohibited Shares. (B)The Agent shall sell in an arms-length transaction (through the Nasdaq Stock Market, if possible) any Prohibited Shares transferred to the Agent by the Purported Acquiror, and the proceeds of such sale (the "Sales Proceeds"), or the Resale Proceeds, if applicable, shall be allocated to the Purported Acquiror up to the following amount: (i) where applicable, the purported purchase price paid or value of consideration surrendered by the Purported Acquiror for the Prohibited Shares, and (ii) where the purported transfer of the Prohibited Shares to the Purported Acquiror was by gift, inheritance, or any G-17 similar purported transfer, the fair market value of the Prohibited Shares at the time of such purported transfer. Subject to the succeeding provisions of this subsection, any Resale Proceeds or Sales Proceeds in excess of the amount allocable to the Purported Acquiror pursuant to the preceding sentence, together with any Prohibited Distributions, shall be the property of the Initial Transferor. If the identity of the Initial Transferor cannot be determined by the Agent through inquiry made to the Purported Acquiror, the Agent shall publish appropriate notice (in The Wall Street Journal, if possible) for seven (7) consecutive business days in an attempt to identify the Initial Transferor in order to transmit any Resale Proceeds or Sales Proceeds or Prohibited Distributions due to the Initial Transferor pursuant to this subsection. The Agent may also take, but is not required to take, other reasonable actions to attempt to identify the Initial Transferor. If after ninety (90) days following the final publication of such notice the Initial Transferor has not been identified, any amounts due to the Initial Transferor pursuant to this subsection may be paid over to a court or governmental agency, if applicable law permits, or otherwise shall be transferred to an entity designated by the Corporation that is described in Section 501(c)(3) of the Code. In no event shall any such amounts due to the Initial Transferor inure to the benefit of the Corporation or the Agent, but such amounts may be used to cover expenses (including but not limited to the expenses of publication) incurred by the Agent in attempting to identify the Initial Transferor. Subsection 4. Prompt Enforcement Against Purported Acquiror. Within thirty (30) business days of learning of a purported transfer of Prohibited Shares to a Purported Acquiror, the Corporation through its Secretary shall demand that the Purported Acquiror surrender to the Agent the certificates representing the Prohibited Shares, or any Resale Proceeds, and any Prohibited Distributions, and if such surrender is not made by the Purported Acquiror within thirty (30) business days from the date of such demand, the Corporation shall institute legal proceedings to compel such transfer, provided, however, that nothing in this subsection 4 shall preclude the Corporation in its discretion from immediately bringing legal proceedings without a prior demand, and also provided that failure of the Corporation to act within the time periods set out in this subsection 4 shall not constitute a waiver of any right of the Corporation to compel any transfer required by subsection 3(A) of this Article 12. Subsection 5. Additional Actions to Prevent Violation or Attempted Violation. Upon a determination by the board of directors of the Corporation that there has been or is threatened a purported transfer of Prohibited Shares to a Purported Acquiror, the board of directors may take such action in addition to any action required by the preceding subsection as it deems advisable to give effect to the provisions of this Article 12, including, without limitation, refusing to give effect on the books of this Corporation to such purported transfer or instituting proceedings to enjoin such purported transfer. Subsection 6. Obligation to Provide Information. The Corporation may require as a condition to the registration of the transfer of any shares of its stock that the proposed transferee furnish to the Corporation all information reasonably requested by the Corporation with respect to all the proposed transferee's direct or indirect ownership interests in, or options to acquire, stock of the Corporation. Subsection 7. Legends. All certificates evidencing ownership of shares of stock of this Corporation that are subject to the restrictions on transfer contained in this Article 12 shall bear a conspicuous legend referencing the restrictions set forth in this Article 12. G-18 Subsection 8. Further Actions. Nothing contained in this Article 12 shall limit the authority of the board of directors of the Corporation to take such other action to the extent permitted by law as it deems necessary or advisable to protect the Corporation and the interests of the holders of its securities in preserving the Tax Benefits. Without limiting the generality of the foregoing, in the event of a change in law making one or more of the following actions necessary or desirable, the board of directors of the Corporation may (i) accelerate or extend the Expiration Date, (ii) modify the Ownership Interest Percentage in the Corporation specified in the first sentence of subsection 1, (iii) modify the definitions of any terms set forth in this Article 12 as reasonably necessary or desirable to preserve the Tax Benefits under the Code and the regulations thereunder, or (iv) determine that the continuation of these restrictions is no longer reasonably necessary for the preservation of the Tax Benefits, which determination shall be based upon an opinion of legal counsel to the Corporation and which determination shall be filed with the Secretary of the Corporation and mailed by the Secretary to shareholders of this Corporation within ten (10) days after the date of any such determination. G-19 ANNEX H THE ARISTOTLE CORPORATION AUDIT COMMITTEE OF THE BOARD OF DIRECTORS PROTOCOLS The Audit Committee ("Committee"), appointed by and acting on behalf of the Board of Directors of The Aristotle Corporation ("Aristotle"), a Delaware corporation, shall be responsible for overseeing Aristotle's financial reporting process and internal controls. The Committee shall be composed of Directors of Aristotle who are independent directors. The Board of Directors shall appoint a Chairman of the Committee who shall serve at the discretion of the Board of Directors. Compliance with Regulatory Requirements The Committee, including the composition of its membership shall at all times be in compliance with the rules and regulations issued from time to time by any authorities having jurisdiction over its affairs, including the United States Securities and Exchange Commission, the National Association of Securities Dealers, Inc. and the NASDAQ National Market System. Responsibilities of Audit Committee The Committee shall undertake such functions as it deems appropriate to oversee Aristotle's financial reporting process and internal controls. Without limiting its scope of activities, the Committee may review and make recommendations with respect to: . The appointment of Aristotle's independent auditors, their proposed scope of audit, their estimated and actual fees and expenses and their performance, in particular, assessing and assuring the independence of such outside auditors . The adequacy and appropriateness of Aristotle's system of internal financial controls, including the need for, and conduct of, an internal auditing function; . The filings made on behalf of Aristotle with the Securities and Exchange Commission, the NASDAQ National Market System and such other exchange upon which the securities of Aristotle are listed; . The procedures established by Aristotle, and actions undertaken on Aristotle's behalf, to protect the Aristotle's proprietary intellectual property; and . The findings of investigations, examinations, and similar reviews, if any, issued or conducted by regulatory authorities which pertain to Aristotle's internal financial controls and financial reporting functions. Further, the Committee shall conduct special investigations at its discretion and shall perform such other functions as may be requested from time to time by the Board of Directors. In the conduct of its responsibilities, the Committee is authorized to communicate directly with any employee of Aristotle or any third party conducting business with Aristotle; engage professionals, including lawyers, accountants, and financial advisers who have or have not previously rendered services to the Aristotle and undertake such other actions as the Committee deems appropriate in order to fulfill its responsibilities. H-1 Meetings The Committee shall meet at the discretion of its Chairman or a majority of its members, but shall meet not less frequently than annually after the submission of the report of Aristotle's independent auditors with respect to Aristotle's most recently completed fiscal year. A portion of the Committee's annual meeting with Aristotle independent auditors should be held without management present. The Committee shall maintain minutes of its proceedings. Reporting Responsibilities The Committee shall report to the Board of Directors as the Chairman, a majority of the members, or the Board of Directors may request. The Committee may, acting on its own initiative, report to, or otherwise communicate with, one or more members of management, including those persons responsible for financial reporting and internal auditing, and Aristotle's independent auditors. Aristotle' independent auditors shall report directly to the Committee but shall be responsible to the entire Board of Directors. Procedures for the Discharging Committee Responsibilities The Committee shall discuss and review audit functions performed by the independent auditors, discussions of which may include, but shall not be limited to: . The independent auditors' proposed audit plan for the current year, and discuss with the independent auditors its scope, staffing, location, reliance upon management and general audit approach; . Significant findings during the year, including the status of previous audit recommendations; . Any difficulties encountered in the course of audit work, including any restrictions on the scope of activities or access to required information; . A review and an assessment of the Committee charter; . Any matters raised by the audit that the Committee believes should be discussed privately without the presence of management; and . Inquiries as to the auditor's independent qualitative judgments about the appropriateness, not just the acceptability, of the accounting principles and the clarity of the financial disclosure practices used or proposed to be used by Aristotle. The Chairman The Chairman shall have the authority and responsibility to call the meetings of the Audit Committee, to oversee the conduct of meetings, to report on the deliberations of the Committee to the Board of Directors and, as appropriate, to others. The Chairman shall have the authority to engage, on behalf of the Committee, counsel, accountants, and others in the furtherance of the Chairman's and the Committee's duties. The Committee, acting by majority of its members, may overrule or modify any decision of the Chairman, or initiate any action on its own. H-2 INDEX TO FINANCIAL STATEMENTS Consolidated Financial Statements of Nasco International, Inc. and Subsidiaries (A Wholly-Owned Subsidiary of Nasco Holdings, Inc.) Independent Auditors' Report........................................................ F-2 Consolidated Balance Sheets at December 31, 2001 and 2000........................... F-3 Consolidated Statements of Earnings, Years ended December 31, 2001, 2000, and 1999.. F-4 Consolidated Statements of Stockholder's Equity and Comprehensive Earnings, from Years ended December 31, 2001, 2000, and 1999..................................... F-5 Consolidated Statements of Cash Flows, Years ended December 31, 2001, 2000, and 1999 F-6 Notes to Consolidated Financial Statements.......................................... F-7 American Educational Products, Inc. and Subsidiaries Index to Consolidated Financial Statements Independent Auditor's Report........................................................ F-22 Consolidated Balance Sheet at December 31, 2000..................................... F-23 Consolidated Statement of Operations for the Year Ended December 31, 2000........... F-24 Consolidated Statement of Stockholders' Equity for the Year Ended December 31, 2000. F-25 Consolidated Statement of Cash Flows for the Year Ended December 31, 2000........... F-26 Notes to Consolidated Financial Statements.......................................... F-27
Financial F-1 NASCO INTERNATIONAL, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Nasco Holdings, Inc.) Independent Auditors' Report The Board of Directors Nasco International, Inc.: We have audited the accompanying consolidated balance sheets of Nasco International, Inc. and subsidiaries (a wholly-owned subsidiary of Nasco Holdings, Inc.) as of December 31, 2001 and 2000, and the related consolidated statements of earnings, stockholder's equity and comprehensive earnings, and cash flows for each of the years in the three-year period ended December 31, 2001. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Nasco International, Inc. and subsidiaries as of December 31, 2001 and 2000, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States of America. /s/ KPMG LLP Milwaukee, Wisconsin February 8, 2002 Financial F-2 NASCO INTERNATIONAL, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Nasco Holdings, Inc.) Consolidated Balance Sheets December 31, 2001 and 2000
2001 2000 ----------- ---------- Assets Current assets: Cash and cash equivalents..................................................... $ 4,464,898 2,565,333 Accounts receivable, less allowance for doubtful receivables of $476,000 and $486,000 at December 31, 2001 and 2000, respectively........................ 13,661,150 12,668,261 Accounts receivable, affiliates............................................... 89,279 -- Inventories................................................................... 24,325,870 20,918,058 Prepaid expenses.............................................................. 6,274,512 5,800,160 Deferred income taxes......................................................... 1,176,500 1,005,230 ----------- ---------- Total current assets.................................................... 49,992,209 42,957,042 ----------- ---------- Property, plant, and equipment, at cost........................................ 15,037,660 14,304,438 Less accumulated depreciation and amortization................................ (5,477,018) (4,494,833) ----------- ---------- Net property, plant, and equipment...................................... 9,560,642 9,809,605 Goodwill and other intangible assets, net...................................... 7,345,963 2,474,652 Deferred income taxes.......................................................... 423,000 730,780 Other assets................................................................... 114,588 261,935 ----------- ---------- Total assets............................................................ $67,436,402 56,234,014 =========== ========== Liabilities and Stockholder's Equity Current liabilities: Line of credit................................................................ $ -- 2,541,416 Note payable to Geneve Corporation............................................ -- 5,490,214 Current installments of long-term debt........................................ 8,403,474 6,420,449 Trade accounts payable........................................................ 3,694,031 4,201,397 Accrued expenses.............................................................. 5,384,703 4,020,750 ----------- ---------- Total current liabilities............................................... 17,482,208 22,674,226 ----------- ---------- Long-term debt, less current installments...................................... 36,027,427 23,427,632 Minority interest.............................................................. -- 3,316,097 Stockholder's equity: Common stock, $0.01 par value, authorized 4,500 shares; issued and outstanding 100 shares.................................................................. 1 1 Additional paid-in capital.................................................... 3,252,862 2,978,277 Retained earnings............................................................. 10,872,164 3,897,467 Accumulated other comprehensive loss:......................................... Cumulative foreign currency translation adjustment.......................... (198,260) (59,686) ----------- ---------- Total stockholder's equity.............................................. 13,926,767 6,816,059 ----------- ---------- Total liabilities and stockholder's equity.............................. $67,436,402 56,234,014 =========== ==========
See accompanying notes to consolidated financial statements. Financial F-3 NASCO INTERNATIONAL, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Nasco Holdings, Inc.) Consolidated Statements of Earnings December 31, 2001, 2000 and 1999
2001 2000 1999 ------------ ----------- ----------- Net sales..................................................... 161,960,716 143,798,507 124,815,745 Cost of sales................................................. 105,447,337 93,757,526 81,199,581 ------------ ----------- ----------- Gross profit........................................... 56,513,379 50,040,981 43,616,164 Selling and administrative expense............................ 37,049,590 32,019,738 26,538,657 Special charges: American Educational Products, Inc........... 611,705 785,489 -- Management fees............................................... 1,611,600 1,520,400 1,434,000 ------------ ----------- ----------- Earnings from operations............................... 17,240,484 15,715,354 15,643,507 ------------ ----------- ----------- Other expense (income): Interest expense.............................................. 3,159,571 2,765,237 887,725 Interest income............................................... (295,421) (163,848) (72,138) Other, net.................................................... (159,904) (70,051) (132,448) ------------ ----------- ----------- 2,704,246 2,531,338 683,139 ------------ ----------- ----------- Earnings before income taxes and minority interest..... 14,536,238 13,184,016 14,960,368 Income taxes.................................................. 5,860,440 5,217,431 5,774,000 Minority interest............................................. 98,899 195,271 -- ------------ ----------- ----------- Net earnings........................................... $ 8,774,697 8,161,856 9,186,368 ============ =========== =========== Basic earnings per share...................................... $ 87,746.97 81,618.56 91,863.68 ============ =========== =========== Diluted earnings per share.................................... $ 87,746.97 81,618.56 91,863.68 ============ =========== ===========
See accompanying notes to consolidated financial statements. Financial F-4 NASCO INTERNATIONAL, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Nasco Holdings, Inc.) Consolidated Statements of Stockholder's Equity and Comprehensive Earnings December 31, 2001, 2000 and 1999
Accumulated Additional other Total Comprehensive Common paid-in Retained comprehensive stockholder's earnings stock capital earnings earnings (loss) equity ------------- ------ ---------- ------------ --------------- ------------- Balance, December 31, 1998............... $ 1 $2,978,277 $ 11,549,243 $ (70,302) $ 14,457,219 Net earnings......... $9,186,368 -- -- 9,186,368 -- 9,186,368 Other comprehensive earnings (loss): Foreign currency translation adjustment......... 18,140 -- -- -- 18,140 18,140 ---------- Comprehensive earnings........... $9,204,508 ========== --- ---------- ------------ --------- ------------ Balance, December 31, 1999............... 1 2,978,277 20,735,611 (52,162) 23,661,727 Net earnings......... $8,161,856 -- -- 8,161,856 -- 8,161,856 Other comprehensive earnings (loss): Foreign currency translation adjustment......... (7,524) -- -- -- (7,524) (7,524) ---------- Comprehensive earnings........... $8,154,332 ========== Dividend paid........ -- (25,000,000) -- (25,000,000) --- ---------- ------------ --------- ------------ Balance, December 31, 2000............... 1 2,978,277 3,897,467 (59,686) 6,816,059 Net earnings......... $8,774,697 -- -- 8,774,697 -- 8,774,697 Equity contribution from parent........ -- -- 274,585 -- -- 274,585 Other comprehensive earnings (loss): Foreign currency translation adjustment......... (138,574) -- -- -- (138,574) (138,574) ---------- Comprehensive earnings........... $8,636,123 ========== Dividend paid........ -- -- (1,800,000) -- (1,800,000) Balance, December 31, 2001............... $ 1 $3,252,862 $ 10,872,164 $(198,260) $ 13,926,767 === ========== ============ ========= ============
See accompanying notes to consolidated financial statements. Financial F-5 NASCO INTERNATIONAL, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Nasco Holdings, Inc.) Consolidated Statements of Cash Flows Years ended December 31, 2001, 2000, and 1999
2001 2000 1999 ------------ ----------- ---------- Cash flows from operating activities: Net earnings........................................................ $ 8,774,697 8,161,856 9,186,368 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization................................... 2,205,222 1,865,159 962,476 Loss (gain) on sale of property, plant, and equipment........... 11,714 (1,225) (22,474) Deferred income tax............................................. 136,510 (58,569) 7,000 Change in assets and liabilities, net of effects of acquired business: Accounts receivable.......................................... (177,162) 364,719 (1,031,531) Inventories.................................................. (2,133,463) (1,466,028) (2,153,356) Prepaid expenses and other................................... (450,873) (390,690) (577,385) Trade accounts payable....................................... (1,290,756) 427,389 59,585 Accrued expenses............................................. 1,363,953 376,745 (959,990) Other assets................................................. 146,051 233,000 -- ------------ ----------- ---------- Net cash provided by operating activities.................. 8,585,893 9,512,356 5,470,693 ------------ ----------- ---------- Cash flows from investing activities: Purchases of property, plant, and equipment......................... (1,252,121) (1,344,352) (1,075,831) Proceeds from the sale of property, plant, and equipment............ 33,503 1,225 27,234 Cash paid for the acquisition of Spectrum, net of cash acquired..... (5,240,999) -- -- Cash paid for acquisition of AMEP's minority shareholders' interests......................................................... (5,252,486) -- -- Cash acquired from acquisition of AMEP.............................. -- 145,806 -- ------------ ----------- ---------- Net cash used in investing activities...................... (11,712,103) (1,197,321) (1,048,597) ------------ ----------- ---------- Cash flows from financing activities: Equity contribution from parent..................................... 274,585 -- -- Proceeds from issuance of long-term debt............................ 20,000,000 35,000,000 -- Proceeds from equity transactions with minority shareholders........ -- 910,789 -- Repayment of borrowings on line of credit........................... (2,541,416) (574,000) -- Payment of Geneve notes payable..................................... (5,490,214) -- -- Principal payments on long-term debt................................ (5,417,180) (16,806,000) (5,000,000) Dividends paid, including $781,000 paid to minority shareholders during 2000....................................................... (1,800,000) (25,781,000) -- Deferred financing fees............................................. -- (125,000) -- ------------ ----------- ---------- Net cash provided by (used in) financing activities........ 5,025,775 (7,375,211) (5,000,000) ------------ ----------- ---------- Net increase (decrease) in cash............................ 1,899,565 939,824 (577,904) Cash and cash equivalents at beginning of year....................... 2,565,333 1,625,509 2,203,413 ------------ ----------- ---------- Cash and cash equivalents at end of year............................. $ 4,464,898 2,565,333 1,625,509 ============ =========== ========== Supplemental disclosures of cash flow information: Cash paid during the year for:...................................... Interest.......................................................... $ 2,566,960 2,699,108 940,520 Income taxes...................................................... 4,810,000 4,865,000 6,075,000 Noncash investing and financing activities: Note payable issued in exchange for the net assets of AMEP........ -- 5,490,214 --
See accompanying notes to consolidated financial statements. Financial F-6 NASCO INTERNATIONAL, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Nasco Holdings, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS December 31, 2001, 2000 and 1999 (1) Organization and Financial Statement Presentation These consolidated financial statements include the accounts of Nasco International, Inc. (Nasco) and its subsidiaries - collectively, the "Company" - - and are prepared in accordance with accounting principles generally accepted in the United States of America. Nasco is a wholly-owned subsidiary of Nasco Holdings, Inc. (NHI). NHI is currently an 80% owned subsidiary of Geneve Corporation (Geneve). Geneve is a wholly-owned subsidiary of Geneve Holdings, Inc. (GHI). Nasco is a mail order company headquartered in Fort Atkinson, Wisconsin, with operations in Wisconsin, Minnesota, California, and Canada, which sells merchandise through various catalogs. Catalog products principally include arts and crafts, agricultural products, school teaching aides, molded plastics, and biology products. The principal markets for these products are educational institutions and commercial entities throughout the United States. AMEP, a wholly-owned subsidiary of Nasco, sells a wide variety of educational and commercial products through multiple sales channels. AMEP's products include those developed and manufactured by AMEP, as well as those manufactured by other companies. AMEP's customers include educational institutions, wholesalers, individual educators, and consumers, primarily within the United States. (2) Summary of Significant Accounting Policies (a) Principles of Consolidation All significant intercompany balances and transactions have been eliminated in consolidation. (b) Revenue Recognition Customarily applying FOB-shipping point terms, the Company recognizes revenue upon shipment of products to its customer, which corresponds to the time when risk of ownership transfers. The point of shipment may be from a Company distribution center or from a vendor's location as a drop shipment. All drop shipment sales are recorded at gross selling price. An allowance is provided for estimated future returns. In 2000, the Company adopted the consensus of the Financial Accounting Standards Board's Emerging Issues Task Force (EITF) Issue No. 00-10, Accounting for Shipping and Handling Fees and Costs. Their consensus requires that all amounts billed to a customer in a sales transaction related to shipping and handling be recorded on a gross basis as revenue and expense. Accordingly, Nasco records amounts billed to customers for shipping and handling in net sales, records the freight costs incurred for delivery of product in costs of sales, and records all other costs incurred in the shipping and handling of customer orders in selling and administrative expenses. (c) Inventories Inventories are stated at the lower of cost (principally determined on a first-in, first-out basis) or net realizable value. (d) Property, Plant, and Equipment Property, plant, and equipment are stated at cost. Depreciation of Nasco's property, plant, and equipment is principally provided using an accelerated method. Depreciation of AMEP's property, plant, and equipment is Financial F-7 NASCO INTERNATIONAL, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Nasco Holdings, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 computed by the straight-line method. The Company utilizes useful lives ranging generally from 3 to 7 years for machinery and equipment and 32 years for buildings. Leasehold improvements are amortized using the straight-line method over the terms of the respective leases. Maintenance and repairs are charged to expense when incurred. Property replacements and betterments that extend the life of assets, including reproduction masters for significant, nonroutine product updates, are capitalized and subsequently depreciated. In accordance with Statement of Financial Accounting Standards (SFAS) No. 121, Accounting for the Impairment of Long-lived Assets and for Long-lived Assets to Be Disposed Of (SFAS 121), the Company reviews long-lived assets and certain identifiable intangibles for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future undiscounted net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (e) Goodwill and Other Intangibles Goodwill, which represents the excess of cost over the fair value of net assets acquired in the acquisition of AMEP, has been amortized on a straight-line basis over 15 years. Goodwill and accumulated amortization were $7,738,006 and $729,834, respectively, at December 31, 2001 and $2,397,558 and $275,086, respectively, at December 31, 2000. Costs allocated to covenants not to compete are amortized over the contractual lives of the noncompete agreements, generally ranging from four to six years. Covenants not to compete and accumulated amortization were $1,189,000 and $851,208, respectively, at December 31, 2001 and $1,189,000 and $836,820, respectively, at December 31, 2000. (f) Translation of Financial Statements Denominated in Foreign Currencies The assets and liabilities of Nasco's Canadian subsidiaries are translated at year-end exchange rates, and the related statements of earnings are translated at the average exchange rates for the respective years. Gains or losses resulting from translating foreign currency financial statements are recorded as accumulated other comprehensive earnings, a separate component of stockholder's equity. Gains or losses resulting from foreign currency transactions (transactions denominated in a currency other than the entity's local currency) are included in net earnings but are not significant in the years presented. (g) Income Taxes Nasco and its qualifying domestic subsidiaries are included in the consolidated Federal income tax return of GHI. The provision for income taxes for Nasco is allocated to all subsidiaries on a separate return basis, and payments for federal taxes are made to NHI. The Company accounts for income taxes under the asset and liability method, wherein deferred income tax assets and liabilities are recognized for the future tax consequences attributable to differences between the Financial F-8 NASCO INTERNATIONAL, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Nasco Holdings, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 consolidated financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred income tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred income tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. (h) Cash Equivalents For purposes of the consolidated statement of cash flows, the Company considers debt securities with original maturities of three months or less to be cash equivalents. Cash equivalents consist of money market accounts, certificates of deposit, and reverse repurchase agreements totaling $2,844,000 and $1,982,000 at December 31, 2001 and 2000, respectively. (i) Research and Development Costs The Company expenses research and development costs as incurred. Research and development costs were approximately $341,000, $487,000, and $440,000 in 2001, 2000, and 1999, respectively. (j) Advertising Costs Substantially all of the Company's advertising is through the mailing of catalogs. The Company expenses the production costs of advertising the first time the advertising takes place, except for direct-response advertising, the cost of which is capitalized and amortized over its expected period of future benefits. Direct-response advertising consists primarily of catalog advertisements of the Company's products. The capitalized costs of advertising are amortized over the one-year period following the publication of the catalog. At December 31, 2001 and 2000, approximately $3,701,000 and $4,375,000, respectively, of direct-response advertising costs were reported as prepaid expenses. Advertising costs expensed were approximately $10,134,000, $8,909,000, and $7,114,000 in 2001, 2000, and 1999, respectively. (k) Fair Value of Financial Instruments and Concentration of Credit Risk The carrying values of the Company's trade receivables and trade payables approximate fair value due to their short maturities. The fair values of the Company's line of credit, notes payable, and long-term debt approximate fair value because the effective interest rates on the obligations approximate the respective Company's current cost of borrowing for similar terms and amounts. A substantial portion of the Company's sales are either direct to educational institutions or to distributors who sell to educational institutions. Management believes that the allowance for doubtful accounts is sufficient to cover the related credit risk. (l) Earnings Per Share Basic earnings per share are calculated by dividing net earnings by the weighted average number of common shares outstanding for the period. Diluted earnings per share are calculated by dividing net earnings by the weighted average number of common shares outstanding during the year and including each share that would have been outstanding assuming the issuance of common shares for all dilutive potential common shares outstanding during the year. Nasco does not have a complex capital structure, so there is no difference between basic and diluted earnings per share. Financial F-9 NASCO INTERNATIONAL, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Nasco Holdings, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 (m) Use of Estimates The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. (n) Recently Issued Accounting Pronouncements In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, Business Combinations (SFAS 141), and SFAS No. 142, Goodwill and Other Intangible Assets (SFAS 142). SFAS 141 requires that the purchase method of accounting be used for all business combinations. SFAS 141 specifies criteria that intangible assets acquired in a business combination must meet to be recognized and reported separately from goodwill. SFAS 142 will require that goodwill and intangible assets with indefinite useful lives no longer be amortized, but instead tested for impairment at least annually in accordance with the provisions of SFAS 142. SFAS 142 also requires that intangible assets with estimable useful lives be amortized over their respective estimated useful lives to their estimated residual values and reviewed for impairment in accordance with SFAS 121 and, after its adoption, SFAS 144. The Company adopted the provisions of SFAS 141 as of July 1, 2001, and SFAS 142 is effective January 1, 2002. Goodwill and intangible assets determined to have an indefinite useful life acquired in business combinations completed before July 1, 2001 continue to be amortized and tested for impairment using the guidance contained in SFAS 121 prior to the full adoption of SFAS 142. Upon adoption of SFAS 142, the Company is required to evaluate its existing intangible assets and goodwill that were acquired in purchase business combinations and to make any necessary reclassifications in order to conform with the new classification criteria in SFAS 141 for recognition separate from goodwill. The Company will be required to reassess the useful lives and residual values of all intangible assets acquired and make any necessary amortization period adjustments by the end of the first interim period after adoption. If an intangible asset is identified as having an indefinite useful life, the Company will be required to test the intangible asset for impairment in accordance with the provisions of SFAS 142 within the first interim period. Goodwill should be tested for impairment at a level of reporting referred to as a reporting unit. The two-step impairment test shall be used to identify potential goodwill impairment and measure the amount of a goodwill impairment loss to be recognized, if any. Impairment is measured as the excess of carrying value over the fair value of an intangible asset with an indefinite life. Any impairment loss will be measured as of the date of adoption and recognized as the cumulative effect of a change in accounting principle in the first interim period. As of December 31, 2001, the Company has unamortized goodwill in the amount of $7,008,172 and unamortized identifiable intangible assets in the amount of $337,792, all of which will be subject to the transition provisions of SFAS 142. Amortization expense related to goodwill was $454,748 and $275,086 for the years ended December 31, 2001 and 2000, respectively. The Company does not expect the impact of the adoption of the Statements to have a material effect on the financial statements, nor does the Company expect to recognize any transitional impairment losses as the cumulative effect of a change in accounting principle. In August 2001, the FASB issued SFAS No. 144, Accounting for the Impairment or Disposal of Long-lived Assets (SFAS 144). This Statement supersedes SFAS 121 yet retains its fundamental provisions for recognition and measurement of the impairment of long-lived assets to be held and used and for measurement of long-lived assets to be disposed of by sale. In addition, SFAS 144 requires companies to separately report discontinued Financial F-10 NASCO INTERNATIONAL, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Nasco Holdings, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 operations and extends that reporting to a component of an entity that either has been disposed of (by sale, abandonment, or in a distribution to owners) or is classified as held for sale. The Company is required to adopt SFAS 144 on January 1, 2002. The impact of the adoption of SFAS 144 is not expected to have a material effect on the financial statements or operations of the Company. (o) Reporting Certain 2000 and 1999 amounts have been reclassified to conform to the 2001 presentation. (3) Acquisitions and Special Charges During 1999 and 2000, G.C. Associates Holding Corp. (GC), a wholly-owned subsidiary of Geneve, acquired blocks of common stock of AMEP through purchases in the public market. A common-stock purchase in March 2000 increased GC's holdings in AMEP to 60% ownership. At that point, the acquisition of AMEP common stock was recorded based on step acquisition accounting. Step acquisition accounting requires a pro rata allocation of the fair values of identifiable net assets acquired at the date of previous and additional acquisitions. At December 31, 2000, GC had acquired 666,961 common shares of AMEP, representing 55% of the total outstanding common stock. The decrease in GC's ownership percentage during the period from March 2000 through December 2000 was a result of additional issuances of common stock by AMEP, primarily resulting from the exercise of outstanding stock options. GC's investment in AMEP at December 31, 2000 was $5,183,000, and the application of step acquisition accounting resulted in gross goodwill of $2,398,000. In July 2000, the board of directors of AMEP agreed in principle to the terms of a merger proposal from GC. In March 2001, Nasco became the successor to the shares of AMEP previously owned by GC and assumed all rights and obligations under the merger agreement. Under the terms of the agreement, all shareholders other than Nasco and its affiliates received $10.00 in cash for each share of AMEP stock they owned, and in March 2001, AMEP became a wholly-owned subsidiary of Nasco. Nasco paid approximately $5,252,000 during 2001 for the acquisition of the remaining AMEP minority shareholders' interests and recorded an additional $1,936,000 of goodwill as a result. As a result of this transfer of ownership interests between entities under common control, Nasco has accounted for the fair value of AMEP's net assets and AMEP's operations using the "as if pooling of interests" method as of March 31, 2000, the date GC gained a controlling interest in AMEP. By including AMEP in the 2000 operating results since March 2000, the 2000 consolidated financial statements include incremental sales of approximately $11,750,000, incremental gross operating income of $561,000, and a reduction in net earnings before taxes of $307,000. The consolidated balance sheet as of December 31, 2000 includes AMEP current assets of $8,495,000, net fixed assets of approximately $2,398,000, net goodwill of $2,122,000, current liabilities of $5,094,000, long-term debt of $428,000, and minority interest liability of $3,316,000. During 2001 and 2000, AMEP incurred certain costs totaling $611,705 and $785,489, respectively, which are classified as special charges in the accompanying consolidated statements of earnings. The special charges include nonrecurring costs related to the redemption of stock options held by directors and employees, professional fees related to the settlement of shareholder litigation, and various legal, accounting, and regulatory fees incurred as a result of the merger. In April 2001, the Company acquired 100% of the stock ownership of Spectrum Educational Supplies Ltd. (Spectrum), a Canadian provider of educational product lines, for $5,241,000 cash. The transaction has been accounted for as a purchase and included recording $3,434,000 of additional goodwill. Financial F-11 NASCO INTERNATIONAL, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Nasco Holdings, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 The following pro forma presentation of the years ended December 31, 2001 and 2000 has been prepared as if the AMEP and Spectrum acquisitions had occurred on January 1, 2000:
2001 2000 ------------ ----------- Net sales................. $163,730,000 155,695,000 Net earnings.............. 8,696,000 7,849,000 Basic earnings per share.. 86,960 78,490 Diluted earnings per share 86,960 78,490
The pro forma amounts presented above include adjustments to historical amounts for interest on acquisition debt incurred, amortization of goodwill, and depreciation on revalued fixed assets. The pro forma information is not necessarily indicative of the results of operation of the combined company had these events occurred on January 1, 2000. Furthermore, the Company has made substantial changes to the operations of AMEP and Spectrum subsequent to the acquisition date, and none of these changes is reflected in the pro forma amounts above. Therefore, the amounts presented above are not indicative of future results. (4) Inventories The classification of inventories at December 31, 2001 and 2000 is as follows:
2001 2000 ----------- ---------- Raw materials.......... $ 2,451,188 2,917,236 Work in process........ 575,274 644,889 Finished goods......... 2,301,102 3,424,670 Catalog merchandise.... 19,882,287 14,817,068 Less inventory reserves (883,981) (885,805) ----------- ---------- Net inventory.......... $24,325,870 20,918,058 =========== ==========
(5) Prepaid Expenses A summary of prepaid expenses at December 31, 2001 and 2000 is as follows:
2001 2000 ---------- --------- Prepaid catalog costs.. $3,701,481 4,375,188 Prepaid pension expense 1,376,000 635,000 Other.................. 1,197,031 789,972 ---------- --------- Total prepaid expenses. $6,274,512 5,800,160 ========== =========
Financial F-12 NASCO INTERNATIONAL, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Nasco Holdings, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 (6)Property, Plant, and Equipment, at Cost A summary of property, plant, and equipment at December 31, 2001 and 2000 is as follows:
2001 2000 ----------- ---------- Land and improvements........................ $ 768,984 780,043 Buildings and improvements................... 7,446,022 7,822,864 Machinery, furniture, and equipment.......... 6,677,859 5,666,492 Leasehold improvements....................... 141,960 35,039 Construction in progress..................... 2,835 -- ----------- ---------- Total property, plant, and equipment, at cost $15,037,660 14,304,438 =========== ==========
During 2001 and 2000, Nasco removed from its property, plant, and equipment accounts approximately $558,000 and $451,000, respectively, of fully depreciated plant and equipment still in use. (7)Notes Payable and Long-term Debt During 2001, Nasco amended its five-year bank credit facility (Credit Facility). The proceeds from the amended Credit Facility were used to extinguish existing debt with the lenders, to complete the acquisitions of AMEP and Spectrum, to repay GC's note payable of $5,490,214, assumed as part of the acquisition of AMEP common stock in 2000, and to extinguish existing AMEP bank debt. The principal balance of the AMEP line of credit, which was extinguished during 2001, was $2,541,416 at December 31, 2000. Financial F-13 NASCO INTERNATIONAL, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Nasco Holdings, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 A summary of the Company's long-term debt as of December 31, 2001 and 2000 is as follows:
2001 2000 ----------- ---------- Nasco variable-rate (4.05% and 8.6% at December 31, 2001 and2000, respectively) promissory note under the Credit Facility, due in scheduled principal installments of $4,000,000 on September 30, 2002, $4,000,000 on December 31, 2002, and with graduating increases in each annual September 30 and December 31 installment due thereafter, with a final installment of $500,000 due on March 31, 2006. Collateralized by property, plant, and equipment, accounts receivable, and all shares of Nasco's subsidiaries' capital stock outstanding........................ $44,000,000 -- AMEP note payable, principal due in four annual installments of$237,500, bearing interest at a stated rate of 7.5%, payableannually. For financial reporting purposes, the note was assigned an additional 2.5% of imputed interest (total interest rate of 10%). The face value of the note was $237,500 and $475,000 at December 31, 2001 and 2000, respectively, and is collateralized by intellectual property.......... 232,185 464,027 AMEP license agreement payable, with an imputed interest rate of10%, due in four annual installments of $100,000, collateralizedby intellectual property. The face value of the license payablewas $100,000 and $200,000 at December 31, 2001 and 2000,respectively................................................................ 100,000 182,027 AMEP capital lease obligations, due in monthly installments of$13,000 with varying maturities. Collateralized by informationsystem hardware and manufacturing equipment............................................................................ 98,716 202,027 Nasco variable-rate promissory notes extinguished during 2001.......................... -- 29,000,000 ----------- ---------- Long-term debt.................................................................. 44,430,901 29,848,081 Less current installments.............................................................. (8,403,474) (6,420,449) ----------- ---------- Long-term debt, less current installments....................................... $36,027,427 23,427,632 =========== ==========
The average variable rate on the promissory notes was 6.1%, 8.4%, and 6.2% for the years ended December 31, 2001, 2000, and 1999, respectively. In addition, during 2001, Nasco obtained a $2,500,000 secured bank line of credit to meet working capital requirements, of which no amount was outstanding at December 31, 2001. Financial F-14 NASCO INTERNATIONAL, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Nasco Holdings, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 Aggregate annual maturities of long-term debt as of December 31, 2001 are as follows:
Year ending December 31: 2002.......... $ 8,403,474 2003.......... 9,027,427 2004.......... 9,000,000 2005.......... 9,000,000 2006.......... 9,000,000 ----------- $44,430,901 ===========
The Credit Facility contains various financial and operating covenants, including, among other things, requirements that Nasco maintain certain financial ratios and restrictions on additional indebtedness, dividend payments, capital expenditures, capital disposals, and management fees. Nasco was in compliance with all financial covenants as of December 31, 2001. Nasco has available a $200,000 unsecured line of credit facility to support letters of credit for merchandise procurement. At December 31, 2001, the line of credit had no balance outstanding, and outstanding letters of credit secured by this facility totaled $9,000. (8)Income Taxes The 2001, 2000, and 1999 provisions for income taxes consist of the following:
2001 2000 1999 ---------- --------- --------- Current: United States Federal $4,743,700 4,412,000 4,799,000 Canadian Provincial.. 12,250 -- -- State................ 967,980 864,000 968,000 ---------- --------- --------- 5,723,930 5,276,000 5,767,000 ---------- --------- --------- Deferred:............ United States Federal 120,000 (60,569) 2,000 State................ 16,510 2,000 5,000 ---------- --------- --------- 136,510 (58,569) 7,000 ---------- --------- --------- $5,860,440 5,217,431 5,774,000 ========== ========= ========= Effective tax rate... 40.3% 39.6% 38.6% ========== ========= =========
Financial F-15 NASCO INTERNATIONAL, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Nasco Holdings, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 A reconciliation of the Company's current effective tax rate and the U.S. Federal statutory income tax rate on income before minority interest is as follows:
2001 2000 1999 ----- ----- ----- U.S. Federal statutory rate..................... 35.0 % 35.0 % 35.0 % State income taxes, net of federal tax benefits. 4.4 % 4.3 % 4.2 % Nondeductible goodwill amortization............. 1.1 % 0.7 % -- Nondeductible special charges................... -- 2.1 % -- AMEP net operating loss carryforward utilization -- (1.4)% -- Other........................................... (0.2)% (1.1)% (0.6)% ----- ----- ----- Effective tax rate.............................. 40.3 % 39.6 % 38.6 % ===== ===== =====
In previous years, AMEP incurred net operating losses. Internal Revenue Service regulations allow AMEP to carry forward its net operating losses (NOL) and offset them against future taxable income, if any. As of December 31, 2001, the NOL carryforwards approximate $1,700,000 and expire in the years 2009, 2010, and 2011. Current tax regulations impose a number of limitations and restrictions on the usage of NOL carryforwards, including a limitation of $600,000 per year for AMEP's utilization of these NOL's. Financial F-16 NASCO INTERNATIONAL, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Nasco Holdings, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 The tax effects of temporary differences that give rise to significant portions of the net deferred tax assets at December 31, 2001 and 2000 are presented below:
2001 2000 ---------- ---------- Deferred tax assets: Plant and equipment................................................ $ -- $ 39,780 Inventories........................................................ 622,000 516,000 Accrued expenses................................................... 635,000 654,000 Net operating losses............................................... 690,000 888,000 Accounts receivable................................................ 190,000 194,000 Other, net......................................................... 38,500 145,230 ---------- ---------- Total gross deferred tax assets........................... 2,175,500 2,437,010 Deferred tax liabilities: Prepaid pension cost............................................... (540,000) (249,000) Plant and equipment................................................ (36,000) -- Prepaid advertising costs.......................................... -- (452,000) ---------- ---------- Total gross deferred tax liabilities...................... (576,000) (701,000) ---------- ---------- Net deferred tax assets................................... $1,599,500 $1,736,010 ========== ========== Classification of net deferred taxes in consolidated balance sheets: Current net deferred tax asset..................................... $1,176,500 $1,005,230 Noncurrent net deferred tax asset.................................. 423,000 730,780 ---------- ---------- $1,599,500 $1,736,010 ========== ==========
In assessing the realizability of deferred tax assets, management considers whether it is more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets at December 31, 2001 is dependent upon the Company's generation of approximately $4,000,000 in future taxable income during the periods in which those temporary differences become deductible, including sufficient taxable income at AMEP in order to fully utilize its NOL, subject to its $600,000 annual NOL utilization limitation. Based upon the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not the Company will realize the benefits of these deferred tax assets at December 31, 2001. (9) Lease Commitments The Company leases real and personal property under various noncancelable operating lease agreements. Rent expense under these agreements is approximately $989,000, $605,000, and $372,000 in 2001, 2000, and 1999, respectively. Financial F-17 NASCO INTERNATIONAL, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Nasco Holdings, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 The following is a schedule of future minimum rental payments required under operating leases, all of which relate to the rental of real and personal property, that have initial or remaining noncancelable terms in excess of one year as of December 31, 2001: Year ending December 31: 2002.......................................... $ 953,000 2003.......................................... 749,000 2004.......................................... 564,000 2005.......................................... 425,000 Thereafter.................................... 96,000 ---------- Total minimum payments required........ $2,787,000 ==========
AMEP has certain royalty agreements with third parties on various products. Total royalty expense recognized in the years ended December 31, 2001 and 2000 was $132,000 and $100,000, respectively. (10) Employee Benefit Plans Nasco has noncontributory defined benefit pension plans covering substantially all salaried and hourly employees. The plan covering salaried employees provides pension benefits that are based on years of service and average compensation. The plan covering hourly employees provides pension benefits that are based on stated amounts for each year of service. Nasco's policy is to fund pension costs accrued up to a maximum deductible contribution but not less than the minimum required by the Employee Retirement Income Security Act of 1974. Plan assets are primarily invested in an immediate participation guarantee contract (IPGC) with the Massachusetts Mutual Life Insurance Company. The fair market value of the Plan's IPGC, as determined by the Massachusetts Mutual Life Insurance Company at December 31, 2001 and 2000, approximates $9,046,000 and $8,048,000, respectively. Financial F-18 NASCO INTERNATIONAL, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Nasco Holdings, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 The following table sets forth these plans' funded status and presents a reconciliation of the amounts recognized in the Company's consolidated balance sheets as of December 31, 2001 and 2000:
Pension benefits ------------------------ 2001 2000 ----------- ----------- Changes in benefit obligation: Benefit obligation at beginning of year............ $ 9,373,763 $ 8,634,345 Service cost....................................... 493,958 424,486 Interest cost...................................... 684,116 609,031 Actuarial loss..................................... 715,370 283,615 Benefits paid...................................... (574,654) (577,714) ----------- ----------- Benefit obligations at end of year........... 10,692,553 9,373,763 Change in plan assets: Fair value of plan assets at beginning of year..... 8,313,485 7,872,451 Actual return on plan assets....................... 534,248 532,743 Employer contribution.............................. 921,357 504,470 Benefits paid, including expenses.................. (612,060) (596,179) ----------- ----------- Fair value of plan assets at end of year..... 9,157,030 8,313,485 Funded status....................................... (1,535,523) (1,060,278) Unrecognized net actuarial loss..................... 3,032,845 2,311,173 Unrecognized prior service cost..................... (16,530) (19,046) Unrecognized transition asset....................... (104,491) (143,554) Adjustment to recognize minimum liability........... -- (453,141) ----------- ----------- Prepaid pension cost......................... $ 1,376,301 $ 635,154 =========== ===========
2001 2000 1999 --------- --------- --------- Weighted average assumptions at year end: Discount rate........................... 7.00% 7.00% 7.00% Expected return on plan assets.......... 7.75% 7.75% 7.75% Rate of compensation increase........... 4.00% 4.00% 4.00% Components of net periodic benefit cost: Service cost............................ $ 493,958 $ 424,486 $ 394,407 Interest cost........................... 684,116 609,031 568,226 Expected return on plan assets.......... (657,005) (612,444) (589,567) Amortization of transition asset........ (39,063) (39,063) (39,063) Amortization of prior service cost...... (2,516) (2,516) (2,516) Recognized net actuarial loss........... 153,862 110,451 87,522 --------- --------- --------- Net periodic benefit cost......... $ 633,352 $ 489,945 $ 419,009 ========= ========= =========
Financial F-19 NASCO INTERNATIONAL, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Nasco Holdings, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 Nasco sponsors a defined contribution pension plan that covers substantially all Nasco employees. The Company may make discretionary contributions to the plan. No Company contributions were made during 2001, 2000, and 1999. (11) Related Party Transactions The Company expensed management fees of $1,611,600, $1,520,400, and $1,434,000 charged by NHI in 2001, 2000, and 1999, respectively. The Company recorded other income from management fees of $100,000, $100,000, and $127,000 in 2001, 2000, and 1999, respectively, for services provided to Geneve and an investee. The Company paid cash dividends of $1,800,000 and $25,000,000 in 2001 and 2000, respectively, to NHI. In 2001, the Company began leasing a facility from NHI, LLC, an entity 100% owned by NHI, whose sole purpose is the ownership and management of the facility known as J-Star. The J-Star facility is occupied by both Nasco and an unrelated party by the name of J-Star. Total rent expense paid by Nasco for this facility totaled $213,000 in 2001. (12) Segment Data The Company's business activities are organized into two principal business segments, Educational and Commercial. The Educational segment markets instructional teaching aids and materials to educational institutions nationwide, primarily kindergarten through grade 12 classes. The primary marketing tool is the publication and distribution of catalogs to these institutions. Potential for this segment to grow is directly related to school enrollments and the relative strength of government funding of education. The Commercial segment is comprised of several commercial industries, including agriculture, sterile sampling containers and systems, nursing home activities, and other novelty and gift products. This segment markets its products through catalog distribution nationwide and through a worldwide dealer network representing more than 60 countries. Market growth in this segment is related to the general economic conditions of world agriculture, the increasing size of aged population, as well as increasing global awareness of food and water quality standards. The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates the performance of these segments based on segment sales and gross profit. Financial F-20 NASCO INTERNATIONAL, INC. AND SUBSIDIARIES (A Wholly-Owned Subsidiary of Nasco Holdings, Inc.) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2001, 2000 and 1999 The following table presents segment information for the years ended December 31:
2001 2000 1999 ------------ ----------- ----------- Net sales: Educational................... $135,954,000 118,733,000 100,016,000 Commercial.................... 29,560,000 27,909,000 26,645,000 Intercompany.................. (3,553,000) (2,843,000) (1,845,000) ------------ ----------- ----------- Net sales............... $161,961,000 143,799,000 124,816,000 ============ =========== =========== Gross profit: Educational................... $ 49,600,000 43,472,000 36,668,000 Commercial.................... 10,841,000 10,236,000 9,874,000 Other costs of sales.......... (3,928,000) (3,667,000) (2,926,000) ------------ ----------- ----------- Gross profit............ $ 56,513,000 50,041,000 43,616,000 ============ =========== =========== Identifiable assets: Educational................... $ 25,056,000 22,580,000 14,747,000 Commercial.................... 3,937,000 3,666,000 3,319,000 Other corporate assets........ 38,443,000 29,988,000 21,582,000 ------------ ----------- ----------- Identifiable assets..... $ 67,436,000 56,234,000 39,648,000 ============ =========== ===========
(13) Pending Merger On November 27, 2001, NHI entered into an agreement to merge the Company with The Aristotle Corporation, a developer and manufacturer of health and medical education teaching aids and computer-based training products. The Company expects to complete the merger in 2002. Financial F-21 AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES INDEPENDENT AUDITOR'S REPORT Board of Directors American Educational Products, Inc. Boulder, Colorado We have audited the accompanying consolidated balance sheet of American Educational Products, Inc. and Subsidiaries as of December 31, 2000, and the related consolidated statement of operations, stockholders' equity, and cash flows for the year then ended. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of American Educational Products, Inc. and Subsidiaries as of December 31, 2000, and the results of their operations and their cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ HEIN + ASSOCIATES LLP Hein + Associates LLP Denver, Colorado March 9, 2001 Financial F-22 AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET December 31, 2000 ASSETS CURRENT ASSETS Cash...................................................................................... $ 223,000 Trade receivables, net of allowance of $146,000........................................... 1,888,000 Inventories............................................................................... 4,949,000 Prepaid advertising costs................................................................. 1,213,000 Other..................................................................................... 222,000 ----------- TOTAL CURRENT ASSETS................................................................... 8,495,000 PROPERTY AND EQUIPMENT, net............................................................... 2,162,000 INTANGIBLE ASSETS, net.................................................................... 1,515,000 DEFERRED TAXES, net....................................................................... 651,000 VIDEO LIBRARY, net........................................................................ -- OTHER ASSETS.............................................................................. 83,000 ----------- TOTAL ASSETS........................................................................... $12,906,000 =========== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES Note payable.............................................................................. $ 2,541,000 Current maturities of long-term debt...................................................... 420,000 Accounts payable.......................................................................... 1,409,000 Accrued expenses.......................................................................... 724,000 ----------- TOTAL CURRENT LIABILITIES.............................................................. 5,094,000 LONG-TERM DEBT, less current maturities................................................... 428,000 COMMITMENTS (Note 4) STOCKHOLDERS' EQUITY Preferred stock; $0.01 par value; 50,000,000 shares authorized; none issued or outstanding -- Common stock; $0.05 par value; 100,000,000 shares authorized; 1,212,740 shares issued and outstanding............................................................................. 60,000 Additional paid in capital................................................................ 7,677,000 Accumulated deficit....................................................................... (353,000) ----------- TOTAL STOCKHOLDERS' EQUITY............................................................. 7,384,000 ----------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY............................................. $12,906,000 ===========
See accompanying notes to consolidated financial statements Financial F-23 AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS For the year ended December 31, 2000 INCOME: Net sales.................... $16,192,000 Cost of goods sold........... 9,836,000 ----------- Gross profit.............. 6,356,000 OPERATING EXPENSES: Advertising and catalog costs 2,000,000 Other marketing.............. 1,421,000 ----------- Total marketing........... 3,421,000 General and administrative... 2,254,000 Special Charges.............. 785,000 ----------- Total operating expenses.. 6,460,000 ----------- OPERATING LOSS............... (104,000) INTEREST EXPENSE, net........ (445,000) ----------- LOSS BEFORE INCOME TAXES..... (549,000) Income tax benefit........ 76,000 ----------- NET LOSS..................... $ (473,000) =========== Basic loss per share......... $ (0.42) =========== Diluted loss per share....... $ (0.42) ===========
See accompanying notes to consolidated financial statements Financial F-24 AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY For the year ended December 31, 2000
Common Stock ----------------- Additional Retained Paid Earnings Number of Common in (Accumulated Shares Stock Capital Deficit) Total --------- ------- ---------- ------------ ---------- Balance as of January 1, 2000.. 1,076,070 $54,000 $7,215,000 $ 120,000 $7,389,000 Sale of common stock under the employee stock purchase plan.. 2,362 -- 19,000 -- 19,000 Exercise of options............ 9,300 -- 30,000 -- 30,000 Exercise of $10.00 warrants.... 50,008 2,000 478,000 -- 480,000 Expense of warrant issue....... -- -- 120,000 -- 120,000 Exercise of $8.00 warrants..... 75,000 4,000 596,000 -- 600,000 Special cash dividend.......... -- -- (781,000) -- (781,000) Net loss....................... -- -- -- (473,000) (473,000) --------- ------- ---------- --------- ---------- Balance as of December 31, 2000 1,212,740 $60,000 $7,677,000 $(353,000) $7,384,000 ========= ======= ========== ========= ==========
See accompanying notes to consolidated financial statements Financial F-25 AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS For the year ended December 31, 2000
2000 ---------- CASH FLOWS FROM OPERATING ACTIVITIES: Net loss...................................... $ (473,000) Expenses not requiring cash outlays: Depreciation............................... 637,000 Amortization............................... 311,000 Bad debt expense........................... 95,000 Provision for inventory obsolescence....... 84,000 Imputed interest expense................... 39,000 Imputed cost of warrants issued............ 120,000 Provision for deferred taxes............... (76,000) Changes in working capital items: Trade receivables.......................... (31,000) Inventories................................ (925,000) Prepaid advertising costs.................. (42,000) Accounts payable........................... 60,000 Accrued expenses........................... 382,000 Other...................................... 141,000 ---------- Net cash provided by operating activities.. 322,000 CASH FLOWS FROM INVESTING ACTIVITIES: Purchase of property and equipment............ (325,000) ---------- Net cash used in investing activities...... (325,000) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from notes payable and long term debt 766,000 Payments on notes payable and long term debt.. (982,000) Proceeds from common stock transactions....... 1,129,000 Special cash dividend......................... (781,000) ---------- Net cash provided by financing activities.. 132,000 ---------- NET INCREASE IN CASH.......................... 129,000 Cash, at beginning of period.................. 94,000 ---------- Cash, at end of period........................ $ 223,000 ==========
See accompanying notes to consolidated financial statements Financial F-26 AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) Nature Of Business and Significant Accounting Policies Nature of Business American Educational Products, Inc. ("AMEP" or the "Company") was organized as a Colorado corporation in 1986. During 2000, G.C. Associates Holdings Corp. ("GC") purchased a majority of AMEP's outstanding common stock. AMEP and GC entered into a merger agreement (see Note 2). In March 2001, Nasco International, Inc. ("Nasco") became the successor to GC's interest in the shares of AMEP previously owned by GC and assumed all of GC's rights and obligations under the merger agreement. Sales to Nasco were $889,000 in 2000. The Company sells a wide variety of educational products through multiple sales channels. The Company's products include those developed and manufactured by the Company, as well as products manufactured by other companies. The Company's customers include educational institutions, wholesalers, individual educators, and consumers. Approximately 95% of the Company's 2000 sales were in the United States and the remainder was exported to various locations throughout the world. The Company utilizes several trade names in its marketing efforts. Scott Resources ("Scott") specializes in manufacturing math products and earth science (geology) products. Hubbard Scientific ("Hubbard") specializes in manufacturing science products for teaching life science (biology and chemistry) and physical science (physics and astronomy). National Teaching Aids ("NTA") specializes in manufacturing Microslide(TM) Viewers and the related Microslides(TM). Summit Learning ("Summit") distributes a wide array of math and science products primarily through the use of direct mail advertising. To-Sew ("To-Sew") designs sewing kits that are sold via direct mail advertising to family and consumer science educators. Principles of Consolidation The consolidated financial statements include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Use of Estimates The preparation of the Company's consolidated financial statements in conformity with generally accepted accounting principles requires the Company's management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Estimates that have a significant impact are a) future value of deferred tax assets, b) future sales to be derived from catalog mailings, c) useful life of intangible assets, d) future recoverability of all long-lived assets, e) net realizable value of inventory, f) future collectability of accounts receivable, and g) useful life and salvage value of property and equipment. Actual results could differ from those estimates. Revenue Recognition Sales are recorded at time of shipment and an allowance is provided for estimated future returns. Cash Equivalents Short-term investments with an original maturity of three months or less are considered to be cash equivalents. Financial F-27 AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS --(Continued) Inventories Inventories are valued at the lower of cost [using costing systems that approximate a first-in, first-out (FIFO) basis] or market, and consist of the following at December 31, 2000: Raw material............ $2,245,000 Work in process......... 4,000 Finished goods.......... 3,108,000 Less valuation allowance (408,000) ---------- TOTAL................ $4,949,000 ==========
Property and Equipment Property and equipment are stated at cost. Depreciation is computed by the straight-line method over estimated useful lives ranging generally from 3 to 32 years. Depreciation expense was $637,000 for the year ended December 31, 2000. Maintenance and repairs are charged to expenses when incurred. Property replacements and betterments that extend the life of assets, including reproduction masters for significant, non-routine product updates, are capitalized and subsequently depreciated. Property and equipment consist of the following at December 31, 2000: Reproduction masters.......... $ 3,645,000 Plant machinery and equipment. 2,150,000 Office furniture and equipment 291,000 Land and buildings............ 738,000 Information systems........... 1,147,000 Vehicles and other............ 36,000 ----------- 8,007,000 Less accumulated depreciation. (5,845,000) ----------- $ 2,162,000 ===========
Video Library The Company capitalizes costs incurred relating to the development of educational video products. These costs are amortized over the estimated future unit sales of the video products on an individual film forecast computation method. Estimated future unit sales of each video represent a significant estimate and are reviewed quarterly by the Company. All development costs were fully amortized during 2000 in accordance with the Company's sales estimates. Actual sales have continued beyond the estimated end of life. Fully amortized costs will remain on the balance sheet until the videos are discontinued. Amortization expense was $94,000 for the year ended December 31, 2000. As of December 31, 2000 the video library consists of: Production costs--completed videos $ 940,000 Accumulated amortization.......... (940,000) --------- TOTAL.......................... -- =========
Financial F-28 AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Intangibles In the various acquisitions made by the Company, the purchase price was allocated to individual assets, including intangible assets, based upon their estimated fair market value. If any portion of the overall purchase price cannot be allocated to specific assets, that portion is allocated to goodwill. Copyright costs are amortized over the shorter period of the estimated remaining lives of the products or the estimated remaining lives of their related copyrights. The lives range from 2 years to 6 years. Costs allocated to "non-compete" covenants are amortized over the contractual lives of the non-competition agreements, generally ranging from four to six years. Goodwill is amortized over fifteen years. Evaluation of the goodwill amortization period is highly subjective and is periodically analyzed based upon changing conditions. The Company believes that the actual economic life of its various goodwill amounts will ultimately exceed the fifteen years used for accounting purposes. As of December 31, 2000, intangible assets consist of:
Accumulated Cost Amortization Net ---------- ------------ ---------- Copyrights $ 650,000 $ (650,000) -- Covenants. 1,189,000 (837,000) $ 352,000 Goodwill.. 1,345,000 (182,000) 1,163,000 ---------- ----------- ---------- $3,184,000 $(1,669,000) $1,515,000 ========== =========== ==========
Prepaid Advertising Costs Substantially all of the Company's advertising is through the mailing of catalogs. The printing and mailing costs of catalogs are recorded as a current prepaid cost. These costs are amortized to expense based upon individual cost pools using actual and estimated future revenues for each catalog. All other advertising costs are expensed when the advertising first takes place. Long-Lived Assets and Intangibles Management periodically assesses recoverability of all long-lived assets, including intangibles. The assessment for impairment is performed whenever events or changes in circumstance indicate that the carrying value of an asset may not be recoverable. The assessment compares the carrying value of the assets to the estimated future cash flows of the assets, exclusive of interest. If an impairment is indicated, a provision is made to reduce the asset's carrying value to its estimated fair value. Fair Value of Financial Instruments and Concentration of Credit Risk The carrying value of the Company's trade receivables and trade payables are considered to approximate fair value due to their short maturities. The fair value of the Company's notes payable are considered to approximate fair value because the effective interest rates on the obligations approximate the Company's current cost of borrowing. The Company has a concentration of credit risk because substantially all of its sales are either direct to educational institutions or to distributors who sell to educational institutions. Management believes that the allowance for doubtful accounts is sufficient to cover the related credit risk. Financial F-29 AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Stock-Based Compensation Statement of Financial Accounting Standards No. 123 Accounting for Stock-Based Compensation ("SFAS 123") requires disclosure of the fair value and other characteristics of stock options granted to employees. Under the provisions of SFAS 123, the Company has elected to continue using the intrinsic value method of accounting for employee stock-based compensation in accordance with Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees ("APB 25"). Income Taxes The Company accounts for income taxes under the liability method of SFAS 109. Deferred income taxes reflect the effect of temporary differences between the tax basis of assets and liabilities and the carrying value of those assets and liabilities for financial reporting purposes. Deferred income taxes also reflect the value of net operating loss carryforwards. Tax effects are computed using the tax rates and laws enacted as of the balance sheet date. Earnings Per Share The earnings per share is presented in accordance with the provisions of Statement of Financial Accounting Standards No. 128, Earnings Per Share ("SFAS 128"). SFAS 128 specifies the method of computation, presentation, and disclosure for earnings per share ("EPS"). It requires the presentation of the two EPS amounts, basic and diluted. Basic EPS is calculated by dividing net income by the weighted average number of common shares outstanding for the period. Diluted EPS includes the dilution that would occur if outstanding stock options and other dilutive securities were exercised. Under certain circumstances, the calculation results in an anti-dilutive impact. An anti-dilutive impact means that the calculation increases earnings per share or reduces losses per share. All securities with an anti-dilutive impact are excluded from the diluted EPS calculation. Supplemental Disclosures of Cash Flow Information-- For the year ended December 31, 2000: Cash payments for: Interest................................................... $408,000 ======== Non-cash investing and financing activities: Capital leases incurred in exchange for equipment purchases $ 16,000 ========
Impact of Recently Issued Accounting Standards In June 1998, Statement of Financial Accounting Standards No. 133 Accounting for Derivative Instruments and Hedging Activities ("SFAS 133") was issued. SFAS 133 establishes accounting and reporting standards for derivative financial instruments and for hedging activities. The Company does not currently engage in any activities that would be covered by SFAS 133. Financial F-30 AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Reporting Comprehensive Income Statement of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS 130") became effective during 1998. SFAS 130 establishes standards for reporting and display of comprehensive income, its components and accumulated balances. Comprehensive income is defined to include all changes in equity except those resulting from investments by owners and distributions to owners. Since its inception, the Company has not entered into any transactions that meet the definition of comprehensive income other than net income or net loss. Accordingly, the balance of accumulated comprehensive income at December 31, 2000 was nil and total comprehensive loss for the year ended December 31, 2000 was equal to the net loss reported for the year. (2) Pending Merger and Special Charges On July 10, 2000, the Board of Directors of AMEP agreed in principle to the terms of a merger proposal from G.C. Associates Holdings Corp. ("GC"). In March 2001, Nasco International, Inc. ("Nasco") became the successor to GC's interest in the shares of AMEP previously owned by GC and assumed all of GC's rights and obligations under the merger agreement. Under the terms of the agreement, AMEP will become a wholly owned subsidiary of Nasco and all shareholders other than Nasco and its affiliates will receive $10.00 in cash for each share of AMEP stock that they own. The merger agreement is subject to shareholder approval and other conditions. Merger related documents have been submitted to regulatory agencies for review and the shareholder vote will be held shortly after all approvals are received. During 2000, AMEP incurred certain costs classified as special charges in the accompanying statement of operations. These costs include approximately $350,000 related to the redemption of stock options held by directors, $98,000 related to the redemption of stock options held by employees, $250,000 related to shareholder litigation, and $87,000 of various legal, accounting and regulatory fees incurred as a result of the pending merger In connection with the pending merger, the Board of Directors has committed to repurchase common stock and stock options owned by four senior managers. The cost to the Company will approximate $400,000 to be incurred at the time the merger closes. (3) Notes Payable and Long-term Debt The Company has a revolving line of credit pursuant to an asset-based financing agreement that expires April 30, 2002. Borrowing under this line of credit bears interest at a floating rate plus 1% (totaling 10.5% as of December 31, 2000). Interest is payable monthly. The principal balance was $2,541,000 at December 31, 2000. The agreement provides for maximum borrowings up to $4,050,000. The actual amount available to be borrowed at any one time is derived from a borrowing base formula as defined in the agreement relating to allowable inventory and accounts receivable. As of December 31, 2000, the borrowing base formula would have limited borrowings to $3,074,000. The line of credit is collateralized by substantially all of the Company's assets. As the financing agreement contains a subjective "due-upon-demand" clause, the entire balance is classified as a current liability. In addition, the borrowing arrangement contains both positive and negative compliance covenants. The Company is currently in violation of two covenants. One concerns actions that result in a change of control of the Company. The second requires the Company to maintain a fixed charges coverage ratio of 1.75 (as defined). Despite these violations, the lender has not demanded payment. There are current negotiations with the lender to restructure the terms of the debt. Scheduled principal payments are $36,000 per month. Financial F-31 AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) The Company's long-term debt consisted of the following at December 31, 2000: Note Payable to the sellers of NTA, principal due in four annual. $ 464,000 installments of $237,500. At the option of the Company, can be converted into common stock at a rate of $10 per share. Collateralized by intellectual property. License agreement, due in four annual installments of $100,000. Collateralized by intellectual property.......................... 182,000 Capital lease obligations, due in monthly installments of $13,000 with varying maturities. Collateralized by information system hardware and manufacturing equipment............................ 202,000 Total............................................................ 848,000 Less current maturities.......................................... (420,000) --------- Long-term debt................................................... $ 428,000 =========
At December 31, 2000, the future minimum principal payments on long term debt and capitalized lease obligations were as follows: 2001. $420,000 2002. 400,000 2003. 19,000 2004. 9,000 -------- Total $848,000 ========
The note payable to the sellers of NTA bears interest at a stated rate of 7.5%, payable annually. For financial reporting purposes, the note was assigned an additional 2.5% of imputed interest (total interest rate of 10%). The face value of the note was $475,000 at December 31, 2000. The license agreement is non-interest bearing. For financial reporting purposes, the license was assigned an imputed interest rate of 10%. The face value of the license payable was $200,000 at December 31, 2000. (4) Commitments The Company leases office space, equipment, and warehouse facilities under noncancellable operating leases. Total rental expense for the year ended December 31, 2000 was $338,000. Future minimum rental commitments at December 31, 2000 are as follows: 2001...... $200,000 2002...... 167,000 2003...... 163,000 2004...... 168,000 Thereafter 41,000 -------- Total..... $739,000 ========
The Company has certain royalty agreements with third parties on various products. Total royalty expense for the year ended December 31, 2000 was $135,000. Financial F-32 AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) (5) Shareholder Litigation In connection with the Company's proposed merger, William Federman commenced a civil lawsuit on July 13, 2000 in the District Court in Boulder County, Colorado, on behalf of himself and, purportedly, all others similarly situated. The complaint sought an order preventing AMEP from proceeding with the merger or any other business combination until an auction or other procedure designed to obtain the highest possible price for shareholders was held, and other relief. GC and its parent company, Geneve Corporation, and members of AMEP's Board of Directors were named as defendants in the suit in addition to the Company. Shortly after the Federman suit was filed, another action alleging almost identical claims was filed in the same court by Dean Shahinian on behalf of himself and all others similarly situated. The two cases were consolidated into one action. On November 13, 2000, all parties reached an agreement-in-principle to settle the lawsuit. The Court has granted preliminary approval of the settlement agreement. The Court provisionally certified the lawsuit as a class action and set a "Settlement Fairness Hearing" for May 2, 2001. Shareholders and warrantholders of AMEP common stock are permitted to submit objections as to the fairness of the settlement to the Court. Absent any objections, the order is likely to be made final at the conclusion of the hearing on May 2, 2001. (6) Stockholders' Equity Preferred Stock The Company has authorized 50,000,000 shares of preferred stock. These shares may be issued in series with such rights and preferences as may be determined by the Board of Directors. None of the shares are issued and outstanding. Common Stock The Company has authorized 100,000,000 shares of $0.05 par value common stock. During 1997, the Company issued a warrant dividend to existing shareholders. The warrant dividend consisted of one warrant for each share of common stock owned by shareholders. Each warrant entitled its holder to purchase one additional share of the Company's common stock at an exercise price of $10.00 per share. No voting rights were attached to the warrant. All of these warrants, amounting to 992,000, were issued and outstanding at December 31, 1999. During 2000, 50,000 warrants were exercised. All remaining warrants expired on December 1, 2000. Warrants During 2000, the Company issued 75,000 warrants to its investor relations firm. Each warrant entitled its holder to purchase one share of the Company's common stock at an exercise price of $8.00 per share. No voting rights were attached to the warrants. The Company recorded an imputed cost of $120,000 related to these warrants, all of which were exercised in August 2000. Financial F-33 AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) Earnings per Share The following is a reconciliation of basic and diluted earnings per share:
For the year ended December 31, 2000 ----------------------------------- Per Income Shares Share (Numerator) (Denominator) Amount ----------- ------------- ------ Basic EPS Loss available to common shareholders......................... ($473,000) 1,134,139 ($0.42) ====== Effect of dilutive securities................................. Stock options................................................. Convertible debt.............................................. * * Diluted EPS................................................... --------- --------- Loss available to common stockholders plus assumed conversions ($473,000) 1,134,139 ($0.42) ========= ========= ======
* Additional income of $55,397 and additional shares of 55,397 would be anti-dilutive Options to purchase 123,000 shares of common stock were outstanding at December 31, 2000. All of them had an anti-dilutive effect on the 2000 earnings per share calculation. Furthermore, the Company has committed to redeem certain outstanding options held by key employees. During 2000, the Company recorded a cost of $98,000 reflecting its commitment. ESPP Substantially all of the Company's regular full-time employees are eligible to participate in an employee stock purchase plan (ESPP), except those owning more than 5% of the Company's common stock or more than $25,000 in value of the Company's common stock. Stockholders have authorized issuance of up to 60,000 shares under the ESPP. Under the ESPP, employees may purchase shares at 85% of the NASDAQ quoted market value on either the beginning or ending date of the six month enrollment period, whichever is less. The number of shares purchased under the ESPP for the year ended December 31, 2000 was 2,362. Expenses related to the ESPP are not material. Stock Options On June 2, 1997, the shareholders approved the 1997 Stock Incentive Plan. The 1997 Stock Incentive Plan (the "1997 Plan") superseded the previously existing plan, the 1990 Incentive Stock Option Plan, and all activity under the 1990 was merged into the 1997 Plan. The 1997 Plan was created to conform to recent changes in securities and tax laws and regulations and to conform to new requirements of the NASDAQ Stock Market. The 1997 Plan authorizes the Board of Directors to issue incentive stock options to executive officers and key employees and to grant non-qualified stock options and/or stock purchase rights to officers, employees, former employees, directors, and consultants. The options are generally granted for a five-year period, with the exercise price based upon the market price of the Company's freely traded common stock on the date of the grant. The total number of options authorized for issuance under the Plan is 179,300. All 36,000 incentive stock options outstanding at December 31, 2000 were fully vested and exercisable. The incentive stock options had exercise prices ranging from $3.875 to $7.125. Financial F-34 AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) At December 31, 2000, there were 16,485 shares authorized for future grants of incentive stock options under the existing Plan. The Company has issued non-qualified stock options under the terms of the 1997 Plan (and its predecessor plan). No options were issued in 2000. All 87,000 non-qualified options outstanding at December 31, 2000 were exercisable. The non-qualified stock options had exercise prices ranging from $3.875 to $9.125. The following is a summary of the number of shares under option:
Number of Shares ------------------ Incentive Non- Weighted Stock Qualified Average Option Stock Exercise Plan Options Total Price --------- --------- ------- -------- Balance, January 1, 2000 41,800 141,500 183,300 $6.49 Options granted......... -- -- -- -- Options exercised....... (5,300) (4,000) (9,300) $3.23 Options terminated...... (500) (50,500) (51,000) $4.98 ------ ------- ------- Balance, Dec. 31, 2000.. 36,000 87,000 123,000 $7.23 ====== ======= ======= =====
For all options granted, the weighted average market price of the Company's common stock on the grant date was equal to the weighted average exercise price. Pro Forma Stock-Based Compensation Disclosures The Company applies APB Opinion 25 and related interpretations in accounting for its stock options that are granted to employees and directors. Accordingly, no compensation cost has been recognized for grants of options where the exercise price is not less than the quoted market value of the Company's common stock on the grant date. Had compensation cost been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS 123, the Company's net loss and loss per share for the year ended December 31, 2000 would not have changed. (7) Income Taxes The composition of income tax benefit for the year ended December 31, 2000 was as follows: Current. -- Deferred $76,000 ------- Total... $76,000
Generally, the difference between the Company's current effective tax rate and the Federal statutory rate of 34% is primarily caused by the addition of state taxes (2%-4%) offset by changes to the deferred tax valuation allowance and permanent differences for non-deductible expenditures. In 2000, certain costs related to the shareholder litigation and which were recorded for financial reporting purposes may not be deductible for tax purposes. The net effect of the non-deductible items reduced the effective tax rate by approximately 20%. In previous years, the Company incurred net operating losses. Internal Revenue Service regulations allow the Company to carryforward its net operating losses and offset them against future taxable income, if any. As of Financial F-35 AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) December 31, 2000, the NOL carryforwards approximate $2,300,000 and expire in the years 2009, 2010, and 2011. Current tax regulations impose a number of limitations and restrictions on the usage of net operating loss carryforwards. Specifically, the Company must earn future taxable income such that the NOL's can be used as a deduction. A change in control of the Company could limit the usage of the NOL. Thus, there is no guarantee that the Company will be able to utilize the carryforwards before they expire. Nevertheless, the Company believes that it is more likely than not that it will utilize the NOL carryforwards before they expire. The tax benefit reported in 2000 represents recognition of a deferred tax asset for the net loss incurred. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. The significant components of deferred tax assets and liabilities as of December 31, 2000 were as follows: Deferred tax assets (liabilities): Current Accounts receivable............... $ 51,000 Inventories....................... 124,000 Prepaid advertising costs......... (452,000) Accrued Expenses.................. 80,000 Net operating losses.............. 197,000 Long-term Property, plant and equipment..... (40,000) Net operating losses.............. 691,000 --------- Net deferred tax asset............ $ 651,000 =========
The Company has determined that it was more likely than not that it would be able to offset future taxable income against the net operating loss carryforwards. Accordingly, no valuation allowance has been provided. The Company will periodically review the net realizable value of its deferred tax asset. Should the deferred tax asset become impaired in the future, an appropriate valuation allowance will be provided. (8) Consolidated Segment Data The Company follows Statement of Financial Accounting Standards No. 131, Disclosures About Segments of an Enterprise and Related Information ("SFAS 131"), which established standards for the way companies report information about their operating segments. Prior period amounts have been restated to conform to the requirements of this new statement. The Company's reportable segments are integrated business units that design, develop, assemble and distribute similar products. The difference between the two segments is the type of customer. The manufacturing segment sells primarily to wholesalers. The distribution segment sells primarily to the end user. Although all segments are managed as part of an integrated enterprise, they are reported herein in a manner consistent with the internal reports prepared for management. Transactions between reportable segments are recorded at cost. Substantially all general and administrative services are provided by the Company to the segments without charge. Acquisition related expenses, including amortization of acquisition costs, are considered a corporate expense. All of the Company's assets are located in the United States of America. Financial F-36 AMERICAN EDUCATIONAL PRODUCTS, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued) AMEP is operated as an integrated enterprise and the segment amounts reported herein would not necessarily be indicative of operating results if the segments were operated independently. As of and for the year ended December 31, 2000:
Description Manufacturing Distribution Corporate Total - ----------- ------------- ------------ ----------- ----------- Net Sales.................... $9,708,000 $6,484,000 -- $16,192,000 Operating Income............. $2,549,000 $ 171,000 $(2,039,000) $ 681,000 Interest Expense............. $ 247,000 $ 86,000 $ 112,000 $ 445,000 Assets....................... $7,739,000 $2,766,000 $ 2,401,000 $12,906,000 Capital Acquisitions......... $ 220,000 $ 91,000 $ 29,000 $ 340,000 Depreciation And Amortization $ 548,000 $ 70,000 $ 330,000 $ 948,000
(9) Subsequent Events (unaudited) In March 2001, AMEP reached an agreement-in-principle with its affiliate, Nasco International, Inc. ("Nasco"), pursuant to which it is anticipated that Nasco will manage Summit and To-Sew on behalf of AMEP from Nasco's existing facilities. Relocation of certain Summit and To-Sew operations from Fort Collins, Colorado to Fort Atkinson, Wisconsin began in March 2001. Financial F-37
Exhibit Number Description - ------ ----------- 2.1+ Agreement and Plan of Merger dated as of November 27, 2001 among The Aristotle Corporation, Geneve Corporation, Nasco Holdings, Inc. and Nasco International, Inc. (included as Annex A to the proxy statement-prospectus forming a part of this Registration Statement and incorporated herein by reference). 3.1 Restated Certificate of Incorporation of The Aristotle Corporation, incorporated herein by reference to Exhibit 3.1 of The Aristotle Corporation Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997. 3.2 Amended and Restated Bylaws of The Aristotle Corporation, incorporated herein by reference to Exhibit 3.2 of The Aristotle Corporation Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 1997. 4.1 Restated Certificate of Incorporation of The Aristotle Corporation and Amended and Restated Bylaws filed as Exhibits 3.1 and 3.2 are incorporated into this item by reference. See Exhibit 3.1 and Exhibit 3.2 above. 4.2 Registration Rights Agreement dated as of April 11, 1994 between The Aristotle Corporation and the shareholders listed on Exhibit A thereto, incorporated herein by reference to an exhibit to The Aristotle Corporation Registration Statement on Form S-3 (File No. 333-4185). 4.3 Preferred Stock Purchase Agreement dated as of October 22, 1997 between The Aristotle Corporation and Geneve Corporation, incorporated herein by reference to Exhibit 10.5 of The Aristotle Corporation Quarterly Report on Form 10-Q for fiscal quarter ended September 30, 1997. 4.4 Registration Rights Agreement dated as of October 22, 1997 between The Aristotle Corporation and Geneve Corporation, incorporated herein by reference to Exhibit 10.6 of The Aristotle Corporation Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997. 4.5 Letter Agreement dated as of September 15, 1997 among The Aristotle Corporation, Aristotle Sub, Inc. and certain stockholders, incorporated herein by reference to Exhibit 10.7 of The Aristotle Corporation Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 1997. 4.6 Letter Agreement dated as of February 9, 2000 between The Aristotle Corporation and Geneve Corporation regarding certain limitations on voting and the acquisition of additional shares of common stock, incorprated herein by reference to The Aristotle Corporation Report on Form 13D/A dated February 15, 2000. 4.7 Letter Agreement dated as of April 28, 2000 between The Aristotle Corporation and Geneve Corporation, modifying the letter agreement between such parties dated as of February 9, 2000, regarding certain limitations on voting and the acquisition of additional shares of common stock, incorporated herein by reference to The Aristotle Corporation Current Report on Form 8-K dated May 2, 2000. 5.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. regarding legality of securities being registered. 8.1 Opinion of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. regarding certain U.S. income tax aspects of the merger. 10.1 Stock Option Plan of The Aristotle Corporation, as amended, incorporated herein by reference to Exhibit 10.2 of The Aristotle Corporation Annual Report on Form 10-K for the fiscal year ended December 31, 1992 (the "1992 Form 10-K"). 10.2 Settlement and Release Agreement dated as of May 29, 1996 among The Aristotle Corporation, the Federal Deposit Insurance Corporation and certain other interested parties, incorporated herein by reference to Exhibit 10.22 of The Aristotle Corporation Annual Report on Form 10-K for the fiscal year ended June 30, 1996. 10.3 Stipulation and Agreement of Settlement dated as of May 28, 1996 regarding In Re First Constitution Stockholders Litigation, incorporated herein by reference to Exhibit 10.23 of The Aristotle Corporation Annual Report on Form 10-K for the fiscal year ended June 30, 1996.
1
Exhibit Number Description - ------ ----------- 10.4 Stock Purchase Agreement between The Aristotle Corporation and Kevin Sweeney dated as of April 30, 1999, incorporated herein by reference to Exhibit 2.1 of The Aristotle Corporation Current Report on form 8-K dated May 4, 1999, as amended. 10.5 The Aristotle Corporation 1997 Employee and Director Stock Plan, incorporated herein by reference to The Aristotle Corporation Registration Statement on Form S-8 dated December 10, 1997. 10.6 The Employment Agreement dated as of February 1, 2001 by and between The Aristotle Corporation and Paul McDonald, incorporated herein by reference to Exhibit 10.8 of The Aristotle Corporation Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2001. 10.7 The Employment Agreement dated as of February 1, 2001 by and between The Aristotle Corporation and John Crawford, incorporated herein by reference to Exhibit 10.9 of The Aristotle Corporation Annual Report on Form 10-K for the fiscal year ended June 30, 2001 (included as Annex E to the proxy statement-prospectus forming a part of this Registration Statement and incorporated herein by reference). 10.8 Amended and Restated Credit Agreement (5 Year) dated as of May 29, 2001 among Nasco International, Inc., Various Financial Institutions now or hereafter parties hereto, Bank One, Wisconsin, and Bank of America, N.A. 10.9 Amended and Restated Credit Agreement (364 Days) dated as of May 29, 2001 among Nasco International, Inc., Various Financial Institutions now or hereafter parties hereto, Bank One, Wisconsin, and Bank of America, N.A. 10.10 The Aristotle Corporation 2002 Stock Option Plan (attached as Annex D to this proxy statement- prospectus forming a part of this Registration Statement and incorporated herein by reference). 10.11 Exchange Agreement, dated as of November 27, 2001, by and between The Aristotle Corporation and Geneve Corporation, incorporated herein by reference to Exhibit 10 of The Aristotle Corporation Current Report on Form 8-K, dated November 30, 2001. 10.12 Second Amended and Restated Mortgage (and Security Agreement and Assignment of Leases and Rents), dated as of August 21, 2001, by and between Nasco International, Inc., as Mortgagor, in favor of Bank of America, N.A., as agent. 10.13 Second Amended and Restated Deed of Trust, Security Agreement, Assignment of Rents and Leases, and Fixture Filing, dated as of August 21, 2001, by Nasco International, Inc., as Mortgagor, in favor of Commonwealth Land Title Insurance Company, as Trustee for the benefit of Bank of America, N.A. 10.14 Deed of Trust, Security Agreement, Assignment of Rents and Leases, and Fixture Filing, dated as of August 21, 2001, by American Educational Products, Inc., as Mortgagor, in favor of The Public Trustee for the County of Larimer, State of Colorado, as Trustee for the benefit of Bank of America, N.A. 10.15 Form of Stockholders Agreement by and among The Aristotle Corporation, Geneve Corporation and Nasco Holdings, Inc., incorporated herein by reference to Exhibit 99.3 of The Aristotle Corporation Current Report on Form 8-K dated November 27, 2001. 13.1 The Aristotle Corporation Annual Report on Form 10-K for the fiscal year ended June 30, 2001 (included as Annex E to the proxy statement-prospectus forming a part of this Registration Statement and incorporated herein by reference). 13.2 The Aristotle Corporation Amended Annual Report on Form 10-K/A for the fiscal year ended June 30, 2001 (included as Annex E to the proxy statement-prospectus forming a part of this Registration Statement and incorporated herein by reference). 13.3 The Aristotle Corporation Quarterly Report on Form 10-Q for the three months ended September 30, 2001 filed with the SEC (SEC file number 000-14669) on November 14, 2001. 13.4 The Aristotle Corporation Quarterly Report on Form 10-Q for the three months ended December 31, 2001 (included as Annex F to the proxy statement-prospectus forming a part of this Registration Statement and incorporated herein by reference).
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Exhibit Number Description - ------ ----------- 21.1 Subsidiaries of The Aristotle Corporation, incorporated herein by reference to Exhibit 21.1 of The Aristotle Corporation Annual Report on Form 10-K for the fiscal year ended June 30, 2001 (included as Annex E to the proxy statement-prospectus forming a part of this Registration Statement and incorporated herein by reference). 23.1 Consent of Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. (included as part of its opinion filed as Exhibit 5.1 and incorporated herein by reference). 23.2 Consent of Duff & Phelps, LLC (included as part of its opinion filed as Exhibit 99.1 and incorporated herein by reference). 23.3 Consent of Arthur Andersen LLP. 23.3.1 Letter regarding Arthur Andersen LLP representations. 23.4 Consent of KPMG LLP. 23.5 Consent of Hein + Associates LLP 24.1 Power of Attorney (included on the signature page of this Form S-4 and incorporated herein by reference). 99.1 Opinion of Duff & Phelps, LLC (included as Annex C to the proxy statement-prospectus forming a part of this Registration Statement and incorporated herein by reference). 99.2 Form of Amended and Restated Certificate of Incorporation of The Aristotle Corporation (included as Annex B to the proxy statement-prospectus forming a part of this Registration Statement and incorporated herein by reference). 99.3 Form of Second Amended and Restated Certificate of Incorporation of The Aristotle Corporation (included as Annex G to the proxy statement-prospectus forming a part of this Registration Statement and incorporated herein by reference). 99.4 Form of Stockholders Agreement between The Aristotle Corporation and Geneve Corporation, incorporated herein by reference to Exhibit 99.3 of The Aristotle Corporation Current Report on Form 8-K, dated November 30, 2001. 99.5** Form of Proxy of Aristotle.
** Previously filed. + In accordance with Item 601(b)(2) of Regulation S-K, the schedules have been omitted and a list briefly describing the schedules is at the end of Annex A. Aristotle will furnish supplementally a copy of any omitted schedule to the Commission upon request. 3 EX-5.1 3 dex51.txt OPINION OF MINTZ, LEVIN, COHN, FERRIS, GLOVSKY EXHIBIT 5.1 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. One Financial Center Boston, Massachusetts 02111 617 542 6000 617 542 2241 fax April 10, 2002 The Aristotle Corporation 27 Elm Street New Haven, Connecticut 06510 Ladies and Gentlemen: We have acted as counsel to The Aristotle Corporation, a Delaware corporation (the "Company"), in connection with the Registration Statement on Form S-4 (File No. 333-_____) (the "Registration Statement") filed by the Company with the Securities and Exchange Commission (the "SEC") for the purpose of registering with the SEC under the Securities Act of 1933, as amended (the "Securities Act"), up to (a) 15,000,000 shares of the Company's common stock, $0.01 par value per share ("Common Stock") (the "Merger Shares") pursuant to the Agreement and Plan of Merger, dated as of November 27, 2001 by and among the Company, Geneve Corporation, Nasco Holdings, Inc. and Nasco International, Inc. (the "Merger Agreement"), (b) 1,285,482 shares of the Company's Series I $6.00 convertible voting cumulative 11% preferred stock, $0.01 par value, per share (the "Series I Preferred Shares") to be issued as a stock dividend (the "Dividend") to holders of Common Stock immediately prior to the Merger (as defined in the Merger Agreement) and (c) 1,114,000 shares of Common Stock issuable upon conversion of the Series I Preferred Shares (the "Conversion Common Shares," and together with the Merger Shares and Series I Preferred Shares, the "Shares"). In connection with the rendering of the opinion set forth below, we have examined, are familiar with and, to the extent we deemed appropriate, we have relied on originals or copies, certified or otherwise, identified to our satisfaction, of (i) the Registration Statement, (ii) the Restated Certificate of Incorporation of the Company currently in effect, (iii) the Amended and Restated By-laws of the Company currently in effect, (iv) the Merger Agreement, (v) the form of Amended and Restated Certificate of Incorporation of the Company to be filed with the Secretary of State of the State of Delaware immediately prior to the issuance of the Dividend (the "Amended Charter"), (vi) the resolutions adopted by the Board of Directors of the Company on November 21, 2001, relating to the Merger Agreement and certain related matters and (vii) such other documents, agreements, records, instruments, certificates of public officials and certificates of officers or other representatives of the Company or others as we have deemed necessary or appropriate for purposes of and as a basis for rendering the opinion set forth below. In our examination, we have (i) assumed the genuineness of all signatures and the authenticity of all documents submitted to us as originals, (ii) assumed the conformity to original Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. The Aristotle Corporation. April 10, 2002 Page 2 documents of all documents submitted to us as certified or photostatic copies and the authenticity of the originals of such copies and (iii) assumed and relied upon the truth, accuracy and completeness (without independent investigation or verification) of the information, representations, warranties and statements contained in the records, documents, instruments and certificates we have reviewed. In rendering the opinion set forth below, we have assumed that such parties had, have or will have all requisite power and authority to execute and deliver all agreements, documents, instruments and certificates examined by us and have also assumed the due authorization by all requisite action, and the due execution and delivery by such parties of all such agreements, documents, instruments and certificates and the validity and binding effect thereof. As to any facts material to the opinion expressed herein which we have not independently established or verified, we have relied upon statements and representations of officers and other representatives of the Company and others. Our opinion is limited to the laws of the State of Delaware (including the applicable provisions of the Delaware General Corporation Law and the reported judicial decisions interpreting the laws) and the federal laws of the United States of America. We express no opinion with respect to the laws of any other jurisdiction and no opinion is expressed herein with respect to the qualification of the Shares under the securities or blue sky laws of any state or any foreign jurisdiction. Based upon and subject to the foregoing, we are of the opinion that: 1. The Merger Shares have been duly authorized for issuance in connection with the Merger and, upon consummation of the Merger, the issuance of the Merger Shares and the delivery of proper stock certificates therefor in accordance with the terms and conditions of the Merger Agreement, the Merger Shares will be validly issued, fully paid and non-assessable. 2. Assuming authorization of the Dividend by the Board of Directors of the Company and the filing of the Amended Charter with the Secretary of State of the State of Delaware, the Series I Preferred Shares will be duly authorized for issuance in connection with the Dividend and the Conversion Common Shares will be duly authorized for issuance in connection with the conversion of the Conversion Common Shares, upon consummation of the Dividend, the issuance of the Series I Preferred Shares and the delivery of proper stock certificates therefore. The Series I Preferred Shares will be validly issued, fully paid and non-assessable, and upon the conversion of the Series I Preferred Shares, the issuance of the Conversion Common Shares and the delivery of proper stock certificates therefore in accordance with the terms and conditions of the Amended Charter, the Conversion Common Shares will be validly issued, fully paid and non-assessable. We hereby consent to the filing of this opinion as an exhibit to the Registration Statement and to the reference to this opinion under the caption "Legal Matters" in the proxy statement-prospectus included therein. In giving this consent, we do not thereby admit that we are included in the category of persons whose consent is required under Section 7 of the Securities Act or the rules and regulations of the SEC promulgated thereunder. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. The Aristotle Corporation. April 10, 2002 Page 3 This opinion is furnished by us, as counsel to the Company, in accordance with the requirements of Item 601(b)(5) of Regulation S-K under the Securities Act and, except as provided in the immediately preceding paragraph, is not to be used, circulated or quoted for any other purpose or otherwise referred to or relied upon by any other person without the express written permission of the Company. Very truly yours, /s/ Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. EX-8.1 4 dex81.txt TAX OPINION OF MINTZ, LEVIN, COHN, FERRIS, GLOVSKY Exhibit 8.1 Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. One Financial Center Boston, Massachusetts 02111 617 542 6000 617 542 2241 fax April 11, 2002 The Aristotle Corporation 27 Elm Street New Haven, CT 06510 Dear Ladies and Gentlemen: We have acted as counsel to The Aristotle Corporation, a Delaware corporation (the "Company"), in connection with the Agreement and Plan of Merger dated as of November 27, 2002 (the "Merger Agreement"), by and among the Company, Geneve Corporation, Nasco Holdings, Inc. and Nasco International, Inc., a Delaware corporation ("Nasco") and _____________. Pursuant to the Merger Agreement, Nasco will merge with and into the Company (the "Merger"). The Merger is described in the Registration Statement on Form S-4 (the "Registration Statement") of which this exhibit is a part. This opinion is being rendered pursuant to the requirements of item 21(a) of Form S-4 under the Securities Act of 1933, as amended. Capitalized terms not defined herein have the meanings set forth in the Merger Agreement and the documents related thereto. In preparing this opinion, we have examined and relied upon (i) the Merger Agreement, (ii) the Proxy Statement/Prospectus included in the Registration Statement (the "Proxy Statement"), (iii) the tax representation letters delivered to us by the Company, Nasco and certain of Nasco's affiliates in connection with this opinion (the "Representation Letters"), and (iv) such other documents as we have deemed necessary or appropriate in order to enable us to render this opinion. In our examination of documents, we have assumed the authenticity of original documents, the accuracy of copies, the genuineness of signatures, and the legal capacity of signatories. In rendering this opinion, we have assumed without investigation or verification that the facts relating to the Merger as described in the Proxy Statement are true, correct and complete in all material respects; that all representations and warranties contained in the Proxy Statement, the Merger Agreement and the Representation Letters are, at the time they are made, and will remain at all times through the Effective Time, true, correct and complete and may be relied upon by us at the time they are made and at all times through the Effective Time; and that, as to all matters for which a person or entity has represented that such person or entity is not a party to, does not have, or is not aware of, any plan, intention, understanding or agreement, there is no such plan, intention, understanding or agreement. We have further assumed that all parties to the Merger Agreement and to any other documents examined by us have acted, and will act, in accordance with the terms of such Merger Agreement and documents; and that the Merger will be consummated at the Effective Time pursuant to the terms, conditions and covenants set forth in MINTZ, LEVIN, COHN, FERRIS, GLOVSKY and POPEO, P.C. The Aristotle Corporation April 11, 2002 Page 2 the Merger Agreement (including, without limitation, the effecting of the Merger in accordance with the General Corporation Law of the State of Delaware without the waiver or modification of any such terms, conditions and covenants; and that the Company, and Nasco will comply with all reporting obligations required under the Internal Revenue Code of 1986, as amended (the "Code"), and Treasury Regulations with respect to the Merger. Any inaccuracy in, or breach of, any of the aforementioned statements, representations or assumptions could adversely affect our opinion. Our opinion is based on existing provisions of the Code, Treasury Regulations, judicial decisions and rulings and other pronouncements of the Internal Revenue Service (the "IRS") as in effect on the date of this opinion, all of which are subject to change (possibly with retroactive effect) or reinterpretation. No assurances can be given that a change in the law on which our opinion is based or the interpretation thereof will not occur or that such change will not affect the opinion expressed herein. We undertake no responsibility to advise you of any such developments in the law after the Effective Time. No ruling has been or will be sought from the IRS by the Company or Nasco as to the United States federal income tax consequences or any aspect of the Merger, and our opinion is not binding upon either the IRS or any court. Thus, no assurances can be given that a position taken in reliance on our opinion will not be challenged by the IRS or rejected by a court. Based upon and subject to the foregoing, the discussion in the Proxy Statement under the heading "Material United States Federal Income Tax Consequences of the Merger and a Stock Dividend" subject to the limitations and qualifications described therein, fairly and accurately constitutes our opinion as to the material United States federal income tax consequences of the Merger. Our opinion addresses only the specific United States federal income tax consequences of the Merger set forth herein, and does not address any other federal, state, local, or foreign income, estate, gift, transfer, sales, use or other tax consequences that may result from the Merger. This opinion is being provided to you solely for use in connection with the Registration Statement, and this opinion letter may not be used, circulated, quoted, or otherwise referred to for any other purpose. We hereby consent to the use of our name under the caption "Material United States Federal Income Tax Consequences of the Merger" in the Registration Statement and to the filing of this opinion as an exhibit to the Registration Statement Very truly yours, /s/ MINTZ, LEVIN, COHN, FERRIS GLOVSKY and POPEO, P.C. EX-10.8 5 dex108.txt AMENDED AND RESTATED CREDIT AGREEMENT (5 YEAR) Exhibit 10.8 EXECUTION COPY U.S. $51,000,000 AMENDED AND RESTATED CREDIT AGREEMENT (FIVE YEAR) among NASCO INTERNATIONAL, INC., as the Borrower, and VARIOUS FINANCIAL INSTITUTIONS NOW OR HEREAFTER PARTIES HERETO, as the Lenders, BANK ONE, WISCONSIN, as Documentation Agent and BANK OF AMERICA, N.A. as the Administrative Agent for the Lenders BANC OF AMERICA SECURITIES LLC as Sole Lead Arranger and Sole Book Manager TABLE OF CONTENTS
PAGE ARTICLE I DEFINITIONS AND ACCOUNTING TERMS ............................ 1 SECTION 1.1 Defined Terms ......................................... 1 SECTION 1.2 Use of Defined Terms .................................. 19 SECTION 1.3 Cross-References ...................................... 19 SECTION 1.4 Accounting and Financial Determinations ............... 20 ARTICLE II COMMITMENTS, BORROWING PROCEDURES AND NOTES ................. 20 SECTION 2.1 Commitments. .......................................... 20 SECTION 2.1.1 Commitment of Each Lender ............................. 20 SECTION 2.2 Reduction of Commitment Amount ........................ 20 SECTION 2.2.1 Optional .............................................. 20 SECTION 2.2.2 [Mandatory]. [Reserved]. .............................. 20 SECTION 2.3 Borrowing Procedure. .................................. 20 SECTION 2.3.1 Borrowings ............................................ 20 SECTION 2.3.2 All Borrowings ........................................ 20 SECTION 2.4 Continuation and Conversion Elections ................. 21 SECTION 2.5 Funding ............................................... 21 SECTION 2.6 Notes ................................................. 21 ARTICLE III REPAYMENTS, PREPAYMENTS, INTEREST AND FEES .................. 22 SECTION 3.1 Repayments and Prepayments. ........................... 22 SECTION 3.1.1 Repayment of Loans .................................... 22 SECTION 3.1.2 Prepayment of Loans ................................... 22 SECTION 3.2 Interest Provisions ................................... 23 SECTION 3.2.1 Rates ................................................. 23 SECTION 3.2.2 Default Rates ......................................... 24 SECTION 3.2.3 Payment Dates ......................................... 24 SECTION 3.3 Fees .................................................. 24 SECTION 3.4 Agent's Fee ........................................... 24 ARTICLE IV CERTAIN EURODOLLAR RATE AND OTHER PROVISIONS ................ 25 SECTION 4.1 Eurodollar Rate Lending Unlawful ...................... 25 SECTION 4.2 Deposits Unavailable .................................. 25 SECTION 4.3 Increased Costs, etc .................................. 25 SECTION 4.4 Funding Losses ........................................ 26 SECTION 4.5 Increased Capital Costs ............................... 26 SECTION 4.6 Taxes ................................................. 26 SECTION 4.7 Payments, Computations, etc ........................... 27 SECTION 4.8 Sharing of Payments ................................... 28 SECTION 4.9 Setoff ................................................ 28 SECTION 4.10 Use of Proceeds ....................................... 29 ARTICLE V CONDITIONS TO EFFECTIVENESS AND BORROWINGS .................. 29
i SECTION 5.1 Effectiveness ......................................... 29 SECTION 5.1.1 Resolutions, etc ...................................... 29 SECTION 5.1.2 Delivery of Notes ..................................... 29 SECTION 5.1.3 Credit Agreements ..................................... 29 SECTION 5.1.4 Confirmation .......................................... 29 SECTION 5.1.5 Satisfaction with Tax Sharing Agreement ............... 30 SECTION 5.1.6 Opinions of Counsel ................................... 30 SECTION 5.1.7 Closing Fees, Expenses, etc ........................... 30 SECTION 5.1.8 No Materially Adverse Effect .......................... 30 SECTION 5.1.9 Compliance with Warranties, No Default, etc ........... 30 SECTION 5.1.10 Satisfactory Legal Form ............................... 31 SECTION 5.2 All Borrowings ........................................ 31 SECTION 5.2.1 Compliance with Warranties, No Default, etc ........... 31 SECTION 5.2.2 Borrowing Request ..................................... 31 SECTION 5.2.3 Satisfactory Legal Form ............................... 32 SECTION 5.2.4 Consummation of AMEP Acquisition ...................... 32 ARTICLE VI REPRESENTATIONS AND WARRANTIES .............................. 32 SECTION 6.1 Organization, etc ..................................... 32 SECTION 6.2 Due Authorization, Non-Contravention, etc ............. 32 SECTION 6.3 Government Approval, Regulation, etc .................. 33 SECTION 6.4 Validity, etc ......................................... 33 SECTION 6.5 Financial Information ................................. 33 SECTION 6.6 No Material Adverse Change ............................ 34 SECTION 6.7 Litigation, Labor Controversies, etc .................. 34 SECTION 6.8 Subsidiaries .......................................... 34 SECTION 6.9 Ownership of Properties ............................... 34 SECTION 6.10 Taxes ................................................. 34 SECTION 6.11 Pension and Welfare Plans ............................. 35 SECTION 6.12 Environmental Warranties .............................. 35 SECTION 6.13 Regulations U and X ................................... 36 SECTION 6.14 Real Property; Mortgage, etc .......................... 36 SECTION 6.15 The Collateral Documents .............................. 36 SECTION 6.16 Accuracy of Information ............................... 37 SECTION 6.17 Subordinated Debt ..................................... 37 SECTION 6.18 Intellectual Property ................................. 37 ARTICLE VII COVENANTS ................................................... 38 SECTION 7.1 Affirmative Covenants ................................. 38 SECTION 7.1.1 Financial Information, Reports, Notices, etc .......... 38 SECTION 7.1.2 Compliance with Laws, etc ............................. 39 SECTION 7.1.3 Maintenance of Properties ............................. 40 SECTION 7.1.4 Insurance ............................................. 40 SECTION 7.1.5 Books and Records ..................................... 40 SECTION 7.1.6 Environmental Covenant ................................ 40 SECTION 7.1.7 Fourth Amendment to Mortgage .......................... 41 SECTION 7.1.8 Modesto Property ...................................... 42
ii SECTION 7.1.9 AMEP Property ................................................... 42 SECTION 7.1.10 Subsidiary Pledge Agreement and Subsidiary Security Agreement ... 43 SECTION 7.1.11 Further Assurances .............................................. 43 SECTION 7.2 Negative Covenants .............................................. 44 SECTION 7.2.1 Business Activities ............................................. 44 SECTION 7.2.2 Indebtedness .................................................... 44 SECTION 7.2.3 Liens ........................................................... 45 SECTION 7.2.4 Financial Condition ............................................. 45 SECTION 7.2.5 Investments ..................................................... 46 SECTION 7.2.6 Restricted Payments, etc ........................................ 47 SECTION 7.2.7 Capital Expenditures, etc ....................................... 47 SECTION 7.2.8 Take or Pay Contracts ........................................... 47 SECTION 7.2.9 Consolidation, Merger, etc ...................................... 48 SECTION 7.2.10 Asset Dispositions, etc ......................................... 48 SECTION 7.2.11 Modification of Tax Sharing Agreement and Subordinated Debt ..... 48 SECTION 7.2.12 Transactions with Affiliates .................................... 48 SECTION 7.2.13 Inconsistent Agreements ......................................... 49 SECTION 7.2.14 Negative Pledges, Restrictive Agreements, etc ................... 49 SECTION 7.2.15 Management Fees ................................................. 49 SECTION 7.2.16 Tax Sharing Payments ............................................ 49 SECTION 7.2.17 Use of Proceeds ................................................. 50 ARTICLE VIII EVENTS OF DEFAULT ...................................................... 50 SECTION 8.1 Listing of Events of Default .................................... 50 SECTION 8.1.1 Non-Payment of Obligations ...................................... 50 SECTION 8.1.2 Breach of Warranty .............................................. 50 SECTION 8.1.3 Non-Performance of Certain Covenants and Obligations ............ 50 SECTION 8.1.4 Non-Performance of Other Covenants and Obligations .............. 50 SECTION 8.1.5 Default on Other Indebtedness ................................... 50 SECTION 8.1.6 Judgments ....................................................... 50 SECTION 8.1.7 Pension Plans ................................................... 51 SECTION 8.1.8 Control of the Borrower ......................................... 51 SECTION 8.1.9 Bankruptcy, Insolvency, etc ..................................... 51 SECTION 8.1.10 Impairment of Security, etc ..................................... 52 SECTION 8.2 Action if Bankruptcy ............................................ 52 SECTION 8.3 Action if Other Event of Default ................................ 52 SECTION 8.4 Cumulative Remedies ............................................. 52 ARTICLE IX THE AGENT .............................................................. 52 SECTION 9.1 Actions ......................................................... 52 SECTION 9.2 Funding Reliance, etc ........................................... 53 SECTION 9.3 Exculpation ..................................................... 53 SECTION 9.4 Successor ....................................................... 53 SECTION 9.5 Loans by Bank of America ........................................ 54 SECTION 9.6 Credit Decisions ................................................ 54 SECTION 9.7 Copies, etc ..................................................... 54 SECTION 9.8 Action Through Agent ............................................ 54
iii SECTION 9.9 Documentation Agents .................................... 54 SECTION 9.10 Collateral Matters ...................................... 55 ARTICLE X MISCELLANEOUS PROVISIONS ....................................... 55 SECTION 10.1 Waivers, Amendments, etc ................................ 55 SECTION 10.2 Notices ................................................. 56 SECTION 10.3 Payment of Costs and Expenses ........................... 56 SECTION 10.4 Indemnification ......................................... 57 SECTION 10.5 Survival ................................................ 58 SECTION 10.6 Severability ............................................ 58 SECTION 10.7 Headings ................................................ 58 SECTION 10.8 Execution in Counterparts ............................... 58 SECTION 10.9 Governing Law; Entire Agreement ......................... 59 SECTION 10.10 Successors and Assigns .................................. 59 SECTION 10.11 Sale and Transfer of Loans and Notes; Participations in Loans and Notes ...................................... 59 SECTION 10.11.1 Assignments ............................................. 59 SECTION 10.11.2 Participations .......................................... 60 SECTION 10.11.3 Information and Assistance .............................. 61 SECTION 10.12 Other Transactions ...................................... 61 SECTION 10.13 Maximum Interest. ....................................... 61 SECTION 10.14 Forum Selection and Consent to Jurisdiction ............. 63 SECTION 10.15 Waiver of Jury Trial .................................... 63
SCHEDULES SCHEDULE I Disclosure Schedule SCHEDULE II Pricing Schedule EXHIBITS EXHIBIT A Form of Note EXHIBIT B Form of Borrowing Request EXHIBIT C Form of Continuation/Conversion Notice EXHIBIT D Copy of Pledge Agreement EXHIBIT E Copy of Security Agreement EXHIBIT F Form of Subsidiary Pledge Agreement EXHIBIT G Form of Subsidiary Security Agreement EXHIBIT H Form of Opinion of Counsel EXHIBIT I Form of Lender Assignment Agreement EXHIBIT J Form of Confirmation iv AMENDED AND RESTATED CREDIT AGREEMENT (FIVE YEAR) THIS AMENDED AND RESTATED CREDIT AGREEMENT (FIVE YEAR), dated as of May 29, 2001, among NASCO INTERNATIONAL, INC., a Wisconsin corporation (the "Borrower"), the various financial institutions which are now, or in accordance -------- with Section 10.11.1 hereafter become, parties hereto (collectively, the --------------- "Lenders"), BANK ONE, WISCONSIN, as Documentation Agent (in such capacity, the ------- "Documentation Agent"), and BANK OF AMERICA, N.A., as administrative agent (in ------------------- such capacity, the "Agent") for the Lenders. ----- W I T N E S S E T H: WHEREAS, the Borrower, various financial institutions and the Agent have entered into a Credit Agreement dated as of March 31, 2000 (the "Existing Credit --------------- Agreement"); - --------- WHEREAS, the parties hereto have agreed to amend and restate the Existing Credit Agreement so as to, among other things, increase the amount of the facility and amend certain covenants and various other provisions of the Existing Credit Agreement; WHEREAS, proceeds of the Loans will be used to finance the AMEP Acquisition and to refinance the Existing Credit Agreement; WHEREAS, the parties hereto intend that this Agreement and the documents executed in connection herewith not effect a novation of the obligations of the Borrower under the Existing Credit Agreement, but merely a restatement of and, where applicable, an amendment to the terms governing such obligations; NOW, THEREFORE, in consideration of the premises and the mutual agreements and covenants herein contained, the parties agree as follows: ARTICLE I. DEFINITIONS AND ACCOUNTING TERMS SECTION 1.1 Defined Terms. The following terms (whether or not ------------- underscored) when used in this Agreement, including its preamble and recitals, shall, except where the context otherwise requires, have the following meanings (such meanings to be equally applicable to the singular and plural forms thereof): "Acquired Companies" means AMEP and Spectrum. ------------------ "Acquisition Agreements" means the AMEP Acquisition Agreement and the ---------------------- Spectrum Acquisition Agreement. "Acquisitions" means the AMEP Acquisition and the Spectrum ------------ Acquisition. 1 "Affiliate" of any Person means (a) any other Person which, directly --------- or indirectly, controls, is controlled by or is under common control with such Person (excluding any trustee under, or any committee with responsibility for administering, any Plan) and (b) any Person who is a general partner, director or officer of such Person or of any Person described in the foregoing clause ------ (a). A Person shall be deemed to be "controlled by" any other Person if such - --- other Person possesses, directly or indirectly, power (a) to vote 10% or more of the securities (on a fully diluted basis) having ordinary voting power for the election of directors or managing general partners; or (b) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise. "Agent" is defined in the preamble and includes each other Person ----- -------- which shall have subsequently been appointed as the successor Agent pursuant to Section 9.4. - ----------- "Agent's Fee Letter" means that certain Appendix A to the Summary of ------------------ Terms and Conditions dated May 29, 2001 regarding fees. "Agreement" means this Amended and Restated Credit Agreement (Five --------- Year) as the same may thereafter from time to time be further amended, supplemented, amended and restated or otherwise modified in accordance with the terms hereof. "AMEP" means American Educational Products, Inc. ---- "AMEP Acquisition" means the acquisition by the Borrower of AMEP ---------------- pursuant to the AMEP Acquisition Agreement, which shall be comprised of (i) the purchase by the Borrower of the common stock of AMEP from the public, (ii) the refinancing of a note payable to Geneve, (iii) the payment of a dividend to Holdings and (iv) the refinancing of the existing credit facility between U.S. Bank and AMEP. "AMEP Acquisition Agreement" means the Agreement and Plan of Merger -------------------------- between G.C. Associates Holdings Corp. and American Educational Products, Inc., dated August 14, 2000 (as amended) in the form previously delivered to the Agent. "AMEP Mortgage" means that certain Mortgage executed and delivered by ------------- the Borrower pursuant to Section 7.1.9, as amended, supplemented, restated, ------------- extended, renewed, partially released or otherwise modified from time to time. "AMEP Property" means the Property (as such term is defined in the ------------- AMEP Mortgage). "Applicable Margin" means the rate per annum determined pursuant to ----------------- Schedule II. - ----------- "Assignee Lender" is defined in Section 10.11.1. --------------- --------------- 2 "Authorized Officer" means, relative to the Borrower, those of its ------------------ officers whose signatures and incumbency shall have been certified to the Agent and the Lenders pursuant to Section 5.1.1. ------------- "Bank of America" means Bank of America, N.A. --------------- "Base Rate" means a fluctuating rate per annum equal to the higher of --------- (a) the Federal Funds Rate plus 1/2 of 1% and, (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its "prime rate." Such rate is a rate set by Bank of America based upon various factors including Bank of America's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such rate announced by Bank of America shall take effect at the opening of business on the day specified in the public announcement of such change. "Base Rate Loan" means a Loan bearing interest at a fluctuating rate -------------- determined by reference to the Base Rate. "Borrower" is defined in the preamble. -------- -------- "Borrowing" means the Loans of the same type and, in the case of --------- Eurodollar Rate Loans, having the same Interest Period made by all Lenders on the same Business Day and pursuant to the same Borrowing Request in accordance with Section 2.1. ----------- "Borrowing Request" means a loan request and certificate duly executed ----------------- by an Authorized Officer of the Borrower, substantially in the form of Exhibit B --------- hereto. "Business Day" means ------------ (a) any day which is neither a Saturday or Sunday nor a legal holiday on which banks are authorized or required to be closed in New York, New York, Chicago, Illinois or Ft. Atkinson, Wisconsin; and (b) relative to the making, continuing, prepaying or repaying of any Eurodollar Rate Loans, including with respect to the giving of notices required under this Agreement therefor, any day described in the foregoing clause (a) which is also a day on which dealings in ---------- Dollars are carried on in the London interbank market. "Business Plan" means the business plan for the Borrower entitled ------------- "Nasco International, Inc. Consolidated Business Plan for Year Ended December 31, 2001", heretofore delivered to the Lenders. "Capital Expenditures" means, for any period, the sum of -------------------- (a) the aggregate amount of all expenditures of the Borrower and its Subsidiaries for fixed or capital assets made during such period which, in accordance 3 with GAAP, would be classified as capital expenditures and, without duplication, all amounts expended under Section 7.2.9(b); ---------------- (b) and the aggregate amount of all Capitalized Lease Liabilities incurred during such period. "Capitalized Lease Liabilities" means all monetary obligations of the ----------------------------- Borrower or any of its Subsidiaries under any leasing or similar arrangement which, in accordance with GAAP, would be classified as capitalized leases, and, for purposes of this Agreement and each other Loan Document, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP, and the stated maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "Cash Equivalent Investment" means, at any time: -------------------------- (a) any evidence of Indebtedness issued or guaranteed by the United States Government; (b) commercial paper, maturing not more than nine months from the date of issue, which is issued by (i) a corporation (other than an Affiliate of the Borrower) organized under the laws of any state of the United States or of the District of Columbia and rated at least A-l by Standard & Poor's Ratings Services or P-l by Moody's Investors Service, Inc., or (ii) any Lender (or its holding company); (c) any certificate of deposit or bankers acceptance, maturing not more than one year after such time, which is issued by either (i) a commercial banking institution that is a member of the Federal Reserve System and has a combined capital and surplus and undivided profits of not less than $500,000,000, or (ii) any Lender; or (d) any repurchase agreement entered into with any Lender, any other commercial banking institution of the stature referred to in clause (c)(i) ------------- or any investment banking firm or broker which (directly or through a parent or subsidiary corporation) issues commercial paper maturing not more than nine months from the date of issue with a rating of at least A-1 by Standard & Poor's Ratings Group or P-1 by Moody's Investors Service, Inc., which repurchase agreement 4 (i) is secured by a fully perfected security interest in any obligation of the type described in any of clauses (a) through (c), and ----------- --- (ii) has a market value at the time such repurchase agreement is entered into of not less than 100% of the repurchase obligation of such Lender (or other commercial banking institution) thereunder. "CERCLA" means the Comprehensive Environmental Response, Compensation ------ and Liability Act of 1980, as amended. "CERCLIS" means the Comprehensive Environmental Response Compensation ------- Liability Information System List. "Change in Control" means ----------------- (a) at any time when the aggregate principal amount of Indebtedness outstanding hereunder exceeds $10,000,000, Edward Netter and members of his family shall cease to own and control, individually or in the aggregate, directly or through corporations controlled by Edward Netter and members of his family, for any reason, free and clear of all Liens, options or other encumbrances or rights (other than any pledge of capital stock of Geneve granted in favor of a commercial lender securing Indebtedness, which Indebtedness may not exceed $10,000,000 in principal amount unless and until the outstanding principal amount of all Loans is equal to or less than $10,000,000, it being understood and agreed that foreclosure upon such Lien shall constitute a "Change in Control"), at least 51% of the outstanding shares of capital stock having ordinary voting power for the election of directors of Geneve on a fully diluted basis, other than by reason of death or legal incapacity, in which case a "Change in Control" shall not be deemed to occur until the date which is six months after such death or legal incapacity; or (b) the failure of Geneve to own and control, directly (or indirectly through no more than one intermediate corporation) and free and clear of all Liens, options or other encumbrances or rights, at least 80% of the outstanding shares of capital stock having ordinary voting power for the election of directors of the Borrower on a fully diluted basis. "Code" means the Internal Revenue Code of 1986, as amended, reformed ---- or otherwise modified from time to time. "Collateral Documents" means, collectively, the Pledge Agreement, the -------------------- Security Agreement, the Mortgage, the Modesto Mortgage, the Fourth Amendment to Mortgage, the Second Amendment to Modesto Mortgage, the AMEP Mortgage, the Subsidiary Pledge Agreement, the Subsidiary Security Agreement and any other agreement, document or instrument executed and delivered in connection therewith. "Commitment" means, relative to any Lender, such Lender's obligation ---------- to make Loans pursuant to Section 2.1.1; collectively, for all the Lenders, the ------------- "Commitments". ----------- 5 "Commitment Amount" means, on the date hereof, $51,000,000, as such ----------------- amount may be reduced from time to time pursuant to Section 2.2. ----------- "Commitment Termination Event" means ---------------------------- (a) he occurrence of any Default described in clauses (a) ----------- through (d) of Section 8.1.9 with respect to the --- ------------- Borrower or any Significant Subsidiary; or (b) the occurrence and continuance of any other Event of Default and either (i) the declaration of the Loans to be due and payable pursuant to Section 8.3, or ----------- (ii) in the absence of such declaration, the giving of notice by the Agent, acting at the direction of the Required Lenders, to the Borrower that the Commitments have been terminated. "Confirmation" means the Confirmation, executed and delivered by the ------------ Borrower pursuant to Section 5.1.4, substantially in the form of Exhibit J ------------- --------- hereto, as amended, supplemented, amended and restated or otherwise modified from time to time. "Consolidated Current Assets" means, as of the close of any month in --------------------------- each Fiscal Year, all amounts which, in accordance with GAAP consistently applied, would be included as current assets on a consolidated balance sheet of the Borrower and each of its Subsidiaries at such time, but in any event not including any cash or Cash Equivalent Investments. "Consolidated Current Assets Level" means, as of the last day of any --------------------------------- Fiscal Quarter, the sum of (i) 80% of all amounts which, in accordance with GAAP consistently applied, would be included as gross accounts receivable on a consolidated balance sheet of the Borrower and each of its Subsidiaries at such time plus (ii) 60% of all amounts which, in accordance with GAAP consistently ---- applied, would be included as gross inventory on a consolidated balance sheet of the Borrower and each of its Subsidiaries at such time. "Consolidated Current Liabilities" means, as of the close of any month -------------------------------- in each Fiscal Year, all amounts which, in accordance with GAAP consistently applied, would be included as current liabilities on a consolidated balance sheet of the Borrower and each of its Subsidiaries at such time, but shall exclude the current portion of long-term Indebtedness. "Consolidated Current Ratio" means, as of the close of any month in -------------------------- each Fiscal Year, the ratio of Consolidated Current Assets to Consolidated Current Liabilities at such time. "Consolidated Debt Service Coverage Ratio" means, as of the close of ---------------------------------------- any Fiscal Quarter, the ratio of: 6 (a) EBITDA computed for the four consecutive Fiscal Quarters ending on the computation date to -- (b) the sum of (i) Consolidated Interest Expense computed for the four consecutive Fiscal Quarters ending on the computation date, plus ---- (ii) Required Principal Payments as of such computation date. "Consolidated Funded Debt" means, as of the date of any determination ------------------------ thereof, the aggregate outstanding principal amount of all Indebtedness of the Borrower and each of its Subsidiaries of the nature referred to in clauses (a), ----------- (b), (c) and (f) of the definition of "Indebtedness". - --- --- --- ------------ "Consolidated Interest Expense" means, for any Fiscal Quarter, the ----------------------------- aggregate interest expense of the Borrower and each of its Subsidiaries for such Fiscal Quarter, as determined in accordance with GAAP consistently applied, including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and banker's acceptances and net costs under interest rate swap or exchange agreements and the portion of any obligation under capital leases allocable to interest expense but excluding in any event any amounts payable under the Agent's Fee Letter. "Consolidated Net Income" means, for any period, all amounts which, in ----------------------- conformity with GAAP consistently applied, would be included under net income on a consolidated income statement of the Borrower and each of its Subsidiaries for such period. "Consolidated Net Worth" means, at any time, all amounts which, in ---------------------- accordance with GAAP consistently applied, would be included under shareholders' equity on a consolidated balance sheet of the Borrower and each of its Subsidiaries at such time; provided that, in any event, such amounts are to be -------- net of amounts carried on the books of the Borrower and each of its Subsidiaries for treasury stock. "Contingent Liability" means any agreement, undertaking or arrangement -------------------- by which any Person guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the indebtedness, obligation or any other liability of any other Person (other than by endorsements of instruments in the course of collection), or guarantees the payment of dividends or other distributions upon the shares of any other Person. The amount of any Person's obligation under any Contingent Liability shall (subject to any limitation set forth therein) be deemed to be the outstanding 7 principal amount (or maximum principal amount, if larger) of the debt, obligation or other liability guaranteed thereby. "Continuation/Conversion Notice" means a notice of continuation or ------------------------------ conversion and certificate duly executed by an Authorized Officer of the Borrower, substantially in the form of Exhibit C hereto. "Controlled Group" means all members of a controlled group of ---------------- corporations and all members of a controlled group of trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414(b) or 414(c) of the Code or section 4001 of ERISA. "Credit Agreement (364 Days)" means the Amended and Restated Credit --------------------------- Agreement (364 Days) of the Borrower dated the date hereof providing for loans in the principal amount of up to $2,500,000, as the same may thereafter from time to time be amended, supplemented, amended and restated or otherwise modified in accordance with the terms thereof. "Default" means any Event of Default or any condition, occurrence or ------- event which, after notice or lapse of time or both, would constitute an Event of Default. "Disclosure Schedule" means the Disclosure Schedule attached hereto as ------------------- Schedule I, as it may be amended, supplemented or otherwise modified from time - ---------- to time by the Borrower with the written consent of the Agent and the Required Lenders. "Dollar" and the sign "$" mean lawful money of the United States. ------ - "Domestic Office" means, relative to any Lender, the office of such --------------- Lender designated as such below its signature hereto or designated in the Lender Assignment Agreement or such other office of a Lender (or any successor or assign of such Lender) within the United States as may be designated from time to time by notice from such Lender to each other Person party hereto. "EBITDA" means, for any period, Consolidated Net Income for such ------ period plus to the extent deducted in determining such Consolidated Net Income, ---- Consolidated Interest Expense, income tax expense, depreciation and amortization for such period; provided that for purposes of calculating EBITDA for any -------- Period, the consolidated net income of any Person acquired by the Borrower or any Subsidiary during such period (plus, to the extent deducted in determining such consolidated net income, interest expense, income tax expense, depreciation and amortization of such Person) shall be included on a pro forma basis for such --- ----- period (assuming the consummation of each such acquisition and the incurrence or assumption of any Indebtedness in connection therewith occurred on the first day of such period, but adjusted to add back non-recurring expenses (such as owner compensation) to the extent disclosed to and approved by the Required Lenders) based upon (a) to the extent available, (i) the audited consolidated balance sheet of such acquired Person and its consolidated Subsidiaries as at the end of the fiscal year of such Person preceding the acquisition of such Person and the related audited consolidated statements of income, stockholders' equity and cash flows for such fiscal year and (ii) any subsequent unaudited financial statements for such Person for the period prior to the acquisition of such 8 Person so long as such statements were prepared on a basis consistent with the audited financial statements referred to above or (b) to the extent the items listed in clause (a) are not available, such historical financial statements and ---------- other information as is disclosed to, and approved by, the Required Lenders. "Effective Date" is defined in Section 5.1. -------------- "Environmental Laws" means all applicable federal, state or local ------------------ statutes, laws, ordinances, codes, rules, regulations and guidelines (including consent decrees and administrative orders) relating to public health and safety and protection of the environment. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended, and any successor statute of similar import, together with the regulations thereunder, in each case as in effect from time to time. References to sections of ERISA also refer to any successor sections. "Eurodollar Office" means, relative to any Lender, the office of such ----------------- Lender designated as such below its signature hereto or designated in the Lender Assignment Agreement or such other office of a Lender (or any successor or assign of such Lender) as may be designated from time to time by notice from such Lender to the Borrower and the Agent, whether or not outside the United States, which shall be making or maintaining Eurodollar Rate Loans of such Lender hereunder. "Eurodollar Rate" means for any Interest Period with respect to any --------------- Eurodollar Rate Loan, a rate per annum determined by Agent pursuant to the following formula: Eurodollar Rate = Eurodollar Base Rate -------------------- 1.00 - Eurodollar Reserve Percentage Where, "Eurodollar Base Rate" means, for such Interest Period: -------------------- (a) the rate per annum (carried out to the fifth decimal place) equal to the rate determined by Agent to be the offered rate that appears on the page of the Telerate Screen that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (b) in the event the rate referenced in the preceding subsection (a) does not appear on such page or service or such page or service shall cease to be available, the rate per annum (carried out to the fifth decimal place) equal to the rate determined by Agent to be the offered rate on such other page or other service that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the 9 first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (c) in the event the rates referenced in the preceding subsections (a) and (b) are not available, the rate per annum determined by Agent as the rate of interest at which Dollar deposits (for delivery on the first day of such Interest Period) in same day funds in the approximate amount of the applicable Eurodollar Rate Loan and with a term equivalent to such Interest Period would be offered by its London Branch to major banks in the Offshore Dollar market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period. "Eurodollar Reserve Percentage" means, for any day during any Interest ----------------------------- Period, the reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day, whether or not applicable to any Bank, under regulations issued from time to time by the Board of Governors of the Federal Reserve System for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities"). The Eurodollar Rate for each outstanding Eurodollar Rate Loan shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage. The determination of the Eurodollar Reserve Percentage and the Eurodollar Base Rate by Agent shall be conclusive in the absence of manifest error. "Eurodollar Rate Loan" means a Loan bearing interest, at all times -------------------- during an Interest Period applicable to such Loan, at a fixed rate of interest determined by reference to the Eurodollar Rate. "Event of Default" is defined in Section 8.1. ---------------- ----------- "Excess Cash Flow" means, for any period, the remainder of ---------------- (a) Consolidated Net Income for such period, plus ---- (b) to the extent deducted in determining such Consolidated Net Income, income tax expense, depreciation and amortization for such period, plus ---- (c) any decrease in working capital during such period, plus ---- (d) any non-cash charges 10 less ---- (e) the sum, without duplication of (i) scheduled repayments of the Loans made during such period pursuant to Section 3.1.1, ------------- plus ---- (ii) voluntary prepayments of the Loans pursuant to Section 3.1.2 during such period, ------------- plus ---- (iii) cash payments made in such period with respect to Capital Expenditures, plus ---- (iv) all federal, state, local and foreign income taxes paid by the Borrower and its Subsidiaries during such period, plus ---- (v) any increases in working capital during such period. "Existing Credit Agreement" is defined in the recitals. ------------------------- -------- "Existing Note" means any promissory note of the Borrower payable to ------------- the initial Lender, executed and delivered by the Borrower in favor of such Lender pursuant to the Existing Credit Agreement, evidencing the aggregate Indebtedness of the Borrower to such Lender resulting from the Loans made to the Borrower under the Existing Credit Agreement. "Federal Funds Rate" means, for any period, a fluctuating interest ------------------ rate per annum equal for each day during such period to (a) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York; or (b) if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Bank of America from three federal funds brokers of recognized standing selected by it. 11 "Fiscal Quarter" means any quarter of a Fiscal Year. -------------- "Fiscal Year" means any period of twelve consecutive calendar months ----------- ending on December 31; references to a Fiscal Year with a number corresponding to any calendar year (e.g., the "2001 Fiscal Year") refer to the Fiscal Year --- ending on December 31 occurring during such calendar year. "Fourth Amendment to Mortgage" means the Fourth Amendment to Mortgage ---------------------------- executed and delivered by the Borrower pursuant to Section 7.1.7, in form ------------- satisfactory to the Agent, as amended, supplemented, restated, extended, renewed, partially released or otherwise modified from time to time. "F.R.S. Board" means the Board of Governors of the Federal Reserve ------------ System or any successor thereto. "GAAP" is defined in Section 1.4. ---- ----------- "Geneve" means Geneve Corporation, a Delaware corporation which ------ directly owns 80% of the voting stock of Holdings and, indirectly through such ownership interest, owns 80% of the voting stock of the Borrower. "Hazardous Material" means ------------------ (a) any "hazardous substance", as defined by CERCLA; (b) any "hazardous waste", as defined by the Resource Conservation and Recovery Act, as amended; (c) any petroleum product; or (d) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material or substance within the meaning of any other applicable federal, state or local law, regulation, ordinance or requirement (including consent decrees and administrative orders) relating to or imposing liability or standards of conduct concerning any hazardous, toxic or dangerous waste, substance or material, all as amended or hereafter amended. "Hedging Obligations" means, with respect to any Person, all ------------------- liabilities of such Person under interest rate swap agreements, interest rate cap agreements and interest rate collar agreements, and all other agreements or arrangements designed to protect such Person against fluctuations in interest rates or currency exchange rates. "herein", "hereof", "hereto", "hereunder" and similar terms contained ------ ------ ------ --------- in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular Section, paragraph or provision of this Agreement or such other Loan Document. 12 "Highest Lawful Rate" means, with respect to any indebtedness owed to ------------------- any Lender hereunder or under any other Loan Document, the maximum nonusurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received by such Lender with respect to such indebtedness under applicable law. "Holdings" means NASCO Holdings, Inc., a Wisconsin corporation. -------- "Impermissible Qualification" means, relative to the opinion or --------------------------- certification of any independent public accountant as to any financial statement of the Borrower, any qualification or exception to such opinion or certification (a) which is of a "going concern" or similar nature; (b) which relates to the limited scope of examination of matters relevant to such financial statement; or (c) which relates to the treatment or classification of any item in such financial statement and which, as a condition to its removal, would require an adjustment to such item the effect of which would be to cause the Borrower to be in default of any of its obligations under Section 7.2.4. ------------- "including" means including without limiting the generality of any --------- description preceding such term, and, for purposes of this Agreement and each other Loan Document, the parties hereto hereby agree that the rule of ejusdem ------- generis shall not be applicable to limit a general statement, which is followed - ------- by or referable to an enumeration of specific matters, to matters similar to the matters specifically mentioned. "Indebtedness" of any Person means, without duplication: ------------ (a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (b) all obligations, contingent or otherwise, relative to the face amount of all letters of credit, whether or not drawn, and banker's acceptances issued for the account of such Person; (c) all obligations of such Person as lessee under leases which have been or should be, in accordance with GAAP, recorded as Capitalized Lease Liabilities; (d) all other items which, in accordance with GAAP, would be included as liabilities on the liability side of the balance sheet of such Person as of the date at which Indebtedness is to be determined; (e) net liabilities of such Person under all Hedging Obligations; 13 (f) whether or not so included as liabilities in accordance with GAAP, all obligations of such Person to pay the deferred purchase price of property or services, and indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse; and (g) all Contingent Liabilities of such Person in respect of any of the foregoing. For all purposes of this Agreement, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture in which such Person is a general partner or a joint venturer. "Indemnified Liabilities" is defined in Section 10.4. ----------------------- ------------ "Indemnified Parties" is defined in Section 10.4. ------------------- ------------ "Insignificant Subsidiary" means Nasco Exports. ------------------------ "Interest Period" means, relative to any Eurodollar Rate Loans, the --------------- period beginning on (and including) the date on which such Eurodollar Rate Loan is made or continued as, or converted into, a Eurodollar Rate Loan pursuant to Section 2.3 or 2.4 and shall end on (but exclude) the day which numerically - ----------- --- corresponds to such date one, two, three or, if available (as determined in the sole discretion of the Lenders), six months thereafter (or, if such month has no numerically corresponding day, on the last Business Day of such month), as the Borrower may select in its relevant notice pursuant to Section 2.3 or 2.4; ----------- --- provided, however, that - -------- ------- (a) the Borrower shall not be permitted to select Interest Periods to be in effect at any one time which have expiration dates occurring on more than five different dates; (b) if such Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next following Business Day unless such next following Business Day is the first Business Day of a calendar month, in which case such Interest Period shall end on the Business Day next preceding such numerically corresponding day; (c) Interest Periods shall be selected in a manner such that principal amounts of the Notes required to be repaid pursuant to Section 3.1.2(b) hereof shall not require the breakage of any Interest ---------------- Periods; (d) the Borrower may not select any Interest Period, if after giving effect to such selection, the aggregate principal amount of the all Loans having Interest Periods ending after any date on which an installment of principal of the Loans is scheduled to be paid pursuant to Section 3.1.1 would be greater than the aggregate principal amount ------------- of the Loans permitted to be outstanding after payment of such installment; and 14 (e) no Interest Period may end later than the Stated Maturity Date. "Investment" means, relative to any Person, ---------- (a) any loan or advance made by such Person to any other Person (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business); (b) any Contingent Liability of such Person; and (c) any ownership or similar interest held by such Person in any other Person. The amount of any Investment shall be the original principal or capital amount thereof less all returns of principal or equity thereon (and without adjustment by reason of the financial condition of such other Person) and shall, if made by the transfer or exchange of property other than cash, be deemed to have been made in an original principal or capital amount equal to the fair market value of such property. "Lead Arranger" means Banc of America Securities LLC, as sole lead ------------- arranger and sole book manager. "Lender Assignment Agreement" means a Lender Assignment Agreement --------------------------- substantially in the form of Exhibit I hereto. --------- "Lenders" is defined in the preamble. ------- -------- "Lien" means any security interest, mortgage, pledge, hypothecation, ---- assignment, deposit arrangement, encumbrance, lien (statutory or otherwise), charge against or interest in property to secure payment of a debt or performance of an obligation or other priority or preferential arrangement of any kind or nature whatsoever. "Loan" is defined in Section 2.1.1. ---- ------------- "Loan Documents" means, collectively, this Agreement, the Notes, the -------------- Collateral Documents, the Confirmation and any other document executed in connection or pursuant hereto or thereto from time to time which sets forth that it constitutes a "Loan Document", in each case as amended, supplemented, amended and restated or otherwise modified from time to time. "Materially Adverse Effect" means, relative to any occurrence of ------------------------- whatever nature (including, without limitation, any adverse determination in any litigation, arbitration, or governmental investigation or proceeding), a materially adverse effect on: (a) the consolidated business, assets, revenues, financial condition, operations, or prospects of the Borrower and its Subsidiaries; or 15 (b) the ability of the Borrower to perform any of its payment or other material obligations under this Agreement, the Notes, the Mortgage, any other Collateral Document or any other Loan Document. "Modesto Mortgage" means Deed of Trust, Security Agreement, Assignment ---------------- of Rents and Leases and Fixture Filing dated as of August 5, 1997, as amended, supplemented, restated, extended, reviewed, partially released or otherwise modified from time to time. "Modesto Property" means lots 3 and 4 of Landmark Business Center, as ---------------- per map thereof, recorded October 4, 1988 in Book 33, page 31, Stanislaus County, California Records. "Monthly Payment Date" means the last day of each calendar month or, -------------------- if any such day is not a Business Day, the next succeeding Business Day. "Mortgage" means the Original Mortgage, as amended by the Fourth -------- Amendment to Mortgage, and as amended, supplemented, restated, extended, renewed, partially released or otherwise modified from time to time. "Mortgaged Collateral" means the Collateral (as such term is defined -------------------- in the Mortgage). "Mortgaged Real Property" means the Property (as such term is defined ----------------------- in the Mortgage). "Nasco Exports" means Nasco Exports, Inc., a Wisconsin corporation and ------------- a direct, wholly-owned Subsidiary of the Borrower. "Note" means a promissory note of the Borrower payable to any Lender, ---- executed and delivered by the Borrower in accordance with this Agreement, substantially in the form of Exhibit A hereto (as such promissory note may be --------- amended, endorsed or otherwise modified from time to time), evidencing the aggregate Indebtedness of the Borrower to such Lender resulting from outstanding Loans, and also means all other promissory notes accepted from time to time in substitution therefor or renewal thereof. "Obligations" means all obligations (monetary or otherwise) of the ----------- Borrower arising under or in connection with this Agreement, the Notes, the Mortgage, each other Collateral Document and each other Loan Document. "Organic Document" means, relative to the Borrower, its certificate of ---------------- incorporation, its by-laws and all shareholder agreements, voting trusts and similar arrangements applicable to any of its authorized shares of capital stock. "Original Credit Agreement" means the Third Amended and Restated ------------------------- Credit Agreement dated as of January 2, 1996 among the Borrower, certain Lenders and Bank of America, N.A., as agent. 16 "Original Credit Agreement (364 Days)" means the Credit Agreement (364 ------------------------------------ Days) dated as of March 31, 2000 among the Borrower, certain Lenders, Bank One, Wisconsin, as co-agent and Bank of America, N.A., as agent. "Original Mortgage" means that certain Mortgage (and Security ----------------- Agreement) executed and delivered by the Borrower pursuant to the Original Credit Agreement, dated as of June 25, 1992, as amended, supplemented, amended and restated and otherwise modified through the date hereof. "Participant" is defined in Section 10.11. ----------- ------------- "PBGC" means the Pension Benefit Guaranty Corporation and any entity ---- succeeding to any or all of its functions under ERISA. "Pension Plan" means a "pension plan", as such term is defined in ------------ section 3(2) of ERISA, which is subject to Title IV of ERISA (other than a multiemployer plan as defined in section 4001(a)(3) of ERISA), and to which the Borrower or any corporation, trade or business that is, along with the Borrower, a member of a Controlled Group, may have liability, including any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA. "Percentage" means, relative to any Lender, the percentage set forth ---------- opposite its signature hereto or set forth in the Lender Assignment Agreement, as such percentage may be adjusted from time to time pursuant to Lender Assignment Agreement(s) executed by such Lender and its Assignee Lender(s) and delivered pursuant to Section 10.11. ------------- "Person" means any natural person, corporation, partnership, limited ------ liability company, firm, association, trust, government, governmental agency or any other entity, whether acting in an individual, fiduciary or other capacity. "Plan" means any Pension Plan or Welfare Plan. ---- "Pledge Agreement" means the Pledge Agreement, executed and delivered ---------------- by the Borrower, a copy of which is attached as Exhibit D hereto, as amended, --------- supplemented, amended and restated or otherwise modified from time to time. "Principal Repayment Date" is defined in Section 3.1.1. ------------------------ ------------- "Quarterly Payment Date" means the last day of each March, June, ---------------------- September and December or, if any such day is not a Business Day, the next succeeding Business Day. "Release" means a "release", as such term is defined in CERCLA. ------- "Required Lenders" means, at any time prior to the Effective Date, ---------------- Lenders having at least 66 2/3% of the Commitments and, from and after the Effective Date, Lenders holding at 17 least 66 2/3% of the then aggregate outstanding principal amount of the Notes then held by the Lenders, or, if no such principal amount is then outstanding, Lenders having at least 66 2/3% of the Commitments. "Required Principal Payments" means the principal amount of the --------------------------- scheduled repayments set forth in Section 3.1.1 for the four consecutive Fiscal ------------- Quarters following the date on which such payments are computed. "Resource Conservation and Recovery Act" means the Resource -------------------------------------- Conservation and Recovery Act, 42 U.S.C. Section 690, et seq., as in effect from ------ time to time. "Second Amendment to Modesto Mortgage" means the Second Amendment to ------------------------------------ the Modesto Mortgage executed and delivered by Borrower pursuant to Section ------- 7.1.8, in form satisfactory to the Agent, as amended, supplemented, restated, - ----- extended, renewed, partially released or otherwise modified from time to time. "Security Agreement" means the Security Agreement, executed and ------------------ delivered by the Borrower, a copy of which is attached as Exhibit E hereto, --------- together with the intellectual property agreements relating thereto, as amended, supplemented, amended and restated or otherwise modified from time to time. "Senior Debt" means the remainder of (a) Consolidated Funded Debt ----------- minus (b) Subordinated Debt. "Senior Debt to EBITDA Ratio" means, at any date, the ratio of (a) --------------------------- Senior Debt as of such date to (b) EBITDA for such period of four consecutive Fiscal Quarters then most recently ended. For purposes of calculating the Senior Debt to EBITDA Ratio as at any date, EBITDA shall be calculated on a pro forma --- ----- basis (as certified by the Borrower to the Agent) assuming all acquisitions made, and all divestitures completed, during the four consecutive Fiscal Quarters then most recently ended had been made on the first day of such period (but without adjustment for expected cost savings or other synergies). "Significant Subsidiaries" means all Subsidiaries of the Borrower ------------------------ other than the Insignificant Subsidiary. "Spectrum" means the group of companies known as Spectrum Educational -------- Supplies Limited. "Spectrum Acquisition" means the acquisition by the Borrower of -------------------- Spectrum pursuant to the Spectrum Acquisition Agreement with the proceeds of loans made to the Borrower under the Original Credit Agreement (364 Days). "Spectrum Acquisition Agreement" means the Share Purchase Agreement ------------------------------ dated as of March 21, 2001 among 2001328 Ontario Limited, John B. West and Shirley West, and Spectrum Educational Supplies Limited, SI Manufacturing Limited, and Morgan Moulds Ltd., in the form previously delivered to the Agent. 18 "Stated Maturity Date" means March 31, 2006. -------------------- "Subordinated Debt" means unsecured Indebtedness of the Borrower for ----------------- money borrowed which is subordinated, upon terms satisfactory to the Agent and the Required Lenders in their sole discretion, in right of payment to the payment in full in cash of all Obligations. "Subsidiary" means, with respect to any Person, any corporation of ---------- which more than 50% of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by such Person, by such Person and one or more other Subsidiaries of such Person, or by one or more other Subsidiaries of such Person. "Subsidiary Pledge Agreement" means, the Subsidiary Pledge Agreement, --------------------------- executed and delivered by the Borrower, pursuant to Section 7.1.10, -------------- substantially in the form of Exhibit F hereto, as amended, supplemented, amended --------- and restated or otherwise modified from time to time. "Subsidiary Security Agreement" means, the Subsidiary Security ----------------------------- Agreement, executed and delivered by the Borrower, pursuant to Section 7.1.10, -------------- substantially in the form of Exhibit G hereto, as amended, supplemented, amended --------- and restated or otherwise modified from time to time. "Taxes" is defined in Section 4.6. ----- ----------- "Type" means, relative to any Loan, the portion thereof, if any, being ---- maintained as a Base Rate Loan or a Eurodollar Rate Loan. "United States" or "U.S." means the United States of America, its ------------- --- fifty States and the District of Columbia. "Welfare Plan" means a "welfare plan", as such term is defined in ------------ section 3(1) of ERISA. SECTION 1.2 Use of Defined Terms. Unless otherwise defined or the -------------------- context otherwise requires, terms for which meanings are provided in this Agreement shall have such meanings when used in the Disclosure Schedule and in each Note, Borrowing Request, Continuation/Conversion Notice, Loan Document, notice and other communication delivered from time to time in connection with this Agreement or any other Loan Document. SECTION 1.3 Cross-References. Unless otherwise specified, references ---------------- in this Agreement and in each other Loan Document to any Article or Section are references to such Article or Section of this Agreement or such other Loan Document, as the case may be, and, unless otherwise specified, references in any Article, Section or definition to any clause are references to such clause of such Article, Section or definition. 19 SECTION 1.4 Accounting and Financial Determinations. Unless otherwise --------------------------------------- specified, all accounting terms used herein or in any other Loan Document shall be interpreted, all accounting determinations and computations hereunder or thereunder (including under Section 7.2.4) shall be made, and all financial ------------- statements required to be delivered hereunder or thereunder shall be prepared, in accordance with those generally accepted accounting principles ("GAAP") ---- applied in the preparation of the financial statements referred to in Section ------- 6.5. - --- ARTICLE II. COMMITMENTS, BORROWING PROCEDURES AND NOTES SECTION 2.1 Commitments. ----------- SECTION 2.1.1 Commitment of Each Lender. On the terms and subject to the ------------------------- conditions of this Agreement (including Article V), each Lender severally agrees --------- to make term loans ( the "Loans") to the Borrower in an amount not to exceed ----- such Lender's Percentage of the Commitment Amount provided that no Lender shall -------- be permitted or required to make any Loan if, after giving effect thereto, the aggregate outstanding principal amount of all Loans of all Lenders would exceed the Commitment Amount. The commitment of each Lender described in this Section ------- 2.1.1 is herein referred to as its "Commitment". Each Lender shall make only two - ----- ---------- Loans, the first on or before May 31, 2001 and the second on or before July 31, 2001. SECTION 2.2 Reduction of Commitment Amount. The Commitment Amount is ------------------------------ subject to reduction from time to time pursuant to this Section 2.2. ----------- SECTION 2.2.1 Optional. The Borrower may, from time to time on any Business -------- Day occurring after the time of the initial Borrowing hereunder, voluntarily reduce the Commitment Amount; provided, however, that all such reductions shall -------- ------- be irrevocable and shall require at least three Business Days' prior notice to the Agent and be permanent, and any partial reduction of the Commitment Amount shall be in a minimum amount of $500,000 and in an integral multiple of $250,000. SECTION 2.2.2 [Mandatory]. [Reserved]. --------- SECTION 2.3 Borrowing Procedure. ------------------- SECTION 2.3.1 Borrowings. By delivering a Borrowing Request to the Agent on ---------- or before 9:00 a.m., Chicago time, on a Business Day subsequent to the date of the initial Borrowing hereunder, the Borrower may from time to time irrevocably request, on not less than three nor more than five Business Days notice, that a Borrowing be made in a minimum amount of $1,000,000 and an integral multiple of $500,000, or in the unused amount of the Commitments. SECTION 2.3.2 All Borrowings. On the terms and subject to the conditions of -------------- this Agreement, each such Borrowing pursuant to Sections 2.3.1 and 2.3.2 shall -------------- ----- be comprised of the type of Loans specified in the Borrowing Request and shall be made on the Business Day 20 specified in such Borrowing Request. On or before 10:00 a.m. (Chicago time), on such Business Day, each Lender shall deposit with the Agent same day funds in an amount equal to such Lender's Percentage of the requested Borrowing. Such deposit will be made to an account which the Agent shall specify from time to time by notice to the Lenders. To the extent funds are received from the Lenders, the Agent shall make such funds available to the Borrower by wire transfer to the account the Borrower shall have specified in its Borrowing Request. No Lender's obligation to make any Loan shall be affected by any other Lender's failure to make any Loan. SECTION 2.4 Continuation and Conversion Elections. By delivering a ------------------------------------- Continuation/ Conversion Notice to the Agent on or before 9:00 a.m., Chicago time, on a Business Day, the Borrower may from time to time irrevocably elect, on not less than three nor more than five Business Days' notice, that all, or any portion in an aggregate minimum amount of $500,000 and an integral multiple of $250,000, of any Loans be, in the case of Base Rate Loans, converted into Eurodollar Rate Loans or, in the case of Eurodollar Rate Loans, be converted into a Base Rate Loan (in the absence of delivery of a Continuation/Conversion Notice with respect to any Eurodollar Rate Loan at least three Business Days before the last day of the then current Interest Period with respect thereto, such Eurodollar Rate Loan shall, on such last day, automatically convert to a Base Rate Loan); provided, however, that (a) each such conversion or -------- ------- continuation shall be prorated among the applicable outstanding Loans of all Lenders, and (b) no portion of the outstanding principal amount of any Loans may be continued as, or be converted into, Eurodollar Rate Loans when any Default has occurred and is continuing. SECTION 2.5 Funding. Each Lender may, if it so elects, fulfill its ------- obligation to make, continue or convert Eurodollar Rate Loans hereunder by causing one of its foreign branches or Affiliates (or an international banking facility created by such Lender) to make or maintain such Eurodollar Rate Loan; provided, however, that such Eurodollar Rate Loan shall nonetheless be deemed to have been made and to be held by such Lender, and the obligation of the Borrower to repay such Eurodollar Rate Loan shall nevertheless be to such Lender for the account of such foreign branch, Affiliate or international banking facility. In addition, the Borrower hereby consents and agrees that, for purposes of any determination to be made for purposes of Section 4.1, 4.2, 4.3 or 4.4, it shall ------- --- --- --- --- be conclusively assumed that each Lender elected to fund all Eurodollar Rate Loans by purchasing, as the case may be, Dollar certificates of deposit in the U.S. or Dollar deposits in its Eurodollar Office's interbank eurodollar market. SECTION 2.6 Notes. Each Lender's Loans under its Commitment shall be ----- evidenced by a Note payable to the order of such Lender in a maximum principal amount equal to such Lender's Percentage (as of the Effective Date) of the Commitment Amount. The Note issued hereunder and as of the Effective Date shall be issued in substitution and exchange for, and not in satisfaction or payment of, the Existing Notes and the Indebtedness (together with the obligation to pay accrued interest thereon) originally evidenced by the Existing Notes which is now to be evidenced by the replacement Notes delivered pursuant to this Agreement shall be (and the Borrower hereby acknowledges and agrees that such Indebtedness is) a continuing Indebtedness, and nothing herein contained shall be construed to deem such Existing Notes paid, or to release or terminate any Lien or security interest given to secure such Existing Notes, which Liens and security interests shall continue to secure such Indebtedness as evidenced by such Notes. The Borrower hereby irrevocably authorizes each Lender to make (or cause to be made) appropriate notations on the grid attached to such Lender's Note (or on any continuation of such 21 grid), which notations, if made, shall evidence, inter alia, the date of, the ----- ---- outstanding principal of, and the interest rate and Interest Period applicable to the Loans evidenced thereby. Such notations shall be conclusive and binding on the Borrower absent manifest error; provided, however, that the failure of -------- ------- any Lender to make any such notations shall not limit or otherwise affect any Obligations of the Borrower. Interest Periods in respect of Eurodollar Rate Loans outstanding under the Existing Notes as of the Effective Date shall be carried forward under the Notes issued hereunder as of the Effective Date. ARTICLE III. REPAYMENTS, PREPAYMENTS, INTEREST AND FEES SECTION 3.1 Repayments and Prepayments. -------------------------- SECTION 3.1.1 Repayment of Loans. The Borrower shall, on each date set ------------------ forth below (each such date, a "Principal Repayment Date"), make a scheduled ------------------------ repayment of the aggregate outstanding principal amount of the Loans, in the principal amounts set forth opposite such Principal Repayment Date: Principal Repayment Date Amount ------------------------ ------ September 30, 2001 $3,500,000 December 31, 2001 $3,500,000 September 30, 2002 $4,000,000 December 31, 2002 $4,000,000 September 30, 2003 $4,500,000 December 31, 2003 $4,500,000 September 30, 2004 $4,500,000 December 31, 2004 $4,500,000 September 30, 2005 $4,500,000 December 31, 2005 $4,500,000 March 31, 2006 $9,000,000 SECTION 3.1.2 Prepayment of Loans. Prior to the repayment by the Borrower ------------------- of the entire principal amount of all outstanding Loans, the Borrower (a) may, from time to time on any Business Day, make a voluntary prepayment, in whole or in part, of the outstanding principal amount of any Loans; provided, however, that -------- ------- (i) any such prepayment shall be made pro rata among Loans of the same type and, if applicable, having the same Interest Period of all Lenders, (ii) no such prepayment of any Eurodollar Rate Loan may be made on any day other than the last day of the Interest Period for such Loan, 22 (iii) all such voluntary prepayments shall require at least three but no more than five Business Days' prior written notice to the Agent, and (iv) all such voluntary partial prepayments shall be in an aggregate minimum amount of $100,000 and an integral multiple of $50,000 in excess thereof; and (b) shall, on each date when any reduction in the Commitment Amount shall become effective, including pursuant to Section 2.2, make a mandatory ----------- prepayment of all Loans equal to the excess, if any, of the aggregate, outstanding principal amount of all Loans over the Commitment Amount as so reduced; (c) shall, on April 30 of each year, commencing April 30, 2002, make a mandatory prepayment of all Loans in an amount equal to 50% of the Excess Cash Flow for the preceding Fiscal Year; (d) shall, within 30 days after the Effective Date, make a mandatory prepayment of all Loans in the amount of $2,000,000 which shall result in a reduction of the scheduled repayment due on September 30, 2001 pursuant to Section 3.1.1; and ------------- (e) shall, immediately upon any acceleration of the Stated Maturity Date of any Loans pursuant to Section 8.2 or Section 8.3, repay all such ----------- ----------- Loans so accelerated. Each prepayment of any Loans made pursuant to this Section shall be without premium or penalty, except as may be required by Section 4.4. Except as ----------- specifically required hereunder, any prepayment of the Loans shall be applied to the unpaid installments thereof in the order of the maturity of such installments; provided, however, that any prepayment of the Loans pursuant to -------- ------- clause (c) of this Section 3.1.2 shall be applied to the unpaid installments - --------- ------------- thereof in the inverse order of the maturity of such installments. Loans which are prepaid may not be reborrowed. SECTION 3.2 Interest Provisions. Interest on the outstanding principal ------------------- amount of Loans shall accrue and be payable in accordance with this Section 3.2. ----------- SECTION 3.2.1 Rates. Pursuant to an appropriately delivered Borrowing ----- Request or Continuation/Conversion Notice, the Borrower may elect that Loans accrue interest at a rate per annum: (a) on that portion maintained from time to time as a Base Rate Loan, equal to the sum of the Base Rate plus the Applicable Margin from time to time in effect; and (b) on that portion maintained as a Eurodollar Rate Loan, during each Interest Period applicable thereto, equal to the sum of the Eurodollar Rate for such Interest Period plus the Applicable Margin. All Eurodollar Rate Loans shall bear interest from and including the first day of the applicable Interest Period to (but not including) the last day of such Interest Period at the interest rate determined as applicable to such Eurodollar Rate Loan. All Base Rate Loans shall bear 23 interest from and including the date such Loans are made to (but not including) the day such Loans are repaid or converted into Eurodollar Rate Loans. SECTION 3.2.2 Default Rates. So long as any Event of Default shall have ------------- occurred and be continuing hereunder, interest on the unpaid principal amount of the Loans outstanding shall be paid on demand at a rate per annum equal to the Base Rate plus the Applicable Margin for Base Rate Loans plus 2%, and after the date any principal amount of any Loan has become due and payable (whether on the Stated Maturity Date, upon acceleration or otherwise), or after any other monetary Obligation of the Borrower shall have become due and payable, the Borrower shall pay interest (after as well as before judgment) on demand on all of such amounts at a rate per annum equal to the Base Rate plus the Applicable Margin for Base Rate Loans plus 2%. SECTION 3.2.3 Payment Dates. Interest accrued on each Loan shall be ------------- payable, without duplication: (a) upon payment in full thereof; (b) on that portion of the Loans being paid or prepaid, on the date of any such payment or prepayment; (c) with respect to Base Rate Loans, on each Monthly Payment Date occurring after the Effective Date; (d) with respect to Eurodollar Rate Loans, the last day of each applicable Interest Period (and, if such Interest Period shall exceed three months, on the day three months after the commencement of such Interest Period); (e) with respect to any Base Rate Loans converted into Eurodollar Rate Loans on a day when interest would not otherwise have been payable pursuant to clause (c), on the date of such conversion; and --------- (f) on that portion of any Loans the Stated Maturity Date of which is accelerated pursuant to Section 8.2 or Section 8.3, immediately upon such ----------- ----------- acceleration. Interest accrued on Loans or other monetary Obligations arising under this Agreement or any other Loan Document after the date such amount is due and payable (whether on the Stated Maturity Date, upon acceleration or otherwise) shall be payable upon demand. SECTION 3.3 Fees. The Borrower agrees to pay the fees set forth in this ---- Section 3.3. All such fees shall be non-refundable. - ----------- SECTION 3.3.1 Agent's Fee. The Borrower agrees to pay to the Agent for its ----------- own account on or prior to the occurrence of the Effective Date the fees set forth in the Agent's Fee Letter. 24 ARTICLE IV. CERTAIN EURODOLLAR RATE AND OTHER PROVISIONS SECTION 4.1 Eurodollar Rate Lending Unlawful. If any Lender shall determine -------------------------------- (which determination shall, upon notice thereof to the Borrower and the Lenders, be conclusive and binding on the Borrower) that the introduction of or any change in or in the interpretation of any law makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for such Lender to make, continue or maintain any Loan as, or to convert any Loan into, a Eurodollar Rate Loan of a certain type, the obligations of all Lenders to make, continue, maintain or convert any such Loans shall, upon such determination, forthwith be suspended until such Lender shall notify the Agent that the circumstances causing such suspension no longer exist, and all Eurodollar Rate Loans of such type shall automatically convert into Base Rate Loans at the end of the then current Interest Periods with respect thereto or sooner, if required by such law or assertion. SECTION 4.2 Deposits Unavailable. If the Agent shall have determined that -------------------- (a) Dollar certificates of deposit or Dollar deposits, as the case may be, in the relevant amount and for the relevant Interest Period are not available to Bank of America in its relevant market; or (b) by reason of circumstances affecting Bank of America's relevant market, adequate means do not exist for ascertaining the interest rate applicable hereunder to Eurodollar Rate Loans of such type, then, upon notice from the Agent to the Borrower and the Lenders, the obligations of all Lenders under Section 2.3 and Section 2.4 to make or continue ----------- ----------- any Loans as, or to convert any Loans into, Eurodollar Rate Loans of such type shall forthwith be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. SECTION 4.3 Increased Costs, etc. The Borrower agrees to reimburse each -------------------- Lender, upon demand, for any increase in the cost to such Lender of, or any reduction in the amount of any sum receivable by such Lender, in respect of making, continuing or maintaining (or of its obligation to make, continue or maintain) any Loans as, or of converting (or of its obligation to convert) any Loans into, Eurodollar Rate Loans (including without limitation by reason of any increase in any reserve requirements or taxes). Each Lender shall promptly notify the Borrower in writing of the occurrence of any such event, such notice to state, in reasonable detail, the reasons therefor and the additional amount required fully to compensate such Lender for such increased cost or reduced amount. Such additional amounts shall be payable by the Borrower directly to such Lender within five days of its receipt of such notice, and such notice shall, in the absence of manifest error, be conclusive and binding on the Borrower. Such Lender will use such method of allocation as it deems reasonable and appropriate. 25 SECTION 4.4 Funding Losses. In the event any Lender shall incur any loss or -------------- expense (including any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to make, continue or maintain any portion of the principal amount of any Loan as, or to convert any portion of the principal amount of any Loan into, a Eurodollar Rate Loan) as a result of (a) any conversion or repayment or prepayment of the principal amount of any Eurodollar Rate Loan on a date other than the scheduled last day of the Interest Period applicable thereto, whether pursuant to Section 3.1 or ----------- otherwise; (b) any Loans not being made as Eurodollar Rate Loans in accordance with the Borrower's request therefor; or (c) any Loans not being continued as, or converted into, Eurodollar Rate Loans in accordance with the Continuation/Conversion Notice therefor, then, upon the written notice of such Lender to the Borrower (with a copy to the Agent), the Borrower shall, within five days of its receipt thereof, pay directly to such Lender such amount as will (in the reasonable determination of such Lender) reimburse such Lender for such loss or expense. Such written notice (which shall include calculations in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on the Borrower. SECTION 4.5 Increased Capital Costs. If any change in, or the introduction, ----------------------- adoption, effectiveness, interpretation, reinterpretation or phase-in of, any law or regulation, directive, guideline, decision or request (whether or not having the force of law) of any court, central bank, regulator or other governmental authority affects or would affect the amount of capital required or expected to be maintained by any Lender or any Person controlling such Lender, and such Lender determines (in its sole and absolute discretion) that the rate of return on its or such controlling Person's capital as a consequence of its Commitment or the Loans made by such Lender is reduced to a level below that which such Lender or such controlling Person could have achieved but for the occurrence of any such circumstance, then, in any such case upon notice from time to time by such Lender to the Borrower, the Borrower shall immediately pay directly to such Lender additional amounts sufficient to compensate such Lender or such controlling Person for such reduction in rate of return. A statement of such Lender as to any such additional amount or amounts (including calculations thereof in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on the Borrower. In determining such amount, such Lender may use any method of averaging and attribution that it (in its sole and absolute discretion) shall deem applicable. SECTION 4.6 Taxes. All payments by the Borrower of principal of, and ----- interest on, the Loans and all other amounts payable hereunder shall be made free and clear of and without deduction for any present or future income, excise, stamp or franchise taxes and other taxes, fees, duties, withholdings or other charges of any nature whatsoever imposed by any taxing authority, but excluding franchise taxes and taxes imposed on or measured by any Lender's net income or receipts (such non-excluded items being called "Taxes"). In the event ----- that any withholding or deduction from any payment to be made by the Borrower hereunder is required in respect of any Taxes pursuant to any applicable law, rule or regulation, then the Borrower will 26 (a) pay directly to the relevant authority the full amount required to be so withheld or deducted; (b) promptly forward to the Agent an official receipt or other documentation satisfactory to the Agent evidencing such payment to such authority; and (c) pay to the Agent for the account of the Lenders such additional amount or amounts as is necessary to ensure that the net amount actually received by each Lender will equal the full amount such Lender would have received had no such withholding or deduction been required. Moreover, if any Taxes are directly asserted against the Agent or any Lender with respect to any payment received by the Agent or such Lender hereunder, the Agent or such Lender may pay such Taxes and the Borrower will promptly pay such additional amounts (including any penalties, interest or expenses) as is necessary in order that the net amount received by such person after the payment of such Taxes (including any Taxes on such additional amount) shall equal the amount such person would have received had not such Taxes been asserted. If the Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Agent, for the account of the respective Lenders, the required receipts or other required documentary evidence, the Borrower shall indemnify the Lenders for any incremental Taxes, interest or penalties that may become payable by any Lender as a result of any such failure. For purposes of this Section 4.6, a distribution hereunder by the Agent or any ----------- Lender to or for the account of any Lender shall be deemed a payment by the Borrower. Upon the request of the Borrower or the Agent, each Lender that is organized under the laws of a jurisdiction other than the United States shall, prior to the due date of any payments under the Notes, execute and deliver to the Borrower and the Agent, on or about the first scheduled repayment date in each Fiscal Year, one or more (as the Borrower or the Agent may reasonably request) United States Internal Revenue Service Forms W-8BEN or Forms W-8ECI or such other forms of documents (or successor forms or documents), appropriately completed, as may be applicable to establish the extent, if any, to which a payment to such Lender is exempt from withholding or deduction of Taxes. SECTION 4.7 Payments, Computations, etc. Unless otherwise expressly --------------------------- provided, all payments by the Borrower pursuant to this Agreement, the Notes or any other Loan Document shall be made by the Borrower to the Agent for the pro rata account of the Lenders entitled to receive such payment. All such payments required to be made to the Agent shall be made, without setoff, deduction or counterclaim, not later than 10:00 a.m., Chicago time, on the date due, in same day or immediately available funds, to such account as the Agent shall specify from time to time by notice to the Borrower. Funds received after that time shall be deemed to have been received by the Agent on the next succeeding Business Day. The Agent shall promptly remit in same day funds to each Lender its share, if any, of such payments received by the Agent for the account of such Lender. The Borrower hereby authorizes the Agent to charge any account maintained by the Borrower with the Agent or Bank of America for any amount due and payable under this Agreement as and when so due and payable. All interest and fees shall be 27 computed on the basis of the actual number of days (including the first day but excluding the last day) occurring during the period for which such interest or fee is payable over a year comprised of 360 days. Whenever any payment to be made shall otherwise be due on a day which is not a Business Day, such payment shall (except as otherwise required by clause (c) of the definition of the term --------- "Interest Period" with respect to Eurodollar Rate Loans) be made on the next --------------- succeeding Business Day and such extension of time shall be included in computing interest and fees, if any, in connection with such payment. SECTION 4.8 Sharing of Payments. If any Lender shall obtain any payment or ------------------- other recovery (whether voluntary, involuntary, by application of setoff or otherwise) on account of any Loan (other than pursuant to the terms of Sections -------- 4.3, 4.4 and 4.5) in excess of its pro rata share of payments then or therewith - --- --- --- obtained by all Lenders, such Lender shall purchase from the other Lenders such participations in Loans made by them as shall be necessary to cause such purchasing Lender to share the excess payment or other recovery ratably with each of them; provided, however, that if all or any portion of the excess -------- ------- payment or other recovery is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and each Lender which has sold a participation to the purchasing Lender shall repay to the purchasing Lender the purchase price to the ratable extent of such recovery together with an amount equal to such selling Lender's ratable share (according to the proportion of (a) the amount of such selling Lender's required repayment to the purchasing Lender to (b) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section may, to the fullest extent permitted by law, exercise all its rights of payment (including pursuant to Section 4.9) with respect to such participation as fully ----------- as if such Lender were the direct creditor of the Borrower in the amount of such participation. If under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a setoff to which this Section applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this Section to share in the benefits of any recovery on such secured claim. SECTION 4.9 Setoff. Each Lender shall, upon the occurrence of any Default ------ described in clauses (a) through (d) of Section 8.1.9 or, with the consent of ---------- --- ------------- the Required Lenders, upon the occurrence of any other Event of Default, have the right to appropriate and apply to the payment of the Obligations owing to it (whether or not then due), and (as security for such Obligations) the Borrower hereby grants to each Lender a continuing security interest in, any and all balances, credits, deposits, accounts or moneys of the Borrower then or thereafter maintained with or otherwise held by such Lender; provided, however, -------- ------- that any such appropriation and application shall be subject to the provisions of Section 4.8. Each Lender agrees promptly to notify the ----------- 28 Borrower and the Agent after any such setoff and application made by such Lender; provided, however, that the failure to give such notice shall not affect -------- ------- the validity of such setoff and application. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff under applicable law or otherwise) which such Lender may have. SECTION 4.10 Use of Proceeds. The Borrower shall apply the proceeds of the --------------- Loans in accordance with the recitals; provided that, in no event shall the -------- proceeds of the Loans be used by the Borrower or any of its Subsidiaries to acquire all or any portion of the ownership or assets of any other Person or entity except as otherwise permitted by this Agreement. ARTICLE V. CONDITIONS TO EFFECTIVENESS AND BORROWINGS SECTION 5.1 Effectiveness. This Agreement shall become effective, and all ------------- loans outstanding under the Existing Credit Agreement shall be deemed to be loans hereunder, on the date (the "Effective Date") that each of the conditions -------------- precedent set forth in this Section 5.1 have been satisfied. ----------- SECTION 5.1.1 Resolutions, etc. The Agent shall have received from the ----------------- Borrower a certificate, dated the date hereof, of its Secretary or Assistant Secretary as to (a) resolutions of its Board of Directors then in full force and effect authorizing the execution, delivery and performance of this Agreement, the Notes, each Collateral Document and each other Loan Document executed or to be executed by it; and (b) the incumbency and signatures of those of its officers authorized to act with respect to this Agreement, the Notes, each Collateral Document and each other Loan Document executed or to be executed by it, upon which certificate the Agent and each Lender may conclusively rely until the Agent shall have received a further certificate of the Secretary of the Borrower canceling or amending such prior certificate, which further certificate shall be reasonably satisfactory to the Agent. SECTION 5.1.2 Delivery of Notes. The Agent shall have received from the ----------------- Borrower, for the account of each Lender, a duly executed Note, dated as of the date hereof. SECTION 5.1.3 Credit Agreements. The Agent shall have received executed ----------------- counterparts of this Agreement and the Credit Agreement (364 Days), dated as of the date hereof, duly executed by the Borrower, the Agent, and each of the Lenders. SECTION 5.1.4 Confirmation. The Agent shall have received executed ------------ counterparts of the Confirmation, dated as of the date hereof, duly executed by the Borrower. 29 SECTION 5.1.5 Satisfaction with Tax Sharing Agreement. The Agent and the --------------------------------------- Lenders shall have received true copies (as certified by an authorized officer of the Borrower) of, and reviewed and become satisfied with the provisions of, any tax sharing agreement to which the Borrower has become a party since March 31, 2000. SECTION 5.1.6 Opinions of Counsel. The Agent shall have received opinions, ------------------- dated the date hereof and addressed to the Agent and each Lender, from Steven B. Lapin, general counsel to the Borrower, substantially in the form of Exhibit H --------- hereto. SECTION 5.1.7 Closing Fees, Expenses, etc. The Agent shall have received --------------------------- for its own account all fees, and all costs and expenses for which invoices have been provided, due and payable pursuant to Sections 3.3 and 10.3. ------------ ---- SECTION 5.1.8 No Materially Adverse Effect. No events have occurred which, ---------------------------- as reasonably determined by the Agent, individually or in the aggregate, comprise a Materially Adverse Effect since December 31, 2000. SECTION 5.1.9 Compliance with Warranties, No Default, etc. Both before and ------------------------------------------- after the Effective Date, the following statements shall be true and correct: (a) the representations and warranties set forth in Article VI ---------- (excluding, however, those contained in Section 6.7) of this Agreement, ----------- Article III of the Pledge Agreement, Article III of the Security Agreement, and Article I of the Mortgage shall be true and correct in all material respects with the same effect as if then made (unless stated to relate solely to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date); (b) except as disclosed by the Borrower to the Agent and the Lenders pursuant to Section 6.7, ----------- (i) no labor controversy, litigation, arbitration or governmental investigation or proceeding shall be pending or, to the knowledge of the Borrower, threatened against the Borrower or any of its Subsidiaries which might have a Materially Adverse Effect or which purports to affect the legality, validity or enforceability of this Agreement, the Notes, any Collateral Document or any other Loan Document, and (ii) no development shall have occurred in any labor controversy, litigation, arbitration or governmental investigation or proceeding disclosed pursuant to Section 6.7 which might have a Materially ----------- Adverse Effect; and (c) no Default shall have then occurred and be continuing, and neither the Borrower nor any of its Subsidiaries shall be in violation of any law or governmental regulation or court order or decree, the violation of which could have a Materially Adverse Effect. 30 SECTION 5.1.10 Satisfactory Legal Form. All documents executed or submitted ----------------------- pursuant hereto by the Borrower or on behalf of the Borrower or any of its Subsidiaries shall be satisfactory in form and substance to the Agent and its counsel; the Agent and its counsel shall have received all information, approvals, opinions, documents or instruments as the Agent or its counsel may reasonably request. SECTION 5.2 All Borrowings. The obligation of each Lender to fund any Loan -------------- on the occasion of any Borrowing shall be subject to the satisfaction of each of the conditions precedent set forth in this Section 5.2. ----------- SECTION 5.2.1 Compliance with Warranties, No Default, etc. Both before and ------------------------------------------- after giving effect to any Borrowing (but, if any Default of the nature referred to in Section 8.1.5 shall have occurred with respect to any other Indebtedness, ------------- without giving effect to the application, directly or indirectly, of the proceeds thereof) the following statements shall be true and correct (a) the representations and warranties set forth in Article VI ---------- (excluding, however, those contained in Section 6.7) of this Agreement, ----------- Article III of the Pledge Agreement, Article III of the Security Agreement and Article I of the Mortgage shall be true and correct with the same effect as if then made (unless stated to relate solely to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date); (b) except as disclosed by the Borrower to the Agent and the Lenders pursuant to Section 6.7 ----------- (i) no labor controversy, litigation, arbitration or governmental investigation or proceeding shall be pending or, to the knowledge of the Borrower, threatened against the Borrower or any of its Subsidiaries which might have a Materially Adverse Effect or which purports to affect the legality, validity or enforceability of this Agreement, the Notes, any Collateral Document or any other Loan Document; and (ii) no development shall have occurred in any labor controversy, litigation, arbitration or governmental investigation or proceeding disclosed pursuant to Section 6.7 which might have a Materially ----------- Adverse Effect; and (c) no Default shall have then occurred and be continuing, and neither the Borrower nor any of its Subsidiaries shall be in violation of any law or governmental regulation or court order or decree, the violation of which could have a Materially Adverse Effect. SECTION 5.2.2 Borrowing Request. The Agent shall have received a Borrowing ----------------- Request for such Borrowing. Each of the delivery of a Borrowing Request and the acceptance by the Borrower of the proceeds of such Borrowing shall constitute a representation and warranty by the Borrower that on the date of such Borrowing (both immediately before and after 31 giving effect to such Borrowing and the application of the proceeds thereof) the statements made in Section 5.2.1 are true and correct. ------------- SECTION 5.2.3 Satisfactory Legal Form. All documents executed or submitted ----------------------- pursuant hereto by the Borrower or any of its Subsidiaries shall be satisfactory in form and substance to the Agent and its counsel; the Agent and its counsel shall have received all information, approvals, opinions, documents or instruments as the Agent or its counsel may reasonably request. SECTION 5.2.4 Consummation of AMEP Acquisition. The Agent shall have -------------------------------- received satisfactory evidence on or before the date of the second Borrowing Request of the consummation of the AMEP Acquisition in substantially the form provided for in the AMEP Acquisition Agreement. ARTICLE VI REPRESENTATIONS AND WARRANTIES In order to induce the Lenders and the Agent to enter into this Agreement and to make Loans hereunder, the Borrower represents and warrants unto the Agent and each Lender as set forth in this Article VI. ---------- SECTION 6.1 Organization, etc. The Borrower and each of its Subsidiaries is ----------------- a corporation validly organized and existing and in good standing under the laws of the State of its incorporation, is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the nature of its business requires such qualification (except where the failure to be so qualified would not have a Materially Adverse Effect), and has full power and authority and holds all requisite governmental licenses, permits and other approvals to enter into and perform its Obligations under this Agreement, the Notes, the Fourth Amendment to Mortgage, the Second Amendment to Modesto Mortgage, each Collateral Document and each other Loan Document and to own and hold under lease its property and to conduct its business substantially as currently conducted by it. SECTION 6.2 Due Authorization, Non-Contravention, etc. The execution, ----------------------------------------- delivery and performance by the Borrower of this Agreement, the Notes, the Fourth Amendment to Mortgage, the Second Amendment to Modesto Mortgage, each other Collateral Document and each other Loan Document executed or to be executed by it are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not (a) contravene the Borrower's Organic Documents; (b) contravene any contractual restriction, law or governmental regulation or court decree or order binding on or affecting the Borrower; or (c) result in, or require the creation or imposition of, any Lien on any of the Borrower's properties (except pursuant to the Loan Documents). 32 SECTION 6.3 Government Approval, Regulation, etc. No authorization or ------------------------------------- approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or other Person is required for the due execution, delivery or performance by the Borrower of this Agreement, the Notes, the Fourth Amendment to Mortgage, the Second Amendment to Modesto Mortgage, any other Collateral Document or any other Loan Document. The Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. Neither the Borrower nor any of its Subsidiaries is in violation of any provision of the Investment Company Act of 1940, as amended, or the Public Utility Holding Company Act of 1935, as amended, and, without limiting the generality of the foregoing, neither the Borrower nor any of its Subsidiaries has performed, or has omitted to perform, any action which, pursuant to any provision of either such Act, would result in the Borrower being incapable of performing any of its obligations or agreements hereunder or under the Notes, the Fourth Amendment to Mortgage, the Second Amendment to Modesto Mortgage, any other Collateral Document or any other Loan Document executed in connection with or pursuant hereto. SECTION 6.4 Validity, etc. This Agreement and each Original Collateral -------------- Document constitutes, and the Notes, the Fourth Amendment to Mortgage, the Second Amendment to Modesto Mortgage, each other Collateral Document and each other Loan Document executed by the Borrower will, on the due execution and delivery thereof, constitute, the legal, valid and binding obligations of the Borrower enforceable in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency or similar laws applying to creditors' rights generally or general equitable principles. SECTION 6.5 Financial Information. (a) The consolidated and consolidating --------------------- balance sheets of the Borrower and each of its Subsidiaries as of December 31, 2000 for the Fiscal Year then ended and the related consolidated statements of earnings and cash flow and the related consolidating statement of earnings of the Borrower and each of its Subsidiaries, copies of which have been furnished to the Agent and each Lender, have been prepared in accordance with GAAP consistently applied, and present fairly the consolidated or consolidating, as applicable, financial condition of the corporation(s) covered thereby as at the date thereof and the results of their operations for the period then ended. Neither the Borrower nor any of its Subsidiaries has any material liability, contingent liability, liability for taxes, long-term leases or forward or long-term commitments which are not reflected in the foregoing financial statements (including the footnotes thereto). (b) The consolidated and consolidating balance sheets of AMEP and each of its Subsidiaries as of December 31, 2000 for the Fiscal Year then ended and the related consolidated statements of earnings and cash flow and the related consolidating statement of earnings of AMEP and each of its Subsidiaries, copies of which have been furnished to the Agent and each Lender, have been prepared in accordance with GAAP consistently applied, and present fairly the consolidated or consolidating, as applicable, financial condition of the corporation(s) covered thereby as at the date thereof and the results of their operations for the period then ended. Neither AMEP nor any of its Subsidiaries has any material liability, 33 contingent liability, liability for taxes, long-term leases or forward or long-term commitments which are not reflected in the foregoing financial statements (including the footnotes thereto). (c) The consolidated and consolidating balance sheets of Spectrum and each of its Subsidiaries as of June 30, 2000 for the Fiscal Year then ended and January 31, 2001 for the seven months then ended and the related consolidated statements of earnings and cash flow and the related consolidating statement of earnings of Spectrum and each of its Subsidiaries, copies of which have been furnished to the Agent and each Lender, have been prepared in accordance with GAAP consistently applied, and present fairly the consolidated or consolidating, as applicable, financial condition of the corporation(s) covered thereby as at the date thereof and the results of their operations for the period then ended. Neither Spectrum nor any of its Subsidiaries has any material liability, contingent liability, liability for taxes, long-term leases or forward or long-term commitments which are not reflected in the foregoing financial statements (including the footnotes thereto). SECTION 6.6 No Material Adverse Change. Since the respective dates of the -------------------------- financial statements described in Section 6.5, there has been no material ----------- adverse change on a consolidated basis in the financial condition, operations, assets, business, properties or prospects of the Borrower and its Significant Subsidiaries or in the ability of the Borrower to repay the Obligations when due in accordance with the terms thereof. SECTION 6.7 Litigation, Labor Controversies, etc. There is no pending or, ------------------------------------ to the knowledge of the Borrower, threatened litigation, action, proceeding, or labor controversy affecting the Borrower or any of its Significant Subsidiaries, or any of their respective properties, businesses, assets or revenues, which has any reasonable likelihood of having a Materially Adverse Effect or which purports to affect the legality, validity or enforceability of this Agreement, the Notes, any Collateral Document or any other Loan Document. SECTION 6.8 Subsidiaries. The Borrower has no Subsidiaries, except those ------------ Subsidiaries (a) which are identified in Item 6.8 ("Existing Subsidiaries") of the -------- Disclosure Schedule and/or (b) which are permitted to have been acquired after the Effective Date, if any, in accordance with Section 7.2.5 or 7.2.9. ------------- ----- SECTION 6.9 Ownership of Properties. The Borrower and each of its ----------------------- Subsidiaries has good and marketable title to all of the properties and assets, real and personal, tangible and intangible, of any nature whatsoever (including patents, trademarks, trade names, service marks and copyrights) that it owns, and a valid leasehold interest in all of such property which it leases, free and clear of all Liens, charges or claims (including infringement claims with respect to patents, trademarks, copyrights and the like) except as permitted pursuant to Section 7.2.3. ------------- SECTION 6.10 Taxes. Each of the Borrower and its Significant Subsidiaries ----- has filed all tax returns and reports required by law to have been filed by it and has paid all taxes and governmental charges thereby shown to be owing, except any such taxes or charges which are 34 being contested in good faith by appropriate action and for which adequate reserves in accordance with GAAP shall have been set aside on its books. SECTION 6.11 Pension and Welfare Plans. During the twelve-consecutive-month ------------------------- period prior to the initial closing date of the Original Credit Agreement and since such time through and including the date of the occurrence of the Effective Date, no steps have been taken to terminate any Pension Plan, and no contribution failure has occurred with respect to any Pension Plan sufficient to give rise to a Lien under section 302(f) of ERISA. No condition exists or event or transaction has occurred with respect to any Pension Plan which might result in the incurrence by the Borrower or any member of the Controlled Group of any material liability, fine or penalty. Except as disclosed in Item 6.11 ("Post-Retirement Benefits") of the Disclosure Schedule, neither the Borrower nor any member of the Controlled Group has any contingent liability with respect to any post-retirement benefit under a Welfare Plan, other than liability for continuation coverage described in Part 6 of Title I of ERISA. SECTION 6.12 Environmental Warranties. Except as set forth in Item 6.12 ------------------------ --------- ("Environmental Matters") of the Disclosure Schedule: (a) all facilities and property (including underlying groundwater) owned or leased or operated by the Borrower or any of its Subsidiaries have been, and continue to be, owned or leased by the Borrower and its Subsidiaries in material compliance with all Environmental Laws; (b) there have been no past, and there are no pending or, to the best of the Borrower's knowledge, threatened (i) claims, complaints, notices or requests for information received by the Borrower or any of its Subsidiaries with respect to any alleged violation of any Environmental Law, or (ii) complaints, notices or inquiries to the Borrower or any of its Subsidiaries regarding potential liability under any Environmental Law; (c) there have been no Releases of Hazardous Materials at, on or under any property now or previously owned or leased or operated by the Borrower or any of its Subsidiaries that, singly or in the aggregate, have, or may reasonably be expected to have, a Materially Adverse Effect; (d) the Borrower and its Subsidiaries have been issued and are in material compliance with all permits, certificates, approvals, licenses and other authorizations relating to environmental matters and appropriate for their businesses; (e) no property now or previously owned or leased by the Borrower or any of its Subsidiaries is listed or, to the best of the Borrower's knowledge, proposed for listing (with respect to owned property only) on the National Priorities List pursuant to CERCLA, on the CERCLIS or on any similar state list of sites requiring investigation or clean-up; 35 (f) there are no underground storage tanks, active or abandoned, including petroleum storage tanks, on or under any property now or previously owned or leased or operated by the Borrower or any of its Subsidiaries that, singly or in the aggregate, have, or may reasonably be expected to have, a Materially Adverse Effect; (g) neither the Borrower nor any of its Subsidiaries has directly transported or directly arranged for the transportation of any Hazardous Material to any location which is listed or, to the best of the Borrower's knowledge, proposed for listing on the National Priorities List pursuant to CERCLA, on the CERCLIS or on any similar state list or which is the subject of federal, state or local enforcement actions or other investigations which may lead to claims that, singly or in the aggregate, would be material against the Borrower or any of its Significant Subsidiaries for any remedial work, damage to natural resources or personal injury, including claims under CERCLA; (h) there are no polychlorinated biphenyls or friable asbestos present at any property now or previously owned or leased or operated by the Borrower or any of its Subsidiaries that, singly or in the aggregate, have, or may reasonably be expected to have, a Materially Adverse Effect; and (i) no conditions exist at, on or under any property now or previously owned or leased or operated by the Borrower which, with the passage of time, or the giving of notice or both, would give rise to liability which would have, or may reasonably be expected to have, singly or in the aggregate, a Materially Adverse Effect under any Environmental Law. SECTION 6.13 Regulations U and X. The Borrower is not engaged in the ------------------- business of extending credit for the purpose of purchasing or carrying margin stock, and no proceeds of any Loans will be used for a purpose which violates, or would be inconsistent with, F.R.S. Board Regulation U or X. Less than 25% of the assets of the Borrower and the consolidated assets of the Borrower and its Subsidiaries consist of margin stock. Terms for which meanings are provided in F.R.S. Board Regulation U or X or any regulations substituted therefor, as from time to time in effect, are used in this Section with such meanings. SECTION 6.14 Real Property; Mortgage, etc. The Mortgaged Real Property, the ----------------------------- Modesto Property and the AMEP Property constitute all of the real property in which the Borrower or any of its Subsidiaries (including the Acquired Companies and their Subsidiaries) has an ownership interest with a book value in excess of $50,000. SECTION 6.15 The Collateral Documents. The provisions of the Collateral ------------------------ Documents executed by the Borrower or any of its Subsidiaries in favor of Bank of America, as agent for the benefit of the Lenders, are effective to create, in favor of the Lenders, securing the Notes and all other Obligations from time to time outstanding, a legal, valid and enforceable security interest in all right, title and interest of the Borrower and such Subsidiaries in any and all of the collateral described therein, and all appropriate filings and recordings having been made or appropriately provided for, each of such Collateral Documents constitutes a fully perfected security interest in all right, title and interest of the Borrower and such Subsidiaries in such collateral superior in right to any liens, existing or future, which the Borrower or any such Subsidiary or any creditors 36 of or purchasers from, or any other Person, may have against such collateral or interests therein, except to the extent, if any, otherwise provided therein. SECTION 6.16 Accuracy of Information. All factual information heretofore or ----------------------- contemporaneously furnished by or on behalf of the Borrower in writing to the Agent or any Lender for purposes of or in connection with this Agreement or any transaction contemplated hereby (including the Business Plan, true and complete copies of which were furnished to the Agent and each Lender in connection with its execution and delivery hereof) is, and all other such factual information hereafter furnished by or on behalf of the Borrower to the Agent or any Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified and, as to information (other than financial statements but, subject to the proviso below; including the Business Plan) provided prior to the Effective Date, as of the Effective Date, and such information is not, or shall not be, as the case may be, incomplete by omitting to state any material fact necessary to make such information not misleading; provided that projections contained in the Business Plan or other materials - -------- furnished by the Borrower to the Agent or the Lenders were prepared in good faith by the Borrower in a manner consistent with GAAP (as applied in the financial statements referred to in Section 6.5) and represent the Borrower's ----------- reasonable estimates, as of the respective dates thereof, of the Borrower's reasonably expected future performance. The Borrower has furnished the Lenders a true and complete copy of each tax sharing agreement to which it has become a party to since March 31, 2000. SECTION 6.17 Subordinated Debt. Notwithstanding any bankruptcy, insolvency, ----------------- reorganization, moratorium or similar proceeding in respect of the Borrower, at all times, (a) the subordination provisions of any Subordinated Debt will be enforceable by the Lender with respect to the Obligations, (b) all Obligations, including the Obligations to pay principal of and interest on the Loans and fees in connection therewith, constitute "Senior Indebtedness" under any Subordinated Debt, and all such Obligations will be entitled to the benefits of subordination created by any Subordinated Debt, and (c) all payments of principal of or interest on any Subordinated Debt made by the Borrower or from the liquidation of its property will be subject to such subordination provisions. The Borrower acknowledges that the Lenders are entering into this Agreement, and making the Loans, in reliance upon the subordination provisions contained in all Subordinated Debt. The Borrower shall have furnished to the Lenders a true and complete copy of the proposed documents for any proposed Subordinated Debt at least ten Business Days prior to the issuance thereof. SECTION 6.18 Intellectual Property. The Borrower has no patents, trademarks --------------------- or copyrights except those listed on the Annexes to the Security Agreement. 37 ARTICLE VII. COVENANTS SECTION 7.1 Affirmative Covenants. The Borrower agrees with the Agent and --------------------- each Lender that, so long as the Commitments are outstanding and, thereafter, until all Obligations have been paid and performed in full, the Borrower will perform the obligations set forth in this Section 7.1. ----------- SECTION 7.1.1 Financial Information, Reports, Notices, etc. The Borrower --------------------------------------------- will furnish, or will cause to be furnished, to each Lender and the Agent copies of the following financial statements, reports, notices and information: (a) as soon as available and in any event within 60 days after the end of each of the first three Fiscal Quarters of each Fiscal Year of the Borrower, consolidated and consolidating balance sheets of the Borrower and its Subsidiaries as of the end of such Fiscal Quarter, consolidated statements of earnings and cash flow of the Borrower and its Subsidiaries for such Fiscal Quarter and for the period commencing at the end of the previous Fiscal Year and ending with the end of such Fiscal Quarter and a consolidating statement of earnings of the Borrower and its Subsidiaries for such Fiscal Quarter and for the period commencing at the end of the previous Fiscal Year and ending with the end of such Fiscal Quarter, certified by the chief financial Authorized Officer of the Borrower; (b) as soon as available and in any event within 120 days after the end of each Fiscal Year of the Borrower, an appropriately updated business plan substantially in the form of, and containing the same scope of information as, the Business Plan and a copy of the annual audit report for such Fiscal Year for the Borrower and its Subsidiaries including therein consolidated and consolidating balance sheets of the Borrower and its Subsidiaries as of the end of such Fiscal Year, consolidated statements of earnings and cash flow of the Borrower and its Subsidiaries for such Fiscal Year and consolidating statements of earnings of the Borrower and its Subsidiaries for such Fiscal Year, in each case certified (without any Impermissible Qualification) in a manner acceptable to the Agent and the Required Lenders by KPMG LLP or other independent public accountants of recognized standing acceptable to the Agent and the Required Lenders, together with (i) a certificate from such accountants containing a computation of, and showing compliance with, each of the financial ratios and restrictions contained in Section 7.2.4 and to the effect that, in making the examination necessary for the signing of such annual report by such accountants, they have not become aware of any Default that has occurred and is continuing, or, if they have become aware of such Default, describing such Default and the steps, if any, being taken to cure it, and (ii) unaudited consolidated and consolidating financial statements for the Borrower and its Subsidiaries prepared on the basis of, and with figures used in the preparation of, such audited financial statements and comprised of balance sheets and statements of earnings and cash flow; (c) as soon as available and in any event within 60 days after the end of each Fiscal Quarter, a certificate, executed by the chief financial Authorized Officer of the Borrower, showing (in reasonable detail and with appropriate calculations and 38 computations in all respects satisfactory to the Agent) compliance with the financial covenants set forth in Section 7.2.4 and with the provisions of ------------- Sections 7.2.6, 7.2.7 and 7.2.10 and also showing the amount of any -------------- ----- ------ inter-company advances by the Borrower to any of its Subsidiaries (broken out by Subsidiary); (d) as soon as possible and in any event within three Business Days after the occurrence of each Default, a statement of the chief financial Authorized Officer of the Borrower setting forth details of such Default and within four Business Days thereafter, the action which the Borrower has taken and proposes to take with respect thereto; (e) as soon as possible and in any event within five Business Days after (x) the occurrence of any adverse development with respect to any litigation, action, proceeding or labor controversy described in Section ------- 6.7, or (y) the commencement of any labor controversy, litigation, action, --- proceeding of the type described in Section 6.7, notice thereof and copies ----------- of all documentation relating thereto; (f) promptly after the sending or filing thereof, copies of any reports and registration statements which the Borrower or any of its Subsidiaries may file with the Securities and Exchange Commission or any national securities exchange or pursuant to the Investment Company Act of 1940, as amended, or the Public Utility Holding Company Act of 1935, as amended, and promptly after the receipt of any communication from any governmental authority or agency administering either of such Acts, copies thereof, as well as copies of any reports the Borrower furnishes to its securityholders which the Borrower reasonably determines to be material to the Lender or the Obligations; (g) immediately upon and in any event within five Business Days of becoming aware of the institution of any steps by the Borrower or any other Person to terminate any Pension Plan, or the failure to make a required contribution to any Pension Plan if such failure is sufficient to give rise to a Lien under section 302(f) of ERISA, or the taking of any action with respect to a Pension Plan which could result in the requirement that the Borrower furnish a bond or other security to the PBGC or such Pension Plan, or the occurrence of any event with respect to any Pension Plan which could result in the incurrence by the Borrower of any material liability, fine or penalty, or any material increase in the contingent liability of the Borrower with respect to any post-retirement Welfare Plan benefit, notice thereof and copies of all documentation relating thereto; and (h) such other information respecting the condition or operations, financial or otherwise, of the Borrower or any of its Subsidiaries as any Lender through the Agent may from time to time reasonably request. SECTION 7.1.2 Compliance with Laws, etc. Other than with respect to the -------------------------- Mortgaged Real Property (as to which the provisions of the Mortgage shall govern and control), the Borrower will, and will cause each of its Subsidiaries to, comply in all material respects with all applicable laws, rules, regulations and orders, such compliance to include (without limitation): 39 (a) the maintenance and preservation of its corporate existence and qualification as a foreign corporation (except where the failure to be so qualified would not have a material adverse effect on the consolidated financial condition, operations, assets, business, properties or prospects of the Borrower and its Significant Subsidiaries); and (b) the payment, before the same become delinquent, of all taxes, assessments and governmental charges imposed upon it or upon its property except to the extent being contested in good faith by appropriate action and for which adequate reserves in accordance with GAAP shall have been set aside on its books. SECTION 7.1.3 Maintenance of Properties. Other than with respect to the ------------------------- Mortgaged Real Property (as to which the provisions of the Mortgage shall govern and control), the Borrower will, and will cause each of its Significant Subsidiaries to, maintain, preserve, protect and keep its properties in good repair, working order and condition, and make necessary and proper repairs, renewals and replacements so that its business carried on in connection therewith may be properly conducted in all material respects at all times unless the Borrower determines in good faith that the continued maintenance of any of its properties is no longer economically desirable. SECTION 7.1.4 Insurance. Other than with respect to the Mortgaged Real --------- Property (as to which the provisions of the Mortgage shall govern and control), the Borrower will, and will cause each of its Significant Subsidiaries to, maintain or cause to be maintained with responsible insurance companies insurance with respect to its properties and business (including business interruption insurance) against such casualties and contingencies and of such types and in such amounts as is customary in the case of similar businesses and will, upon request of the Agent, furnish to each Lender at reasonable intervals a certificate of an Authorized Officer of the Borrower setting forth the nature and extent of all insurance maintained by the Borrower and its Subsidiaries in accordance with this Section. SECTION 7.1.5 Books and Records. The Borrower will, and will cause each of ----------------- its Significant Subsidiaries to, keep books and records which accurately reflect all of its material business affairs and transactions and permit the Agent and each Lender or any of their respective representatives, at reasonable times and intervals, to visit all of its offices, to discuss its financial matters with its officers and independent public accountant (and the Borrower hereby authorizes such independent public accountant to discuss the Borrower's financial matters with each Lender or its representatives whether or not any representative of the Borrower is present) and to examine (and, at the expense of the Borrower, photocopy extracts from) any of its books or other corporate records. The Borrower shall pay any fees of such independent public accountant incurred in connection with the Agent's or any Lender's exercise of its rights pursuant to this Section. SECTION 7.1.6 Environmental Covenant. The Borrower will, and will cause ---------------------- each of its Subsidiaries to, (a) use and operate all of its facilities and properties in material compliance with all Environmental Laws, keep all necessary permits, approvals, certificates, licenses 40 and other authorizations relating to environmental matters in effect and remain in material compliance therewith, and handle all Hazardous Materials in material compliance with all applicable Environmental Laws; (b) immediately and in any event within five Business Days notify the Agent and provide copies upon receipt of all written claims, complaints, notices or inquiries relating to the condition of its facilities and properties or compliance with Environmental Laws, and shall promptly take all action to seek to cure and have dismissed with prejudice to the satisfaction of the relevant governmental authorities and agencies any actions and proceedings relating to compliance with Environmental Laws; and (c) provide such information and certifications which the Agent may reasonably request from time to time to evidence compliance with this Section 7.1.6. SECTION 7.1.7 Fourth Amendment to Mortgage. No later than 90 days after the ---------------------------- date hereof, the Borrower shall deliver to the Agent executed counterparts of the Fourth Amendment to Mortgage duly executed by the Borrower, together with (a) evidence of the completion (or satisfactory arrangements for the completion) of all recordings and filings (including fixture filings) of the Fourth Amendment to Mortgage as may be necessary or desirable, in the reasonable opinion of the Agent and its counsel, to create (and continue) a valid, perfected first priority mortgage or deed of trust Lien, of record, against the properties purported to be covered thereby; (b) a mortgagee's title insurance policy endorsement in favor of the Agent and the Lenders in amounts and in form and substance and issued by issuers, in each case reasonably satisfactory to the Agent, with respect to the Mortgaged Real Property, insuring that title to such Mortgaged Real Property is marketable and that the interest created by the Mortgage constitutes a valid, perfected first mortgage Lien, of record, on the title to such property free and clear of all defects and encumbrances other than as approved by the Agent, and such policy shall also include such endorsements as the Agent shall request and shall be accompanied by evidence of the payment in full of all premiums thereon; (c) an opinion of Wisconsin counsel, dated a date satisfactory to the Agent, addressed to the Agent and each Lender, in form of satisfactory to the Agent and each Lender and (d) evidence reasonably satisfactory to the Agent that the Borrower has in effect the insurance with respect to the Mortgaged Real Property required to be carried by the Borrower pursuant to the terms of the Mortgage, such evidence to include, without limitation (i) a loss payable endorsement, in form satisfactory to the Agent, naming the Agent, as agent for the Lenders, as a loss payee with respect to all casualty insurance policies and (ii) an endorsement naming the Agent, as agent for the Lenders, as an additional insured with respect to all liability insurance policies. 41 SECTION 7.1.8 Modesto Property. No later than 90 days after the date ---------------- hereof, the Borrower shall deliver to the Agent executed counterparts of the Second Amendment to Modesto Mortgage, duly executed by the Borrower, together with (a) evidence of the completion (or satisfactory arrangements for the completion) of all recordings and filings (including fixture filings) of the Second Amendment to Modesto Mortgage as may be necessary or desirable, in the reasonable opinion of the Agent and its counsel, to create (and continue) a valid, perfected first priority mortgage or deed of trust Lien, of record, against the properties purported to be covered thereby; (b) a mortgagee's title insurance policy endorsement in favor of the Agent and the Lenders in amounts and in form and substance and issued by issuers, in each case reasonably satisfactory to the Agent, with respect to the Modesto Property, insuring that title to such Modesto Property is marketable and that the interest created by the Modesto Mortgage constitutes a valid, perfected first mortgage Lien, of record, on the title to such property free and clear of all defects and encumbrances other than as approved by the Agent, and such policy shall also include such endorsements as the Agent shall request and shall be accompanied by evidence of the payment in full of all premiums thereon; (c) an opinion of California counsel, dated a date satisfactory to the Agent, addressed to the Agent and each Lender, in form of satisfactory to the Agent and each Lender and (d) evidence reasonably satisfactory to the Agent that the Borrower has in effect the insurance with respect to the Modesto Property required to be carried by the Borrower pursuant to the terms of the Modesto Mortgage, such evidence to include, without limitation (i) a loss payable endorsement, in form satisfactory to the Agent, naming the Agent, as agent for the Lenders, as a loss payee with respect to all casualty insurance policies and (ii) an endorsement naming the Agent, as agent for the Lenders, as an additional insured with respect to all liability insurance policies. SECTION 7.1.9 AMEP Property. No later than 90 days after the date hereof, ------------- the Borrower shall deliver to the Agent executed counterparts of the AMEP Mortgage, duly executed by the Borrower, together with (a) evidence of the completion (or satisfactory arrangements for the completion) of all recordings and filings (including fixture filings) of the AMEP Mortgage as may be necessary or desirable, in the reasonable opinion of the Agent and its counsel, to create (and continue) a valid, perfected first priority mortgage or deed of trust Lien, of record, against the properties purported to be covered thereby; (b) a mortgagee's title insurance policy endorsement in favor of the Agent and the Lenders in amounts and in form and substance and issued by issuers, in each case reasonably satisfactory to the Agent, with respect to the AMEP Property, insuring that title to such AMEP Property is marketable and that the interest created by the AMEP Mortgage constitutes a valid, perfected first mortgage Lien, of record, on the title to such 42 property free and clear of all defects and encumbrances other than as approved by the Agent, and such policy shall also include such endorsements as the Agent shall request and shall be accompanied by evidence of the payment in full of all premiums thereon; (c) an opinion of local counsel, dated a date satisfactory to the Agent, addressed to the Agent and each Lender, in form of satisfactory to the Agent and each Lender and (d) evidence reasonably satisfactory to the Agent that the Borrower has in effect the insurance with respect to the AMEP Property required to be carried by the Borrower pursuant to the terms of the AMEP Mortgage, such evidence to include, without limitation (i) a loss payable endorsement, in form satisfactory to the Agent, naming the Agent, as agent for the Lenders, as a loss payee with respect to all casualty insurance policies and (ii) an endorsement naming the Agent, as agent for the Lenders, as an additional insured with respect to all liability insurance policies. SECTION 7.1.10 Subsidiary Pledge Agreement and Subsidiary Security --------------------------------------------------- Agreement. No later than 60 days after the date of the consummation of the AMEP - --------- Acquisition, the Borrower shall deliver the following documents to the Agent: (a) executed counterparts of (i) the Subsidiary Pledge Agreement executed by the Borrower, together with the certificates evidencing all of the issued and outstanding shares of capital stock and promissory notes with respect to the acquired subsidiaries of AMEP pledged pursuant to the Subsidiary Pledge Agreement, which certificates evidencing shares of capital stock shall in each case be accompanied by undated stock powers duly executed in blank and which promissory notes shall be duly endorsed in blank and (ii) the Subsidiary Security Agreement executed by the Borrower with respect to the acquired subsidiaries of AMEP; and (b) an opinion addressed to the Agent and each Lender, from Steven B. Lapin, general counsel to the Borrower, in form and substance reasonably satisfactory to the Agent and counsel to the Agent, with respect to certain matters relating to the execution and delivery of the Subsidiary Pledge Agreement and the Subsidiary Security Agreement. SECTION 7.1.11 Further Assurances. Promptly upon the written request of the ------------------ Agent, or the Required Lenders, the Borrower shall, and shall cause each Subsidiary to, execute, acknowledge, deliver, record, re-record, file, re-file, register and re-register, any and all such further acts, deeds, conveyances, security agreements, mortgages, assignments, estoppel certificates, financing statements and continuations thereof, termination statements, notices of assignment, transfers, certificates, assurances and other instruments the Agent or the Required Lenders as the case may be, may reasonably request from time to time in order (a) to ensure that (i) the Obligations are secured by substantially all assets of the Borrower and (ii) the Obligations are secured by substantially all of the assets of each Subsidiary (including, promptly upon the acquisition or creation thereof, any Subsidiary created or acquired after the date hereof), (b) to perfect and maintain the validity, effectiveness and priority of any of the Loan Documents and the Liens intended to be created thereby, and (c) to better assure, convey, grant, assign, transfer, preserve, protect and confirm to the Agent and the Lenders the rights granted or now or hereafter intended to be granted to the Agent and the Lenders under any Loan Documents or under any 43 other document executed in connection therewith. Contemporaneously with the execution and delivery of any document referred to above, the Borrower shall, and shall cause each Subsidiary to, deliver all resolutions, opinions and corporate documents as the Agent or the Required Lenders may reasonably request to confirm the enforceability of such document and the perfection of the security interest created thereby, if applicable. SECTION 7.2 Negative Covenants. The Borrower agrees with the Agent and each ------------------ Lender that, so long as the Commitments shall be outstanding and, thereafter, until all Obligations have been paid and performed in full, the Borrower will perform the obligations set forth in this Section 7.2. ----------- SECTION 7.2.1 Business Activities. The Borrower will not, and will not ------------------- permit any of its Subsidiaries to, engage in any business activity, other than the business of selling, primarily through mail order and electronic means, teaching aids and equipment to educators and specialized equipment and supplies to farmers, ranchers, laboratories, hospitals and emergency services, and in the financial services business and such activities as may be incidental or directly related thereto. SECTION 7.2.2 Indebtedness. The Borrower will not, and will not permit any ------------ of its Subsidiaries to, create, incur, assume or suffer to exist or otherwise become or be liable in respect of any Indebtedness, other than, without duplication, the following: (a) Indebtedness in respect of the Loans and other Obligations; (b) unsecured Indebtedness incurred in the ordinary course of business (including open accounts extended by suppliers on normal trade terms in connection with purchases of goods and services, but excluding Indebtedness incurred through the borrowing of money and Contingent Liabilities); (c) Indebtedness of the Borrower and its Subsidiaries in respect of Capitalized Lease Liabilities to the extent permitted in Section 7.2.7; ------------- (d) Indebtedness under the Credit Agreement (364 Days); (e) Indebtedness of the Borrower comprising reimbursement obligations in respect of letters of credit issued to support imported merchandise purchased from time to time by the Borrower, provided that the aggregate -------- amount of all such letters of credit and, in turn, of all such reimbursement obligations, shall not exceed $500,000; and (f) Indebtedness of the Borrower incurred in connection with the Guaranty, dated as of April 16, 2001 in favor of J-Star Industries, Inc. pursuant to which the Borrower has guaranteed the obligations of NHI, LLC under the Environmental Remediation and Indemnification Agreement, dated as of April 16, 2001, by and between NHI, LLC and J-Star Industries, Inc. and the Environmental Escrow Agreement, dated as of April 16, 2001, by and between NHI, LLC and J-Star Industries, Inc. 44 SECTION 7.2.3 Liens. The Borrower will not, and will not permit any of its ----- Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any of its property, revenues or assets, whether now owned or hereafter acquired, except: (a) Liens securing payment of the Obligations and the "Obligations" under the Credit Agreement (364 Days), granted pursuant to any Loan Document; (b) Other than with respect to the Mortgaged Real Property and the Modesto Property (as to which the provisions of the Mortgage and the Modesto Mortgage shall govern and control), liens for taxes, assessments or other governmental charges or levies not at the time delinquent or thereafter payable without penalty or being contested in good faith by appropriate action and for which adequate reserves in accordance with GAAP shall have been set aside on its books; (c) Liens of carriers, warehousemen, mechanics, materialmen and landlords incurred in the ordinary course of business for sums not overdue or being contested in good faith by appropriate action and for which adequate reserves in accordance with GAAP shall have been set aside on its books; (d) Liens incurred in the ordinary course of business in connection with worker's compensation, unemployment insurance or other forms of governmental insurance or benefits, or to secure performance of tenders, statutory obligations, leases and contracts (other than for borrowed money) entered into in the ordinary course of business or to secure obligations on surety or appeal bonds; (e) judgment Liens in existence less than 15 days after the entry thereof or with respect to which execution has been stayed or the payment of which is covered in full (subject to a customary deductible) by insurance maintained with responsible insurance companies; (f) Liens to secure the reimbursement obligations permitted under Section 7.2.2(e) on the merchandise financed with the letters of credit ---------------- described therein; and (g) Permitted Encumbrances (as defined in the Mortgage) with respect to the Mortgaged Real Property and Modesto Property. SECTION 7.2.4 Financial Condition. The Borrower hereby covenants and agrees ------------------- as set forth below: (a) Current Ratio. The Borrower will not permit its Consolidated ------------- Current Ratio, as of the end of any month during any Fiscal Year, to be less than 2.0 to 1. (b) Consolidated Net Worth. The Borrower will not permit its ---------------------- Consolidated Net Worth, at any time during any Fiscal Year, to be less than an amount equal to the sum of (i) $8,000,000 plus (ii) an amount equal to ---- 50% of Consolidated Net Income for the period from the date hereof to the date of determination thereof (if positive). 45 (c) Consolidated Current Assets Levels. The Borrower will not permit ---------------------------------- its Consolidated Current Assets Level, as of the last day of any Fiscal Quarter of any Fiscal Year, to be less than the amounts set forth below: Fiscal Quarter Amount -------------- ------ March 31 $27,000,000 June 30 $31,000,000 September 30 $34,000,000 December 31 $25,000,000 (d) Consolidated Debt Service Coverage Ratio. The Borrower will not ---------------------------------------- permit its Consolidated Debt Service Coverage Ratio to be less than (x) 1.25 to 1 from the Effective Date through September 29, 2001, (y) 1.50 to 1 from September 30, 2001 through December 30, 2001 and (z) 1.75 to 1 thereafter. SECTION 7.2.5 Investments. The Borrower will not, and will not permit any ----------- of its Subsidiaries to, make, incur, assume or suffer to exist any Investment in any other Person, except: (a) Cash Equivalent Investments; (b) without duplication, Investments permitted as Indebtedness pursuant to Section 7.2.2; ------------- (c) without duplication, Investments permitted as Capital Expenditures pursuant to Section 7.2.7; and ------------- (d) (i) Investments made prior to the Effective Date in its Subsidiaries, (ii) from and after the Effective Date and in the ordinary course of business, Investments by the Borrower in its Subsidiaries in an aggregate amount not to exceed $3,000,000 at any one time outstanding, or by any such Subsidiary in any of its Subsidiaries, by way of contributions to capital or loans or advances and (iii) from and after the Effective Date, Investments by the Borrower in Geneve in an aggregate amount not to exceed $3,000,000 at any one time outstanding (provided, that all such -------- Investments shall be by way of loans to Geneve made by the Borrower and evidenced by one or more promissory notes (each such promissory note to be in form and substance reasonably satisfactory to the Agent) duly executed and delivered in pledge to the Agent; (e) Investments in the Acquired Companies and each of their respective Subsidiaries; provided, however, that - -------- ------- (f) any Investment which when made complies with the requirements of the definition of the term "Cash Equivalent Investment" may continue to be -------------------------- held 46 notwithstanding that such Investment if made thereafter would not comply with such requirements; and (g) no Investment otherwise permitted by clause (b), (c) or (d) shall ---------- --- --- be permitted to be made if, immediately before or after giving effect thereto, any Default shall have occurred and be continuing. SECTION 7.2.6 Restricted Payments, etc. On and at all times after the ------------------------- Effective Date: (a) the Borrower will not declare, pay or make any dividend or distribution (in cash, property or obligations) on any shares of any class of capital stock (now or hereafter outstanding) of the Borrower or on any warrants, options or other rights with respect to any shares of any class of capital stock (now or hereafter outstanding) of the Borrower (other than dividends or distributions payable in its common stock or warrants to purchase its common stock or splitups or reclassifications of its stock into additional or other shares of its common stock), or apply, or permit any of its Subsidiaries to apply, any of its funds, property or assets to the purchase, redemption, sinking fund or other retirement of, or agree or permit any of its Subsidiaries to purchase or redeem, any shares of any class of capital stock (now or hereafter outstanding) of, the Borrower, or warrants, options or other rights with respect to any shares of any class of capital stock (now or hereafter outstanding) of the Borrower; (b) the Borrower will not prepay any other Indebtedness or prepay or repay any Subordinated Debt, except as expressly permitted under clause (d) ---------- of Section 7.2.2; and ------------- (c) the Borrower will not, and will not permit any Subsidiary to, make any deposit for any of the foregoing purposes; provided, however, that, (i) the Borrower may pay a dividend of up to $1,800,000 - -------- ------- to Holdings from the date hereof to December 31, 2001 and (ii) each year thereafter the Borrower may pay a dividend up to an amount equal to 50% of the Excess Cash Flow for the preceding Fiscal Year (so long as the Borrower has first made the mandatory prepayment due pursuant to Section 3.1.2 (d)). ------------------ SECTION 7.2.7 Capital Expenditures, etc. The Borrower will not, and will -------------------------- not permit any of its Subsidiaries to, make or commit to make Capital Expenditures in any Fiscal Year in excess of $2,700,000 in the aggregate. SECTION 7.2.8 Take or Pay Contracts. The Borrower will not, and will not --------------------- permit any of its Subsidiaries to, enter into or be a party to any arrangement for the purchase of materials, supplies, other property or services if such arrangement by its express terms requires that payment be made by the Borrower or such Subsidiary regardless of whether such materials, supplies, other property or services are delivered or furnished to it, unless the aggregate amount payable under all such arrangements shall not exceed $100,000 in any calendar year. 47 SECTION 7.2.9 Consolidation, Merger, etc. The Borrower will not, and will --------------------------- not permit any of its Subsidiaries to, liquidate or dissolve, consolidate with, or merge into or with, any other corporation, or purchase or otherwise acquire all or substantially all of the assets of any Person (or of any division thereof) except (a) any such Subsidiary may liquidate or dissolve voluntarily into, and may merge with and into, the Borrower or any wholly-owned Subsidiary, and the assets or stock of any Subsidiary may be purchased or otherwise acquired by the Borrower or any wholly-owned Subsidiary; and (b) so long as no Default has occurred and is continuing or would occur after giving effect thereto, the Borrower or any of its Subsidiaries may purchase all or substantially all of the assets of any Person, or acquire such Person by merger, if permitted (without duplication) by Section 7.2.7 to be made as a Capital Expenditure (provided that any ------------- -------- amounts so expended shall count as Capital Expenditures for purposes of Section 7.2.7). ------------- SECTION 7.2.10 Asset Dispositions, etc. The Borrower will not, and will not ------------------------ permit any of its Subsidiaries to, sell, transfer, lease, contribute or otherwise convey, or grant options, warrants or other rights with respect to, all or any part of its assets (including accounts receivable and capital stock of Subsidiaries) to any Person, other than the sale of inventory in the ordinary course of business, unless (a) permitted by Section 7.2.6 or 7.2.9 or (b) in ------------- ----- addition to the exceptions provided in the foregoing clause (a), the net book ---------- value of such assets, together with the net book value of all other assets sold, transferred, leased, contributed or conveyed by the Borrower or any of its Subsidiaries pursuant to this clause (b) since the Effective Date, does not ---------- exceed $250,000. SECTION 7.2.11 Modification of Tax Sharing Agreement and Subordinated Debt. ----------------------------------------------------------- The Borrower will not consent to any amendment, supplement or other modification of any of the terms or provisions contained in, or applicable to, the tax sharing agreement delivered to the Lenders pursuant to this Agreement or, after the issuance thereof, the terms or provisions of any Subordinated Debt. SECTION 7.2.12 Transactions with Affiliates. The Borrower will not, and ---------------------------- will not permit any Significant Subsidiary to, enter into, or cause, suffer or permit to exist: (a) any arrangement or contract with any of its other Affiliates of a nature customarily entered into by Persons which are Affiliates of each other for tax or financial reporting purposes (including, without limitation, management or similar contracts or arrangements relating to the allocation of revenues, taxes and expenses or otherwise) unless such arrangement or contract is fair and equitable to the Borrower or such Significant Subsidiary; or (b) any other transaction, arrangement or contract with any of its other Affiliates which would not be entered into by a prudent Person in the position of the Borrower or such Significant Subsidiary with, or which is on terms which are less favorable than are obtainable from, any Person which is not one of its Affiliates. 48 SECTION 7.2.13 Inconsistent Agreements. The Borrower will not enter into ----------------------- any agreement containing any provision which would be violated or breached by any borrowing by the Borrower made hereunder or by the performance by the Borrower of its obligations hereunder or under any instrument executed pursuant hereto. SECTION 7.2.14 Negative Pledges, Restrictive Agreements, etc. The Borrower ---------------------------------------------- will not, and will not permit any of its Subsidiaries to, enter into any agreement (excluding this Agreement and any other Loan Document) prohibiting (a) the creation or assumption of any Lien upon its properties, revenues or assets, whether now owned or hereafter acquired, or the ability of the Borrower to amend or otherwise modify this Agreement or any other Loan Document; or (b) the ability of any Subsidiary to make any payments, directly or indirectly, to the Borrower by way of dividends, advances, repayments of loans or advances, reimbursements of management and other intercompany charges, expenses and accruals or other returns on investments, or any other agreement or arrangement which restricts the ability of any such Subsidiary to make any payment, directly or indirectly, to the Borrower. SECTION 7.2.15 Management Fees. The Borrower will not, and will not permit --------------- any of its Subsidiaries to, pay management or similar fees to any Affiliate (other than payments by any of the Borrower's Subsidiaries to the Borrower) without the written approval of the Required Lenders which, when aggregated with all other management fees paid by the Borrower and its Subsidiaries in any Fiscal Year, would exceed the amounts set forth below opposite such Fiscal Year: Fiscal Year Amount ----------- ------ 2001 $1,611,624 2002 $1,708,321 2003 $1,810,821 2004 $1,919,470 2005 $2,034,638 2006 $2,156,716 provided that, in any event and at all times, no management fees may be paid - -------- when any Default has occurred and is continuing or would occur after giving effect thereto. SECTION 7.2.16 Tax Sharing Payments. The Borrower will not, and will not -------------------- permit any of its Subsidiaries to, make any tax sharing payments to Holdings which, when aggregated with all other tax sharing payments made by the Borrower and its Subsidiaries in any Fiscal Quarter, would exceed the estimated quarterly tax sharing payments required to be made pursuant to the tax sharing agreement heretofore delivered to the Lenders pursuant to this Agreement; provided that, -------- in any event and at all times, no tax sharing payment may be paid when any Default has occurred and is continuing or would occur after giving effect thereto. 49 SECTION 7.2.17 Use of Proceeds. The Borrower will not use the proceeds of --------------- the Loans for any purpose that is not set forth in the recitals, provided, -------- -------- however, that the Borrower may use the proceeds of the Loans for working capital - ------- and the payment of a dividend to Holdings in accordance with Section 7.2.6. ------------- ARTICLE VIII. EVENTS OF DEFAULT SECTION 8.1 Listing of Events of Default. Each of the following events or ---------------------------- occurrences described in this Section 8.1 shall constitute an "Event of ----------- -------- Default". - ------- SECTION 8.1.1 Non-Payment of Obligations. The Borrower shall default in the -------------------------- payment or prepayment when due of any principal of any Loan, or the Borrower shall default (and such default shall continue unremedied for a period of five days) in the payment when due of any interest on any Loan or any other Obligation. SECTION 8.1.2 Breach of Warranty. Any representation or warranty of the ------------------ Borrower or any of its Affiliates made or deemed to be made hereunder or in any other Loan Document or in any other writing or certificate furnished by or on behalf of the Borrower or any of its Affiliates to the Agent or any Lender for the purposes of or in connection with this Agreement or any such other Loan Document (including any certificates delivered pursuant to Article V) is or --------- shall be incorrect when made in any material respect. SECTION 8.1.3 Non-Performance of Certain Covenants and Obligations. The ---------------------------------------------------- Borrower shall default in the due performance and observance of any of its obligations under Section 7.2.1 through 7.2.16. ------------- ------ SECTION 8.1.4 Non-Performance of Other Covenants and Obligations. The -------------------------------------------------- Borrower shall default in the due performance and observance of any other agreement contained herein or in any other Loan Document (other than the Mortgage), and such default shall continue unremedied for a period of 30 days after notice thereof shall have been given to the Borrower by the Agent or an Event of Default shall occur under (and as defined in) the Mortgage. SECTION 8.1.5 Default on Other Indebtedness. A default shall occur in the ----------------------------- payment when due (subject to any applicable grace period), whether by acceleration or otherwise, of any Indebtedness (other than the Loans) equal to or in excess of $1,000,000 of the Borrower or any of the Borrower's Significant Subsidiaries, or a default shall occur in the performance or observance of any obligation or condition with respect to such Indebtedness if the effect of such default is to accelerate the maturity of any such Indebtedness or such default shall continue unremedied for any applicable period of time sufficient to permit the holder or holders of such Indebtedness, or any trustee or agent for such holders, to cause such Indebtedness to become due and payable prior to its expressed maturity. SECTION 8.1.6 Judgments. Any judgment or order for the payment of money in --------- excess of $250,000 shall be rendered against the Borrower or any of its Significant Subsidiaries 50 and there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect or, during such 30 day period, enforcement proceedings shall have been commenced by any creditor and not stayed or withdrawn. SECTION 8.1.7 Pension Plans. Any of the following events shall occur with ------------- respect to any Pension Plan (a) the institution of any steps by the Borrower, any member of its Controlled Group or any other Person to terminate a Pension Plan if, as a result of such termination, the Borrower or any such member could be required to make a contribution to such Pension Plan, or could reasonably expect to incur a liability or obligation to such Pension Plan, in excess of $250,000; or (b) a contribution failure occurs with respect to any Pension Plan sufficient to give rise to a Lien under section 302(f) of ERISA. SECTION 8.1.8 Control of the Borrower. Any Change in Control shall occur. ----------------------- SECTION 8.1.9 Bankruptcy, Insolvency, etc. The Borrower or any of its ---------------------------- Significant Subsidiaries shall (a) become insolvent or generally fail to pay, or admit in writing its inability or unwillingness to pay, debts as they become due; (b) apply for, consent to, or acquiesce in, the appointment of a trustee, receiver, sequestrator or other custodian for the Borrower or any of its Significant Subsidiaries or any property of any thereof, or make a general assignment for the benefit of creditors; (c) in the absence of such application, consent or acquiescence, permit or suffer to exist the appointment of a trustee, receiver, sequestrator or other custodian for the Borrower or any of its Significant Subsidiaries or for a substantial part of the property of any thereof, and such trustee, receiver, sequestrator or other custodian shall not be discharged within 60 days, provided that the Borrower and each Significant Subsidiary hereby expressly authorizes the Agent and each Lender to appear in any court conducting any relevant proceeding during such 60-day period to preserve, protect and defend their rights under the Loan Documents; (d) permit or suffer to exist the commencement of any bankruptcy, reorganization, debt arrangement or other case or proceeding under any bankruptcy or insolvency law, or any dissolution, winding up or liquidation proceeding, in respect of the Borrower or any of its Significant Subsidiaries, and, if any such case or proceeding is not commenced by the Borrower or such Significant Subsidiary, such case or proceeding shall be consented to or acquiesced in by the Borrower or such Significant Subsidiary or shall result in the entry of an order for relief or shall remain for 60 days undismissed, provided that the Borrower and each Significant Subsidiary hereby expressly authorizes the Agent and each Lender to appear in any court conducting any such case or proceeding 51 during such 60-day period to preserve, protect and defend their rights under the Loan Documents; or (e) take any action authorizing, or in furtherance of, any of the foregoing. SECTION 8.1.10 Impairment of Security, etc. Any Collateral Document or any --------------------------- other Loan Document, or any Lien granted thereunder, shall (except in accordance with its terms), in whole or in part, terminate, cease to be effective or cease to be the legally valid, binding and enforceable obligation of any Obligor party thereto; the Borrower, any other Obligor or any other party shall, directly or indirectly, contest in any manner such effectiveness, validity, binding nature or enforceability; or any Lien securing any Obligation shall, in whole or in part, cease to be a perfected first priority Lien. SECTION 8.2 Action if Bankruptcy. If any Event of Default described in -------------------- clauses (a) through (d) of Section 8.1.9 shall occur, the outstanding principal - ----------- --- ------------- amount of all outstanding Loans and all other Obligations shall automatically be and become immediately due and payable, and the Commitments shall automatically be terminated, without notice or demand. SECTION 8.3 Action if Other Event of Default. If any Event of Default -------------------------------- (other than any Event of Default described in clauses (a) through (d) of Section ----------- --- ------- 8.1.9) shall occur for any reason, whether voluntary or involuntary, and be - ------ continuing, the Agent, upon the direction of the Required Lenders, shall by notice to the Borrower declare the Commitments to be terminated and all or any portion of the outstanding principal amount of the Loans and other Obligations to be due and payable, whereupon the full unpaid amount of such Loans and other Obligations which shall be so declared due and payable shall be and become immediately due and payable, without further notice, demand or presentment. SECTION 8.4 Cumulative Remedies. The remedies provided herein are ------------------- cumulative and not exclusive of any remedies provided by law. ARTICLE IX. THE AGENT SECTION 9.1 Actions. Each Lender hereby appoints Bank of America as its ------- Agent under and for purposes of this Agreement, the Notes, each Collateral Document and each other Loan Document. Each Lender authorizes the Agent to act on behalf of such Lender under this Agreement, the Notes, each Collateral Document and each other Loan Document and, in the absence of other written instructions from the Required Lenders received from time to time by the Agent (with respect to which the Agent agrees that it will comply, except as otherwise provided in this Section or as otherwise advised by counsel), to exercise such powers hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof, together with such powers as may be reasonably incidental thereto. Each Lender hereby indemnifies (which indemnity shall survive any termination of this Agreement) the Agent, pro rata according --- ---- to such Lender's Percentage, from and against any and all liabilities, obligations, losses, damages, claims, costs or expenses of any kind or nature whatsoever which may at any 52 time be imposed on, incurred by, or asserted against, the Agent in any way relating to or arising out of this Agreement, the Notes, any Collateral Document and any other Loan Document, including reasonable attorneys' fees, and as to which the Agent is not reimbursed by the Borrower; provided, however, that no -------- ------- Lender shall be liable for the payment of any portion of such liabilities, obligations, losses, damages, claims, costs or expenses which are determined by a court of competent jurisdiction in a final proceeding to have resulted solely from the Agent's gross negligence or willful misconduct. The Agent shall not be required to take any action hereunder, under the Notes, under any Collateral Document or under any other Loan Document, or to prosecute or defend any suit in respect of this Agreement, the Notes, any Collateral Document or any other Loan Document, unless it is indemnified hereunder to its satisfaction. If any indemnity in favor of the Agent shall be or become, in the Agent's determination, inadequate, the Agent may call for additional indemnification from the Lenders and cease to do the acts indemnified against hereunder until such additional indemnity is given. SECTION 9.2 Funding Reliance, etc. Unless the Agent shall have been --------------------- notified by telephone, confirmed in writing, by any Lender by 4:00 p.m., Chicago time, on the day prior to the date of any proposed Borrowing that such Lender will not make available the amount which would constitute its Percentage of the Loans of such proposed Borrowing, the Agent may assume that such Lender has made such amount available to the Agent and, in reliance upon such assumption, make available to the Borrower a corresponding amount. If and to the extent that such Lender shall not have made such amount available to the Agent, such Lender and the Borrower severally agree to repay the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date the Agent made such amount available to the Borrower to the date such amount is repaid to the Agent, at the interest rate applicable at the time to Loans. SECTION 9.3 Exculpation. Neither the Agent nor any of its directors, ----------- officers, employees or agents shall be liable to any Lender for any action taken or omitted to be taken by it under this Agreement, the Notes, any Collateral Document or any other Loan Document, or in connection herewith or therewith, except for its own wilful misconduct or gross negligence, nor responsible for any recitals or warranties herein or therein, nor for the effectiveness, enforceability, validity or due execution of this Agreement, the Notes, any Collateral Document or any other Loan Document, nor for the creation, perfection or priority of any Liens purported to be created by any of the Loan Documents, or the validity, genuineness, enforceability, existence, value or sufficiency of any collateral security, nor to make any inquiry respecting the performance by the Borrower of its obligations hereunder or under the Notes, any Collateral Document or any other Loan Document. Any such inquiry which may be made by the Agent shall not obligate it to make any further inquiry or to take any action. The Agent shall be entitled to rely upon advice of counsel concerning legal matters and upon any notice, consent, certificate, statement or writing which the Agent believes to be genuine and to have been presented by a proper Person. SECTION 9.4. Successor. The Agent may resign as such at any time upon at --------- least 30 days' prior notice to the Borrower and all Lenders. If the Agent at any time shall resign, the Required Lenders may appoint another Lender as a successor Agent which shall thereupon become the Agent hereunder. If no successor Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the retiring 53 Agent's giving notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be one of the Lenders or a commercial banking institution organized under the laws of the U.S. (or any State thereof) or a U.S. branch or agency of a commercial banking institution, and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall be entitled to receive from the retiring Agent such documents of transfer and assignment as such successor Agent may reasonably request, and shall thereupon succeed to and become vested with all rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation hereunder as the Agent, the provisions of (a) this Article IX shall inure to its benefit as to any actions ---------- taken or omitted to be taken by it while it was the Agent under this Agreement; and (b) Section 10.3 and Section 10.4 shall continue to inure to its ------------ ------------ benefit. SECTION 9.5 Loans by Bank of America. Bank of America shall have the ------------------------ same rights and powers with respect to (x) the Loans made by it or any of its Affiliates, and (y) the Notes held by it or any of its Affiliates as any other Lender and may exercise the same as if it were not the Agent. Bank of America and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or Affiliate of the Borrower as if Bank of America were not the Agent hereunder. SECTION 9.6 Credit Decisions. Each Lender acknowledges that it has, ---------------- independently of the Agent and each other Lender, and based on such Lender's review of the financial information of the Borrower, this Agreement, the other Loan Documents (the terms and provisions of which being satisfactory to such Lender) and such other documents, information and investigations as such Lender has deemed appropriate, made its own credit decision to extend its Commitment. Each Lender also acknowledges that it will, independently of the Agent and each other Lender, and based on such other documents, information and investigations as it shall deem appropriate at any time, continue to make its own credit decisions as to exercising or not exercising from time to time any rights and privileges available to it under this Agreement or any other Loan Document. SECTION 9.7 Copies, etc. The Agent shall give prompt notice to each ----------- Lender of each notice or request required to be given by the Agent to the Lenders pursuant to the terms of this Agreement (unless concurrently delivered to the Lenders by the Borrower). The Agent will distribute to each Lender each document or instrument received for the account of the Lenders and copies of all other communications received by the Agent from the Borrower for distribution to the Lenders by the Agent in accordance with the terms of this Agreement. SECTION 9.8 Action Through Agent. All actions taken with respect to any -------------------- collateral security or guaranties provided under the Loan Documents shall be taken solely by the Agent, and no Lender shall have any right to take any actions individually with respect thereto. SECTION 9.9 Documentation Agents. None of the Lenders identified on the -------------------- facing page or signature pages of this Agreement as a "documentation agent" shall have any right, 54 power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders as such. Each Lender acknowledges that it has not relied, and will not rely, on any of the Lenders so identified in deciding to enter into this Agreement or in taking or not taking action hereunder. SECTION 9.10 Collateral Matters. (a) The Agent is authorized on behalf ------------------ of all the Lenders, without the necessity of any notice to or further consent from the Lenders, from time to time to take any action with respect to any Collateral or the Collateral Documents which may be necessary to perfect and maintain perfected the security interest in and Liens upon the Collateral granted pursuant to the Collateral Documents. (b) The Lenders irrevocably authorize the Agent, at its option and in its discretion, to release any Lien granted to or held by the Agent upon any Collateral (i) upon termination of the Commitments and payment in full of all Loans and all other Obligations known to the Agent and payable under this Agreement or any other Loan Document; (ii) constituting property sold or to be sold or disposed of as part of or in connection with any disposition permitted hereunder; (iii) constituting property in which the Borrower or any Subsidiary owned no interest at the time the Lien was granted or any time thereafter; (iv) constituting property leased to the Borrower or any Subsidiary under a lease which has expired or been terminated in a transaction permitted under this Agreement or is about to expire and which has not been, and is not intended by the Borrower or such Subsidiary to be, renewed or extended;(v) consisting of an instrument evidencing Indebtedness or other debt instrument, if the indebtedness evidenced thereby has been paid in full; or (vi) if approved, authorized or ratified in writing by the Required Lenders or all of the Lenders, as the case may be, as provided in subsection 10.1(d). Upon request by the Agent at any ------------------ time, the Lenders will confirm in writing the Agent's authority to release particular types or items of Collateral pursuant to this subsection 9.10(a), ------------------ provided that the absence of any such confirmation for whatever reason shall not - -------- affect the Agent's rights under this Section 9.11. ------------ (c) Each Lender agrees with and in favor of each other (which agreement shall not be for the benefit of the Borrower or any Subsidiary) that the Borrower's obligation to such Lender under this Agreement and the other Loan Documents is not and shall not be secured by any real property collateral now or hereafter acquired by such Lender other than the Mortgaged Real Property and the Modesto Property. ARTICLE X MISCELLANEOUS PROVISIONS SECTION 10.1 Waivers, Amendments, etc. The provisions of this Agreement ------------------------ and of each other Loan Document may from time to time be amended, modified or waived, if such amendment, modification or waiver is in writing and consented to by the Borrower and the Required Lenders; provided, however, that no such -------- ------- amendment, modification or waiver which would: 55 (a) modify any requirement hereunder that any particular action be taken by all the Lenders or by the Required Lenders shall be effective unless consented to by each Lender; (b) modify this Section 10.1, change the definition of "Required ------------ -------- Lenders", increase the Commitment Amount or the Percentage of any ------- Lender, reduce any fees described in Article III, or release any ----------- collateral security, except as otherwise specifically provided or contemplated in this Agreement or in any Loan Document, shall be made without the consent of each Lender and each holder of a Note; (c) extend the due date for, or reduce the amount of, any scheduled repayment or prepayment of principal of or interest on any Loan (or reduce the principal amount of or rate of interest on any Loan) shall be made without the consent of the holder of that Note evidencing such Loan; or (d) affect adversely the interests, rights or obligations of the Agent in its capacity as the Agent shall be made without consent of the Agent. No failure or delay on the part of the Agent, any Lender or the holder of any Note in exercising any power or right under this Agreement or any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No notice to or demand on the Borrower in any case shall entitle it to any notice or demand in similar or other circumstances. No waiver or approval by the Agent, any Lender or the holder of any Note under this Agreement or any other Loan Document shall, except as may be otherwise stated in such waiver or approval, be applicable to subsequent transactions. No waiver or approval hereunder shall require any similar or dissimilar waiver or approval thereafter to be granted hereunder. SECTION 10.2 Notices. All notices and other communications provided to ------- any party hereto under this Agreement or any other Loan Document shall be in writing or by facsimile and addressed, delivered or transmitted to such party at its address or facsimile number set forth below its signature hereto or set forth in the Lender Assignment Agreement or at such other address or facsimile number as may be designated by such party in a notice to the other parties. Any notice, if mailed and properly addressed with postage prepaid or if properly addressed and sent by pre-paid courier service, shall be deemed given when received; any notice, if transmitted by facsimile, shall be deemed given when transmitted (upon receipt of electronic confirmation of transmission). SECTION 10.3 Payment of Costs and Expenses. The Borrower agrees to pay ----------------------------- on demand all expenses of the Agent and the Lead Arranger (including the fees and out-of-pocket expenses of counsel to the Agent and the Lead Arranger (including the reasonable allocated cost of internal legal services and all disbursements of internal counsel) and of local counsel, if any, who may be retained by counsel to the Agent and the Lead Arranger) in connection with (a) the negotiation, preparation, execution and delivery of this Agreement, the Notes, each Collateral Document and of each other Loan Document, including schedules and exhibits, and any amendments, waivers, consents, supplements or other modifications to this Agreement, the Notes, any Collateral Document or any other Loan Document as 56 may from time to time hereafter be required or requested, whether or not the transactions contemplated hereby or thereby are consummated; (b) the filing, recording, refiling or rerecording of the Fourth Amendment to Mortgage, the Second Amendment to Modesto Mortgage, the Pledge Agreement and the Security Agreement and/or any Uniform Commercial Code financing statements relating thereto and all amendments, supplements and modifications to any thereof and any and all other documents or instruments of further assurance required to be filed or recorded or refiled or rerecorded by the terms hereof or of the Mortgage, the Pledge Agreement or the Security Agreement; (c) the preparation and review of the form of any document or instrument relevant to this Agreement, the Notes, any Collateral Document or any other Loan Document; and (d) the administration of this Agreement, the Notes, the Collateral Documents and the other Loan Documents and the consideration of legal questions relevant hereto and thereto. The Borrower further agrees to pay, and to hold the Agent, the Lead Arranger and the Lenders harmless from all liability for, any stamp or other taxes which may be payable in connection with the execution or delivery of this Agreement, the borrowings hereunder, or the issuance of the Notes or any other Loan Documents. The Borrower also agrees to reimburse the Agent, the Lead Arranger and each Lender upon demand for all reasonable out-of-pocket expenses (including reasonable attorneys' fees and legal expenses) incurred by the Agent or the Lead Arranger or such Lender in connection with (x) the negotiation of any restructuring or "work-out", whether or not consummated, of any Obligations, and (y) the enforcement of any Obligations. SECTION 10.4 Indemnification. In consideration of the execution and --------------- delivery of this Agreement by each Lender and the extension of the Commitments, the Borrower hereby indemnifies, exonerates and holds the Agent and each Lender and each of their respective officers, directors, employees and agents (collectively, the "Indemnified Parties") free and harmless from and against any ------------------- and all actions, causes of action, suits, losses, costs, liabilities and damages, and expenses incurred in connection therewith (irrespective of whether any such Indemnified Party is a party to the action for which indemnification hereunder is sought), including reasonable attorneys' fees and disbursements (collectively, the "Indemnified Liabilities"), incurred by the Indemnified ----------------------- Parties or any of them as a result of, or arising out of, or relating to (a) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of any Loan; (b) the entering into and performance of this Agreement and any other Loan Document by any of the Indemnified Parties (including any action brought by or on behalf of the Borrower as the result of any determination by the Required Lenders pursuant to Article V not to fund any Loans); --------- 57 (c) any investigation, litigation or proceeding related to any acquisition or proposed acquisition by the Borrower or any of its Subsidiaries of all or any portion of the stock or assets of any Person, whether or not the Agent or such Lender is party thereto; (d) any investigation, litigation or proceeding related to any environmental cleanup, audit, compliance or other matter relating to the protection of the environment or the Release by the Borrower or any of its Subsidiaries of any Hazardous Material; and (e) the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission, discharging or releases from, any real property owned or operated by the Borrower or any Subsidiary thereof of any Hazardous Material (including any losses, liabilities, damages, injuries, costs, expenses or claims asserted or arising under any Environmental Law), regardless of whether caused by, or within the control of, the Borrower or such Subsidiary, except for any such Indemnified Liabilities arising for the account of a particular Indemnified Party by reason of the relevant Indemnified Party's gross negligence or wilful misconduct. If and to the extent that the foregoing undertaking may be unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. SECTION 10.5 Survival. The obligations of the Borrower under Sections 4.3, -------- ------------ 4.4, 4.5, 4.6, 10.3 and 10.4, and the obligations of the Lenders under Section - --- --- --- ---- ---- ------- 9.1, shall in each case survive any termination of this Agreement, the payment - --- in full of all Obligations and the termination of all Commitments. The representations and warranties made by the Borrower in this Agreement and in each other Loan Document shall survive the execution and delivery of this Agreement and each such other Loan Document. SECTION 10.6 Severability. Any provision of this Agreement, the Notes, any ------------ Collateral Document or any other Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement, the Notes, any Collateral Document or such Loan Document or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 10.7 Headings. The various headings of this Agreement and of each -------- other Loan Document are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or such other Loan Document or any provisions hereof or thereof. SECTION 10.8 Execution in Counterparts. This Agreement may be executed by ------------------------- the parties hereto in several counterparts, each of which shall be executed by the Borrower and the Agent and be deemed to be an original and all of which shall constitute together but one and the same agreement. 58 SECTION 10.9 Governing Law; Entire Agreement. THIS AGREEMENT, THE NOTES, ------------------------------- EACH COLLATERAL DOCUMENT AND EACH OTHER LOAN DOCUMENT SHALL EACH BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS, EXCEPT AS TO ANY COLLATERAL DOCUMENT WHICH EXPRESSLY SPECIFIES THAT THE LAWS OF ANOTHER STATE SHALL GOVERN SUCH DOCUMENT. This Agreement, the Notes, the Collateral Documents and the other Loan Documents constitute the entire understanding among the parties hereto with respect to the subject matter hereof and supersede any prior agreements, written or oral, with respect thereto. SECTION 10.10 Successors and Assigns. This Agreement shall be binding upon ---------------------- and shall inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that: -------- ------- (a) the Borrower may not assign or transfer its rights or obligations hereunder without the prior written consent of the Agent and all Lenders; and (b) the rights of sale, assignment and transfer of the Lenders are subject to Section 10.11. ------------- SECTION 10.11 Sale and Transfer of Loans and Notes; Participations in Loans ------------------------------------------------------------- and Notes. Each Lender may assign, or sell participations in, its Loans and - --------- Commitment to one or more other Persons in accordance with this Section 10.11. ------------- SECTION 10.11.1 Assignments. Any Lender, with notice to the Borrower and ----------- the Agent, but without the consent of the Borrower or the Agent, may assign and delegate to any of its Affiliates or any other Lender, or with the consent of the Borrower and the Agent one or more commercial banks or other financial institutions or funds (each such Affiliate, Lender, commercial bank, financial institution or fund described as being the Person to whom such assignment and delegation is to be made, being hereinafter referred to as an "Assignee -------- Lender"), all or any fraction of such Lender's total Loans (which assignment and - ------ delegation shall be of a constant, and not a varying, percentage of all the assigning Lender's Loans) in a minimum aggregate amount of $2,500,000; provided, -------- however, that any such Assignee Lender will comply, if applicable, with the - ------- provisions contained in the last sentence of Section 4.6 and further, provided, ----------- ------- -------- however, that the Borrower and the Agent shall be entitled to continue to deal - ------- solely and directly with such Lender in connection with the interests so assigned and delegated to an Assignee Lender until (a) written notice of such assignment and delegation, together with payment instructions, addresses and related information with respect to such Assignee Lender, shall have been given to the Borrower and the Agent by such Lender and such Assignee Lender; (b) such Assignee Lender shall have executed and delivered to the Borrower and the Agent a Lender Assignment Agreement, accepted by the Agent; and (c) the processing fees described below shall have been paid. 59 From and after the date that the Agent accepts such Lender Assignment Agreement, (x) the Assignee Lender thereunder shall be deemed automatically to have become a party hereto and to the extent that rights and obligations hereunder have been assigned and delegated to such Assignee Lender in connection with such Lender Assignment Agreement, shall have the rights and obligations of a Lender hereunder and under the other Loan Documents, (y) the assignor Lender, to the extent that rights and obligations hereunder have been assigned and delegated by it in connection with such Lender Assignment Agreement, shall be released from its obligations hereunder and under the other Loan Documents and (z) the assignor Lender and the Assignee Lender shall have the respective Percentages set forth in the Lender Assignment Agreement. Within five Business Days after its receipt of notice that the Agent has received an executed Lender Assignment Agreement, the Borrower shall execute and deliver to the Agent (for delivery to the relevant Assignee Lender) a new Note evidencing such Assignee Lender's assigned Loans and, if the assignor Lender has retained Loans hereunder, a replacement Note in the principal amount of the Loans retained by the assignor Lender hereunder (such Note to be in exchange for, but not in payment of, that Note then held by such assignor Lender). Each such Note shall be dated the date of the predecessor Note. The assignor Lender shall mark the predecessor Note "exchanged" and deliver it to the Borrower. Accrued interest on that part of the predecessor Note evidenced by the new Note, and accrued fees, shall be paid as provided in the Lender Assignment Agreement. Accrued interest on that part of the predecessor Note evidenced by the replacement Note shall be paid to the assignor Lender. Accrued interest and accrued fees shall be paid at the same time or times provided in the predecessor Note and in this Agreement. Unless otherwise agreed to by the Agent, such assignor Lender or such Assignee Lender must also pay a processing fee to the Agent upon delivery of any Lender Assignment Agreement in the amount of $5,000. Any attempted assignment and delegation not made in accordance with this Section 10.11.1 shall be null and --------------- void. SECTION 10.11.2 Participations. Any Lender may at any time sell to one or -------------- more commercial banks or other Persons (each of such commercial banks and other Persons being herein called a "Participant") participating interests in any of ----------- the Loans or other interests of such Lender hereunder; provided, however, that -------- ------- (a) no participation contemplated in this Section 10.11 shall ------------- relieve such Lender from its other obligations hereunder or under any other Loan Document; (b) such Lender shall remain solely responsible for the performance of such other obligations; (c) the Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and each of the other Loan Documents; (d) no Participant, unless such Participant is an Affiliate of such Lender, or is itself a Lender, shall be entitled to require such Lender to take or refrain from taking any action hereunder or under any other Loan Document, except that such Lender may agree with any Participant that such Lender will not, without such Participant's consent, take any actions of the type described in clause (b) or (c) of Section 10.1; and ---------- --- ------------ 60 (e) the Borrower shall not be required to pay any amount under Section 4.6 that is greater than the amount which it would have been ----------- required to pay had no participating interest been sold. The Borrower acknowledges and agrees that each Participant, for purposes of Sections 4.3, 4.4, 4.5, 4.6, 4.8, 4.9, 10.3 and 10.4, shall be considered a - ------------ --- --- --- --- --- ---- ---- Lender. SECTION 10.11.3 Information and Assistance. The Borrower hereby agrees to -------------------------- provide prompt and reasonable assistance with respect to any contemplated or proposed assignments or participations, and hereby further agrees that any information supplied to a Lender pursuant hereto may be supplied by such Lender to any bona fide potential assignee or participant. SECTION 10.12 Other Transactions. Nothing contained herein shall preclude ------------------ the Agent or any other Lender from engaging in any transaction, in addition to those contemplated by this Agreement or any other Loan Document, with the Borrower or any of its Affiliates in which the Borrower or such Affiliate is not restricted hereby from engaging with any other Person. SECTION 10.13 Maximum Interest. It is the intention of the parties hereto ---------------- that each Lender shall conform strictly to usury laws applicable to it. Accordingly, the parties hereto stipulate and agree that none of the terms and provisions contained in the Notes, this Agreement, any Collateral Document or any other Loan Document shall ever be construed to create a contract to pay to any Lender for the use, forbearance, or retention of money at a rate in excess of the Highest Lawful Rate applicable to such Lender, and that for purposes hereof, "interest" shall include the aggregate of all charges or other consideration which constitute interest under applicable law and are contracted for, taken, reserved, charged, or received under any of this Agreement, the Notes, the Collateral Documents or the other Loan Documents or otherwise in connection with the transactions contemplated by this Agreement. Further, if the transactions contemplated hereby would be usurious as to any Lender under laws applicable to it, then, in that event, notwithstanding anything to the contrary in the Notes, this Agreement, any Collateral Document or in any other Loan Document or agreement entered into in connection with or as security for the Notes, it is agreed as follows: the aggregate of all consideration which constitutes interest under law applicable to each such Lender that is contracted for, taken, reserved, charged, or received by such Lender under the Notes, this Agreement, or under any of the other aforesaid Loan Documents or agreements or otherwise in connection with the Notes shall under no circumstances exceed the maximum amount allowed by the law applicable to such Lender, and any excess shall be credited by such Lender on the principal amount of the Indebtedness of the Borrower owed to such Lender (or, if the principal amount of such Indebtedness shall have been paid in full, to the extent such interest has been received by a Lender it shall be refunded by such Lender to the Borrower). The provisions of this Section 10.13(a) shall control over all other provisions of ---------------- this Agreement, the Notes, the Collateral Documents and the other Loan Documents which may be in apparent conflict herewith. The parties further stipulate and agree that, without limitation on the foregoing, all calculations of the rate or amount of interest contracted for, taken, reserved, charged or received under any of this Agreement, the Notes, the Collateral Documents and the other Loan Documents which are made for the purpose of determining whether such rate or amount exceed the Highest Lawful Rate 61 shall be made, to the extent permitted by applicable law, by amortizing, prorating, allocating, and spreading during the period of the full stated term of the Indebtedness, and if longer and if permitted by applicable law, until payment in full, all interest at any time so contracted for, taken, reserved, charged, or received. (b) If at any time the effective rate of interest which would otherwise apply to any Indebtedness hereunder or evidenced by any Lender's Notes would exceed the Highest Lawful Rate applicable to such Lender (taking into account the interest rate applicable to such Indebtedness pursuant to the other provisions of this Agreement, plus all additional charges and consideration which have been contracted for, taken, reserved, charged, or received under this Agreement, such Lender's Notes, the Collateral Documents, and the other Loan Documents, or any of them, and which additional charges or consideration (the "Additional Charges") constitute interest with respect to such Indebtedness), ------------------ the effective interest rate to apply to such Indebtedness made by such Lender shall be limited to the Highest Lawful Rate, but any subsequent reductions in the interest rate applicable to such Indebtedness owed to such Lender shall not reduce the effective interest rate to apply to such Indebtedness owed to such Lender below the Highest Lawful Rate applicable to such Lender until the total amount of interest accrued on such Indebtedness equals the amount of interest which would have accrued if the interest rate from time to time applicable to such Indebtedness owed to such Lender had at all times been in effect with respect to such Indebtedness pursuant to the other provisions of this Agreement and the other Loan Documents and if the Lenders had collected all Additional Charges called for under this Agreement, the Notes, the Collateral Documents and the other Loan Documents. If at maturity or final payment of such Lender's Obligations the total amount of interest paid to any Lender hereunder and under the other Loan Documents (including amounts designated as "interest" plus any Additional Charges which constitute interest with respect to such Lenders, and taking into account the limitations of the first sentence of this Section ------- 10.13(b)) is less than the total amount of such "interest" which would have been - -------- paid if all amounts were paid as required by this Agreement (without giving effect to this Section 10.13) and the other Loan Documents (the amount of the ------------- difference described above, the "Deficiency"), then the Borrower agrees, to the ---------- fullest extent permitted by the laws applicable to such Lender, to pay to such Lender an amount equal to the lesser of (i) the difference between (1) the amount of such "interest" which would have accrued on such Lender's Notes if the Highest Lawful Rate had at all times been in effect, and (2) the amount of interest actually paid on such Lender's Notes (including amounts designated as "interest" plus any Additional Charges which constitute interest with respect to such Lender's Notes) and (ii) the amount of the Deficiency. (c) Notwithstanding anything to the contrary contained above in this Section 10.13, it is understood and agreed that (i) all representations and - ------------- warranties contained in this Agreement, in the Collateral Documents and in the other Loan Documents have been made without reliance upon, or giving effect to, the provisions of Section 10.13(a) and (ii) that the Lenders have relied upon ---------------- the accuracy of such representations and warranties. Furthermore, the Borrower acknowledges and agrees that each Lender shall, to the fullest extent permitted by law, be entitled to recover damages from the Borrower in the event of a material misrepresentation by the Borrower. 62 SECTION 10.14 Forum Selection and Consent to Jurisdiction. ANY LITIGATION ------------------------------------------- BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT, THE NOTES, ANY COLLATERAL DOCUMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE LENDERS OR THE BORROWER SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS; PROVIDED, HOWEVER, THAT -------- ------- ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF ILLINOIS. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, THE BORROWER HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS AGREEMENT, THE NOTES, THE COLLATERAL DOCUMENTS AND THE OTHER LOAN DOCUMENTS. SECTION 10.15 Waiver of Jury Trial. THE AGENT, THE LENDERS AND THE BORROWER -------------------- HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT, THE NOTES, ANY COLLATERAL DOCUMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE LENDERS OR THE BORROWER. THE BORROWER ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE 63 AGENT AND THE LENDERS ENTERING INTO THIS AGREEMENT AND EACH SUCH COLLATERAL DOCUMENT AND EACH SUCH OTHER LOAN DOCUMENTS. 64 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the day and year first above written. NASCO INTERNATIONAL, INC. By: /s/ Dean T. Johnson -------------------------------------- Title: Chief Financial Officer Address: 901 Janesville Avenue Fort Atkinson, WI 53538-0901 Telecopier No.: 920-563-0234 Attention: Dean T. Johnson Chief Financial Officer Copy to: Geneve Corporation 96 Cummings Point Road Stamford, Connecticut 06902 Telecopier No.: 203-348-3103 Attention: Theresa Herbert, Vice President BANK OF AMERICA, N.A. as Agent By: /s/ Gary R. Peet -------------------------------------- Title: Managing Director Address: 231 South LaSalle Street Chicago, Illinois 60697 Telecopier No.: 312-987-0889 Attention: Debra Basler Vice President 65 PERCENTAGE LENDERS ---------- ------- 53.2710% BANK OF AMERICA, N.A. By: /s/ Gary R. Peet ----------------------------- Title: Managing Director Domestic Office: 231 South LaSalle Street Chicago, Illinois 60697 Telecopy No.: 312-987-0889 Attention: Debra Basler Vice President Eurodollar Office: 231 South LaSalle Street Chicago, Illinois 60697 46.7290% BANK ONE, WISCONSIN By: /s/ Paul C. Fuerst ------------------------------- Title: Senior Vice President Domestic Office: 111 East Wisconsin Avenue Mail Code WI1-2032 Milwaukee, Wisconsin 53202 Telecopy No.: (414) 765-2176 Attention: Mark Bruss 66 EXHIBIT A NOTE $23,831,790.00 Date: May 29, 2001 FOR VALUE RECEIVED, Nasco International, Inc., a Wisconsin corporation (the "Borrower") hereby unconditionally promises to pay to the order of BankOne, Wisconsin (the "Lender"): (1) prior to or on the Stated Maturity Date the principal amount of Twenty-three million eight hundred thirty-one thousand seven hundred ninety Dollars ($23,831,790.00), or, if less, the aggregate unpaid principal amount of Loans advanced by the Lender to such Borrower pursuant to the Amended and Restated Credit Agreement (Five Year) dated as of May 29, 2001 (as amended and in effect from time to time, the "Credit Agreement"), among the Borrower, BankOne, Wisconsin, as Documentation Agent, Bank of America, N.A. as Administrative Agent, and the various financial institutions (including the Lender) which are, or may from time to time become parties thereto; and (2) interest on the principal balance hereof from time to time outstanding from the Effective Date (as defined in the Credit Agreement) through and including the maturity date hereof at the times and at the rates provided in the Credit Agreement. This Note evidences borrowings under and has been issued by the Borrower in accordance with the terms of the Credit Agreement. The Lender and any holder hereof is entitled to the benefits of the Credit Agreement and the other Loan Documents, and may enforce the agreements of the Borrower contained therein, and any holder hereof may exercise the respective remedies provide for thereby or otherwise available in respect thereof, all in accordance with the respective terms thereof. All capitalized terms used in this Note and not otherwise defined herein shall have the same meanings herein as in the Credit Agreement. The Borrower irrevocably authorizes the Lender to make or cause to be made, at or about the date of any Loan made to such Borrower or at the time of receipt of any payment of principal of this Note, an appropriate notation on the grid attached to this Note, or the continuation of such grid, or any other similar record, including computer records, reflecting the making of such Loan or (as the case may be) the receipt of such payment. The outstanding amount of the Loans set forth on the grid attached to this Note, or the continuation of such grid, or any other similar record including computer records, maintained by the Lender with respect to any Loans made to the Borrower shall be prima ------ facie evidence of the principal amount thereof owing and unpaid by the Borrower ----- to the Lender, but the failure to record, or any error is so recording, any such amount on any such grid, continuation or other record shall not limit or Exhibit A-1 otherwise affect the obligation of the Borrower hereunder or under the Credit Agreement to make payments of principal and of interest on this Note when due. The Borrower has the right in certain circumstances and the obligation under certain other circumstances to prepay the whole or part of the principal of this Note severally owing by the Borrower on the terms and conditions specified in the Credit Agreement. If any one or more of the Events of Default shall occur and be continuing with respect to the Borrower, the entire unpaid principal amount of this Note owing by such Borrower and all of the unpaid interest accrued thereon may become or be declared due and payable in the manner and with the effect provided in the Credit Agreement. No delay or omission on the part of the Lender or any holder hereof in exercising any right hereunder shall operate as a waiver of such right or of any other rights of the Lender or such holder, nor shall any delay, omission or waiver on any one occasion be deemed a bar or waiver of the same or any other right on any further occasion. Except to the extent otherwise provided in the Credit Agreement, the Borrower hereby waives presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note, and assents to any extension or postponement of time of payment or any other indulgence, to any substitution, exchange or release of collateral and to the addition or release of any other party or person primarily or secondarily liable. THIS NOTE AND THE OBLIGATIONS OF THE BORROWER HEREUNDER SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF ILLINOIS. IN WITNESS WHEREOF, the undersigned has caused this Note to be executed as of the day and year first above written. NASCO INTERNATIONAL, INC. By: /s/ Dean T. Johnson --------------------------- Title: Chief Financial Officer Exhibit A-2 EXHIBIT A NOTE $27,168,210.00 Date: May 29, 2001 FOR VALUE RECEIVED, Nasco International, Inc., a Wisconsin corporation (the "Borrower") hereby unconditionally promises to pay to the order of Bank of America, N.A. (the "Lender"): (a) prior to or on the Stated Maturity Date the principal amount of Twenty-seven million one hundred sixty-eight thousand two hundred ten Dollars ($27,168,210.00), or, if less, the aggregate unpaid principal amount of Loans advanced by the Lender to such Borrower pursuant to the Amended and Restated Credit Agreement (Five Year) dated as of May 29, 2001 (as amended and in effect from time to time, the "Credit Agreement"), among the Borrower, Bank of America, N.A., as Documentation Agent, Bank of America, N.A. as Administrative Agent, and the various financial institutions (including the Lender) which are, or may from time to time become parties thereto; and (b) interest on the principal balance hereof from time to time outstanding from the date of this Loan through and including the maturity date hereof at the times and at the rates provided in the Credit Agreement. This Note evidences borrowings under and has been issued by the Borrower in accordance with the terms of the Credit Agreement. The Lender and any holder hereof is entitled to the benefits of the Credit Agreement and the other Loan Documents, and may enforce the agreements of the Borrower contained therein, and any holder hereof may exercise the respective remedies provide for thereby or otherwise available in respect thereof, all in accordance with the respective terms thereof. All capitalized terms used in this Note and not otherwise defined herein shall have the same meanings herein as in the Credit Agreement. The Borrower irrevocably authorizes the Lender to make or cause to be made, at or about the date of any Loan made to such Borrower or at the time of receipt of any payment of principal of this Note, an appropriate notation on the grid attached to this Note, or the continuation of such grid, or any other similar record, including computer records, reflecting the making of such Loan or (as the case may be) the receipt of such payment. The outstanding amount of the Loans set forth on the grid attached to this Note, or the continuation of such grid, or any other similar record including computer records, maintained by the Lender with respect to any Loans made to the Borrower shall be prima ----- facie evidence of the principal amount thereof owing and unpaid by the Borrower ----- to the Lender, but the failure to record, or any error is so recording, any such amount on any such grid, continuation or other record shall not limit or otherwise affect the obligation of the Borrower hereunder or under the Credit Agreement to make payments of principal and of interest on this Note when due. Exhibit A-3 The Borrower has the right in certain circumstances and the obligation under certain other circumstances to prepay the whole or part of the principal of this Note severally owing by the Borrower on the terms and conditions specified in the Credit Agreement. If any one or more of the Events of Default shall occur and be continuing with respect to the Borrower, the entire unpaid principal amount of this Note owing by such Borrower and all of the unpaid interest accrued thereon may become or be declared due and payable in the manner and with the effect provided in the Credit Agreement. No delay or omission on the part of the Lender or any holder hereof in exercising any right hereunder shall operate as a waiver of such right or of any other rights of the Lender or such holder, nor shall any delay, omission or waiver on any one occasion be deemed a bar or waiver of the same or any other right on any further occasion. Except to the extent otherwise provided in the Credit Agreement, the Borrower hereby waives presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note, and assents to any extension or postponement of time of payment or any other indulgence, to any substitution, exchange or release of collateral and to the addition or release of any other party or person primarily or secondarily liable. THIS NOTE AND THE OBLIGATIONS OF THE BORROWER HEREUNDER SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF ILLINOIS. IN WITNESS WHEREOF, the undersigned has caused this Note to be executed as of the day and year first above written. NASCO INTERNATIONAL, INC. By: /s/ Dean T. Johnson --------------------------- Title: Chief Financial Officer Exhibit A-4 EXHIBIT B FORM OF BORROWING REQUEST Bank of America, N.A., as Administrative Agent 231 S. LaSalle Street Chicago, IL 60697 Attention: [Name] [Title] Ladies and Gentlemen: This Borrowing Request is delivered to you pursuant to Section 2.3 of the ----------- Amended and Restated Credit Agreement (Five Year), dated as of May 29, 2001 (together with all amendments, if any, from time to time made thereto, the "Credit Agreement"), among Nasco International, Inc., a Wisconsin corporation ---------------- (the "Borrower"), certain financial institutions which are, or may from time to -------- time become parties thereto, Bank One, Wisconsin, as documentation agent and Bank of America, N.A., as administrative agent (the "Agent"). Unless otherwise ----- defined herein or the context otherwise requires, terms used herein have the meanings provided in the Credit Agreement. The Borrower hereby requests that a Loan be made in the aggregate principal amount of $_______ on _______, 200__ as a [Eurodollar Rate Loan having an Interest Period of ___] [Base Rate Loan]. The Borrower hereby acknowledges that, pursuant to Section 5.2.2 of the ------------- Credit Agreement, each of the delivery of this Borrowing Request and the acceptance by the Borrower of the proceeds of the Loans requested hereby constitute a representation and warranty by the Borrower that, on the date of such Loans, and before and after giving effect thereto and to the application of the proceeds therefrom, all statements set forth in Section 5.2.1 are true and ------------- correct in all material respects. The Borrower agrees that if prior to the time of the Borrowing requested hereby any matter certified to herein by it will not be true and correct at such time as if then made, it will immediately so notify the Agent. Except to the extent, if any, that prior to the time of the Borrowing requested hereby the Agent shall receive written notice to the contrary from the Borrower, each matter certified to herein shall be deemed once again to be certified as true and correct at the date of such Borrowing as if then made. Please transfer the proceeds of the Borrowing to the accounts of the following persons at the financial institutions indicated: Exhibit B-1 Person to be Paid Amount to be Name Account No. Name, Address, etc. of Transferee Transferred Lender $_____________ _________ _____________ _________________________________ _________________________________ Attention:_______________________ $_____________ _________ _____________ _________________________________ _________________________________ Attention:_______________________ Balance of The Borrower _____________ _________________________________ such proceeds _________________________________ Attention:_______________________ The Borrower has caused this Borrowing Request to be executed and delivered, and the certification and warranties contained herein to be made, by its duly Authorized Officer this ___ day of _______________, 200__. NASCO INTERNATIONAL, INC. By: Title: Exhibit B-2 EXHIBIT C FORM OF CONTINUATION/CONVERSION NOTICE Bank of America, N.A., as Administrative Agent 231 S. LaSalle Street Chicago, IL 60697 Attention: [Name] [Title] Ladies and Gentlemen: This Continuation/Conversion Notice is delivered to you pursuant to Section ------- 2.4 of the Amended and Restated Credit Agreement (Five Year), dated as of May - --- 29, 2001 (together with all amendments, if any, from time to time made thereto, the "Credit Agreement"), among Nasco International, Inc., a Wisconsin ---------------- corporation (the "Borrower"), certain financial institutions which are, or may -------- from time to time become parties thereto, Bank One, Wisconsin, as documentation agent and Bank of America, N.A., as administrative agent, (the "Agent"). Unless ----- otherwise defined herein or the context otherwise requires, terms used herein have the meanings provided in the Credit Agreement. The Borrower hereby requests that on_________, 200__, (1) $_____ of the presently outstanding principal amount of the Loans originally made on _____, 200__ [and $______ of the presently outstanding principal amount of the originally made on _____, 200__], (2) and all presently being maintained as */[Base Rate Loans] - [Eurodollar Rate Loans], (3) be [converted into] [continued as], (4) [Eurodollar Rate Loans having an Interest Period of ____ months] [Base Rate Loans]. The Borrower hereby: _____________________ */ Select appropriate interest rate option. - - Exhibit C-1 (a) certifies and warrants that no Default has occurred and is continuing; and (b) agrees that if prior to the time of such continuation or conversion any matter certified to herein by it will not be true and correct at such time as if then made, it will immediately so notify the Agent. Except to the extent, if any, that prior to the time of the continuation or conversion requested hereby the Agent shall receive written notice to the contrary from the Borrower, each matter certified to herein shall be deemed to be certified at the date of such continuation or conversion as if then made. The Borrower has caused this Continuation/Conversion Notice to be executed and delivered, and the certification and warranties contained herein to be made, by its Authorized Officer this ___ day of ________, 200__. NASCO INTERNATIONAL, INC. By: Title: Exhibit C-2 EXHIBIT D PLEDGE AGREEMENT ---------------- THIS PLEDGE AGREEMENT, dated as of March 31, 2000 (as modified from time to time, this " Pledge Agreement") made by NASCO INTERNATIONAL, INC., a Wisconsin ---------------- corporation (the "Pledgor"), in favor of BANK OF AMERICA N.A. (together with any ------- successor(s) thereto in such capacity, the "Agent") for the various financial. ----- institutions (individually a "Lender" and collectively the "Lenders") which are ------ ------- or may from time to time become, parties to the Credit Agreements referred below. WITNESSETH ---------- WHEREAS, pursuant to that certain Third Amended and. Restated Credit Agreement, dated as of January 2, 1996 (as heretofore amended, supplemented arid otherwise modified to the date hereof, the "Existing Credit Agreement"), among ------------------------- the Grantor, the lenders parties thereto and Bank of America Illinois (predecessor to Bank of America, N .A.), as agent, the lenders have extended loans to the Grantor; and WHEREAS, as a condition precedent to any extension of credit under the Existing Credit Agreement, the Grantor was required to execute and deliver the Pledge Agreement (the "Existing Pledge Agreement") pursuant to which the Grantor granted to the Agent a continuing pledge of and security interest in, among other. things, the certificates representing all of the outstanding shares of capital stock of each of the Pledgor's subsidiaries, and all proceeds thereof, to secure, among other things, all of the Pledgor's obligations under the Existing Credit Agreement; WHEREAS, the Grantor has requested that the Lenders make certain credit available, in part to refinance all indebtedness under the Existing Credit Agreement, pursuant to a Credit Agreement (Five Year) dated March 31, 2000 among the Grantor, certain lenders, Bank One) Wisconsin, as co-agent and Bank of America, N.A., as administrative agent (as amended, supplemented, amended and restated or otherwise modified from time to time, being referred to as the "Credit Agreement (Five Year)" and a Credit Agreement (364 Day) dated March 31, 2000 among the Grantor, certain lenders, Bank One, Wisconsin, as co-agent and Bank of America, N.A., as administrative agent (as amended, supplemented, amended and restated or otherwise modified from time to time, being referred to as the "Credit Agreement (364 Day)" and together with the Credit Agreement (Five Year), the "Credit Agreements"); and WHEREAS, it is a condition precedent to such extensions of credit that the Pledgor enter into this Pledge Agreement to grant to the Agent a continuing pledge of and security interest in all of the outstanding shares of capital stock of each subsidiary of the Pledgor; NOW, THEREFORE, for good and valuable consideration the receipt of which is hereby acknowledged, and in order to induce the Lenders to make Loans (including the initial Loans) to the Pledgor from time to time pursuant to the Credit Agreements, in part to refinance the indebtedness under the Existing Credit Agreement, the Pledgor hereby agrees with the Agent, for its benefit and the ratable benefit of each Lander Party, as follows: Exhibit D-1 ARTICLE I DEFINITIONS SECTION 1.1 Certain Terms. The following terms (whether or not underscored) ------------- when used in this Pledge Agreement, including its preamble and recitals, shall have the following meanings (such definitions to be equally applicable to the singular and plural forms thereof): "Agent" is defined in the preamble. ----- -------- "Collateral" is defined in Section 2.1. ---------- ----------- "Collateral, Documents" means the "Collateral Documents" defined in --------------------- the Credit Agreement (5 Year) and "Collateral Documents," as defined in the Credit Agreement (364 Days). "Credit Agreement" is defined in the third recital. ---------------- ------------- "Default" means "Default" as defined in the Credit Agreement (5 Year) and ------- "Default" as defined in the Credit Agreement (364 Days). "Distributions" means all stock dividends, liquidating dividends, shares of ------------- stock resulting from (or in connection with the exercise of) stock splits, reclassifications, warrants, options, non-cash dividends, mergers, consolidations, and all other distributions (whether similar or dissimilar to the foregoing) on or with respect to any Pledged Shares or other shares of capital stock constituting Collateral, but shall not include Dividends. "Dividends" means cash dividends and cash distributions with respect to any --------- Pledged shares or other Pledged Property made in the ordinary course of business and not a liquidating dividend. "Event of Default" means an "Event of Default" as defined in the Credit ---------------- Agreement (Five Year) and "Event of Default" as defined in the Credit Agreement (364 Days). "Existing Credit Agreement" is defined in the preamble. ------------------------- "Existing Pledge Agreement" is defined in the preamble. ------------------------- "Lender" is defined in the preamble. ------ -------- "Lender Party" means, as the context may require, any Lender or the Agent ------------ and each of their respective successors, transferees and assigns. "Lenders" is defined in the preamble. ------- -------- "Loan Documents" means "Loan Documents" as defined in the Credit Agreement -------------- (Five Year) and "Loan Documents" as defined in the Credit Agreement (364 Days). Exhibit D-2 "Notes" mean "Notes" as defined in the Credit Agreement (Five Year) and ----- "Notes" as defined in the Credit Agreement (364 Days). "Obligations" means "Obligations" as defined in the Credit Agreement (Five ----------- Year) and "Ob1igations" as defined in the Credit Agreement (364 Days). "Pledge Agreement" is defined in the preamble. ---------------- -------- "Pledged Note Issuer" means each Person identified in Item B of Attachment ------------------- ------ ---------- 1 hereto as the issuer of the Pledged Note identified opposite the name of such - - Person. "Pledged Notes" means all promissory notes of any Pledged Note Issuer in ------------- the form or substantially the form of Exhibit A hereto which are delivered by --------- the Pledgor to the Agent as Pledged Property hereunder, as such promissory notes, in accordance with Section 4.5, are amended, modified or supplemented ----------- from time to time and together with any promissory note of any Pledged Note Issuer taken in extension or renewal thereof or substitution there for. "Pledged Property" means all Pledged Shares, all Pledged Notes, and all ---------------- other pledged shares of capital stock or promissory notes, all other securities, all assignments of any amounts due or to become due, all other instruments which are now being delivered by the Pledgor to the Agent or may from time to time hereafter be delivered by the Pledgor to the Agent for the purpose of pledge under this Pledge Agreement or any other Loan Document, and all proceeds of any of the foregoing. "Pledged Share Issuer" means each Person identified in Item A of Attachment -------------------- ------ ---------- 1 hereto as the issuer of the Pledged Shares identified opposite the name of - - such Person. "Pledged Shares" means all shares of capital stock of any Pledged Share -------------- Issuer. "Pledgor" is defined in the preamble. ------- -------- "Secured Obligations" is defined in Section 2.2. ------------------- ----------- "U.C.C." means the Uniform Commercial Code, as in effect in the State of ------ Illinois. SECTION 1.2 U.C.C. DEFINITIONS. Un1ess otherwise defined herein or the ------------------ context otherwise, requires, terms for which meanings are provided in the U.C.C. are used, in this Pledge Agreement, including its preamble and recitals, with such meanings. ARTICLE II PLEDGE SECTION 2.1 Confirmation and Grant of Security Interest and Pledge. The ------------------------------------------------------ Pledgor hereby pledges, hypothecates, assigns, charges, mortgages, delivers, and transfers to the Agent for its benefit and the ratable benefit of the Lender Parties, and hereby grants to the Agent, for its benefit and the ratable benefit of the Lender Parties, a continuing pledge and security interest in and to, all of the following property (the "Collateral"): ---------- Exhibit D-3 (a) all issued and outstanding shares of capital stock of each Pledged Share Issuer identified in Item A of Attachment 1 hereto; ------ ------------ (b) all other Pledged Shares issued from time to time; (c) all promissory notes of each Pledged Note Issuer identified in Item B of Attachment 1 hereto; ------ ------------ (d) all other Pledged Notes issued from time to time; (e) all other Pledged Property, whether now or hereafter delivered to the Agent in connection with this Pledge Agreement; (f) all Dividends, Distributions, interest, and other payments and rights with respect to any Pledged Property; and (g) all proceeds of any and all of the foregoing. SECTION 2.2 Security for Obligations. This Pledge Agreement secures the ------------------------ payment in full of all Obligations now or hereafter existing under the Credit Agreements, the Notes, the Collateral Documents and each other Loan Document (including this Pledge Agreement) to which the Pledgor is or may become a party, whether for principal, interest, costs, fees, expenses or otherwise. SECTION 2.3 Delivery of Pledged Property. All certificates or ---------------------------- instruments representing or evidencing any Collateral, including all Pledged Shares and all Pledged Notes, shall be delivered to and held by or on behalf of (and, in the case of the Pledged Notes, endorsed to the order of) the Agent pursuant hereto, shall be in suitable form for transfer by delivery, and shall be accompanied by all necessary instruments of transfer or assignment, duly executed in blank, and all other necessary and appropriate action and approvals shall have been taken or received to grant to the Agent a first priority fully perfected security interest in such Collateral. SECTION 2.4 Dividends on Pledged Shares and Payments on Pledged Notes. --------------------------------------------------------- In the event that any Dividend is to be paid on any Pledged Share or any payment of principal or interest is to be made on any Pledged Note at a time when (x) no Default of the nature referred to in Section 8.1.9 of either Credit Agreement has occurred and is continuing, and no (y) Event of Default has occurred and is continuing, such Dividend or payment may be paid directly to and retained by the Pledgor. If any such Default or Event of Default has occurred and is continuing, then any such Dividend or payment shall be paid directly to the Agent (and if for any reason the Pledgor shall receive such Dividend or payment in such circumstances, the Pledgor shall hold the same segregated and in trust for the Agent until paid to the Agent in accordance with Section 4.4 hereof). ----------- SECTION 2.5 Continuing Security Interest; Transfer of Note. This Pledge ---------------------------------------------- Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until payment in full of all Obligations, Exhibit D-4 (b) be binding upon the Pledgor and its successors, transferees and assigns, and (c) inure, together with the rights and remedies of the Agent hereunder, to the benefit of the Agent and each Other Lender Party. Without limiting the foregoing c1ause (c) any Lender may assign or otherwise ---------- transfer (in whole or in part) any Note or Loan held by it to any other Person or entity, and such other Person or entity shall thereupon become vested with all the rights and benefits in respect thereof granted to such Lender under any Loan Document (including this Pledge Agreement) or otherwise, subject, however, to any contrary provisions in such assignment or transfer, and to the provisions of Section 10.11 and Article IX of each Credit Agreement. Upon the final payment in full of all Obligations, the security interest granted herein shall terminate and all rights to the collateral shall revert to the Pledgor. Upon any such termination, the Agent will, at the Pledgor's sole expense, deliver to the Pledgor, without any representations, warranties or recourse of any kind whatsoever, all certificates and instruments representing or evidencing all Pledged Shares, and all Pledged Notes, together with all other Collateral held by the Agent hereunder, and execute and deliver to the Pledgor such documents as the Pledgor shall reasonably request to evidence such termination. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1 Warranties, etc. The Pledgor represents and warrants unto --------------- each Lender Party, as at the date of each pledge and delivery hereunder (including each pledge and delivery of Pledged Shares and each pledge and delivery of a Pledged Note) by the Pledgor to the Agent of any Collateral, as set forth in this Article. SECTION 3.1.1 Ownership, No Liens, etc. The Pledgor is the legal and ------------------------ beneficial owner of, and has good and marketable title to (and has full right and authority to pledge and assign) such Collateral, free and clear of all liens, security interests, options, or other charges or encumbrances, except any lien or security interest granted pursuant hereto in favor of the Agent. SECTION 3.1.2 Valid Security Interest. The delivery of such Collateral ----------------------- to the Agent is effective to create a valid, perfected, first priority security interest in such Collateral and all proceeds thereof, securing the Obligations. No filing or other action will be necessary to perfect or protect such security interest. SECTION 3.1.3 As to Pledged Shares. In the case of any Pledged Shares -------------------- constituting such Collateral, all of such Pledged Shares are duly authorized arid validly issued, fully paid, and non-assessable, and constitute all of the issued and outstanding shares of capital stock of each Pledged Share Issuer. The Pledgor has no Subsidiary other than the Pledged Share Issuers. SECTION 3.1.4 As to Pledged Notes. In the case of each Pledged Note, all ------------------- of such Pledged Notes have been duly authorized, executed, endorsed, issued and delivered, and are the legal, valid and binding obligation of the issuers thereof, and are not in default. Exhibit D-5 SECTION 3.1.5 Authorization, Approval, etc. No authorization, approval, ---------------------------- or other action by, and no notice to or filing with, any governmental authority, regulatory body or any other Person is required either (a) for the pledge by the Pledgor of any Collateral pursuant to this Pledge Agreement or for the execution, delivery, and performance of this Pledge Agreement by the Pledgor, or (b) for the exercise by the Agent of the voting or other rights provided for in this Pledge Agreement, or, except with respect to any Pledged Shares, as may be required in connection with a depository of such Pledged Shares by laws affecting the offering and sale of securities generally, the remedies in respect of the Collateral pursuant to this Pledge Agreement. SECTION 3.1.6 Compliance with Laws. The Pledgor is in compliance with -------------------- the requirements of all applicable laws, rules, regulations and orders of every governmental authority, the noncompliance with which might materially adversely affect the business, properties, assets, operations, condition (financial or otherwise) or prospects of the Pledgor or the value of the Collateral or the worth of the Collateral as collateral security. ARTICLE IV COVENANTS SECTION 4.1 Protect Collateral; Further Assurances, etc. The Pledgor ------------------------------------------- will not sell, assign, transfer, pledge or encumber in any other manner the Collateral (except in favor of the Agent hereunder). The Pledgor will warrant and defend the right and title herein granted unto the Agent in and to the Collateral (and all right, title and interest represented by the Collateral) against the claims and demands of all Persons whomsoever. The Pledgor agrees that at any time, and from time to times at the expense of the Pledgor, the Pledgor will promptly execute and deliver all further instruments, and take all further action, that may be necessary or desirable, or that the Agent may, reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. SECTION 4.2 Stock Powers, etc. The Pledgor agrees that all Pledged ----------------- Shares (and all other shares of capital stock constituting Collateral) delivered by the Pledgor pursuant to this Pledge Agreement will be accompanied by duly executed undated blank stock powers, or other equivalent instruments of transfer acceptable to the Agent. The Pledgor will, from time to time upon the request of the Agent, promptly deliver to the Agent such stock powers, instruments, and similar documents, satisfactory in form and substance to the Agent, with respect to the Collateral as the Agent may reasonably request and will, from time to time upon the request of the Agent after the occurrence of any Event of Default, promptly transfer any Pledged Shares or other shares of common stock constituting Collateral Into the name of any nominee designated by the Agent. Exhibit D-6 SECTION 4.3 Continuous Pledge. Subject to Section 2.4, the Pledgor will, ----------------- at all times, keep pledged to the Agent pursuant hereto all Pledged Shares and all other shares of capital stock constituting Collateral, all Dividends and Distributions with respect thereto, all Pledged Notes, all interest, principal and other proceeds received by the Agent with respect to the Pledged Notes, and all other Collateral arid other securities, instruments, proceeds, and rights from time to time received by or distributable to the Pledgor in respect of any. Collateral, and will not permit any Pledged Share Issuer to issue any capital stock which shall not have been immediately duly pledged hereunder on a first perfected basis. SECTION 4.4 Voting Rights; Dividends, etc. The Pledgor agrees: ----------------------------- (a) after any Default of the nature referred to in Section ------- 8.1.9 of either Credit Agreement or an Event of Default shall have ----- occurred and be continuing, promptly upon receipt thereof by the Pledgor and without any request therefore by the Agent, to deliver (properly endorsed where required hereby or requested by the Agent) to the Agent all Dividends, Distributions, all interest, all principal, all other cash payments, and all proceeds of the Collateral, all of which shall be held by the Agent as additional Collateral for use in accordance with Section 6.3 and ----------- (b) after any Event of Default shall have occurred and be continuing and the Agent has notified the Pledgor of the Agent's intention to exercise its voting power under this clause (b) of Section ------- 4.4 --- (i) the Agent may exercise (to the exclusion of the Pledgor) the voting power and all other incidental rights of ownership with respect to any Pledged Shares or other shares of capital stock constituting Collateral and the Pledgor hereby grants the Agent an irrevocable proxy, exercisable under such circumstances, to vote the Pledged Shares and such other Collateral; and (ii) promptly to deliver to the Agent such additional proxies and other documents as may be necessary to allow the Agent to exercise such voting power. All Dividends, Distributions, interest, principal, cash payments and proceeds which may at any time and from time to time be held by the Pledgor but which the Pledgor is then obligated to deliver to the Agent, shall, until delivery to the Agent, be held by the Pledgor separate and apart from its other property in trust for the Agent. The Agent agrees that unless an Event of Default shall have occurred and be continuing and the Agent shall have given the notice referred to in clause (b) of Section 4.4, the Pledgor shall have the exclusive voting power ---------- ----------- with respect to any shares of capital stock (including any of the Pledged Shares) constituting Collateral and the Agent shall, upon the written request of the Pledgor, promptly deliver such proxies and other documents, if any, as shall be reasonably requested by the Pledgor which are necessary to allow the Pledgor to exercise voting power with respect to any such share of capital stock (including any of the Pledged Shares) constituting Collateral; provided, however, that no vote shall be cast, or consent, waiver or ratification given, or action taken by the Pledgor that would impair any Collateral or be inconsistent with or violate any provision of the Credit Agreement or any other Loan Document (including this Pledge Agreement). Exhibit D-7 SECTION 4.5 Additional Undertakings. The Pledgor will not, without the ----------------------- prior written consent of the Agent; (a) enter into any agreement amending, supplementing, or waiving any provision of any Pledged Note (including any underlying instrument pursuant to which such Pledged Note is issued) or compromising or releasing or extending the time for payment of any obligation of the maker thereof; (b) take or omit to take any action the taking or the omission of which would result in any impairment or alteration of any obligation of the maker of any Pledged Note or other instrument constituting Collateral; or (c) make any demand under any Pledged Note at any time when a Default of the nature referred to in Section 8.1.9 of either Credit ------------- Agreement, or any Event of Default, has occurred arid is continuing. ARTICLE V THE AGENT SECTION 5.1 Agent Appointed Attorney-in-Fact. The Pledgor hereby -------------------------------- irrevocably appoints the Agent the Pledgor's attorney-in-fact, with full authority in the place and stead of the Pledgor and in the name of the Pledgor or otherwise, from time to time in the Agent's discretion, to take any action and to execute any instrument which the Agent may deem necessary or advisable to accomplish the purposes of this Pledge Agreement, including without limitation; (a) to ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (b) to receive, endorse and collect any drafts or other instruments, documents and chattel paper, in connection with clause (a) above; and (c) to file any claims or take any action or institute any proceedings which the Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Agent with respect to any of the Collateral. The Pledgor hereby acknowledges, consents and agrees that the power of attorney granted pursuant to this Section is irrevocable and coupled with an interest. SECTION 5.2 Agent May Perform. If the Pledgor fails to perform any ----------------- agreement contained herein, the Agent may itself perform, or cause performance of, such agreement, and the expenses of the Agent incurred in connection therewith shall be payable by the Pledgor pursuant to Section 6.4. ----------- SECTION 5.3 Agent Has No Duty. The powers conferred on the Agent ----------------- hereunder are solely to protect its interest (on behalf of the Lender Parties) in the Collateral and shall not impose any duty on it to exercise any such powers. Except for reasonable care of any Collateral Exhibit D-8 in its possession and the accounting for moneys actually received by it hereunder, the Agent shall have no duty as to any Collateral or responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Pledged Property, whether or not the Agent has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. SECTION 5.4 Reasonable Care. The Agent is required to exercise --------------- reasonable care in the custody and preservation of any of the Collateral in its possession; provided, however, the Agent shall be deemed to have exercised ----------------- reasonable care in the custody and preservation of any of the Collateral, if it takes such action for that purpose as the Pledgor reasonably requests in writing at times other than upon the occurrence and during the continuance of any Event of Default, but failure of the Agent to comply with any such request at any time shall not in itself be deemed a failure to exercise reasonable care. ARTICLE VI REMEDIES SECTION 6.1 Certain Remedies. If any Event of Default shall have ---------------- occurred and be continuing: (a) The Agent may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the U.C.C. (whether or not the U.C.C. applies to the affected Collateral) and also may, without notice except as specified below, nil the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Agent's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Agent may deem commercially reasonable, The Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days' prior notice to the Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefore, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (b) The Agent may (i) transfer all or any part of the Collateral into the name of the Agent or its nominee, with or without disclosing that such Collateral is subject to the lien and security interest hereunder, (ii) notify the parties obligated on any of the Collateral to make payment to the Agent of any amount due or to become due thereunder, (iii) enforce collection of any of the Collateral by suit or otherwise, and surrender, release or exchange all or any part thereof, or compromise or extend or Exhibit D-9 renew for any period (whether or not longer than the original period) any obligations of any nature of arty party with respect thereto, (iv) endorse any checks, drafts or other writings in the Pledgor's name to allow collection of the Collateral, (v) take control of any proceeds of the Collateral, and (vi) execute (in the name, place and, stead of the Pledgor) endorsements, assignments, stock powers and other instruments of conveyance or transfer with respect to all or any of the Collateral. SECTION 6.2 Compliance with Restrictions. The Pledgor agrees that in ---------------------------- any sale of any of the Collateral whenever an Event of Default shall have occurred and be continuing, the Agent is hereby authorized to comply with any limitation or restriction in connection with such sale as it may be advised by counsel is necessary in order to avoid any violation of applicable law (including compliance with such procedures as may restrict the number of prospective bidders and purchasers, require that such prospective bidders and purchasers have certain qualifications, and restrict such prospective bidders and purchasers to persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of such Collateral), or in order to obtain any required approval of the sale or of the purchaser by any governmental regulatory authority or official, and the Pledgor further agrees that such compliance shall not result in such sale being considered or deemed not to have been made in a commercially reasonable manner, nor shall the Agent be liable nor accountable to the Pledgor for any discount allowed by the reason of the fact that such Collateral is sold in compliance with any such limitation or restriction. SECTION 6.3 Application of Proceeds. All cash proceeds received by the ----------------------- Agent in respect of any sale of, collection from, or other realization upon, all or any part of the Collateral may, in the discretion of the Agent, be held by the Agent as additional collateral security for, or then or at any time thereafter be applied (after payment of any amounts payable to the Agent pursuant to Section 10.3 of each Credit Agreement and Section 6.4) in whole or ------------ ----------- in part by the Agent against, all or any part of the Obligations in such order as the Agent shall elect. Any surplus of such cash or cash proceeds held by the Agent and remaining after final payment in full of all the Obligations, and the termination of all Commitments, shall be paid over to the Pledgor or to whomsoever may be lawfully entitled to receive such surplus. SECTION 6.4 Indemnity and Expense. The Pledgor hereby indemnifies and --------------------- holds harmless the Agent from and against any and all claims, losses and liabilities arising out of or resulting from this Pledge Agreement (including enforcement of this Pledge Agreement), except claims, losses or liabilities resulting from the Agent's gross negligence or willful misconduct, Upon demand, the Pledgor will pay to the Agent the amount of any and all reasonable expenses, including the reasonable fees and disbursements of its counsel (including the reasonable allocated cost of internal legal services and, all disbursements of internal counsel) and of any experts and agents, which the Agent may incur in connection with: Exhibit D-10 (a) the administration of this Pledge Agreement, the Credit Agreement and each other Loan Document; (b) the custody, preservation, use or operation of, or the sale of, collection from or other realization upon, any of the Collateral; (c) the exercise or enforcement of any of the rights of the Agent hereunder; or (d) the failure by the Pledgor to perform or observe any of the provisions hereof. ARTICLE VII MISCELLANEOUS PROVISIONS SECTION 7.1 Loan Document. This Pledge Agreement is a Loan Document ------------- executed pursuant to the Credit Agreements and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions thereof (including as to the WAIVER OF ANY JURY TRIAL with respect to any litigation relating to or arising out of any matter herein). SECTION 7.2 Amendments, etc. No amendment to or waiver of any provision of --------------- this Pledge Agreement nor consent to any departure by the Pledgor herefrom shall in any event be effective unless the same shall be in writing and signed by the Agent, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it is given. SECTION 7.3 Protection of Collateral. The Agent may from time to time, at ------------------------ its option, perform any act which the Pledgor agrees hereunder to perform and which the Pledgor shall fail to perform after being requested in writing so to perform (it being understood that no such request need be given after the occurrence and during the continuance of any Event of Default) and the Agent may from time to time take any other action which the Agent reasonably deems necessary for the maintenance, preservation or protection of any of the Collateral or of its security interest therein. SECTION 7.4 Addresses for Notices. All notices and other communications --------------------- provided for hereunder shall be in writing (including telegraphic communication) and, if to the Pledgor, mailed, or telegraphed or delivered to it at the address set forth below its signature hereto, if to the Agent, mailed or delivered to it, addressed to it at the address of the Agent Specified in the Credit Agreement or, as to either party, at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. All such notices and other communications shall, when mailed or telegraphed, respectively, be effective when deposited in the mails or delivered to the telegraph company, respectively, addressed as aforesaid. SECTION 7.5 Section Captions. Section captions used in this Pledge ---------------- Agreement are for convenience of reference only, and shall not affect the construction of this Pledge Agreement. Exhibit D-11 SECTION 7.6 Severability. Wherever possible each provision of this Pledge ------------ Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Pledge Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Pledge Agreement. SECTION 7.7 Governing Law, Entire Agreement, etc. THIS PLEDGE AGREEMENT ------------------------------------ SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ILLINOIS, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OP ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. THIS PLEDGE AGREEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE THE ENTIRE UNDERSTANDING AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND SUPERSEDE ANY PRIOR AGREEMENTS, WRITTEN OR ORAL, WITH RESPECT THERETO. Exhibit D-12 IN WITNESS WHEREOF, the parties hereto have caused this Pledge Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the day and year first above written. NASCO INTERNATIONAL, INC. By: /s/ Dean T. Johnson ------------------------------------ Title: Chief Financial Officer Address: 901 Janesville Avenue Fort Atkinson, WI 53538-0901 Telecopy No.: 414-563-0234 Attention: Dean T. Johnson Chief Financial Officer Copy to: Geneve Corporation 96 Cummings Point Road Stamford, Connecticut 06902 Telecopy No.: 203-348-3103 Attention: William J. Peterson Chief Financial Officer Exhibit D-13 ACCEPTED: BANK OF AMERICA LA., as Agent By: /s/ Debra Basler ------------------------------------ Title: Vice President Address: 231 South LaSalle Street Chicago, Illinois 60697 Telecopy No.: 312-987-0889 Attention: Debra Basler Exhibit D-14 ATTACHMENT I to Pledge Agreement Description ----------- Item A. Pledged Shares -------------- Pledged Share Issuer Common Stock - -------------------- ------------ Authorized Outstanding % of Shares Shares Shares Pledged Nasco Export, Inc. 50,000 2,500 100% Nasco Preferred Corporation 1,000 100 100% Nasco Subsidiary Corporation 1,000 100 100% Triarco Arts & Crafts, Inc. 44,000 50 100% Item B. Pledged Notes ------------- None Exhibit D-15 EXHIBIT E SECURITY AGREEMENT THIS SECURITY AGREEMENT, dated as of March 31, 2000 (as modified from time to time, this "Security Agreement"), made by NASCO INTERNATIONAL, INC., a ------------------ Wisconsin corporation (the "Grantor"), in favor of BANK OF AMERICA, N.A., as ------- administrative agent (together with any successor(s) thereto in such capacity, the "Agent") for each of the various financial institutions (individually a ----- "Lender" and collectively the "Lenders") which are or may from time to time ------ ------- become, parties to the Credit Agreements referred to below, WHEREAS, pursuant to that certain Third Amended and Restated Credit Agreement, dated as of January 2, 1996 (as heretofore amended, supplemented and otherwise modified to the date hereof, the "Existing Credit Agreement"), among ------------------------- the Grantor, the lenders parties thereto and Bank of America Illinois (predecessor to Bank of America, N.A.), as agent, the lenders have extended loans to the Grantor; and WHEREAS, as a condition precedent to any extension of credit under the Existing Credit Agreement, the Grantor was required to execute and deliver the Security Agreement (the "Existing Security Agreement") pursuant to which the Grantor granted to the Agent a continuing security interest in all of the "Collateral" identified therein, and, in connection with and to supplement the Existing Security Agreement, the Grantor entered into the Agreement (Patent), the Agreement (Trademark) and the Agreement (Copyright) (collectively referred to herein as the "Supplements"); and ----------- WHEREAS, the Grantor has requested that the Lenders make certain credit available, in part to refinance all indebtedness under the Existing Credit Agreement, pursuant to a Credit Agreement (Five Year) dated March 31, 2000 among the Grantor, certain lenders, Bank One, Wisconsin as co-agent and Bank of America, N.A., as administrative agent (as amended, supplemented, amended and restated or otherwise modified from time to time, being referred to as the "Credit Agreement (Five Year)" and a Credit Agreement (364 Day) dated March 31, 2000 among the Grantor, certain lenders, Bank One, Wisconsin as co-agent and Bank of America, N.A., as administrative agent (as amended, supplemented, amended and restated or otherwise modified from time to time, being referred to as the "Credit Agreement (364 Day)" and together with the Credit Agreement (Five Year), the "Credit Agreements"); and WHEREAS, it is a condition precedent to such extensions of credit that the Grantor enter into this Security Agreement to, among other things, confirm and ratify its grant to the Agent of a continuing security interest in the Collatera1 (including, without limitation, the Copyright Collateral, the Patent Collateral and the Trademark Collateral, as defined therein and in the Supplements); NOW, THEREFORE, for good and valuable consideration the receipt of which is hereby acknow1edged, and in order to induce the Lenders to make Loans (including the initial Loans) to Exhibit E-1 the Grantor from time to time pursuant to the Credit Agreements, in part to refinance the indebtedness under the Existing Credit Agreement, the Grantor hereby agrees with the Agent, for its benefit and the ratable benefit of each Lender Party, as follows: ARTICLE I DEFINITIONS SECTION 1.1 Certain Terms. The following terms (whether or not underscored) ------------- when used in this Security Agreement, including its preamble and recitals, shall have the following meanings (such definitions to be equally applicable to the singular and plural forms thereof); "Agent" is defined in the preamble. ----- -------- "Collateral" is defined in Section 2.1 ---------- ----------- "Collateral Account" is defined in clause (c) of Section 4.1.2. ------------------ ---------- ------------- "Commitments" means the "Commitments" as defined in the Credit Agreement ----------- (Five Year) and the Credit Agreement (364 Day). "Computer Hardware and Software Collateral" means: ----------------------------------------- (a) all computer and other electronic data processing hardware, integrated computer systems, central processing units, memory units, display termina1s, printers, features, computer elements, card readers, tape drives, hard and soft disk drives, cables, electrical supply hardware, generators, power equa1izers, accessories and all peripheral devices and other related computer hardware; (b) all software programs, data and databases (including both source code, object code and all related applications and data files), whether now owned, licensed or 1eased or hereafter acquired by the Grantor, designed for use on the computers and electronic data processing hardware described in clause (a) above; ---------- (c) all firmware associated therewith; (d) all documentation (including flow charts, logic diagrams, manuals guides and specifications) with respect to such hardware, software and firmware described in the preceding clauses (a) through (c); and ----------- --- (e) all rights with respect to all of the foregoing, including, --------- without limitation, any and all copyrights, 1icenses, options, warranties, service contracts, program services, test rights, maintenance rights, support rights, improvement rights, renewal rights and indemnifications arid any substitutions, replacements, additions or model conversions of any of the foregoing. "Copyright Collateral" means all copyrights and all semi-conductor chip -------------------- product mask works of the Grantor, whether statutory or common law, registered or unregistered, now or Exhibit E-2 hereafter in force throughout the world including, without limitation, all of the Grantor's right, title and interest in and to all copyrights and mask works registered in the United States Copyright Office or anywhere else in the world and also including, without limitation, the copyrights and mask works referred to in Item A of Schedule IV attached hereto, and all applications for ------ ----------- registration thereof, whether pending or in preparation, all copyright and mask work licenses, including each copyright and mask work license referred to in Item B of Schedule IV attached hereto, the right to sue for past, present and - ------ ----------- future infringements of any thereof, all rights corresponding thereto throughout the world, all extensions and renewals of any thereof and all proceeds of the foregoing, including, without limitation, licenses, royalties, income, payments, claims, damages and proceeds of suit. "Credit Agreement" is defined in the third recital. ---------------- ----- "Equipment" is defined in clause (a) of Section 2.1. --------- --------- ----------- "Existing Credit Agreement" is defined in the first recital. ------------------------- ------------- "Existing Security Agreement: is defined in the preamble. --------------------------- -------- "Grantor" is defined in the preamble. ------- -------- "Intellectual Property Collateral" means, collectively, the Computer -------------------------------- Hardware and Software Collateral, the Copyright Collateral, the Patent Collateral, the Trademark Collateral and the Trade Secrets Collateral. "Inventory" is defined in clause (b) of Section 2.1. --------- --------- ----------- "Lender" is defined in the preamble. ------ -------- "Lender Party: means, as the context may require, any Lender or the ------------ Agent and each of its respective successor, transferees and assigns. "Lenders" is defined in the preamble. ------- -------- "Loan Documents" means "Loan Documents" as defined in the Credit -------------- Agreement (Five Year) and "Loan Documents" as defined in the Credit Agreement (364 Day). "Notes" means the "Notes" as defined in the Credit Agreement (Five ----- Year) and "Notes" as defined in the Credit Agreement (364 Day). "Obligations" means "Obligations" as defined in the Credit Agreement ----------- (Five Year) and "Obligations" as defined in the Credit Agreement (364 Day). "Patent Collateral" means: ----------------- (a) all letters patent and applications for letters patent throughout the world, including all patent applications in preparation for filing anywhere in the world and Exhibit E-3 including each patent and patent application referred to in Item A of ------ Schedule II attached hereto; ----------- (b) all patent licenses, including each patent license referred to in Item B of Schedule II attached hereto; ------ ----------- (c) all reissues, divisions, continuations, continuations-in-part, extensions, renewals and reexaminations of any of the items described in clauses (a) and (b); and ---------- - (d) all proceeds of, and rights associated with, the foregoing (including license, royalties and proceeds of infringement suits), the right to sue third parties for past, present or future infringements of any patent or patent application, including any patent or patent application referred to in Item A of Schedule II attached hereto, and ------ ----------- for breach or enforcement of any patent license, including any patent license referred to in Item B of Schedule II attached hereto, and all ------ ----------- rights corresponding thereto throughout the world. "Receivables" is defined in clause (c) of Section 2.1. ----------- --------- ----------- "Related Contracts: is defined in clause (c) of Section 2.1. ----------------- ---------- ----------- "Security Agreement" is defined in the preamble. ------------------ -------- "Supplements" is defined in the second recital. ----------- -------------- "Trademark Collateral" means: -------------------- (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, certification marks, collective marks, logos, other source of business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and general intangibles of a like nature (all of the foregoing items in this clause (a) being collectively called a "Trademark"), now existing ------ - --------- anywhere in the world or hereafter adopted or acquired, whether currently in use or not, all registrations and recordings thereof and all applications in connection therewith, whether pending or in preparation for filing, including registrations, recordings and applications in the United States Patent and Trademark Office or in any office or agency of the United States of America or any State thereof or any foreign country, including those referred to in Item A of Schedule III attached hereto; ------ ------------ (b) all Trademark licenses, including each Trademark license referred to in Item B of Schedule III attached; ------ ------------ (c) all reissues, extensions or renewals of any of the items described in clauses (a) and (b); ---------- - (d) all of the goodwill of the business connected with the use of, and symbolized by the items described in, clauses (a) and ---------- (b); and - Exhibit E-4 (e) all proceeds of, and rights associated with, the foregoing, including any claim by the Grantor against third parties for past, present or future infringement or dilution of any Trademark, Trademark registration or Trademark license, including any Trademark, Trademark registration or Trademark license referred to in Item A and Item B of ------ ------ Schedule III attached hereto, or for any injury to the goodwill ------------ associated with the use of any such Trademark or for breach or enforcement of any Trademark license. "Trade Secrets Collateral" means common law and statutory trade secrets and ------------------------ all other confidential or proprietary or useful information and all know-how obtained by or used in or contemplated at any time for use in the business of the Grantor (all of the foregoing being collectively called a "Trade Secret"), ------------ whether or not such Trade Secret has been reduced to a writing or other tangible form, including all documents and things embodying, incorporating or referring in any way to such Trade Secret, all Trade Secret licenses, including each Trade Secret license referred to in Schedule V attached hereto, and including the ---------- right to sue for and to enjoin and to collect damages for the actual or threatened misappropriation of any Trade Secret and for the breach or enforcement of any such Trade Secret license. "U.C.C." means the Uniform Commercial Code, as in effect in the State of ------ Illinois. SECTION 1.2 U.C.C. Definitions. Unless otherwise defined herein or the ------------------ context otherwise requires, terms for which meanings are provided in the U.C.C. are used in this Security Agreement, including its preamble and recitals, with such meanings. ARTICLE II SECURITY INTEREST SECTION 2.1 Confirmation and Grant of Security Interest. The Grantor hereby ------------------------------------------- pledges, assigns and grants, to the Agent for its benefit and the ratable benefit of each of the Lender Parties, and hereby grants to the Agent for its benefit and the ratable benefit of each of the Lender Parties, a continuing security interest in and to all of the following, whether now or hereafter existing or acquired (the "Collateral"): ---------- (a) all equipment in all of its forms of the Grantor, wherever located, and all parts thereof and all accessions, additions, attachments, improvements, substitutions and replacements thereto and therefor (any and all of the foregoing being the "Equipment"); --------- (b) all inventory in all of its forms of the Grantor, wherever located, including (i) all raw materials and work in progress therefor, finished goods thereof, and materials used or consumed in the manufacture or production thereof, (ii) all goods in which the Grantor has an interest in mass or a joint or other interest or right of any kind (including goods in which the Grantor has an interest or right as consignee), and (iii) all goods which are returned to or repossessed by the Grantor; and Exhibit E-5 (iv) live specimens including frogs and all accessions thereto, products thereof and documents therefor (any and all such inventory, materials, goods, accessions, products and documents being the "Inventory"); --------- (c) all accounts, contracts, contract rights, chattel paper, documents and general intangibles of the Grantor, whether or not arising out of or in connection with the sale or lease of goods or the rendering of services, and all rights of the Grantor now or hereafter existing in and to all security agreements, guaranties, leases and other contracts securing or otherwise relating to any such accounts, contracts, contract rights, chattel paper, documents, instruments, and general intangibles (any and all such accounts, contracts, contract rights, chattel paper, documents, instruments, and general intangibles being the "Receivables", and any and ----------- all such security agreements, guaranties, leases and other contracts being the "Related Contracts"); ------- --------- (d) all Intellectual Property Collateral of the Grantor; (e) all certificated securities; (f) all investment property and financial assets; (g) all books, records, writings, data bases, information and other property relating to, used or useful in connection with, evidencing, embodying, incorporating or referring to, any of the foregoing in this Section 2.1; ----------- (h) all of the Grantor's other property and rights of every kind and description and interests therein, including all rights in any bank or other accounts and in all monies from time to time therein; and (i) all products, offspring, rents, issues, profits, returns, income and proceeds of and from any and all of the foregoing Collateral (including proceeds which constitute property of the types described in clauses (a), ---------- (b), (c), (d), (e), (f), (g), and (h), proceeds deposited from time to time - - - - - - - in the Collateral Account and in any lock boxes of the Grantor, and, to the extent not otherwise included, all payments under insurance (whether or not the Agent is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral). Notwithstanding the foregoing, the Agent shall not enforce the security interest granted pursuant to this Security Agreement in rights arising under contracts as to which such enforcement would constitute a violation of a valid and enforceable restriction thereon, unless any required consents shall have been obtained or such restriction shall have become or be rendered ineffective by reason of law, court proceedings or otherwise. The Grantor agrees to use its best efforts to obtain any such required consent. SECTION 2.2 Security for Obligations. This Security Agreement secures the ------------------------ payment of all Obligations now or hereafter existing under the Credit Agreements, the Notes and each Exhibit E-6 other Loan Document (including this Security Agreement) to which the Grantor is or may become a party, whether for principal, interest, costs, fees, expenses or otherwise. SECTION 2.3 Continuing Security Interest; Transfer of Notes. This Security ----------------------------------------------- Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until payment in full of all Obligations and the termination of all Commitments, (b) be binding upon the Grantor, its successors, transferees and assigns, and (c) inure, together with the rights and remedies of the Agent hereunder, to the benefit of the Agent and each other Lender Party. Without limiting the generality of the foregoing clause (c), any Lender may --------- assign or otherwise transfer (in whole or in part) any Note or Loan held by it to any other Person or entity, and such other Person or entity shall thereupon become vested with all the rights and benefits in respect thereof granted to such Lender under an Loan Document (including this Security Agreement) or otherwise, subject, however, to any contrary provisions in such assignment or transfer, and to the provisions of Section 10.11 and Article IX of either Credit Agreement. Upon the final payment in full of all Obligations, the security interest granted herein shall terminate and all rights to the Collateral shall revert to the Grantor. Upon any such termination, the Agent will, at the Grantor's sole expense, execute and deliver to the Grantor such documents as the Grantor shall reasonably request to evidence such termination. SECTION 2.4 Grantor Remains Liable. Anything herein to the contrary ---------------------- notwithstanding: (a) the Grantor shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein, and shall perform all of its duties and obligations under such contracts and agreements to the same extent as if this Security Agreement had not been executed, (b) the exercise by the Agent of any of its rights hereunder shall not release the Grantor from any of its duties or obligations under any such contracts or agreements included in the Collateral, and (c) neither the Agent nor any other Lender Party shall have any obligation or liability under any such contracts or agreements included in the Collateral by reason of this Security Agreement, nor shall the Agent or any other Lender Party be obligated to perform any of the obligations or duties of the Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. ARTICLE III REPRESENTATIONS AND WARRANTIES Exhibit E-7 SECTION 3.1 Representation and Warranties. The Grantor represents and ----------------------------- warrants unto each Lender Party as set forth in this Article. SECTION 3.1.1 Location of Collateral, etc. All of the Equipment and --------------------------- Inventory of the Grantor are located at the places specified in Item A and Item ------ ---- B, respectively, of Schedule I hereto. None of the Equipment and Inventory has, - - ---------- within the four months preceding the date of the Security Agreement, been located at any place other than the place specified in Item A and Item B, ------ ------ respectively, of Schedule I hereto. The place(s) of business and chief executive office of the Grantor and the Offices where the Grantor keeps its records concerning the Receivables, and all originals of all chattel paper which evidence Receivables, are located at the address set forth below the name of the Grantor on the signature page hereof or the Grantor's office in Modesto, California. The Grantor has no trade names other than Nasco, Nasco West and Nasco Plastics. The Grantor has not been known by any legal name different from the one set forth on the signature page hereto, nor has the Grantor been the subject of any merger or other corporate reorganization. The Grantor is not a "retail merchant" within the meaning of Section 9102 of the Uniform Commercial Code - Secured Transactions of the State of California. None of the Receivables is evidenced by a promissory note or other instrument. The Grantor is not a party to any Federal, state or local government contract, although it does sell materials to various municipalities from time to time on ordinary trade terms. SECTION 3.1.2 Ownership, No Liens, etc. The Grantor owns the Collateral ------------------------ free and clear of any Lien, security interest, charge or encumbrance except for the security interest created by this Security Agreement and except as permitted by the Credit Agreement. No effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except such as may have been filed in favor of the Agent relating to this Security Agreement. SECTION 3.1.3 Possession and Control. The Grantor has exclusive possession ---------------------- and control of the Equipment and Inventory. SECTION 3.1.4 Negotiable Documents, Instruments and Chattel Paper. The --------------------------------------------------- Grantor has, contemporaneously herewith, delivered to the Agent possession of all originals of all negotiable documents, instruments and chattel paper currently owned or held by the Grantor (duly endorsed in blank, if requested by the Agent). SECTION 3.1.5 Intellectual Property Collateral. With respect to any -------------------------------- Intellectual Property Collateral the loss, impairment or infringement of which might have a materially adverse effect on the financial condition, operation, assets, business, properties or prospects of the Grantor: (a) such Intellectual Property Collateral is subsisting and has not been adjudged or invalid or unenforceable, in whole or in part; (b) such Intellectual Property Collateral is valid and enforceable; (c) the Grantor has made all necessary filings and recordations to protect its interest in such Intellectual Property Collateral, including, without limitation, recordations of all of its interests in the Patent Collateral and Trademark Collateral in the Exhibit E-8 United States Patent and Trademark Office and in corresponding offices throughout the world and its claims to the Copyright Collateral in the United States Copyright Office and in corresponding offices throughout the world; (d) the Grantor is the exclusive owner of the entire and unencumbered right, title and interest in and to such Intellectual Property Collateral and no claim has been made that the of such Intellectual Property Collateral does or may violate the asserted rights of any third party; and (e) the Grantor has performed and will continue to perform all acts and has paid and will continue to pay all required fees and taxes to maintain each and every item of Intellectual Property Collateral in full force and effect throughout the world, as applicable. The Grantor owns directly or is entitled to use by license or otherwise, all patents, Trademarks, Trade Secrets, copyrights, mask works, licenses, technology, know-how, processes and rights with respect to any of the foregoing used in, necessary for or of importance to the conduct of the Grantor's business. The Schedules hereto contain true and complete listings and descriptions of all of the Grantor's trademarks, trademark licenses, patents, patent licenses, copyrights, copyright licenses and trade secrets. SECTION 3.1.6 Validity, etc. This Security Agreement creates a valid first ------------- priority security interest in the Collateral, securing the payment of the Obligations, and all filings and other actions necessary or desirable to perfect and protect such security interest have been duly taken. SECTION 3.1.7 Authorization, Approval, etc. No authorization, approval or ---------------------------- other action by, and no notice to or filing with, any governmental authority or regulatory body is required either (a) for the grant by the Grantor of the security interest granted hereby or for the execution, delivery and performance of this Security Agreement by the Grantor, or (b) for the perfection of or the exercise by the Agent of its rights and remedies hereunder. SECTION 3.1.8 Compliance with Laws. The Grantor is in compliance with the -------------------- requirements of all applicable laws, rules, regulations and orders of every governmental authority, the non-compliance with which might materially adversely affect the business, properties, assets, operations, condition (financial or otherwise) or prospects of the Grantor or the value of the Collateral or the worth of the Collateral as collateral security. ARTICLE IV COVENANTS Exhibit E-9 SECTION 4.1 Certain Covenants. The Grantor covenants and agrees that, so ----------------- long as any portion of the Obligations shall remain unpaid, the Grantor will, unless the Required Lenders shall otherwise consent in writing, perform the obligations set forth in this Section. SECTION 4.1.1 As to Equipment and Inventory. The Grantor hereby agrees ----------------------------- that it shall (a) keep all the Equipment and Inventory (other than Inventory sold in the ordinary course of business) at the places therefor specified in Section 3.1.1 or, upon 30 days' prior written notice to the Agent, at such ------------- other places in a jurisdiction where all representations and warranties set forth in Article III (including Section 3.1.6) shall be true and correct, ----------- ------------- and all action required pursuant to the first sentence of Section 4.1.7 -------------- ------------- shall have been taken with respect to the Equipment and Inventory; (b) cause the Equipment to be maintained and preserved in the same condition, repair and working order as when new, ordinary wear and tear excepted, and in accordance with any manufacturer's manual; and forthwith, or in the case of any loss or damage to any of the Equipment, as quickly as practicable after the occurrence thereof, make or cause to be made all repairs, replacements and other improvements in connection therewith which are necessary or desirable to such end; and promptly furnish to the Agent a statement respecting any loss or damage to any of the Equipment; and (c) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Equipment and Inventory, except to the extent the validity thereof is being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP have been set aside. SECTION 4.1.2 As to Receivables and Investment Property. ----------------------------------------- (a) The grantor shall keep its place(s) of business and chief executive office and the office(s) where it keeps its records concerning the Receivables, and all originals of all chattel paper which evidenced Receivables, located at the address set forth in Section 3.1.1, or, upon 30 ------------- days' prior written notice to the Agent, at such other locations in a jurisdiction where all actions required by the first sentence of Section -------------- ------- 4.1.7 shall have been taken with respect to the Receivables; not change its ----- name except upon 30 days' prior written notice to the Agent; hold and preserve such records and chattel paper; and permit representatives of the Agent at any time during normal business hours to inspect and make abstracts from such records and chattel paper. (b) Promptly upon the written request of the Agent, the Grantor will direct all obligors under any Receivables to make all payments to one or more lock boxes. Each lock box will be maintained only pursuant to a lock box agreement which is in all respects satisfactory to the Agent and which provides, among other things, that (i) until the lock box bank shall have received written notice to the contrary from the Agent, the lock box bank will make all payments from the lock box to those accounts of the Grantor designated by the Grantor, and, after any such notice, the lock box bank will make all Exhibit E-10 payments from the lock box to the Agent for credit to the Collateral Account, (ii) the lock box bank (if other than the Agent or a Lender) waives all set off rights, and (iii) such lock box agreement may not be amended without the written consent of the Agent. The Agent will not give the notice referred to in the preceding clause (i) unless it has given, or ---------- is contemporaneously giving, notice pursuant to clause (c) of this Section -------------------------- 4.1.2. No funds, other than proceeds of Collateral, will be paid to the ----- lock boxes. The Grantor will not open any new lock box, or terminate any existing lock box, except upon 10 days' prior written notice to the Agent. (c) Upon written notice by the Agent to the Grantor pursuant to this clause (c) of this Section 4.1.2, all proceeds of Collateral received by ---------- ------------- the Grantor shall be delivered in kind to the Agent for deposit to a deposit account (the "Collateral Account") of the Grantor maintained with ------------------ the Agent, and the Grantor shall not commingle any such proceeds, and shall hold separate and apart from all other property, all such proceeds in express trust for the benefit of the Agent until delivery thereof is made to the Agent. The Agent will not give the notice referred to in the preceding sentence unless there shall have occurred and be continuing a Default. No funds, other than proceeds of Collateral, will be deposited in the Collateral Account. (d) The Agent shall have the right to apply any amount in the Collateral Account to the payment of any Obligations which are due and payable or payable upon demand, or to the payment of any Obligations at any time that an Event of Default shall exist. Subject to the rights of the Agent, the Grantor shall have the right, with respect to and to the extent of collected funds in the Collateral Account, as long as there shall be no Default, to require the Agent to permit to be transferred upon the direction of the Grantor any or all of such collected funds. The Agent may at any time transfer to the Grantor's general demand deposit accounts any or all of the collected funds in the Collateral Account; provided, however, -------- ------- that any such transfer shall not be deemed to be a waiver or modification of any of the Agent's rights under clause (d) of this Section 4.1.2. ---------- ------------- (e) The Grantor will, at the Agent's request, enter into such agreements and cause any securities intermediary to enter into such agreements as may be necessary to provide the Agent control of all investment property. SECTION 4.1.3 As to Collateral. ---------------- (a) Until such time as the Agent shall notify the Grantor of the revocation of such power and authority the Grantor (i) may in the ordinary course of its business, at its own expense, sell, lease or furnish under the contracts of service any of the Inventory normally held by the Grantor for such purpose, and use and consume, in the ordinary course of its business, any raw materials, work in process or materials normally held by the Grantor for such purpose, (ii) will, at its own expense, endeavor to collect, as and when due, all amounts due with respect to any of the Collateral, including the taking of such action with respect to such collection as the Agent may reasonably request or, in the absence of such request, as the Grantor may deem advisable, and (iii) may grant, in the ordinary course of business, to any party obligated on any of the Collateral, any rebate, refund or allowance to which such party may be lawfully entitled, and may accept, in Exhibit E-11 connection therewith, the return of goods, the sale or lease of which shall have given rise to such Collateral. The Agent, however, may, at any time, after the occurrence and during the continuance of a Default, whether before or after any revocation of such power and authority or the maturity of any of the Obligations, notify any parties obligated on any of the Collateral to make payment to the Agent of any amounts due or to become due thereunder and enforce collection of any of the Collateral by suit or otherwise and surrender, release or exchange all or any part thereof, or compromise or extend or renew for any period (whether or not longer than the original period) debtedness thereunder or evidenced thereby. Upon request of the Agent, the Grantor will, at its own expense, notify any parties obligated on any of the Collateral to make payment to the Agent of any amounts due or to become due thereunder. (b) The Agent is authorized to endorse, in the name of the Grantor, any item, howsoever received by the Agent, representing any payment on or other proceeds of any of the Collateral. SECTION 4.1.4 As to Intellectual Property Collateral. (a) The Grantor shall not, unless the Grantor shall either (i) reasonably and in good faith determine (and notice of such determination shall have been delivered to the Agent) that any of the Patent Collateral is of negligible economic value to the Grantor, or (ii) have a valid business purpose to do otherwise, do any act, or omit to do any act, whereby any of the Patent Collateral may lapse or become abandoned or dedicated to the public or unenforceable. (b) The Grantor shall not, and the Grantor shall not permit any of its licensees to, unless the Grantor shall either (i) reasonably and in good faith determine (and notice of such determination shall have been delivered to the Agent) that any of the Trademark Collateral is of negligible economic value to the Grantor, or (ii) have a valid business purpose to do otherwise, (i) fail to continue to use any of the Trademark Collateral in order to maintain all of the Trademark Collateral in full force free from any claim of abandonment for non-use, (ii) fail to maintain as in the past the quality of products and services offered under all of the Trademark Collateral, (iii) fail to employ all of the Trademark Collateral registered with any Federal or state or foreign authority with an appropriate notice of such registration, (iv) adopt or use any other Trademark which is confusingly similar or a colorable imitation of any of the Trademark Collateral, (v) use any of the Trademark Collateral registered with any Federal or state or foreign authority except for the uses for which registration or application for registration of all of the Trademark Collateral has been made, and Exhibit E-12 (vi) do or permit any act or knowingly omit to do any act whereby any of the Trademark Collateral may lapse or become invalid or unenforceable. (c) The Grantor shall not, unless the Grantor shall either (i) reasonably and in good faith determine (and notice of such determination shall have been delivered to the Agent) that any of the Copyright Collateral or any of the Trade Secrets Collateral is of negligible economic value to the Grantor, or (ii) have a valid business purpose to do otherwise, do or permit any act or knowingly omit to do any act whereby any of the Copyright Collateral or any of the Trade Secrets Collateral may lapse or become invalid or unenforceable or placed in the public domain except upon expiration of the end of an unrenewable term of a registration thereof. (d) The Grantor shall notify the Agent immediately if it knows, or has reason to know, that any application or registration relating to any material item of the Intellectual Property Collateral may become abandoned or dedicated to the public or placed in the public domain or invalid or unenforceable, or of any adverse determination or development (including the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, the United States Copyright Office or any foreign counterpart thereof or any court) regarding the Grantor's ownership of any of the Intellectual Property Collateral, its right to register the same or to keep and maintain and enforce the same. (e) In no event shall the Grantor or any of its agents, employees, designees or licensees file an application for the registration of any Intellectual Property Collateral with the United States patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, unless it informs the Agent in writing at least 30 days prior to the intended making of such filing, and upon request of the Agent, executes and delivers any and all agreements, instruments, documents and papers as the Agent may reasonably request to evidence the Agent's security interest in such Intellectual Property Collateral and the goodwill and general intangibles of the Grantor relating thereto or represented thereby. (f) The Grantor shall take all necessary steps, including in any proceeding before the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, to maintain and pursue any application (and to obtain the relevant registration) filed with respect to, and to maintain any registration of, the Intellectual Property Collateral, including the filing of applications for renewal, affidavits of use, affidavits of incontestability and opposition, interference and cancellation proceedings and the payment of fees and taxes (except to the extent that dedication, abandonment or invalidation is permitted under the foregoing clauses (a), (b) and (c). ---------------- --- (g) The Grantor shall, contemporaneously herewith, execute and deliver to the Agent an Agreement (Patent), an Agreement (Trademark) and an Agreement (Copyright) Exhibit E-13 in the forms of Exhibit A, Exhibit B and Exhibit C hereto, respectively, --------- --------- --------- amending and restating, in their entirety, respectively, each of the Supplements, and shall execute and deliver to the Agent any other document required to acknowledge or register or perfect the Agent's interest in any part of the Intellectual Property Collateral. SECTION 4.1.5 Insurance. The Grantor will maintain or cause to be --------- maintained with responsible insurance companies insurance with respect to the Equipment and Inventory against such casualties and contingencies and of such types and in such amounts as is customary in the case of similar businesses and will, upon the request of the Agent, furnish a certificate of a reputable insurance broker setting forth the nature and extent of all insurance maintained by the Grantor in accordance with this Section. Without limiting the foregoing, the Grantor further agrees as follows: (a) Each policy for property insurance shall show the Agent as a loss payee. (b) Each policy for liability insurance shall show the Agent as an additional insured. (c) With respect to each life insurance policy, the Grantor shall execute and deliver to the Agent a collateral assignment, notice of which has been acknowledged in writing by the insurer. (d) Each insurance policy shall provide that at least 30 days' prior written notice of cancellation or of lapse shall be given to the Agent by the insured. (e) The Grantor shall, if so requested by the Agent, deliver to the Agent a copy of each insurance policy. (f) All payments in respect of property insurance and life insurance shall be deposited to the Collateral Account and if there shall be no Collateral Account shall be paid to the Grantor. SECTION 4.1.6 Transfers and Other Liens. The Grantor shall not: ------------------------- (a) sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except Inventory in the ordinary course of business or as permitted by the Credit Agreement; or (b) create or suffer to exist any Lien or other charge or encumbrance upon or with respect to any of the Collateral to secure Indebtedness of any Person or entity, except for the security interest created by this Security Agreement and except as permitted by the Credit Agreement. (c) The Grantor will defend the right, title and interest of the Collateral Agent in and to any of the Grantor's rights under the Related Contracts and to the Inventory and Equipment and all other Collateral and in and to the Proceeds and products thereof against the claims and demands of all persons whomsoever. Exhibit E-14 SECTION 4.1.7 Notices. The Grantor will, upon obtaining knowledge thereof, ------- advise the Collateral Agent promptly, in reasonable detail, (a) of any lien, security interest, encumbrance or claims made or asserted against any of the Collateral, (b) of any material change in the value of the Collateral, and (c) of the occurrence of any other event which would have a Materially Adverse Effect on the aggregate value of the Collateral or on the security interests created hereunder. SECTION 4.1.8 Continuous Perfection. The Grantor will not change its name, --------------------- identity or corporate structure in any manner which might make any financing or continuation statement filed hereunder seriously misleading within the meaning of Section 9-402(7) of the U.C.C. (or any other then applicable provision of the U.C.C.) unless the Grantor shall have given the Collateral Agent at least 90 days' prior written notice thereof or shall have delivered to the Collateral Agent (i) acknowledgement copies of UCC-3 financing statements duly executed and duly filed in each jurisdiction in which U.C.C. filings were required in order to perfect the security interest granted by this Agreement in the Collateral and shall have taken all action (or made arrangements to take such action substantially simultaneously with such change if it is impossible to take such action in advance) necessary or reasonably requested by the Collateral Agent to amend such financing statement or continuation statement so that it is not seriously misleading, and (ii), with respect to the Patent Collateral, Trademark Collateral and Copyright Collateral, make all filings necessary in the United States Patent and Trademark Office and the United States Copyright Office, as applicable necessary to reflect such name change. SECTION 4.1.9 Further Assurances, etc. The Grantor agrees that, from time ----------------------- to time at its own expense, the Grantor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Agent may request, in order to perfect, preserve and protect any security interest granted or purported to be granted hereby or to enable the Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, the Grantor will (a) mark conspicuously each document included in the Inventory, each chattel paper included in the Receivables and each Related Contract and, at the request of the Agent, each of its records pertaining to the Collateral with a legend, in form and substance satisfactory to the Agent, indicating that such document, chattel paper, Related Contract or Collateral is subject to the security interest granted hereby; (b) if any Receivable shall be evidenced by a promissory note or other instrument, negotiable document or chattel paper, deliver and pledge to the Agent hereunder such promissory note, instrument, negotiable document or chattel paper duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to the Agent; (c) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as the Agent may request, in order to perfect and preserve the security interests and other rights granted or purported to be granted to the Agent hereby; and Exhibit E-15 (d) furnish to the Agent, from time to time at the Agent's request, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Agent may reasonably request, all in reasonable detail. With respect to the foregoing and the grant of the security interest hereunder, the Grantor hereby authorizes the Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of the Grantor where permitted by law. A carbon, photographic or other reproduction of this Security Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. ARTICLE V THE AGENT SECTION 5.1 Agent Appointed Attorney-in-Fact. The Grantor hereby -------------------------------- irrevocably appoints the Agent the Grantor's attorney-in-fact, with full authority in the place and stead of the Grantor and in the name of the Grantor or otherwise, from time to time in the Agent's discretion, to take any action and to execute any instrument which the Agent may deem necessary or advisable to accomplish the purposes of this Security Agreement, including, without limitation: (a) to ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (b) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clause (a) above; ---------- (c) to file any claims or take any action or institute any proceedings which the Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Agent with respect to any of the Collateral; and (d) to perform the affirmative obligations of the Grantor hereunder (including all obligations of the Grantor pursuant to Section 4.1.7). ------------- The Grantor hereby acknowledges, consents and agrees that the power of attorney granted pursuant to this Section is irrevocable and coupled with an interest. SECTION 5.2 Agent May Perform. If the Grantor fails to perform any ----------------- agreement contained herein, the Agent may itself perform, or cause performance of, such agreement, and the expenses of the Agent incurred in connection therewith shall be payable by the Grantor pursuant to Section 6.2. ----------- SECTION 5.3 Agent Has No Duty. In addition to, and not in limitation of, ----------------- Section 2.4, the powers conferred on the Agent hereunder are solely to protect - ----------- its interest (on behalf of the Lender Parties) in the Collateral and shall not impose any duty on it to exercise any such powers. Except for reasonable care of any Collateral in its possession and the accounting for moneys Exhibit E-16 actually received by it hereunder, the Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. SECTION 5.4 Reasonable Care. The Agent is required to exercise reasonable --------------- care in the custody and preservation of any of the Collateral in its possession; provided, however, the Agent shall be deemed to have exercised reasonable care - -------- ------- in the custody and preservation of any of the Collateral, if it takes such action for that purpose as the Grantor reasonably requests in writing at times other than upon the occurrence and during the continuance of any Event of Default, but failure of the Agent to comply with any such request at any time shall not in itself be deemed a failure to exercise reasonable care. ARTICLE VI REMEDIES SECTION 6.1 Certain Remedies. (a) If any Event of Default shall have ---------------- occurred and be continuing: (i) The Agent may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the U.C.C. (whether or not the U.C.C. applies to the affected Collateral) and also may (A) require the Grantor to, and the Grantor hereby agrees that it will, at its expense and upon request of the Agent forthwith, assemble all or part of the Collateral as directed by the Agent and make it available to the Agent at a place to be designated by the Agent which is reasonably convenient to both parties and (B) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Agent's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Agent may deem commercially reasonable. The Grantor agrees that, to the extent notice of sale shall be require by law at least ten days' prior notice to the Grantor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (ii) All cash proceeds received by the Agent in respect of any sale of, collection from, or other realization upon all or any part of the Collateral may, in the discretion of the Agent, be held by the Agent as collateral for, and/or then or at any time thereafter applied (after payment of any amounts payable to the Agent pursuant to Section 6.2) in ----------- whole or in part by the Agent for the ratable benefit of the Lender Parties Exhibit E-17 against, all or any part of the Obligations in such order as the Agent shall elect. Any surplus of such cash or cash proceeds held by the Agent and remaining after final payment in full of all the Obligations shall be paid over to the Grantor or to whomsoever may be lawfully entitled to receive such surplus. (b) In furtherance of, and not in limitation of, the foregoing, the Collateral Agent, without demand of performance or other demand, advertisements or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon the Grantor or any other Person (all and each of which demands, advertisements and/or notices are hereby expressly waived), may, whenever an Event of Default shall have occurred and be continuing, in a commercially reasonable manner, forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, assign, give option or options to purchase, contract to sell or otherwise dispose of and deliver said Collateral, or any part thereof, in one or more parcels at public or private sale or sales, at any exchange, broker's board or at any of the Collateral Agent's offices or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk, with the right to the Collateral Agent upon any such sale or sales, public or private, to purchase the whole or any part of said Collateral so sold, free of any right or equity of redemption in the Grantor, which right or equity is hereby expressly waived or released. The Collateral Agent shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care, safekeeping or otherwise of any and all of the Collateral or in any way relating to the rights of the Collateral Agent hereunder, including reasonably attorneys' fees and legal expenses, to the payment in whole or in part of the Obligations in such order as the Collateral Agent may elect, the Grantor remaining liable for any deficiency remaining unpaid after such application and all fees and expenses incurred by the Collateral Agent of any other amount required by any provision of law, including, without limitation, Section 9-504(1)(c) of the U.C.C., need the Collateral Agent account for the surplus, if any, to the Grantor. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, in which no notification is required, the Grantor agrees that the Collateral Agent need not give more than ten days' notice of the time and place of any public sale or of the time after which a private sale or other intended disposition is to take place and that such notice is reasonable notification of such matters. No notification need be given to the Grantor if it has signed after default a statement renouncing or modifying any right to notification of sale or other intended disposition. The Grantor further agrees not to assert any rights or privileges which it may acquire under Section 9-112 of the U.C.C. For the purpose of enabling the Collateral Agent to exercise rights and remedies under this Agreement and any Security Agreement Supplements, at such time as the Collateral Agent shall be lawfully entitled to exercise such rights and remedies, and for no other purpose, but as a supplement to and not in limitation of any and all other rights and remedies available to the Collateral Agent and to the extent the Collateral Agent chooses to avail itself of the following, the grants, to the extent not prohibited by applicable law or existing licenses granted in the ordinary course of business (unless and until appropriate consents have been obtained), to the Collateral Agent an irrevocable, non-exclusive license (exercisable without payment of royalty or other compensation to the Borrower), which license shall be exercisable by the Collateral Exhibit E-18 Agent upon and subject to the occurrence and during the continuance of an Event of Default, to use, license or sublicense and to enhance, alter or otherwise modify any Patent Collateral, Copyright Collateral and, subject the maintenance of quality standards comparable to those heretofore maintained by the Grantor in connection with the same or similar goods and services, Trademark Collateral, now owned or hereafter acquired by the Grantor (including, in the case of a license with respect to Copyright Collateral, reasonable access to all media in which any of the licensed items may be recorded or stored and to all computer hardware used for the compilation, storage or printout thereof); provided, -------- however, that (i) to the extent such Patent Collateral consists of patent - ------- licenses or other agreements that provide the Grantor with the right to use patented technology, the non-exclusive license granted hereby to the Collateral Agent shall be subject to the terms and conditions contained in such patent licenses or such other agreements, including without limitation restrictions on the right to sub-license, (ii) to the extent such Copyright Collateral consists of copyright and/or mask work licenses or other agreements that provide the Grantor with the right to use any of the types of items referred to in clause ------ (i) of the definition of "Copyright Collateral", the non-exclusive license - --- granted hereby to the Collateral Agent shall be subject to the terms and conditions contained in such copyright and/or mask work licenses or such other agreements, including without limitation restrictions on the right to sub-license, as the case may be, and (iii) to the extent such Trademark Collateral consists of trademark licenses or other agreements that provide the Grantor with the right to use any of the types of items referred to in clause ------ (i) of the definition of "Trademark Collateral", the non-exclusive license - --- granted hereby to the Collateral Agent shall be subject to the terms and conditions contained in such trademark license or other agreements, including without limitation, restrictions on the right to sub-license, as the case may be. SECTION 6.2 Indemnity and Expenses. ---------------------- (a) The Grantor agrees to indemnify the Agent from and against any and all claims, losses and liabilities arising out of or resulting from this Security Agreement (including, without limitation, enforcement of this Security Agreement), except claims, losses or liabilities resulting from the Agent's gross negligence or willful misconduct. (b) The Grantor will upon demand pay to the Agent the amount of any and all reasonable expenses, including the reasonable fees and disbursements of this counsel and of any experts and agents, which the Agent may incur in connection with (i) the administration of this Security Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of the Agent or the Lender Parties hereunder, and Exhibit E-19 (iv) the failure by the Grantor to perform or observe any of the provisions hereof. ARTICLE VII MISCELLANEOUS PROVISIONS SECTION 7.1 Loan Document. This Security Agreement is a Loan Document ------------- executed pursuant to the Credit Agreements and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions thereof (including as to the WAIVER OF JURY TRIAL with respect to any litigation relating to or arising out of any matter herein). SECTION 7.2 Amendments; etc. No amendment to or waiver of any provision of --------------- this Security Agreement nor consent to any departure by the Grantor herefrom, shall in any event be effective unless the same shall be in writing and signed by the Agent, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 7.3 Addresses for Notices. All notices and other communications --------------------- provided for hereunder shall be in writing (including telegraphic communication) and, if to the Grantor, mailed or telegraphed or delivered to it, addressed to it at the address set forth below its signature hereto, if to the Agent, Agent specified in the Credit Agreements, or as to either party at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. All such notices and other communications shall, when mailed or telegraphed, respectively, be effective when deposited in the mails or delivered to the telegraph company, respectively, addressed as aforesaid. SECTION 7.4 Section Captions. Section captions used in this Security ---------------- Agreement are for convenience of reference only, and shall not affect the construction of this Security Agreement. SECTION 7.5 Severibility. Wherever possible each provision of this Security ------------ Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Security Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Security Agreement. SECTION 7.6 Governing Law, Entire Agreement, etc. THIS SECURITY AGREEMENT ------------------------------------ SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ILLINOIS, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF THE JURISDICTION OTHER THAN THE STATE OF ILLINOIS. THIS SECURITY AGREEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE THE ENTIRE UNDERSTANDING AMONG THE PARTIES Exhibit E-20 HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND SUPERSEDE ANY PRIOR AGREEMENTS, WRITTEN OR ORAL, WITH RESPECT THERETO. Exhibit E-21 IN WITNESS WHEREOF, the Grantor has caused this Security Agreement to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. NASCO INTERNATIONAL, INC. By: /s/ Dean T. Johnson ------------------------------------- Title: Chief Financial Officer Address: 901 Janesville Avenue Fort Atkinson, Wisconsin 53538-0901 Attention: Dean T. Johnson Chief Financial Officer Telecopier No:. 414-563-0234 Copy to: Geneve Corporation 96 Cummings Point Road Stamford, Connecticut 06902 Telecopier No.: 203-348-3103 Attention: William J. Peterson Chief Financial Officer ACCEPTED: BANK OF AMERICA, N.A., as Agent By: /s/ Debra Basler ------------------------------------- Title: Vice President Address: 231 South LaSalle Street Chicago, Illinois 60697 Attention: Debra Basler Telecopier No.: 312-987-0889 Exhibit E-22 SCHEDULE I to Security Agreement Item A. Location of Equipment --------------------- Description Location ----------- -------- 1. Equipment used in Nasco Division 901 Janesville Avenue mail order operation Fort Atkinson, WI 53538 2. Equipment used in Nasco West 4825 Stoddard Road mail order operation Modesto, CA 95352 3. Plastics Mfg. 1409 Larson Road Fort Atkinson, WI 53538 Item B. Location of Inventory --------------------- Description Location ----------- -------- 1. Inventory of Nasco Division 901 Janesville Avenue mail order operation Fort Atkinson, WI 53538 2. Inventory of Nasco Division 4825 Stoddard Road mail order operation Modesto, CA 95352 3. Plastics Mfg. 1409 Larson Road Fort Atkinson, WI 53538 Exhibit E-23 SCHEDULE II to Security Agreement Item A. Patents ------- Issued Patents -------------- County Patent No. Issue Date Inventor(s) Title ------ ---------- ---------- ----------- ----- U.S.A. 5,180,229 1/19/93 William Phillip Sampling Bag Niemeyer With Enclosed Wire Ends Canada 971,090 7/15/75 Ernest M. Risgaard Sealing Means & Methods (Whirl-Pak) Pending Patent Application -------------------------- County Serial No. Filing Date Inventor(s) Title ------ ---------- ----------- ----------- ----- U.S.A. 08/879,346 6/20/97 Daniel C. Infant Simulation Christianson, Devise Judith M. Johnson and Method Roger E. Lidicker Therefore Patent Application in Preparation --------------------------------- County Docket No. Expected Inventor(s) Title ------ ---------- -------- ----------- ----- Filing Date ----------- U.S.A. 714-00068 5/1/00 Daniel C. Auscultation Christianson Simulation System Item B. Patent Licenses --------------- County Licensor. Licensee Effective Expiration Date Subject ------ --------- -------- --------- --------------- ------- Date Matter ---- ------ U.S.A. Phyllis R. Nasco 7/27/87 Expiration of Algebra Steinmann Licensed Patent Models Exhibit E-24 SCHEDULE III to Security Agreement Item A. Trademarks Registered Trademarks --------------------- Country Trademark Registration No. Registration ------- --------- ---------------- ------------ Date ---- U.S.A. Life/form 950,342 01/09/73 U.S.A. Life/Form 951,902 01/30/73 U.S.A. Sludge Judge 1,120,894 06/26/79 U.S.A. Nasco 886,960 03/03/70 U.S.A. Thio-Bag 1,262,085 12/27/84 U.S.A. Whirl-Pak 852,990 07/23/68 U.S.A. Nasco Guard 864,758 02/18/69 U.S.A. CPaRlene 1,562,034 10/24/89 U.S.A. TRANS-PAK 1,644,334 05/14/91 U.S.A. Pro-Sect 1,682,924 04/14/92 U.S.A. Artist Cards 1,735,864 11/24/92 Australia Whirl-Pak A248,142 05/06/78 Canada Whirl-Pak 160,680 01/24/69 Canada Life Form 192,601 07/13/73 Canada Nasco 193,591 08/24/73 Canada Seal-Pak 336,009 New Whirl-Pak 96,6444 04/14/71 Zealand U.S.A. SciQuest 1,888,237 04/11/95 U.S.A. BioQuest 1,844,361 07/12/94 U.S.A. ChemQuest 1,881,897 03/07/95 U.S.A. Speci-Sponge 2,038,404 02/18/97 U.S.A. Classroom 2,020,675 12/03/96 U.S.A. Challenger U.S.A. Paper-Fer-Shapen 2,220,604 01/26/99 Pending Trademark Applications ------------------------------ Country Trademark Serial No. Filing Date ------- --------- ---------- ----------- U.S.A. Ready-or-Not Tot 75/306,817 07/06/97 Exhibit E-25 Trademark Applications in Preparation ------------------------------------- Country Trademark Docket No. Expected Products/ ------- --------- ---------- -------- --------- Filing Date Services ----------- -------- Item B. Trademark Licenses Country Trademark Licensor Licensee Effective Expiration ------- --------- -------- -------- --------- ---------- Date Date ---- ---- Exhibit E-26 SCHEDULE IV to Security Agreement Item A. Copyrights/Mask Work -------------------- Registered Copyrights/Mask Works -------------------------------- County Registration Registration Author(s) Title ------ ------------ ------------ --------- ----- No. Date --- ---- U.S.A. VA457,542 03/22/91 Grant Artist Cards Cummings Impressionist Painter Portraits U.S.A. VA457,544 03/22/91 Grant Artist Cards Cummings Impressionist Series Canada 385,697 01/20/89 Grant Nasco Sampling Cummings Equipment Catalog Canada 385,698 01/20/89 James Six Stummeier Photographs Copyright/Mask Work Pending Registration Applications ----------------------------------------------------- County Serial No. Filing Date Author(s) Title ------ ---------- ----------- --------- ----- Copyright/Mask Work Pending Registration Applications in Preparation -------------------------------------------------------------------- County Docket No. Expected Authors(s) Title ------ ---------- -------- ---------- ----- Filing Date ----------- Item B. Copyright/Mask Work Licenses ---------------------------- County Licensor Licensee Effective Expiration Date Subject ------ -------- -------- --------- --------------- ------- or Territory Date Matter ------------ ---- ------ Exhibit E-27 SCHEDULE V to Security Agreement Trade Secret or Know-How Licenses --------------------------------- County Licensor Licensee Effective Expiration Date Matter ------ -------- -------- --------- --------------- ------ or Territory Date Subject - ------------ ---- ------- Exhibit E-28 AGREEMENT --------- (Trademark) THIS AGREEMENT (TRADEMARK), dated as of March 31, 2000 ( as modified from time to time, this "Agreement", made by NASCO INTERNATIONAL, INC., a Wisconsin --------- corporation (the "Grantor"), in favor of BANK OF AMERICA, N.A., as ------- administrative agent (together with any successor(s) thereto in such capacity, the "Agent") for each of the financial institutions (individually a "Lender" and ----- ------ collectively the "Lenders") which are or may from time to time become, parties ------- to the Credit Agreements referred to below; WITNESSETH: ---------- WHEREAS, pursuant to that certain Third Amended and Restated Credit Agreement, dated as of January 2, 1996 (as heretofore amended, supplemented and otherwise modified to the date hereof, the "Existing Credit Agreement"), among ------------------------- the Grantor, the lenders parties thereto and Bank of America Illinois (predecessor to Bank of America, N.A.), as agent, the lenders have extended loans to the Grantor; and WHEREAS, as a condition precedent to any extension of credit under the Existing Credit Agreement, the Grantor was required to execute and deliver the Security Agreement (the "Existing Security Agreement") pursuant to which the Grantor granted to the Agent a continuing security interest in all of the "Collateral" identified therein, and, in connection with and to supplement the Existing Security Agreement, the Grantor entered into the Agreement (Patent), the Agreement (Trademark) and the Agreement (Copyright) (collectively referred to herein as the "Supplements"); and ----------- WHEREAS, the Grantor has requested that the Lenders make certain credit available, in part to refinance all indebtedness under the Existing Credit Agreement, pursuant to a Credit Agreement (Five Year) dated March 31, 2000 among the grantor, certain lenders, Bank One, Wisconsin, as co-agent and Bank of America, N.A., as administrative agent (as amended, supplemented, amended and restated or otherwise modified from time to time, being referred to as the "Credit Agreement (Five Year)" and a Credit Agreement (364 Day) dated March 31, 2000 among the Grantor, certain lenders, Bank One, Wisconsin, as co-agent and Bank of America, N.A., as administrative agent (as amended, supplemented, amended and restated or otherwise modified form time to time, being referred to as the "Credit Agreement (364 Day)" and together with the Credit Agreement (Five Year), the "Credit Agreements"); and WHEREAS, it is a condition precedent to such extensions of credit that the Grantor enter into this Agreement (Trademark) to, among other things, confirm and ratify its grant to the Agent of a continuing security interest in the Trademark Collateral (as defined in the Security Agreement dated the date hereof of the Grantor (as amended, supplemented, amended and restated or otherwise modified form time to time, being referred to as the "Security Agreement"); NOW, THEREFORE, for good and valuable consideration the receipt of which is hereby acknowledged, and in order to induce the Lenders to make Loans (including the initial Loans) to Exhibit E-29 the Grantor form time to time pursuant to the Credit Agreements, in part to refinance the indebtedness under the Existing Credit Agreement, the Grantor hereby agrees with the Agent, for its benefit and the ratable benefit of each Lender Party, as follows: SECTION 1. Definitions. Unless otherwise defined herein or the context ------------ otherwise requires, terms used in this Agreement, including its preamble and recitals, have the meanings provided in the Security Agreement. SECTION 2. Confirmation and Grant of Security Interest. For good and ------------------------------------------- valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Grantor hereby pledges and assigns to the Agent, for its benefit and the ratable benefit of the Lender Parties, and granted to the Agent, for its benefit and the ratable benefit of the Lender Parties, a continuing security interest in and to, all of the Trademark Collateral, as defined therein. The Grantor hereby ratifies and restates such pledge, assignment and grant, and with greater specificity hereby assigns and pledges to the Agent for its benefit and the ratable benefit of each of the Lender Parties, and does hereby grant, mortgage, pledge and hypothecate to the Agent for its benefit and the ratable benefit of each of the Lender Parties, a continuing security interest in and to all of the following, whether now or hereafter existing or acquired (the "Trademark Collateral"): -------------------- (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, certification marks, collective marks, logos, other source of business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and general intangibles of a like nature (all of the foregoing items in this clause (a) being collectively called a ---------- "Trademark"), now existing anywhere in the world or hereafter adopted and --------- acquired, whether currently in use or not, all registrations and recordings thereof and all applications in connection therewith, whether pending or in preparation for filing, including registrations, recordings and all applications in the United States Patent and Trademark Office or in any office or agency of the United States of America or any State thereof or any foreign country, including those referred to in Item A of Attachment 1 ------ ------------ hereto; (b) all Trademark licenses, including each Trademark licenses referred to in Item B of Attachment 1 hereto; ------ ------------ (c) all reissues, divisions, continuations, continuations-in-part, extension s, renewals and reexaminations of any of the items described in the foregoing clauses (a) and (b); ----------- --- (d) all of the goodwill of business connected with the use of, and symbolized by the items described in, clauses (a) and (b); and ----------- --- (e) all proceeds of, and rights associated with, the foregoing, including any claim by the Grantor against third parties for past, present, or future infringement or dilution of any Trademark or Trademark registration or Trademark license, including any Exhibit E-30 Trademark registration or Trademark license referred to in Item A and ------ Item B of Attachment 1 hereto, or for any injury to the goodwill ------ ------------ associated with the use of any Trademark or for breach or enforcement of any Trademark license. SECTION 3. Security Agreement. This Agreement has been executed ------------------ and delivered by the Grantor for the purpose of, among other things, ratifying and confirming the grant of the Trademark Collateral to the Agent for the benefit of the Lender Parties and registering (and confirming the recordation pursuant to the Security Agreement of) the security interest of the Agent in the Trademark Collateral with the United States Patent and Trademark Office and corresponding offices in other countries of the world. The security interest confirmed and granted hereby has been confirmed and granted as a supplement to, and not in limitation of, the security interest granted to the Agent for its benefit and the benefit of each Lender Party under the Security Agreement. The Security Agreement (and all rights and remedies of the Agent and each Lender Party thereunder) shall remain in full force and effect in accordance with its terms. SECTION 4. Release of Security Interest. Upon payment in full of ---------------------------- all Obligations, the Agent shall, at the Grantor's expense, execute and deliver to the Grantor all instruments and other documents as may be necessary or proper to release the lien on and security in the Trademark Collateral which has been granted hereunder. SECTION 5. Acknowledgement. The Grantor does hereby further --------------- acknowledge and affirm that the rights and remedies of the Agent with respect to the security interest in the Trademark Collateral granted and confirmed hereby are more fully set forth in the Security Agreement, the terms and provisions of which (including the remedies provided for therein) are incorporated by reference herein as if fully set forth herein. SECTION 6. Loan Document, etc. This Agreement is a Loan Document ------------------ executed pursuant to the Credit Agreements and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions of the Credit Agreements. SECTION 7. Counterparts. This Agreement may be executed by the ------------ parties hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. Exhibit E-31 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the day and year first above written. NASCO INTERNATIONAL, INC. By: /s/ Dean T. Johnson ---------------------- Title: Chief Financial Officer Address: 901 Janesville Avenue Fort Atkinson, Wisconsin 53538-0901 Attention: Dean T. Johnson Chief Financial Officer Telecopier No.: 414-563-0234 Copy to: Geneve Corporation 96 Cummings Point Road Stamford, Connecticut 06902 Attention: William J. Petersen Chief Financial Officer Telecopier No.: 203-348-3103 Exhibit E-32 Accepted: BANK OF AMERICA, N.A., as Agent By: /s/ Debra J. Basler ---------------------- Title: Vice President Address: 231 South LaSalle Street Chicago, Illinois 60697 Telecopier No.: 312-987-0889 Attention: Debra Basler Exhibit E-33 ATTACHMENT 1 to Agreement (Trademark) Item A. Trademarks ---------- Registered Trademarks --------------------- Country Trademark Registration No. Registration Date - ------- --------- --------------- ----------------- U.S.A. Life/form 950,342 01/09/73 U.S.A. Life/Form 951,902 01/30/73 U.S.A. Sludge Judge 1,120,894 06/26/79 U.S.A. Nasco 886,960 03/03/70 U.S.A. Thio-Bag 1,262,085 12/27/84 U.S.A. Whirl-Pak 852,990 07/23/68 U.S.A. Nasco Guard 864,758 02/18/69 U.S.A. CPaRlene 1,562,034 10/24/89 U.S.A. TRANS-PAK 1,644,334 05/14/91 U.S.A. Pro-Sect 1,682,924 04/14/92 U.S.A. Artist Cards 1,735,864 11/24/92 Australia Whirl-Pak A248,142 05/06/78 Canada Whirl-Pak 160,680 01/24/69 Canada Life Form 192,601 07/13/73 Canada Nasco 193,591 08/24/73 Canada Seal-Pak 336,009 New Whirl-Pak 96,6444 04/14/71 Zealand U.S.A. SciQuest 1,888,237 04/11/95 U.S.A. BioQuest 1,844,361 07/12/94 U.S.A. ChemQuest 1,881,897 03/07/95 U.S.A. Speci-Sponge 2,038,404 02/18/97 U.S.A. Classroom 2,020,675 12/03/96 U.S.A. Challenger U.S.A. Paper-Fer-Shapen 2,220,604 01/26/99 Pending Trademark Applications ------------------------------ Country Trademark Serial No. Filing Date - ------- --------- ---------- ----------- U.S.A. Ready-or-Not Tot 75/306,817 07/06/97 Trademark Applications in Preparation ------------------------------------- Country Trademark Docket No. Expected Products/ - ------- --------- ---------- Filing Date Services ----------- -------- Exhibit E-34 Item B. Trademark Licenses ------------------ Country Trademark Licensor Licensee Effective Expiration - ------- --------- -------- -------- Date Date ---- ---- Exhibit E-35 AGREEMENT --------- (Patent) THIS AGREEMENT (PATENT), dated as of March 31, 2000 ( as modified from time to time, this "Agreement", made by NASCO INTERNATIONAL, INC., a Wisconsin --------- corporation (the "Grantor"), in favor of BANK OF AMERICA, N.A., as ------- administrative agent (together with any successor(s) thereto in such capacity, the "Agent") for each of the financial institutions (individually a "Lender" and ----- ------ collectively the "Lenders") which are or may from time to time become, parties ------- to the Credit Agreements referred to below; WITNESSETH: ----------- WHEREAS, pursuant to that certain Third Amended and Restated Credit Agreement, dated as of January 2, 1996 ( as heretofore amended, supplemented and otherwise modified to the date hereof, the "Existing Credit Agreement"), among ------------------------- the Grantor, the lenders parties thereto and Bank of America Illinois (predecessor to Bank of America, N.A.), as agent, the lenders have extended loans to the Grantor; and WHEREAS, as a condition precedent to any extension of credit under the Existing Credit Agreement, the Grantor was required to execute and deliver the Security Agreement (the "Existing Security Agreement") pursuant to which the Grantor granted to the Agent a continuing security interest in all of the "Collateral" identified therein, and, in connection with and to supplement the Existing Security Agreement, the Grantor entered into the Agreement (Patent), the Agreement (Trademark) and the Agreement (Copyright) (collectively referred to herein as the "Supplements"); and ----------- WHEREAS, the Grantor has requested that the Lenders make certain credit available, in part to refinance all indebtedness under the Existing Credit Agreement, pursuant to a Credit Agreement (Five Year) dated March 31, 2000 among the grantor, certain lenders, Bank One, Wisconsin, as co-agent and Bank of America, N.A., as administrative agent (as amended, supplemented, amended and restated or otherwise modified from time to time, being referred to as the "Credit Agreement (Five Year)" and a Credit Agreement (364 Day) dated March 31, 2000 among the Grantor, certain lenders, Bank One, Wisconsin, as co-agent and Bank of America, N.A., as administrative agent (as amended, supplemented, amended and restated or otherwise modified form tiem to time, being referred to as the "Credit Agreement (364 Day)" and together with the Credit Agreement (Five Year), the "Credit Agreements"); and WHEREAS, it is a condition precedent to such extensions of credit that the Grantor enter into this Agreement (Patent) to, among other things, confirm and ratify its grant to the Agent of a continuing security interest in the Patent Collateral (as defined in the Security Agreement dated the date hereof of the Grantor (as amended, supplemented, amended and restated or otherwise modified form time to time, being referred to as the "Security Agreement"); NOW, THEREFORE, for good and valuable consideration the receipt of which is hereby acknowledged, and in order to induce the Lenders to make Loans (including the initial Loans) to the Grantor form time to time pursuant to the Credit Agreements, in part to refinance the Exhibit E-36 indebtedness under the Existing Credit Agreement, the Grantor hereby agrees with the Agent, for its benefit and the ratable benefit of each Lender Party, as follows: SECTION 1. Definitions. Unless otherwise defined herein or the context ----------- otherwise requires, terms used in this Agreement, including its preamble and recitals, have the meanings provided in the Security Agreement. SECTION 2. Confirmation and Grant of Security Interest. For good and ------------------------------------------- valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the Grantor hereby pledges and assigns to the Agent, for its benefit and the ratable benefit of the Lender Parties, and granted to the Agent, for its benefit and the ratable benefit of the Lender Parties, a continuing security interest in and to, all of the Patent Collateral, as defined therein. The Grantor hereby ratifies and restates such pledge, assignment and grant, and with greater specificity hereby assigns and pledges to the Agent for its benefit and the ratable benefit of each of the Lender Parties, and does hereby grant, mortgage, pledge and hypothecate to the Agent for its benefit and the ratable benefit of each of the Lender Parties, a continuing security interest in and to all of the following, whether now or hereafter existing or acquired (the "Patent ------ Collateral"): - ---------- (a) all letters patent and applications fro letter patent throughout the world, including all patent applications in preparation for filing anywhere in the world and including each patent and patent application referred to in Item A of Attachment 1 hereto; ------ ------------ (b) all patent licenses, including each patent licenses referred to in Item B of Attachment 1 hereto; ------ ------------ (c) all reissues, divisions, continuations, continuations-in-part, extensions, renewals and reexaminations of any of the items described in the foregoing clauses (a) and (b); and -------------------- (d) all proceeds of, and rights associated with, the foregoing (including license royalties and proceeds of infringement suits), the right to sue third parties for past, present or future infringement suits), the right to sue third parties for past, present or future infringements of any patent or patent application, including any patent or patent application referred to in Item A of Attachment 1 hereto, and for breach or enforcement ------ ------------ of any patent license, including any patent license referred to in Item B ------ of Attachment 1 hereto, and all rights corresponding thereto throughout the ------------ world. SECTION 3. Security Agreement. This Agreement has been executed and ------------------ delivered by the Grantor for the purpose of, among other things, ratifying and confirming the grant of the Patent Collateral to the Agent for the benefit of the Lender Parties and registering (and confirming the recordation pursuant to the Security Agreement of) the security interest of the Agent in the Patent Collateral with the United States Patent and Trademark Office and corresponding offices in other countries of the world. The security interest confirmed and granted hereby has been confirmed and granted as a supplement to, and not in limitation of, the security interest granted to the Agent for its Exhibit E-37 benefit and the benefit of each Lender Party under the Security Agreement. The Security Agreement (and all rights and remedies of the Agent and each Lender Party thereunder) shall remain in full force and effect in accordance with its terms. SECTION 4. Release of Security Interest. Upon payment in full of all ----------------------------- Obligations, the Agent shall, at the Grantor's expense, execute and deliver to the Grantor all instruments and other documents as may be necessary or proper to release the lien on and security in the Patent Collateral which has been granted hereunder. SECTION 5. Acknowledgement. The Grantor does hereby further acknowledge and --------------- affirm that the rights and remedies of the Agent with respect to the security interest in the Patent Collateral granted and confirmed hereby are more fully set forth in the Security Agreement, the terms and provisions of which (including the remedies provided for therein) are incorporated by reference herein as if fully set forth herein. SECTION 6. Loan Document, etc. This Agreement is a Loan Document executed ------------------- pursuant to the Credit Agreements and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions of the Credit Agreements. SECTION 7. Counterparts. This Agreement may be executed by the parties ------------- hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. Exhibit E-38 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the day and year first above written. NASCO INTERNATIONAL, INC. By: /s/ Dean T. Johnson ---------------------- Title: Chief Financial Officer Address: 901 Janesville Avenue Fort Atkinson, Wisconsin 53538-0901 Attention: Dean T. Johnson Chief Financial Officer Telecopier No.: 414-563-0234 Copy to: Geneve Corporation 96 Cummings Point Road Stamford, Connecticut 06902 Telecopier No.: 203-348-3103 Attention: William J. Petersen Chief Financial Officer Exhibit E-39 Accepted: BANK OF AMERICA, N.A., as Agent By: /s/ Debra J. Basler ---------------------- Title: Vice President Address: 231 South LaSalle Street Chicago, Illinois 60697 Attention: Debra Basler Telecopier No.: 312-987-0889 Exhibit E-40 ATTACHMENT 1 to Agreement (Patent) Item A. Patents -------
Issued Patents -------------- County Patent No. Issue Date Inventor(s) Title ------ ---------- ---------- ----------- ----- U.S.A. 5,180,229 1/19/93 William Philip Sampling Bag Niemeyer With Enclosed Wire Ends Canada 971,090 7/15/75 Ernest M. Risgaard Sealing Means & Methods (Whirl-Pak) Pending Patent Application -------------------------- County Serial No. Filing Date Inventor(s) Title ------ ---------- ----------- ----------- ----- U.S.A. 08/879,346 6/20/97 Daniel C. Christianson, Infant Simulation Judith M. Johnson Devise and Method Roger E. Lidicker Therefore Patent Application in Preparation --------------------------------- Expected County Docket No. Filing Date Inventor(s) Title ------ ---------- ----------- ----------- ----- U.S.A. 714-00068 5/1/00 Daniel C. Christianson, Auscultation Judith M. Johnson Simulation System Roger E. Lidicker Item B. Patent Licenses --------------- Subject County Licensor. Licensee Effective Date Expiration Date Matter ------ --------- -------- -------------- --------------- ------ U.S.A. Phyllis R. Nasco 7/27/87 Expiration of Licensed Algebra Steinmann Patent Models
Exhibit E-41 AGREEMENT (Copyright) THIS AGREEMENT (COPYRIGHT), dated as of March 31, 2000 (as modified from time to time, this "Agreement", made by NASCO INTERNATIONAL, INC., a --------- Wisconsin corporation (the "Grantor"), in favor of BANK OF AMERICA, N.A., as ------- administrative agent (together with any successor(s) thereto in such capacity, the "Agent") for each of the financial institutions (individually a "Lender" and ----- collectively the "Lenders") which are or may from time to time become, parties ------- to the Credit Agreements referred to below; WITNESSETH: WHEREAS, pursuant to that certain Third Amended and Restated Credit Agreement, dated as of January 2, 1996 (as heretofore otherwise amended, supplemented and otherwise modified to the date hereof, the "Existing Credit --------------- Agreement"), among the Grantor, the lenders parties thereto and Bank of America - --------- Illinois (predecessor to Bank of America, N.A.), as agent, the lenders have extended loans to the Grantor; and WHEREAS, as a condition precedent to any extension of credit under the Existing Credit Agreement, the Grantor was required to execute and deliver the Security Agreement (the "Existing Security Agreement") pursuant to which the Grantor granted to the Agent a continuing security interest in all of the "Collateral" identified therein, and, in connection with and to supplement the Existing Security Agreement, the Grantor entered into the Agreement (Patent), the Agreement (Trademark) and the Agreement (Copyright) (collectively referred to herein as the "Supplements"); and ----------- WHEREAS, the Grantor has requested that the Lenders make certain credit available, in part to refinance all indebtedness under the Existing Credit Agreement, pursuant to a Credit Agreement (Five Year) dated March 31, 2000 among the grantor, certain lenders, Bank One, Wisconsin, as co-agent and Bank of America, N.A., as administrative agent (as amended, supplemented, amended and restated or otherwise modified from time to time, being referred to as the "Credit Agreement (Five Year)" and a Credit Agreement (364 Day) dated March 31, 2000 among the Grantor, certain lenders, Bank One, Wisconsin, as co-agent and Bank of America, N.A., as administrative agent (as amended, supplemented, amended and restated or otherwise modified form time to time, being referred to as the "Credit Agreement (364 Day)" and together with the Credit Agreement (Five Year), the "Credit Agreements"); and WHEREAS, it is a condition precedent to such extensions of credit that the Grantor enter into this Agreement (Copyright) to, among other things, confirm and ratify its grant to the Agent of a continuing security interest in the Copyright Collateral (as defined in the Security Agreement dated the date hereof of the Grantor (as amended, supplemented, amended and restated or otherwise modified form time to time, being referred to as the "Security Agreement"); Exhibit E-42 NOW, THEREFORE, for good and valuable consideration the receipt of which is hereby acknowledged, and in order to induce the Lenders to make Loans (including the initial Loans) to the Grantor form time to time pursuant to the Credit Agreements, in part to refinance the indebtedness under the Existing Credit Agreement, the Grantor hereby agrees with the Agent, for its benefit and the ratable benefit of each Lender Party, as follows: SECTION 1. Definitions. Unless otherwise defined herein or the context ----------- otherwise requires, terms used in this Agreement, including its preamble and recitals, have the meanings provided in the Security Agreement. SECTION 2. Grant of Security Interest. For good and valuable consideration, -------------------------- the receipt and sufficiency of which are hereby acknowledged, the Grantor hereby confirms that pursuant to the Existing Agreement (Copyright), the Grantor has pledged and assigned to the Agent, for its benefit and the ratable benefit of the Lender Parties, and granted to the Agent, for its benefit and the ratable benefit of the Lender Parties, a continuing security interest in and to, all of the Copyright Collateral, as defined therein. The Grantor hereby ratifies and restates such pledge, assignment and grant, and with greater specificity hereby assigns and pledges to the Agent for its benefit and the ratable benefit of each of the Lender Parties, and does hereby grant, mortgage, pledge and hypothecate to the Agent for its benefit and the ratable benefit of each of the Lender Parties, a continuing security interest in and to all of the following, whether now or hereafter existing or acquired (the "Copyright Collateral"): all -------------------- copyrights and all semi-conductor chip product mask works of the Grantor, whether statutory or common, law, registered or unregistered, now or hereinafter in force throughout the world including, without limitation, all of the Grantor's right, title and interest in and to all copyrights and mask works registered in the United States Copyright Office or anywhere else in the world and also including, without limitation, the copyrights and mask works referred to in Item A of Attachment 1 attached hereto, and all applications for ------- ------------ registration thereof, whether pending or in preparation, all copyright and mask work licenses, including each copyright and mask work license referred to in Item B of Attachment 1 attached hereto, the right to sue for past, present and - ------ ------------ future infringements of any thereof, all rights corresponding thereto throughout the world, all extensions and renewals of any thereof and all proceeds of the foregoing, including, without limitation, licenses, royalties, income, payments, claims, damages and proceeds of suit. SECTION 3. Security Agreement. This Agreement has been executed and ------------------ delivered by the Grantor for the purpose of, among other things, ratifying and confirming the grant of the Patent Collateral to the Agent for the benefit of the Lender Parties and registering (and confirming the recordation pursuant to the Security Agreement of) the security interest of the Agent in the Copyright Collateral with the United States Copyright and Trademark Office and corresponding offices in other countries of the world. The security interest confirmed and granted hereby has been confirmed and granted as a supplement to, and not in limitation of, the security interest granted to the Agent for its benefit and the benefit of each Lender Party under the Security Agreement. The Security Agreement (and all rights and remedies of the Agent and each Lender Party thereunder) shall remain in full force and effect in accordance with its terms. SECTION 4. Release of Security Interest. Upon payment in full of all ---------------------------- Obligations, the Agent shall, at the Grantor's expense, execute and deliver to the Grantor all instruments and Exhibit E-43 other documents as may be necessary or proper to release the lien on and security in the Copyright Collateral which has been granted hereunder. SECTION 5. Acknowledgement. The Grantor does hereby further acknowledge --------------- and affirm that the rights and remedies of the Agent with respect to the security interest in the Copyright Collateral granted and confirmed hereby are more fully set forth in the Security Agreement, the terms and provisions of which (including the remedies provided for therein) are incorporated by reference herein as if fully set forth herein. SECTION 6. Loan Document, etc. This Agreement is a Loan Document ------------------ executed pursuant to the Credit Agreements and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions of the Credit Agreements. SECTION 7. Counterparts. This Agreement may be executed by the parties ------------ hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. Exhibit E-44 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the day and year first above written. NASCO INTERNATIONAL, INC. By: /s/ Dean T. Johnson -------------------------- Title: Chief Financial Officer Address: 901 Janesville Avenue Fort Atkinson, Wisconsin 53538-0901 Attention: Dean T. Johnson Chief Financial Officer Telecopier No.: 414-563-0234 Copy to: Geneve Corporation 96 Cummings Point Road Stamford, Connecticut 06902 Telecopier No.: 203-348-3103 Attention: William J. Petersen Chief Financial Officer Exhibit E-45 Accepted: BANK OF AMERICA, N.A., as Agent By: /s/ Debra J. Basler ---------------------- Title: Vice President Address: 231 South LaSalle Street Chicago, Illinois 60697 Attention: Debra Basler Telecopier No.: 312-987-0889 Exhibit E-46 ATTACHMENT 1 to Agreement (Copyright) Item A. Copyrights/Mask Work --------------------
Registered Copyrights/Mask -------------------------- Works ----- Registration Registration Country No. Date Author(s) Title ------- --- ---- --------- ----- U.S.A. VA457,542 03/22/91 Grant Artist Cards Cummings Impressionist Painter Portraits U.S.A. VA457,544 03/22/91 Grant Artist Cards Cummings Impressionist Series Canada 385,697 01/20/89 Grant Nasco Sampling Cummings Equipment Catalog Canada 385,698 01/20/89 James Six Stummeier Photographs Copyright/Mask Work Pending Registration Applications ----------------------------------------------------- Country Serial No. Filing Date Author(s) Title ------- ---------- ----------- --------- ----- Copyright/Mask Work Registration Applications in Preparation ------------------------------------------------------------ Expected Country Docket No. Filing Date Author(s) Title ------- ---------- ----------- --------- ----- Item B. Copyright/Mask Work Licenses ---------------------------- County or Effective Expiration Subject Territory Licensor Licensee Date Date Matter --------- -------- -------- ---- ---- ------
Exhibit E-47 EXHIBIT F SUBSIDIARY PLEDGE AGREEMENT --------------------------- THIS SUBSIDIARY PLEDGE AGREEMENT, dated as of August 20, 2001 (as modified from time to time, this ("Pledge Agreement") made by AMERICAN EDUCATIONAL PRODUCTS, INC., a Colorado corporation (the "Pledgor"), in favor of BANK OF AMERICA N.A. (together with any successor(s) thereto in such capacity, the "Agent") for the various financial institutions (individually a "Lender" and collectively the "Lenders") which are or may from time to time become, parties to the Credit Agreement referred below. W I T N E S S E T H: WHEREAS, pursuant to that certain Amended and Restated Credit Agreement (Five Year), dated as of May 29, 2001 (as heretofore amended, supplemented and otherwise modified to the date hereof, the "Credit Agreement"), among Nasco International, Inc., a Wisconsin corporation (the "Parent"), the lenders parties thereto, Bank One, Wisconsin, as documentation agent and Bank of America N.A., as agent, the lenders have extended loans to the Parent, in part to finance the AMEP Acquisition and to refinance the Existing Credit Agreement; and WHEREAS, in connection with the extension of credit under the Credit Agreement, the Parent has agreed that the Pledgor shall enter into this Pledge Agreement to grant to the Agent a continuing pledge of and security interest in, among other things, the certificates representing all of the outstanding shares of capital stock of each of the Pledgor's subsidiaries, and all proceeds thereof, to secure, among other things, all of the Parent's obligations under the Credit Agreement; NOW, THEREFORE, for good and valuable consideration the receipt of which is hereby acknowledged, and in order to induce the Lenders to make Loans (including the initial Loans) to the Parent pursuant to the Credit Agreement, in part to refinance the indebtedness under the Existing Credit Agreement, the Pledgor hereby agrees with the Agent, for its benefit and the ratable benefit of each Lender Party, as follows: ARTICLE I DEFINITIONS SECTION 1.1 Certain Terms. When used herein, (a) capitalized terms used but ------------- not defined herein shall have the meanings given to them in the Credit Agreement and (b) the following terms shall have the following meanings (such definitions to be equally applicable to the singular and plural forms thereof): "Collateral" is defined in Section 2.1. ---------- ----------- Exhibit F-1 "Distributions" means all stock dividends, liquidating dividends, shares of ------------- stock resulting from (or in connection with the exercise of) stock splits, reclassifications, warrants, options, non-cash dividends, mergers, consolidations, and all other distributions (whether similar or dissimilar to the foregoing) on or with respect to any Pledged Shares or other shares of capital stock constituting Collateral, but shall not include Dividends. "Dividends" means cash dividends and cash distributions with respect to any --------- Pledged Shares or other Pledged Property made in the ordinary course of business and not a liquidating dividend. "Lender Party" means, as the context may require, any Lender or the Agent ------------ and each of their respective successors, transferees and assigns. "Pledged Note Issuer" means each Person identified in Item B of Attachment ------------------- 1 hereto as the issuer of the Pledged Note identified opposite the name of such Person. "Pledged Notes" means all promissory notes of any Pledged Note Issuer in ------------- the form or substantially the form of Exhibit A hereto which are delivered by --------- the Pledgor to the Agent as Pledged Property hereunder, as such promissory notes, in accordance with Section 4.5, are amended, modified or supplemented from time to time and together with any promissory note of any Pledged Note Issuer taken in extension or renewal thereof or substitution therefor. "Pledged Property" means all Pledged Shares, all Pledged Notes, and all ---------------- other pledged shares of capital stock or promissory notes, all other securities, all assignments of any amounts due or to become due, all other instruments which are now being delivered by the Pledgor to the Agent or may from time to time hereafter be delivered by the Pledgor to the Agent for the purpose of pledge under this Pledge Agreement or any other Loan Document, and all proceeds of any of the foregoing. "Pledged Share Issuer" means each Person identified in Item A of Attachment -------------------- ------ ---------- 1 hereto as the issuer of the Pledged Shares identified opposite the name of - - such Person. "Pledged Shares" means all shares of capital stock of any Pledged Share -------------- Issuer. "Secured Obligations" is defined in Section 2.2. ------------------- ----------- "U.C.C." means the Uniform Commercial Code as in effect in the State of ------ Illinois. SECTION 1.2 U.C.C. Definitions. Unless otherwise defined herein or the ------------------ context otherwise requires, terms for which meanings are provided in the U.C.C. are used in this Pledge Agreement, including its preamble and recitals, with such meanings. ARTICLE II PLEDGE SECTION 2.1 Confirmation and Grant of Security Interest and Pledge. The ------------------------------------------------------ Pledgor hereby pledges, hypothecates, assigns, charges, mortgages, delivers, and transfers to the Agent, Exhibit F-2 for its benefit and the ratable benefit of the Lender Parties, and hereby grants to the Agent, for its benefit and the ratable benefit of the Lender Parties, a continuing pledge and security interest in and to, all of the following property (the "Collateral"): (a) all issued and outstanding shares of capital stock of each Pledged Share Issuer identified in Item A of Attachment 1 hereto; (b) all other Pledged Shares issued from time to time; (c) all promissory notes of each Pledged Note Issuer identified in Item B of Attachment 1 hereto; (d) all other Pledged Notes issued from time to time; (e) all other Pledged Property, whether now or hereafter delivered to the Agent in connection with this Pledge Agreement; (f) all Dividends, Distributions, interest, and other payments and rights with respect to any Pledged Property; and (g) all proceeds of any and all of the foregoing. SECTION 2.2 Security for Obligations. This Pledge Agreement secures the ------------------------ payment in full of all Obligations now or hereafter existing under the Credit Agreement, the Notes, the Collateral Documents and each other Loan Document (including this Pledge Agreement) to which the Parent is or may become a party, whether for principal, interest, costs, fees, expenses or otherwise. SECTION 2.3 Delivery of Pledged Property. All certificates or instruments ---------------------------- representing or evidencing any Collateral, including all Pledged Shares and all Pledged Notes, shall be delivered to and held by or on behalf of (and, in the case of the Pledged Notes, endorsed to the order of) the Agent pursuant hereto, shall be in suitable form for transfer by delivery, and shall be accompanied by all necessary instruments of transfer or assignment, duly executed in blank, and all other necessary and appropriate action and approvals shall have been taken or received to grant to the Agent a first priority fully perfected security interest in such Collateral. SECTION 2.4 Dividends on Pledged Shares and Payments on Pledged Notes. In --------------------------------------------------------- the event that any Dividend is to be paid on any Pledged Share or any payment of principal or interest is to be made on any Pledged Note at a time when (x) no Default of the nature referred to in Section 8.1.9 of the Credit Agreement has occurred and is continuing, and no (y) Event of Default has occurred and is continuing, such Dividend or payment may be paid directly to and retained by the Pledgor. If any such Default or Event of Default has occurred and is continuing, then any such Dividend or payment shall be paid directly to the Agent (and if for any reason the Pledgor shall receive such Dividend or payment in such circumstances, the Pledgor shall hold the same segregated and in trust for the Agent until paid to the Agent in accordance with Section 4.4). ----------- Exhibit F-3 SECTION 2.5 Continuing Security Interest; Transfer of Note. This Pledge ---------------------------------------------- Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until payment in full of all Obligations, (b) be binding upon the Pledgor and its successors, transferees and assigns, and (c) inure, together with the rights and remedies of the Agent hereunder, to the benefit of the Agent and each other Lender Party. Without limiting the foregoing clause (c), any Lender may assign or otherwise transfer (in whole or in part) any Note or Loan held by it to any other Person or entity, and such other Person or entity shall thereupon become vested with all the rights and benefits in respect thereof granted to such Lender under any Loan Document (including this Pledge Agreement) or otherwise, subject, however, to any contrary provisions in such assignment or transfer, and to the provisions of Section 10.11 and Article IX of the Credit Agreement. Upon the final payment in full of all Obligations, the security interest granted herein shall terminate and all rights to the Collateral shall revert to the Pledgor. Upon any such termination, the Agent will, at the Pledgor's sole expense, deliver to the Pledgor, without any representations, warranties or recourse of any kind whatsoever, all certificates and instruments representing or evidencing all Pledged Shares, and all Pledged Notes, together with all other Collateral held by the Agent hereunder, and execute and deliver to the Pledgor such documents as the Pledgor shall reasonably request to evidence such termination. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1 Warranties, etc. The Pledgor represents and warrants unto each --------------- Lender Party, as at the date of each pledge and delivery hereunder (including each pledge and delivery of Pledged Shares and each pledge and delivery of a Pledged Note) by the Pledgor to the Agent of any Collateral, as set forth in this Article. SECTION 3.1.1 Ownership, No Liens, etc. The Pledgor is the legal and ------------------------ beneficial owner of, and has good and marketable title to (and has full right and authority to pledge and assign) such Collateral, free and clear of all liens, security interests, options, or other charges or encumbrances, except any lien or security interest granted pursuant hereto in favor of the Agent. SECTION 3.1.2 Valid Security Interest. The delivery of such Collateral to ----------------------- the Agent is effective to create a valid, perfected, first priority security interest in such Collateral and all proceeds thereof, securing the Obligations. No filing or other action will be necessary to perfect or protect such security interest. SECTION 3.1.3 As to Pledged Shares. In the case of any Pledged Shares -------------------- constituting such Collateral, all of such Pledged Shares are duly authorized and validly issued, fully paid, and non-assessable, and constitute all of the issued and outstanding shares of capital Exhibit F-4 stock of each Pledged Share Issuer. The Pledgor has no Subsidiary other than the Pledged Share Issuers. SECTION 3.1.4 As to Pledged Notes. In the case of each Pledged Note, all ------------------- of such Pledged Notes have been duly authorized, executed, endorsed, issued and delivered, and are the legal, valid and binding obligation of the issuers thereof, and are not in default. SECTION 3.1.5 Authorization, Approval, etc. No authorization, approval, ---------------------------- or other action by, and no notice to or filing with, any governmental authority, regulatory body or any other Person is required either (a) for the pledge by the Pledgor of any Collateral pursuant to this Pledge Agreement or for the execution, delivery, and performance of this Pledge Agreement by the Pledgor, or (b) for the exercise by the Agent of the voting or other rights provided for in this Pledge Agreement, or, except with respect to any Pledged Shares, as may be required in connection with a disposition of such Pledged Shares by laws affecting the offering and sale of securities generally, the remedies in respect of the Collateral pursuant to this Pledge Agreement. SECTION 3.1.6 Compliance with Laws. The Pledgor is in compliance with the -------------------- requirements of all applicable laws, rules, regulations and orders of every governmental authority, the non-compliance with which might materially adversely affect the business, properties, assets, operations, condition (financial or otherwise) or prospects of the Pledgor or the value of the Collateral or the worth of the Collateral as collateral security. ARTICLE IV COVENANTS SECTION 4.1 Protect Collateral; Further Assurances, etc. The Pledgor will ------------------------------------------- not sell, assign, transfer, pledge or encumber in any other manner the Collateral (except in favor of the Agent hereunder). The Pledgor will warrant and defend the right and title herein granted unto the Agent in and to the Collateral (and all right, title and interest represented by the Collateral) against the claims and demands of all Persons whomsoever. The Pledgor agrees that at any time, and from time to time, at the expense of the Pledgor, the Pledgor will promptly execute and deliver all further instruments, and take all further action, that may be necessary or desirable, or that the Agent may reasonably request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable the Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. SECTION 4.2 Stock Powers, etc. The Pledgor agrees that all Pledged Shares ----------------- (and all other shares of capital stock constituting Collateral) delivered by the Pledgor pursuant to this Pledge Agreement will be accompanied by duly executed undated blank stock powers, or other equivalent instruments of transfer acceptable to the Agent. The Pledgor will, from time to time upon the request of the Agent, promptly deliver to the Agent such stock powers, instruments, and similar documents, satisfactory in form and substance to the Agent, with respect to the Collateral Exhibit F-5 as the Agent may reasonably request and will, from time to time upon the request of the Agent after the occurrence of any Event of Default, promptly transfer any Pledged Shares or other shares of common stock constituting Collateral into the name of any nominee designated by the Agent. SECTION 4.3 Continuous Pledge. Subject to Section 2.4, the Pledgor will, at ----------------- ----------- all times, keep pledged to the Agent pursuant hereto all Pledged Shares and all other shares of capital stock constituting Collateral, all Dividends and Distributions with respect thereto, all Pledged Notes, all interest, principal and other proceeds received by the Agent with respect to the Pledged Notes, and all other Collateral and other securities, instruments, proceeds, and rights from time to time received by or distributable to the Pledgor in respect of any Collateral, and will not permit any Pledged Share Issuer to issue any capital stock which shall not have been immediately duly pledged hereunder on a first perfected basis. SECTION 4.4 Voting Rights; Dividends, etc. The Pledgor agrees: ------------------------------ (a) after any Default of the nature referred to in Section 8.1.9 of the Credit Agreement or an Event of Default shall have occurred and be continuing, promptly upon receipt thereof by the Pledgor and without any request therefor by the Agent, to deliver (properly endorsed where required hereby or requested by the Agent) to the Agent all Dividends, Distributions, all interest, all principal, all other cash payments, and all proceeds of the Collateral, all of which shall be held by the Agent as additional Collateral for use in accordance with Section 6.3; and ----------- (b) after any Event of Default shall have occurred and be continuing and the Agent has notified the Pledgor of the Agent's intention to exercise its voting power under this clause (b) of Section 4.4 ----------- (i) the Agent may exercise (to the exclusion of the Pledgor) the voting power and all other incidental rights of ownership with respect to any Pledged Shares or other shares of capital stock constituting Collateral and the Pledgor hereby grants the Agent an irrevocable proxy, exercisable under such circumstances, to vote the Pledged Shares and such other Collateral; and (ii) promptly to deliver to the Agent such additional proxies and other documents as may be necessary to allow the Agent to exercise such voting power. All Dividends, Distributions, interest, principal, cash payments and proceeds which may at any time and from time to time be held by the Pledgor but which the Pledgor is then obligated to deliver to the Agent, shall, until delivery to the Agent, be held by the Pledgor separate and apart from its other property in trust for the Agent. The Agent agrees that unless an Event of Default shall have occurred and be continuing and the Agent shall have given the notice referred to in clause (b) of Section 4.4, the Pledgor shall have the exclusive voting power ----------- with respect to any shares of capital stock (including any of the Pledged Shares) constituting Collateral and the Agent shall, upon the written request of the Pledgor, promptly deliver such proxies and other documents, if any, as shall be reasonably requested by the Pledgor which are necessary to allow the Pledgor to exercise voting power with respect to any such share of capital stock (including Exhibit F-6 any of the Pledged Shares) constituting Collateral; provided, however, that no vote shall be cast, or consent, waiver or ratification given, or action taken by the Pledgor that would impair any Collateral or be inconsistent with or violate any provision of the Credit Agreement or any other Loan Document (including this Pledge Agreement). SECTION 4.5 Additional Undertakings. The Pledgor will not, without the ----------------------- prior written consent of the Agent: (a) enter into any agreement amending, supplementing, or waiving any provision of any Pledged Note (including any underlying instrument pursuant to which such Pledged Note is issued) or compromising or releasing or extending the time for payment of any obligation of the maker thereof; (b) take or omit to take any action the taking or the omission of which would result in any impairment or alteration of any obligation of the maker of any Pledged Note or other instrument constituting Collateral; or (c) make any demand under any Pledged Note at any time when a Default of the nature referred to in Section 8.1.9 of the Credit Agreement, or any Event of Default, has occurred and is continuing. ARTICLE V THE AGENT SECTION 5.1 Agent Appointed Attorney-in-Fact. The Pledgor hereby -------------------------------- irrevocably appoints the Agent the Pledgor's attorney-in-fact, with full authority in the place and stead of the Pledgor and in the name of the Pledgor or otherwise, from time to time in the Agent's discretion, to take any action and to execute any instrument which the Agent may deem necessary or advisable to accomplish the purposes of this Pledge Agreement, including without limitation: (a) to ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (b) to receive, endorse and collect any drafts or other instruments, documents and chattel paper, in connection with clause (a) above; and (c) to file any claims or take any action or institute any proceedings which the Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Agent with respect to any of the Collateral. The Pledgor hereby acknowledges, consents and agrees that the power of attorney granted pursuant to this Section is irrevocable and coupled with an interest. SECTION 5.2 Agent May Perform. If the Pledgor fails to perform any ----------------- agreement contained herein, the Agent may itself perform, or cause performance of, such agreement, and Exhibit F-7 the expenses of the Agent incurred in connection therewith shall be payable by the Pledgor pursuant to Section 6.4. ----------- SECTION 5.3 Agent Has No Duty. The powers conferred on the Agent hereunder ----------------- are solely to protect its interest (on behalf of the Lender Parties) in the Collateral and shall not impose any duty on it to exercise any such powers. Except for reasonable care of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Agent shall have no duty as to any Collateral or responsibility for (a) ascertaining or taking action with respect to calls, conversions, exchanges, maturities, tenders or other matters relative to any Pledged Property, whether or not the Agent has or is deemed to have knowledge of such matters, or (b) taking any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. SECTION 5.4 Reasonable Care. The Agent is required to exercise reasonable --------------- care in the custody and preservation of any of the Collateral in its possession; provided, however, the Agent shall be deemed to have exercised reasonable care in the custody and preservation of any of the Collateral, if it takes such action for that purpose as the Pledgor reasonably requests in writing at times other than upon the occurrence and during the continuance of any Event of Default, but failure of the Agent to comply with any such request at any time shall not in itself be deemed a failure to exercise reasonable care. ARTICLE VI REMEDIES SECTION 6.1 Certain Remedies. If any Event of Default shall have occurred ---------------- and be continuing: (a) The Agent may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the U.C.C. (whether or not the U.C.C. applies to the affected Collateral) and also may, without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Agent's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Agent may deem commercially reasonable. The Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten days' prior notice to the Pledgor of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (b) The Agent may Exhibit F-8 (i) transfer all or any part of the Collateral into the name of the Agent or its nominee, with or without disclosing that such Collateral is subject to the lien and security interest hereunder, (ii) notify the parties obligated on any of the Collateral to make payment to the Agent of any amount due or to become due thereunder, (iii) enforce collection of any of the Collateral by suit or otherwise, and surrender, release or exchange all or any part thereof, or compromise or extend or renew for any period (whether or not longer than the original period) any obligations of any nature of any party with respect thereto, (iv) endorse any checks, drafts or other writings in the Pledgor's name to allow collection of the Collateral, (v) take control of any proceeds of the Collateral, and (vi) execute (in the name, place and stead of the Pledgor) endorsements, assignments, stock powers and other instruments of conveyance or transfer with respect to all or any of the Collateral. SECTION 6.2 Compliance with Restrictions. The Pledgor agrees that in any ---------------------------- sale of any of the Collateral whenever an Event of Default shall have occurred and be continuing, the Agent is hereby authorized to comply with any limitation or restriction in connection with such sale as it may be advised by counsel is necessary in order to avoid any violation of applicable law (including compliance with such procedures as may restrict the number of prospective bidders and purchasers, require that such prospective bidders and purchasers have certain qualifications, and restrict such prospective bidders and purchasers to persons who will represent and agree that they are purchasing for their own account for investment and not with a view to the distribution or resale of such Collateral), or in order to obtain any required approval of the sale or of the purchaser by any governmental regulatory authority or official, and the Pledgor further agrees that such compliance shall not result in such sale being considered or deemed not to have been made in a commercially reasonable manner, nor shall the Agent be liable nor accountable to the Pledgor for any discount allowed by the reason of the fact that such Collateral is sold in compliance with any such limitation or restriction. SECTION 6.3 Application of Proceeds. All cash proceeds received by the\ ----------------------- Agent in respect of any sale of, collection from, or other realization upon, all or any part of the Collateral may, in the discretion of the Agent, be held by the Agent as additional collateral security for, or then or at any time thereafter be applied (after payment of any amounts payable to the Agent pursuant to Section 10.3 of the Credit Agreement and Section 6.4) in whole or in ----------- part by the Agent against, all or any part of the Obligations in such order as the Agent shall elect. Any surplus of such cash or cash proceeds held by the Agent and remaining after final payment in full of all the Obligations, and the termination of all Commitments, shall be paid over to the Pledgor or to whomsoever may be lawfully entitled to receive such surplus. Exhibit F-9 SECTION 6.4 Indemnity and Expenses. The Pledgor hereby indemnifies and ---------------------- holds harmless the Agent from and against any and all claims, losses and liabilities arising out of or resulting from this Pledge Agreement (including enforcement of this Pledge Agreement), except claims, losses or liabilities resulting from the Agent's gross negligence or willful misconduct. Upon demand, the Pledgor will pay to the Agent the amount of any and all reasonable expenses, including the reasonable fees and disbursements of its counsel (including the reasonable allocated cost of internal legal services and all disbursements of internal counsel) and of any experts and agents, which the Agent may incur in connection with: (a) the administration of this Pledge Agreement, the Credit Agreement and each other Loan Document; (b) the custody, preservation, use or operation of, or the sale of, collection from or other realization upon, any of the Collateral; (c) the exercise or enforcement of any of the rights of the Agent hereunder; or (d) the failure by the Pledgor to perform or observe any of the provisions hereof. ARTICLE VII MISCELLANEOUS PROVISIONS SECTION 7.1 Loan Document. This Pledge Agreement is a Loan Document ------------- executed pursuant to the Credit Agreement and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions thereof (including as to the WAIVER OF ANY JURY TRIAL with respect to any litigation relating to or arising out of any matter herein). SECTION 7.2 Amendments, etc. No amendment to or waiver of any provision of --------------- this Pledge Agreement nor consent to any departure by the Pledgor herefrom shall in any event be effective unless the same shall be in writing and signed by the Agent, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which it is given. SECTION 7.3 Protection of Collateral. The Agent may from time to time, at ------------------------ its option, perform any act which the Pledgor agrees hereunder to perform and which the Pledgor shall fail to perform after being requested in writing so to perform (it being understood that no such request need be given after the occurrence and during the continuance of an Event of Default) and the Agent may from time to time take any other action which the Agent reasonably deems necessary for the maintenance, preservation or protection of any of the Collateral or of its security interest therein. SECTION 7.4 Addresses for Notices. All notices and other communications --------------------- provided for hereunder shall be in writing (including telegraphic communication) and, if to the Pledgor, mailed or telegraphed or delivered to it at the address set forth below its signature hereto, if to the Agent, mailed or delivered to it, addressed to it at the address of the Agent specified in the Exhibit F-10 Credit Agreement or, as to either party, at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. All such notices and other communications shall, when mailed or telegraphed, respectively, be effective when deposited in the mails or delivered to the telegraph company, respectively, addressed as aforesaid. SECTION 7.5 Section Captions. Section captions used in this Pledge ---------------- Agreement are for convenience of reference only, and shall not affect the construction of this Pledge Agreement. SECTION 7.6 Severability. Wherever possible each provision of this Pledge ------------ Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Pledge Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Pledge Agreement. SECTION 7.7 Governing Law, Entire Agreement, etc. THIS PLEDGE AGREEMENT ------------------------------------ SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ILLINOIS, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF NEW YORK. THIS PLEDGE AGREEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE THE ENTIRE UNDERSTANDING AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND SUPERSEDE ANY PRIOR AGREEMENTS, WRITTEN OR ORAL, WITH RESPECT THERETO. Exhibit F-11 IN WITNESS WHEREOF, the parties hereto have caused this Pledge Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the day and year first above written. AMERICAN EDUCATIONAL PRODUCTS, INC. By: /s/ Dean T. Johnson -------------------------------------- Title: Chief Financial Officer Address: 401 Hickory Street Fort Collins, Colorado 80522 Attention: Michael Anderson General Manager Telecopier No.: 970-484-3733 Copy to: Nasco International, Inc. 901 Janesville Avenue Fort Atkinson, Wisconsin 53528-0901 Attention: Dean T. Johnson Chief Financial Officer Telecopier No.: 414-563-0234 ACCEPTED: BANK OF AMERICA, N.A., as Agent By: /s/ Debra Basler ------------------------------- Title: Address: 231 South LaSalle Street Chicago, Illinois 60697 Telecopier No.: 312-987-0889 Attention: Debra Basler Vice President Exhibit F-12 SCHEDULE I to Pledge Agreement Item A. Pledged Shares -------------------------- Authorized Outstanding % of Shares Pledged Share Issuer Shares Shares Pledged -------------------------- ------ ------ ------- Hubbard Scientific, Inc. 100,000,000 100 100% Scott Resources, Inc. 50,000 1,000 100% Item B. Pledged Notes -------------------------- NONE Exhibit F-13 EXHIBIT G SUBSIDIARY SECURITY AGREEMENT ----------------------------- THIS SUBSIDIARY SECURITY AGREEMENT, dated as of August 20, 2001 (as modified from time to time, this "Security Agreement"), made by AMERICAN ------------------ EDUCATIONAL PRODUCTS, INC., a Colorado corporation (the "Company"), EACH ------- SUBSIDIARY OF THE COMPANY LISTED ON THE SIGNATURE PAGES HEREOF, EACH OTHER PERSON OR ENTITY WHICH FROM TIME TO TIME BECOMES A PARTY HERETO (collectively, including the Company, the "Grantors" and individually each a "Grantor"), in -------- ------- favor of BANK OF AMERICA, N.A., as administrative agent (together with any successor(s) thereto in such capacity, the "Agent") for each of the various ----- financial institutions (individually a "Lender" and collectively the "Lenders") ------ ------- which are or may from time to time become, parties to the Credit Agreement referred to below. W I T N E S S E T H: ------------------- WHEREAS, pursuant to that certain Amended and Restated Credit Agreement (Five Year), dated as of May 29, 2001 (as heretofore amended, supplemented and otherwise modified to the date hereof, the "Credit Agreement"), among Nasco ---------------- International, Inc., a Wisconsin corporation (the "Parent"), the lenders parties thereto, Bank One Wisconsin, as documentation agent and Bank of America, N.A., as agent, the lenders have extended loans to the Parent, in part to finance the AMEP Acquisition and to refinance the Existing Credit Agreement; and WHEREAS, in connection with the extension of credit under the Credit Agreement, the Parent has agreed that the Grantors shall enter into this Security Agreement to grant to the Agent a continuing security interest in all of the "Collateral" identified herein, and, in connection with and to supplement this Security Agreement, enter into the Agreement (Trademark) (the "Supplement"); ---------- NOW, THEREFORE, for good and valuable consideration the receipt of which is hereby acknowledged, and in order to induce the Lenders to make Loans (including the initial Loans) to the Parent from time to time pursuant to the Credit Agreement, in part to refinance the indebtedness under the Existing Credit Agreement, the Grantors hereby agree with the Agent, for its benefit and the ratable benefit of each Lender Party, as follows: ARTICLE I DEFINITIONS SECTION 1.1 Certain Terms. When used herein, (a) capitalized terms used but ------------- not defined herein shall have the meanings given to them in the Credit Agreement and (b) the Exhibit G-1 following terms shall have the following meanings (such definitions to be equally applicable to the singular and plural forms thereof): "Collateral" is defined in Section 2.1. ---------- ----------- "Collateral Account" is defined in clause (c) of Section 4.1.2. ------------------ ---------- ------------- "Computer Hardware and Software Collateral" means: ----------------------------------------- (a) all computer and other electronic data processing hardware, integrated computer systems, central processing units, memory units, display terminals, printers, features, computer elements, card readers, tape drives, hard and soft disk drives, cables, electrical supply hardware, generators, power equalizers, accessories and all peripheral devices and other related computer hardware; (b) all software programs, data and databases (including both source code, object code and all related applications and data files), whether now owned, licensed or leased or hereafter acquired by such Grantor, designed for use on the computers and electronic data processing hardware described in clause (a) above; ---------- (c) all firmware associated therewith; (d) all documentation (including flow charts, logic diagrams, manuals, guides and specifications) with respect to such hardware, software and firmware described in the preceding clauses (a) through (c); and ----------- --- (e) all rights with respect to all of the foregoing, including, without limitation, any and all copyrights, licenses, options, warranties, service contracts, program services, test rights, maintenance rights, support rights, improvement rights, renewal rights and indemnifications and any substitutions, replacements, additions or model conversions of any of the foregoing. "Copyright Collateral" means, with respect to any Grantor, all copyrights -------------------- and all semi-conductor chip product mask works of the Grantor, whether statutory or common law, registered or unregistered, now or hereafter in force throughout the world including, without limitation, all of the Grantor's right, title and interest in and to all copyrights and mask works registered in the United States Copyright Office or anywhere else in the world and also including, without limitation, the copyrights and mask works referred to in Item A of Schedule IV ------ ----------- attached hereto, and all applications for registration thereof, whether pending or in preparation, all copyright and mask work licenses, including each copyright and mask work license referred to in Item B of Schedule IV attached ------ ----------- hereto, the right to sue for past, present and future infringements of any thereof, all rights corresponding thereto throughout the world, all extensions and renewals of any thereof and all proceeds of the foregoing, including, without limitation, licenses, royalties, income, payments, claims, damages and proceeds of suit. Exhibit G-2 "Intellectual Property Collateral" means, collectively, with respect to any -------------------------------- Grantor, the Computer Hardware and Software Collateral, the Copyright Collateral, the Patent Collateral, the Trademark Collateral and the Trade Secrets Collateral. "Inventory" is defined in clause (b) of Section 2.1. --------- ---------- ----------- "Lender Party" means, as the context may require, any Lender or the Agent ------------ and each of its respective successors, transferees and assigns. "Patent Collateral" means with respect to any Grantor: ----------------- (a) all letters patent and applications for letters patent throughout the world, including all patent applications in preparation for filing anywhere in the world and including each patent and patent application referred to in Item A of Schedule II attached hereto; ------ ----------- (b) all patent licenses, including each patent license referred to in Item B of Schedule II attached hereto; ------ ----------- (c) all reissues, divisions, continuations, continuations-in-part, extensions, renewals and reexaminations of any of the items described in clauses (a) and (b); and (d) all proceeds of, and rights associated with, the foregoing (including license royalties and proceeds of infringement suits), the right to sue third parties for past, present or future infringements of any patent or patent application, including any patent or patent application referred to in Item A of Schedule II attached hereto, and for breach or ------ ----------- enforcement of any patent license, including any patent license referred to in Item B of Schedule II attached hereto, and all rights corresponding ------ ----------- thereto throughout the world. "Receivables" is defined in clause (c) of Section 2.1. ----------- ---------- ----------- "Related Contracts" is defined in clause (c) of Section 2.1. ----------------- ---------- ----------- "Trademark Collateral" means, with respect to any Grantor: -------------------- (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, certification marks, collective marks, logos, other source of business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and general intangibles of a like nature (all of the foregoing items in this clause (a) being collectively called a ---------- "Trademark"), now existing anywhere in the world or hereafter adopted or --------- acquired, whether currently in use or not, all registrations and recordings thereof and all applications in connection therewith, whether pending or in preparation for filing, including registrations, recordings and applications in the United States Patent and Trademark Office or in any office or agency of the United States of America or any State thereof or any foreign country, including those referred to in Item A of Schedule III ------ ------------ attached hereto; Exhibit G-3 (b) all Trademark licenses, including each Trademark license referred to in Item B of Schedule III attached hereto; ------ --- (c) all reissues, extensions or renewals of any of the items described in clauses (a) and (b); ----------- --- (d) all of the goodwill of the business connected with the use of, and symbolized by the items described in, clauses (a) and (b); and ----------- --- (e) all proceeds of, and rights associated with, the foregoing, including any claim by such Grantor against third parties for past, present or future infringement or dilution of any Trademark, Trademark registration or Trademark license, including any Trademark, Trademark registration or Trademark icense referred to in Item A and Item B of Schedule III attached ------ ------ ------------ hereto, or for any injury to the goodwill associated with the use of any such Trademark or for breach or enforcement of any Trademark license. "Trade Secrets Collateral" means with respect to any Grantor, common ------------------------ law and statutory trade secrets and all other confidential or proprietary or useful information and all know-how obtained by or used in or contemplated at any time for use in the business of the Grantor (all of the foregoing being collectively called a "Trade Secret"), whether or not such Trade Secret has been ------------ reduced to a writing or other tangible form, including all documents and things embodying, incorporating or referring in any way to such Trade Secret, all Trade Secret licenses, including each Trade Secret license referred to in Schedule V ---------- attached hereto, and including the right to sue for and to enjoin and to collect damages for the actual or threatened misappropriation of any Trade Secret and for the breach or enforcement of any such Trade Secret license. "U.C.C." means the Uniform Commercial Code, as in effect in the State of ------ Illinois. SECTION 1.2 U.C.C. Definitions. Unless otherwise defined herein or the ------------------ context otherwise requires, terms for which meanings are provided in the U.C.C. are used in this Security Agreement, including its preamble and recitals, with such meanings. ARTICLE II SECURITY INTEREST SECTION 2.1 Confirmation and Grant of Security Interest. Each Grantor ------------------------------------------- hereby pledges, assigns and grants, to the Agent for its benefit and the ratable benefit of each of the Lender Parties, and hereby grants to the Agent for its benefit and the ratable benefit of each of the Lender Parties, a continuing security interest in and to all of the following, whether now or hereafter existing or acquired (with respect to any Grantor, the "Collateral"): ---------- (a) all equipment in all of its forms of such Grantor, wherever located, and all parts thereof and all accessions, additions, attachments, improvements, substitutions and Exhibit G-4 replacements thereto and therefor (any and all of the foregoing being, with respect to any Grantor, the "Equipment"); --------- (b) all inventory in all of its forms of such Grantor, wherever located, including (i) all raw materials and work in process therefor, finished goods thereof, and materials used or consumed in the manufacture or production thereof, (ii) all goods in which such Grantor has an interest in mass or a joint or other interest or right of any kind (including goods in which the Grantor has an interest or right as consignee), and (iii) all goods which are returned to or repossessed by such Grantor, and (iv) live specimens including frogs and all accessions thereto, products thereof and documents therefor (any and all such inventory, materials, goods, accessions, products and documents, with respect to any Grantor, being the "Inventory"); --------- (c) all accounts, contracts, contract rights, chattel paper, documents and general intangibles of such Grantor, whether or not arising out of or in connection with the sale or lease of goods or the rendering of services, and all rights of such Grantor now or hereafter existing in and to all security agreements, guaranties, leases and other contracts securing or otherwise relating to any such accounts, contracts, contract rights, chattel paper, documents, instruments, and general intangibles (any and all such accounts, contracts, contract rights, chattel paper, documents, instruments, and general intangibles being the "Receivables", and any and ----------- all such security agreements, guaranties, leases and other contracts being, with respect to any Grantor, the "Related Contracts"); ----------------- (d) all Intellectual Property Collateral of such Grantor; (e) all certificated securities; (f) all investment property and financial assets; (g) all books, records, writings, data bases, information and other property relating to, used or useful in connection with, evidencing, embodying, incorporating or referring to, any of the foregoing in this Section 2.1; ----------- (h) all of such Grantor's other property and rights of every kind and description and interests therein, including all rights in any bank or other accounts and in all monies from time to time therein; and Exhibit G-5 (i) all products, offspring, rents, issues, profits, returns, income and proceeds of and from any and all of the foregoing Collateral (including proceeds which constitute property of the types described in clauses (a), ----------- (b), (c), (d), (e), (f), (g) and (h), proceeds deposited from time to time --- --- --- --- --- --- --- in the Collateral Account and in any lock boxes of such Grantor, and, to the extent not otherwise included, all payments under insurance (whether or not the Agent is the loss payee thereof), or any indemnity, warranty or guaranty, payable by reason of loss or damage to or otherwise with respect to any of the foregoing Collateral). Notwithstanding the foregoing, the Agent shall not enforce the security interest granted pursuant to this Security Agreement in rights arising under contracts as to which such enforcement would constitute a violation of a valid and enforceable restriction thereon, unless any required consents shall have been obtained or such restriction shall have become or be rendered ineffective by reason of law, court proceedings or otherwise. Each Grantor agrees to use its best efforts to obtain any such required consent. SECTION 2.2 Security for Obligations. This Security Agreement secures the ------------------------ payment of all Obligations now or hereafter existing under the Credit Agreement, the Notes and each other Loan Document (including this Security Agreement) to which the Parent is or may become a party, whether for principal, interest, costs, fees, expenses or otherwise. SECTION 2.3 Continuing Security Interest; Transfer of Notes. This Security ----------------------------------------------- Agreement shall create a continuing security interest in the Collateral and shall (a) remain in full force and effect until payment in full of all Obligations and the termination of all Commitments, (b) be binding upon each Grantor, its successors, transferees and assigns, and (c) inure, together with the rights and remedies of the Agent hereunder, to the benefit of the Agent and each other Lender Party. Without limiting the generality of the foregoing clause (c), any Lender may ---------- assign or otherwise transfer (in whole or in part) any Note or Loan held by it to any other Person or entity, and such other Person or entity shall thereupon become vested with all the rights and benefits in respect thereof granted to such Lender under any Loan Document (including this Security Agreement) or otherwise, subject, however, to any contrary provisions in such assignment or transfer, and to the provisions of Section 10.11 and Article IX of the Credit Agreement. Upon the final payment in full of all Obligations, the security interest granted herein shall terminate and all rights to the Collateral shall revert to the Grantors. Upon any such termination, the Agent will, at the Grantor's sole expense, execute and deliver to any Grantor such documents as such Grantor shall reasonably request to evidence such termination at such Grantor's sole expense. SECTION 2.4 Grantors Remains Liable. Anything herein to the contrary ----------------------- notwithstanding, each Grantor agrees that: (a) such Grantor shall remain liable under the contracts and agreements included in the Collateral to the extent set forth therein, and shall perform all of its duties Exhibit G-6 and obligations under such contracts and agreements to the same extent as if this Security Agreement had not been executed, (b) the exercise by the Agent of any of its rights hereunder shall not release such Grantor from any of its duties or obligations under any such contracts or agreements included in the Collateral, and (c) neither the Agent nor any other Lender Party shall have any obligation or liability under any such contracts or agreements included in the Collateral by reason of this Security Agreement, nor shall the Agent or any other Lender Party be obligated to perform any of the obligations or duties of such Grantor thereunder or to take any action to collect or enforce any claim for payment assigned hereunder. ARTICLE III REPRESENTATIONS AND WARRANTIES SECTION 3.1 Representations and Warranties. Each Grantor represents and ------------------------------ warrants unto each Lender Party as set forth in this Article. SECTION 3.1.1 Location of Collateral, etc. All of the Equipment and --------------------------- Inventory of such Grantor are located at the places specified in Item A and Item ------ ---- B, respectively, of Schedule I hereto. None of the Equipment and Inventory has, - - ---------- within the four months preceding the date of this Security Agreement, been located at any place other than the places specified in Item A and Item B, ------ ------ respectively, of Schedule I hereto. The place(s) of business and chief executive ---------- office of such Grantor and the offices) where such Grantor keeps its records concerning the Receivables, and all originals of all chattel paper which evidence Receivables, are located at the address set forth below the name of such Grantor on the signature page hereof. Such Grantor does not operate under a trade name that is different from its legal name. Such Grantor has not been known by any legal name different from the one set forth on the signature page hereto for such Grantor. Such Grantor is not a "retail merchant" within the meaning of Section 9102 of the Uniform Commercial Code - Secured Transactions of the State of California. None of the Receivables is evidenced by a promissory note or other instrument. Such Grantor is not a party to any Federal, state or local government contract, although it does sell materials to various municipalities from time to time on ordinary trade terms. SECTION 3.1.2 Ownership, No Liens, etc. Such Grantor owns the Collateral ------------------------ free and clear of any Lien, security interest, charge or encumbrance except for the security interest created by this Security Agreement and except as permitted by the Credit Agreement. No effective financing statement or other instrument similar in effect covering all or any part of the Collateral is on file in any recording office, except such as may have been filed in favor of the Agent relating to this Security Agreement. SECTION 3.1.3 Possession and Control. Such Grantor has exclusive possession ---------------------- and control of the Equipment and Inventory. Exhibit G-7 SECTION 3.1.4 Negotiable Documents, Instruments and Chattel Paper. Such --------------------------------------------------- Grantor has, contemporaneously herewith, delivered to the Agent possession of all originals of all negotiable documents, instruments and chattel paper currently owned or held by such Grantor (duly endorsed in blank, if requested by the Agent). SECTION 3.1.5 Intellectual Property Collateral. With respect to any -------------------------------- Intellectual Property Collateral the loss, impairment or infringement of which might have a materially adverse effect on the financial condition, operation, assets, business, properties or prospects of such Grantor: (a) such Intellectual Property Collateral is subsisting and has not been adjudged invalid or unenforceable, in whole or in part; (b) such Intellectual Property Collateral is valid and enforceable; (c) such Grantor has made all necessary filings and recordations to protect its interest in such Intellectual Property Collateral, including, without limitation, recordations of all of its interests in the Patent Collateral and Trademark Collateral in the United States Patent and Trademark Office and in corresponding offices throughout the world and its claims to the Copyright Collateral in the United States Copyright Office and in corresponding offices throughout the world; (d) such Grantor is the exclusive owner of the entire and unencumbered right, title and interest in and to such Intellectual Property Collateral and no claim has been made that the use of such Intellectual Property Collateral does or may violate the asserted rights of any third party; and (e) such Grantor has performed and will continue to perform all acts and has paid and will continue to pay all required fees and taxes to maintain each and every item of Intellectual Property Collateral in full force and effect throughout the world, as applicable. Such Grantor owns directly or is entitled to use by license or otherwise, all patents, Trademarks, Trade Secrets, copyrights, mask works, licenses, technology, know-how, processes and rights with respect to any of the foregoing used in, necessary for or of importance to the conduct of such Grantor's business. The Schedules hereto contain true and complete listings and descriptions of all of such Grantor's trademarks, trademark licenses, patents, patent licenses, copyrights, copyright licenses and trade secrets. SECTION 3.1.6 Validity, etc. This Security Agreement creates a valid first ------------- priority security interest in the Collateral, securing the payment of the Obligations, and all filings and other actions necessary or desirable to perfect and protect such security interest have been duly taken. SECTION 3.1.7 Authorization, Approval, etc. No authorization, approval or ---------------------------- other action by, and no notice to or filing with, any governmental authority or regulatory body is required either Exhibit G-8 (a) for the grant by such Grantor of the security interest granted hereby or for the execution, delivery and performance of this Security Agreement by such Grantor, or (b) for the perfection of or the exercise by the Agent of its rights and remedies hereunder. SECTION 3.1.8 Compliance with Laws. Such Grantor is in compliance with the -------------------- requirements of all applicable laws, rules, regulations and orders of every governmental authority, the non-compliance with which might materially adversely affect the business, properties, assets, operations, condition (financial or ---------- otherwise) or prospects of such Grantor or the value of the Collateral or the worth of the Collateral as collateral security. ARTICLE IV COVENANTS SECTION 4.1 Certain Covenants. Each Grantor covenants and agrees that, so ----------------- long as any portion of the Obligations shall remain unpaid, such Grantor will, unless the Required Lenders shall otherwise consent in writing, perform the obligations set forth in this Section. SECTION 4.1.1 As to Equipment and Inventory. Such Grantor hereby agrees ----------------------------- that it shall (a) keep all the Equipment and Inventory (other than Inventory sold in the ordinary course of business) at the places therefor specified in Section 3.1.1 or, upon 30 days' prior written notice to the Agent, at such ------------- other places in a jurisdiction where all representations and warranties set forth in Article III (including Section 3.1.6) shall be true and correct, ----------- and all action required pursuant to the first sentence of Section 4.1.7 -------------- ------------- shall have been taken with respect to the Equipment and Inventory; (b) cause the Equipment to be maintained and preserved in the same condition, repair and working order as when new, ordinary wear and tear excepted, and in accordance with any manufacturer's manual; and forthwith, or in the case of any loss or damage to any of the Equipment, as quickly as practicable after the occurrence thereof, make or cause to be made all repairs, replacements and other improvements in connection therewith which are necessary or desirable to such end; and promptly furnish to the Agent a statement respecting any loss or damage to any of the Equipment; and (c) pay promptly when due all property and other taxes, assessments and governmental charges or levies imposed upon, and all claims (including claims for labor, materials and supplies) against, the Equipment and Inventory, except to the extent the validity thereof is being contested in good faith by appropriate proceedings and for which adequate reserves in accordance with GAAP have been set aside. SECTION 4.1.2 As to Receivables and Investment Property. ----------------------------------------- (a) Such Grantor shall keep its place(s) of business and chief executive office and the offices) where it keeps its records concerning the Receivables, and all originals of all chattel paper which evidenced Receivables, located at the address set forth in Section ------- Exhibit G-9 3.1.1, or, upon 30 days' prior written notice to the Agent, at such other ----- locations in a jurisdiction where all actions required by the first ----- sentence of Section 4.1.7 shall have been taken with respect to the -------- ------------- Receivables; not change its name except upon 30 days' prior written notice to the Agent; hold and preserve such records and chattel paper; and permit representatives of the Agent at any time during normal business hours to inspect and make abstracts from such records and chattel paper. (b) Promptly upon the written request of the Agent, such Grantor will direct all obligors under any Receivables to make all payments to one or more lock boxes. Each lock box will be maintained only pursuant to a lock box agreement which is in all respects satisfactory to the Agent and which provides, among other things, that (i) until the lock box bank shall have received written notice to the contrary from the Agent, the lock box bank will make all payments from the lock box to those accounts of such Grantor designated by such Grantor, and, after any such notice, the lock box bank will make all payments from the lock box to the Agent for credit to the Collateral Account, (ii) the lock box bank (if other than the Agent or a Lender) waives all set off rights, and (iii) such lock box agreement may not be amended without the written consent of the Agent. The Agent will not give the notice referred to in the preceding clause (i) unless it has ---------- given, or is contemporaneously giving, notice pursuant to clause (c) of ---------- this Section 4.1.2. No funds, other than proceeds of Collateral, will be ------------- paid to the lock boxes. Such Grantor will not open any new lock box, or terminate any existing lock box, except upon 10 days' prior written notice to the Agent. (c) Upon written notice by the Agent to such Grantor pursuant to this clause (c) of this Section 4.1.2, all proceeds of Collateral received by ---------- ------------- the Grantor shall be delivered in kind to the Agent for deposit to a deposit account (the "Collateral Account") of such Grantor maintained with ------------------ the Agent, and such Grantor shall not commingle any such proceeds, and shall hold separate and apart from all other property, all such proceeds in express trust for the benefit of the Agent until delivery thereof is made to the Agent. The Agent will not give the notice referred to in the preceding sentence unless there shall have occurred and be continuing a Default. No funds, other than proceeds of Collateral, will be deposited in the Collateral Account. (d) The Agent shall have the right to apply any amount in the Collateral Account to the payment of any Obligations which are due and payable or payable upon demand, or to the payment of any Obligations at any time that an Event of Default shall exist. Subject to the rights of the Agent, such Grantor shall have the right, with respect to and to the extent of collected funds in the Collateral Account, as long as there shall be no Default, to require the Agent to permit to be transferred upon the direction of such Grantor any or all of such collected funds. The Agent may at any time transfer to such Grantor's general demand deposit accounts any or all of the collected funds in the Collateral Account; provided, however, -------- ------- that any such transfer shall not be deemed to be a waiver or modification of any of the Agent's rights under clause (d) of this Section 4.1.2. ---------- ------------- (e) Such Grantor will, at the Agent's request, enter into such agreements and cause any securities intermediary to enter into such agreements as may be necessary to provide the Agent control of all investment property. Exhibit G-10 SECTION 4.1.3 As to Collateral. ---------------- (a) Until such time as the Agent shall notify such Grantor of the revocation of such power and authority such Grantor (i) may in the ordinary course of its business, at its own expense, sell, lease or furnish under the contracts of service any of the Inventory normally held by such Grantor for such purpose, and use and consume, in the ordinary course of its business, any raw materials, work in process or materials normally held by such Grantor for such purpose, (ii) will, at its own expense, endeavor to collect, as and when due, all amounts due with respect to any of the Collateral, including the taking of such action with respect to such collection as the Agent may reasonably request or, in the absence of such request, as such Grantor may deem advisable, and (iii) may grant, in the ordinary course of business, to any party obligated on any of the Collateral, any rebate, refund or allowance to which such party may be lawfully entitled, and may accept, in connection therewith, the return of goods, the sale or lease of which shall have given rise to such Collateral. The Agent, however, may, at any time, after the occurrence and during the continuance of a Default, whether before or after any revocation of such power and authority or the maturity of any of the Obligations, notify any parties obligated on any of the Collateral to make payment to the Agent of any amounts due or to become due thereunder and enforce collection of any of the Collateral by suit or otherwise and surrender, release or exchange all or any part thereof, or compromise or extend or renew for any period (whether or not longer than the original period) any indebtedness thereunder or evidenced thereby. Upon request of the Agent, such Grantor will, at its own expense, notify any parties obligated on any of the Collateral to make payment to the Agent of any amounts due or to become due thereunder. (b) The Agent is authorized to endorse, in the name of such Grantor, any item, howsoever received by the Agent, representing any payment on or other proceeds of any of the Collateral. SECTION 4.1.4 As to Intellectual Property Collateral. -------------------------------------- (a) Such Grantor shall not, unless such Grantor shall either (i) reasonably and in good faith determine (and notice of such determination shall have been delivered to the Agent) that any of the Patent Collateral is of negligible economic value to such Grantor, or (ii) have a valid business purpose to do otherwise, do any act, or omit to do any act, whereby any of the Patent Collateral may lapse or become abandoned or dedicated to the public or unenforceable. (b) Such Grantor shall not, and such Grantor shall not permit any of its licensees to, unless such Grantor shall either (i) reasonably and in good faith determine (and notice of such determination shall have been delivered to the Agent) that any of the Trademark Collateral is of negligible economic value to such Grantor, or (ii) have a valid business purpose to do otherwise, (i) fail to continue to use any of the Trademark Collateral in order to maintain all of the Trademark Collateral in full force free from any claim of abandonment for non-use, Exhibit G-11 (ii) fail to maintain as in the past the quality of products and services offered under all of the Trademark Collateral, (iii) fail to employ all of the Trademark Collateral registered with any Federal or state or foreign authority with an appropriate notice of such registration, (iv) adopt or use any other Trademark which is confusingly similar or a colorable imitation of any of the Trademark Collateral, (v) use any of the Trademark Collateral registered with any Federal or state or foreign authority except for the uses for which registration or application for registration of all of the Trademark Collateral has been made, and (vi) do or permit any act or knowingly omit to do any act whereby any of the Trademark Collateral may lapse or become invalid or unenforceable. (c) Such Grantor shall not, unless such Grantor shall either (i) reasonably and in good faith determine (and notice of such determination shall have been delivered to the Agent) that any of the Copyright Collateral or any of the Trade Secrets Collateral is of negligible economic value to such Grantor, or (ii) have a valid business purpose to do otherwise, do or permit any act or knowingly omit to do any act whereby any of the Copyright Collateral or any of the Trade Secrets Collateral may lapse or become invalid or unenforceable or placed in the public domain except upon expiration of the end of an unrenewable term of a registration thereof. (d) Such Grantor shall notify the Agent immediately if it knows, or has reason to know, that any application or registration relating to any material item of the Intellectual Property Collateral may become abandoned or dedicated to the public or placed in the public domain or invalid or unenforceable, or of any adverse determination or development (including the institution of, or any such determination or development in, any proceeding in the United States Patent and Trademark Office, the United States Copyright Office or any foreign counterpart thereof or any court) regarding such Grantor's ownership of any of the Intellectual Property Collateral, its right to register the same or to keep and maintain and enforce the same. (e) In no event shall such Grantor or any of its agents, employees, designees or licensees file an application for the registration of any Intellectual Property Collateral with the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, unless it informs the Agent in writing at least 30 days prior to the intended making of such filing, and upon request of the Agent, executes and delivers any and all agreements, instruments, documents and papers as the Agent may reasonably request to evidence the Exhibit G-12 Agent's security interest in such Intellectual Property Collateral and the goodwill and general intangibles of such Grantor relating thereto or represented thereby. (f) Such Grantor shall take all necessary steps, including in any proceeding before the United States Patent and Trademark Office, the United States Copyright Office or any similar office or agency in any other country or any political subdivision thereof, to maintain and pursue any application (and to obtain the relevant registration) filed with respect to, and to maintain any registration of, the Intellectual Property Collateral, including the filing of applications for renewal, affidavits of use, affidavits of incontestability and opposition, interference and cancellation proceedings and the payment of fees and taxes (except to the extent that dedication, abandonment or invalidation is permitted under the foregoing clauses (a), (b) and (c)). ------------ --- --- (g) Such Grantor shall, contemporaneously herewith, execute and deliver to the Agent an Agreement (Patent), an Agreement (Trademark) and an Agreement (Copyright) in the forms of Exhibit A, Exhibit B and Exhibit C --------- --------- --------- hereto, respectively, amending and restating, in their entirety, respectively, each of the Supplements, and shall execute and deliver to the Agent any other document required to acknowledge or register or perfect the Agent's interest in any part of the Intellectual Property Collateral. SECTION 4.1.5 Insurance. Such Grantor will maintain or cause to be --------- maintained with responsible insurance companies insurance with respect to the Equipment and Inventory against such casualties and contingencies and of such types and in such amounts as is customary in the case of similar businesses and will, upon the request of the Agent, furnish a certificate of a reputable insurance broker setting forth the nature and extent of all insurance maintained by such Grantor in accordance with this Section. Without limiting the foregoing, such Grantor further agrees as follows: (a) Each policy for property insurance shall show the Agent as a loss payee. (b) Each policy for liability insurance shall show the Agent as an additional insured. (c) With respect to each life insurance policy, such Grantor shall execute and deliver to the Agent a collateral assignment, notice of which has been acknowledged in writing by the insurer. (d) Each insurance policy shall provide that at least 30 days' prior written notice of cancellation or of lapse shall be given to the Agent by the insured. (e) Such Grantor shall, if so requested by the Agent, deliver to the Agent a copy of each insurance policy. (f) All payments in respect of property insurance and life insurance shall be deposited to the Collateral Account of such Grantor and if there shall be no Collateral Account of such Grantor shall be paid to such Grantor. SECTION 4.1.6 Transfers and Other Liens. Such Grantor shall not: ------------------------- Exhibit G-13 (a) sell, assign (by operation of law or otherwise) or otherwise dispose of any of the Collateral, except Inventory in the ordinary course of business or as permitted by the Credit Agreement; or (b) create or suffer to exist any Lien or other charge or encumbrance upon or with respect to any of the Collateral to secure Indebtedness of any Person or entity, except for the security interest created by this Security Agreement and except as permitted by the Credit Agreement. (c) Such Grantor will defend the right, title and interest of the Collateral Agent in and to any of the Grantor's rights under the Related Contracts and to the Inventory and Equipment and all other Collateral and in and to the Proceeds and products thereof against the claims and demands of all persons whomsoever. SECTION 4.1.7 Notices. Such Grantor will, upon obtaining knowledge thereof, ------- advise the Collateral Agent promptly, in reasonable detail, (a) of any lien, security interest, encumbrance or claims made or asserted against any of the Collateral, (b) of any material change in the value of the Collateral, and (c) of the occurrence of any other event which would have a Materially Adverse Effect on the aggregate value of the Collateral or on the security interests created hereunder. SECTION 4.1.8 Continuous Perfection. Such Grantor will not change its name, --------------------- identity or corporate structure in any manner which might make any financing or continuation statement filed hereunder seriously misleading within the meaning of Section 9-402(7) of the U.C.C. (or any other then applicable provision of the U.C.C.) unless such Grantor shall have given the Collateral Agent at least 90 days' prior written notice thereof or shall have delivered to the Collateral Agent (i) acknowledgment copies of UCC-3 financing statements duly executed and duly filed in each jurisdiction in which U.C.C. filings were required in order to perfect the security interest granted by this Agreement in the Collateral and shall have taken all action (or made arrangements to take such action substantially simultaneously with such change if it is impossible to take such action in advance) necessary or reasonably requested by the Collateral Agent to amend such financing statement or continuation statement so that it is not seriously misleading, and (ii), with respect to the Patent Collateral, Trademark Collateral and Copyright Collateral, make all filings necessary in the United States Patent and Trademark Office and the United States Copyright Office, as applicable necessary to reflect such name change. SECTION 4.1.9 Further Assurances, etc. Such Grantor agrees that, from time ----------------------- to time at its own expense, such Grantor will promptly execute and deliver all further instruments and documents, and take all further action, that may be necessary or desirable, or that the Agent may request, in order to perfect, preserve and protect any security interest granted or purported to be granted hereby or to enable the Agent to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, such Grantor will (a) mark conspicuously each document included in the Inventory, each chattel paper included in the Receivables and each Related Contract and, at the request of the Agent, each of its records pertaining to the Collateral with a legend, in form and Exhibit G-14 substance satisfactory to the Agent, indicating that such document, chattel paper, Related Contract or Collateral is subject to the security interest granted hereby; (b) if any Receivable shall be evidenced by a promissory note or other instrument, negotiable document or chattel paper, deliver and pledge to the Agent hereunder such promissory note, instrument, negotiable document or chattel paper duly endorsed and accompanied by duly executed instruments of transfer or assignment, all in form and substance satisfactory to the Agent; (c) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or desirable, or as the Agent may request, in order to perfect and preserve the security interests and other rights granted or purported to be granted to the Agent hereby; and (d) furnish to the Agent, from time to time at the Agent's request, statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as the Agent may reasonably request, all in reasonable detail. With respect to the foregoing and the grant of the security interest hereunder, such Grantor hereby authorizes the Agent to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of such Grantor where permitted by law. A carbon, photographic or other reproduction of this Security Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. ARTICLE V THE AGENT SECTION 5.1 Agent Appointed Attorney-in-Fact. Each Grantor hereby -------------------------------- irrevocably appoints the Agent such Grantor's attorney-in-fact, with full authority in the place and stead of such Grantor and in the name of such Grantor or otherwise, from time to time in the Agent's discretion, to take any action and to execute any instrument which the Agent may deem necessary or advisable to accomplish the purposes of this Security Agreement, including, without limitation: (a) to ask, demand, collect, sue for, recover, compromise, receive and give acquittance and receipts for moneys due and to become due under or in respect of any of the Collateral; (b) to receive, endorse, and collect any drafts or other instruments, documents and chattel paper, in connection with clause (a) above; ---------- (c) to file any claims or take any action or institute any proceedings which the Agent may deem necessary or desirable for the collection of any of the Collateral or otherwise to enforce the rights of the Agent with respect to any of the Collateral; and Exhibit G-15 (d) to perform the affirmative obligations of such Grantor hereunder (including all obligations of such Grantor pursuant to Section 4.1.7). ------------- Each Grantor hereby acknowledges, consents and agrees that the power of attorney granted pursuant to this Section is irrevocable and coupled with an interest. SECTION 5.2 Agent May Perform. If any of the Grantors fail to perform any ----------------- agreement contained herein, the Agent may itself perform, or cause performance of, such agreement, and the expenses of the Agent incurred in connection therewith shall be payable by the applicable Grantor pursuant to Section 6.2. ----------- SECTION 5.3 Agent Has No Duty. In addition to, and not in limitation of, ----------------- Section 2.4, the powers conferred on the Agent hereunder are solely to protect - ----------- its interest (on behalf of the Lender Parties) in the Collateral and shall not impose any duty on it to exercise any such powers. Except for reasonable care of any Collateral in its possession and the accounting for moneys actually received by it hereunder, the Agent shall have no duty as to any Collateral or as to the taking of any necessary steps to preserve rights against prior parties or any other rights pertaining to any Collateral. SECTION 5.4 Reasonable Care. The Agent is required to exercise reasonable --------------- care in the custody and preservation of any of the Collateral in its possession; provided, however, the Agent shall be deemed to have exercised reasonable care - -------- ------- in the custody and preservation of any of the Collateral, if it takes such action for that purpose as any of the Grantors reasonably request in writing at times other than upon the occurrence and during the continuance of any Event of Default, but failure of the Agent to comply with any such request at any time shall not in itself be deemed a failure to exercise reasonable care. ARTICLE VI REMEDIES SECTION 6.1 Certain Remedies. (a) If any Event of Default shall have ---------------- occurred and be continuing: (i) The Agent may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein or otherwise available to it, all the rights and remedies of a secured party on default under the U.C.C. (whether or not the U.C.C. applies to the affected Collateral) and also may (A) require the Grantors to, and the Grantors hereby agrees that it will, at its expense and upon request of the Agent forthwith, assemble all or part of the Collateral as directed by the Agent and make it available to the Agent at a place to be designated by the Agent which is reasonably convenient to both parties and Exhibit G-16 (B) without notice except as specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any of the Agent's offices or elsewhere, for cash, on credit or for future delivery, and upon such other terms as the Agent may deem commercially reasonable. The Grantors agrees that, to the extent notice of sale shall be required by law, at least ten days' prior notice to the Grantors of the time and place of any public sale or the time after which any private sale is to be made shall constitute reasonable notification. The Agent shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. The Agent may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. (ii) All cash proceeds received by the Agent in respect of any sale of, collection from, or other realization upon all or any part of ----- the Collateral may, in the discretion of the Agent, be held by the Agent as collateral for, and/or then or at any time thereafter applied (after payment of any amounts payable to the Agent pursuant to Section ------- 6.2) in whole or in part by the Agent for the ratable benefit of the --- Lender Parties against, all or any part of the Obligations in such order as the Agent shall elect. Any surplus of such cash or cash proceeds held by the Agent and remaining after final payment in full of all the Obligations shall be paid over to the Grantors or to whomsoever may be lawfully entitled to receive such surplus. (b) In furtherance of, and not in limitation of, the foregoing, the Collateral Agent, without demand of performance or other demand, advertisements or notice of any kind (except the notice specified below of time and place of public or private sale) to or upon the Grantors or any other Person (all and each of which demands, advertisements and/or notices are hereby expressly waived), may, whenever an Event of Default shall have occurred and be continuing, in a commercially reasonable manner, forthwith collect, receive, appropriate and realize upon the Collateral, or any part thereof, and/or may forthwith sell, assign, give option or options to purchase, contract to sell or otherwise dispose of and deliver said Collateral, or any part thereof, in one or more parcels at public or private sale or sales, at any exchange, broker's board or at any of the Collateral Agent's offices or elsewhere upon such terms and conditions as it may deem advisable and at such prices as it may deem best, for cash or on credit or for future delivery without assumption of any credit risk, with the right to the Collateral Agent upon any such sale or sales, public or private, to purchase the whole or any part of said Collateral so sold, free of any right or equity of redemption in the Grantor, which right or equity is hereby expressly waived or released. The Collateral Agent shall apply the net proceeds of any such collection, recovery, receipt, appropriation, realization or sale, after deducting all reasonable costs and expenses of every kind incurred therein or incidental to the care, safekeeping or otherwise of any and all of the Collateral or in any way relating to the rights of the Collateral Agent hereunder, including reasonable attorneys' fees and legal expenses, to the payment in whole or in part of the Obligations in such order as the Collateral Agent may elect, the Grantors remaining liable for any deficiency Exhibit G-17 remaining unpaid after such application and all fees and expenses incurred by the Collateral Agent in collecting such deficiency, and only after so paying over such net proceeds and after the payment by the Collateral Agent of any other amount required by any provision of law, including, without limitation, Section 9-504(1)(c) of the U.C.C., need the Collateral Agent account for the surplus, if any, to the Grantors. Unless the Collateral is perishable or threatens to decline speedily in value or is of a type customarily sold on a recognized market, in which event no notification is required, the Grantors agree that the Collateral Agent need not give more than ten days' notice of the time and place of any public sale or of the time after which a private sale or other intended disposition is to take place and that such notice is reasonable notification of such matters. No notification need be given to any Grantors if such Grantor has signed after default a statement renouncing or modifying any right to notification of sale or other intended disposition. The Grantors further agree to waive and agrees not to assert any rights or privileges which it may acquire under Section 9-112 of the U.C.C. For the purpose of enabling the Collateral Agent to exercise rights and remedies under this Agreement and any Security Agreement Supplements, at such time as the Collateral Agent shall be lawfully entitled to exercise such rights and remedies, and for no other purpose, but as a supplement to and not in limitation of any and all other rights and remedies available to the Collateral Agent and to the extent the Collateral Agent chooses to avail itself of the following, the grants, to the extent not prohibited by applicable law or existing licenses granted in the ordinary course of business (unless and until appropriate consents have been obtained), to the Collateral Agent an irrevocable, non-exclusive license (exercisable without payment of royalty or other compensation to the Borrower), which license shall be exercisable by the Collateral Agent upon and subject to the occurrence and during the continuance of an Event of Default, to use, license or sublicense and to enhance, alter or otherwise modify any Patent Collateral, Copyright Collateral and, subject the maintenance of quality standards comparable to those heretofore maintained by the Grantor in connection with the same or similar goods and services, Trademark Collateral, now owned or hereafter acquired by such Grantor (including, in the case of a license with respect to Copyright Collateral, reasonable access to all media in which any of the licensed items may be recorded or stored and to all computer hardware used for the compilation, storage or printout thereof); provided, however, that (i) to the extent such Patent Collateral consists of - -------- ------- patent licenses or other agreements that provide such Grantor with the right to use patented technology, the non-exclusive license granted hereby to the Collateral Agent shall be subject to the terms and conditions contained in such patent licenses or such other agreements, including without limitation restrictions on the right to sub-license, (ii) to the extent such Copyright Collateral consists of copyright and/or mask work licenses or other agreements that provide such Grantor with the right to use any of the types of items referred to in clause (i) of the definition of "Copyright Collateral", the ---------- non-exclusive license granted hereby to the Collateral Agent shall be subject to the terms and conditions contained in such copyright and/or mask work licenses or such other agreements, including without limitation restrictions on the right to sub-license, as the case may be, and (iii) to the extent such Trademark Collateral consists of trademark licenses or other agreements that provide such Grantor with the right to use any of the types of items referred to in clause ------ (i) of the definition of "Trademark Collateral", the non-exclusive license - --- granted hereby to the Collateral Agent shall be subject to the terms and conditions contained in such trademark license or other agreements, including without limitation, restrictions on the right to sub-license, as the case may be. Exhibit G-18 SECTION 6.1.2 Indemnity and Expenses. ---------------------- (a) Each Grantor agrees to indemnify the Agent from and against any and all claims, losses and liabilities arising out of or resulting from this Security Agreement (including, without limitation, enforcement of this Security Agreement), except claims, losses or liabilities resulting from the Agent's gross negligence or willful misconduct. (b) Each Grantor will upon demand pay to the Agent the amount of any and all reasonable expenses, including the reasonable fees and disbursements of its counsel and of any experts and agents, which the Agent may incur in connection with (i) the administration of this Security Agreement, (ii) the custody, preservation, use or operation of, or the sale of, collection from, or other realization upon, any of the Collateral, (iii) the exercise or enforcement of any of the rights of the Agent or the Lender Parties hereunder, and (iv) the failure by such Grantor to perform or observe any of the provisions hereof. ARTICLE VII MISCELLANEOUS PROVISIONS SECTION 7.1 Loan Document. This Security Agreement is a Loan Document ------------- executed pursuant to the Credit Agreement and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions thereof (including as to the WAIVER OF JURY TRIAL with respect to any litigation relating to or arising out of any matter herein). SECTION 7.2 Amendments; etc. No amendment to or waiver of any provision of --------------- this Security Agreement nor consent to any departure by the Grantors herefrom, shall in any event be effective unless the same shall be in writing and signed by the Agent, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 7.3 Addresses for Notices. All notices and other communications --------------------- provided for hereunder shall be in writing (including telegraphic communication) and, if to the Grantors, mailed or telegraphed or delivered to it, addressed to each Grantor at the address set forth below each Grantor's signature hereto, if to the Agent, mailed or delivered to it, addressed to it at the address of the Agent specified in the Credit Agreement, or as to either party at such other address as shall be designated by such party in a written notice to each other party complying as to delivery with the terms of this Section. All such notices and other communications shall, when mailed or telegraphed, respectively, be effective when deposited in the mails or delivered to the telegraph company, respectively, addressed as aforesaid. Exhibit G-19 SECTION 7.4 Section Captions. Section captions used in this Security ---------------- Agreement are for convenience of reference only, and shall not affect the construction of this Security Agreement. SECTION 7.5 Severability. Wherever possible each provision of this Security ------------ Agreement shall be interpreted in such manner as to be effective and valid under applicable law, but if any provision of this Security Agreement shall be prohibited by or invalid under such law, such provision shall be ineffective to the extent of such prohibition or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Security Agreement. SECTION 7.6 Governing Law, Entire Agreement, etc. THIS SECURITY AGREEMENT ------------------------------------ SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE INTERNAL LAWS OF THE STATE OF ILLINOIS, EXCEPT TO THE EXTENT THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR COLLATERAL ARE GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF ILLINOIS. THIS SECURITY AGREEMENT AND THE OTHER LOAN DOCUMENTS CONSTITUTE THE ENTIRE UNDERSTANDING AMONG THE PARTIES HERETO WITH RESPECT TO THE SUBJECT MATTER HEREOF AND SUPERSEDE ANY PRIOR AGREEMENTS, WRITTEN OR ORAL, WITH RESPECT THERETO. Exhibit G-20 IN WITNESS WHEREOF, the Grantors have caused this Security Agreement to be duly executed and delivered by its officer thereunto duly authorized as of the date first above written. AMERICAN EDUCATIONAL PRODUCTS, INC. By: /s/ Dean T. Johnson --------------------------------- Title: Chief Financial Officer Address: 401 Hickory Street Fort Collins, Colorado 80522 Attention: Michael Anderson General Manager Telecopier No.: 970-484-3733 Copy to: Nasco International, Inc. 901 Janesville Avenue Fort Atkinson, Wisconsin 53538-0901 Attention: Dean T. Johnson Chief Financial Officer Telecopier No.: 414-563-0234 Exhibit G-21 SCOTT RESOURCES, INC. By: /s/ Dean T. Johnson ----------------------------- Title: Chief Financial Officer Address: 401 Hickory Street Fort Collins, Colorado 80522 Attention: Michael Anderson General Manager Telecopier No.: 970-484-3733 Copy to: Nasco International, Inc. 901 Janesville Avenue Fort Atkinson, Wisconsin 53538-0901 Attention: Dean T. Johnson Chief Financial Officer Telecopier No.: 414-563-0234 Exhibit G-22 HUBBARD SCIENTIFIC, INC. By: /s/ Dean T. Johnson ---------------------------------- Title: Chief Financial Officer Address: 1120 Halbleib Road Chippewa Falls, Wisconsin 54729 Attention: Thomas C. Halbleib General Manager Telecopier No.: 715-723-8021 Copy to: Nasco International, Inc. 901 Janesville Avenue Fort Atkinson, Wisconsin 53538-0901 Attention: Dean T. Johnson Chief Financial Officer Telecopier No.: 414-563-0234 Exhibit G-23 ACCEPTED: BANK OF AMERICA, N.A., as Agent By: /s/ Debra Basler ----------------------------- Title: Address: 231 South LaSalle Street Chicago, Illinois 60697 Telecopier No.: 312-987-0889 Attention: Debra Basler Vice President Exhibit G-24 EXHIBIT A to Security Agreement AGREEMENT --------- (Trademark) THIS AGREEMENT (TRADEMARK), dated as of August 20, 2001 (as modified from time to time, this "Agreement"), made by AMERICAN EDUCATIONAL PRODUCTS, INC., a --------- Colorado corporation (the "Company"), EACH SUBSIDIARY OF THE COMPANY LISTED ON ------- THE SIGNATURE PAGES HEREOF, EACH OTHER PERSON OR ENTITY WHICH FROM TIME TO TIME BECOMES A PARTY HERETO (collectively, including the Company, the "Grantors" and -------- individually each a "Grantor"), in favor of BANK OF AMERICA, N.A., as ------- administrative agent (together with any successor(s) thereto in such capacity, the "Agent") for each of the financial institutions (individually a "Lender" and ----- ------ collectively the "Lenders") which are or may from time to time become, parties ------- to the Credit Agreement referred to below. W I T N E S S E T H ------------------- WHEREAS, pursuant to that certain Amended and Restated Credit Agreement (Five Year), dated as of May 29, 2001 (as heretofore amended, supplemented and otherwise modified to the date hereof, the "Credit Agreement"), among Nasco ---------------- International, Inc., a Wisconsin corporation (the "Parent") the lenders parties thereto, Bank One Wisconsin as documentation agent, and Bank of America, N.A., as agent, the lenders have extended loans to the Parent, in part to finance the AMEP Acquisition and to refinance the Existing Credit Agreement; and WHEREAS, it is a condition precedent to any extension of credit under the Credit Agreement, that the Grantors enter into the Security Agreement to grant to the Agent a continuing security interest in all of the "Collateral" identified therein, and, in connection with and to supplement the Security Agreement, enter into this Agreement, to, among other things, confirm and ratify its grant to the Agent of a continuing security interest in the Trademark Collateral; NOW, THEREFORE, for good and valuable consideration the receipt of which is hereby acknowledged, and in order to induce the Lenders to make Loans (including the initial Loans) to the Parent from time to time pursuant to the Credit Agreement, in part to refinance the indebtedness under the Existing Credit Agreement, the Grantors hereby agrees with the Agent, for its benefit and the ratable benefit of each Lender Party, as follows: SECTION 1. Definitions. Unless otherwise defined herein or the context ----------- otherwise requires, terms used in this Agreement, including its preamble and recitals, have the meanings provided in the Security Agreement. SECTION 2. Confirmation and Grant of Security Interest. For good and ------------------------------------------- valuable consideration, the receipt and sufficiency of which are hereby acknowledged, each Grantor Exhibit G-25 hereby pledges and assigns to the Agent, for its benefit and the ratable benefit of the Lender Parties, and granted to the Agent, for its benefit and the ratable benefit of the Lender Parties, a continuing security interest in and to, all of the Trademark Collateral, as defined therein. Each Grantor hereby ratifies and restates such pledge, assignment and grant, and with greater specificity hereby assigns and pledges to the Agent for its benefit and the ratable benefit of each of the Lender Parties, and does hereby grant, mortgage, pledge and hypothecate to the Agent for its benefit and the ratable benefit of each of the Lender Parties, a continuing security interest in and to all of the following, whether now or hereafter existing or acquired (the "Trademark Collateral"): -------------------- (a) all trademarks, trade names, corporate names, company names, business names, fictitious business names, trade styles, service marks, certification marks, collective marks, logos, other source of business identifiers, prints and labels on which any of the foregoing have appeared or appear, designs and general intangibles of a like nature (all of the foregoing items in this clause (a) being ---------- collectively called a "Trademark"), now existing anywhere in the world --------- or hereafter adopted or acquired, whether currently in use or not, all registrations and recordings thereof and all applications in connection therewith, whether pending or in preparation for filing, including registrations, recordings and applications in the United States Patent and Trademark Office or in any office or agency of the United States of America or any State thereof or any foreign country, including those referred to in Item A of Attachment 1 hereto; ------ ------------ (b) all Trademark licenses, including each Trademark license referred to in Item B of Attachment 1 hereto; ------ ------------ (c) all reissues, extensions or renewals of any of the items described in clauses (a) and (b); ----------- --- (d) all of the goodwill of the business connected with the use of, and symbolized by the items described in, clauses (a) and (b); and ----------- --- (e) all proceeds of, and rights associated with, the foregoing, including any claim by such Grantor against third parties for past, present, or future infringement or dilution of any Trademark, Trademark registration or Trademark license, including any Trademark, Trademark registration or Trademark license referred to in Item A and Item B of Attachment 1 hereto, or for any injury to the goodwill ------ ------------ associated with the use of any Trademark or for breach or enforcement of any Trademark license. SECTION 3. Security Agreement. This Agreement has been executed and ------------------ delivered by the Grantors for the purpose of, among other things, ratifying and confirming the grant of the Trademark Collateral to the Agent for the benefit of the Lender Parties and registering (and confirming the recordation pursuant to the Security Agreement of) the security interest of the Agent in the Trademark Collateral with the United States Patent and Trademark Office and corresponding offices in other countries of the world. The security interest confirmed and granted hereby has been confirmed and granted as a supplement to, and not in limitation of, the Exhibit G-26 security interest confirmed and granted to the Agent for its benefit and the benefit of each Lender Party under the Security Agreement. The Security Agreement (and all rights and remedies of the Agent and each Lender Party thereunder) shall remain in full force and effect in accordance with its terms. SECTION 4. Release of Security Interest. Upon payment in full of all ---------------------------- Obligations, the Agent shall, at the Grantors' expense, execute and deliver to each Grantor all instruments and other documents as may be necessary or proper to release the lien on and security interest in the Trademark Collateral which has been granted hereunder. SECTION 5. Acknowledgment. Each Grantor does hereby further acknowledge -------------- and affirm that the rights and remedies of the Agent with respect to the security interest in the Trademark Collateral granted and confirmed hereby are more fully set forth in the Security Agreement, the terms and provisions of which (including the remedies provided for therein) are incorporated by reference herein as if fully set forth herein. SECTION 6. Loan Document, etc. This Agreement is a Loan Document executed ------------------ pursuant to the Credit Agreement and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions of the Credit Agreement. SECTION 7. Counterparts. This Agreement may be executed by the parties ------------ hereto in several counterparts, each of which shall be deemed to be an original and all of which shall constitute together but one and the same agreement. Exhibit G-27 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed and delivered by their respective officers thereunto duly authorized as of the day and year first above written. AMERICAN EDUCATIONAL PRODUCTS, INC. By: /s/ Dean T. Johnson ---------------------- Title: Chief Financial Officer Address: 401 Hickory Street Fort Collins, Colorado 80522 Attention: Michael Anderson General Manager Telecopier No.: 970-484-3733 Copy to: Nasco International, Inc. 901 Janesville Avenue Fort Atkinson, Wisconsin 53538-0901 Attention: Dean T. Johnson Chief Financial Officer Telecopier No.: 414-563-0234 Exhibit G-28 SCOTT RESOURCES, INC. By: /s/ Dean T. Johnson ---------------------- Title: Chief Financial Officer Address: 401 Hickory Street Fort Collins, Colorado 80522 Attention: Michael Anderson General Manager Telecopier No.: 970-484-3733 Copy to: Nasco International, Inc. 901 Janesville Avenue Fort Atkinson, Wisconsin 53538-0901 Attention: Dean T. Johnson Chief Financial Officer Telecopier No.: 414-563-0234 Exhibit G-29 HUBBARD SCIENTIFIC, INC. By: /s/ Dean T. Johnson ---------------------- Title: Chief Financial Officer Address: 1120 Halbleib Road Chippewa Falls, Wisconsin 54729 Attention: Thomas C. Halbleib General Manager Telecopier No.: 715-723-8021 Copy to: Nasco International, Inc. 901 Janesville Avenue Fort Atkinson, Wisconsin 53538-0901 Attention: Dean T. Johnson Chief Financial Officer Telecopier No.: 414-563-0234 Exhibit G-30 ACCEPTED: BANK OF AMERICA, N.A., as Agent By: /s/ Debra Basler ----------------------------- Title: Address: 231 South LaSalle Street Chicago, Illinois 60697 Telecopier No.: 312-987-0889 Attention: Debra Basler Vice President Exhibit G-31 EXHIBIT H FORM OF OPINION OF COUNSEL __________, 2001 Bank of America, N.A. as Administrative Agent 231 South LaSalle Street Chicago, Illinois 60697 -and- The Lenders from time to time parties to the Credit Agreement referred to below. Re: Amended and Restated Credit Agreement (Five Year) (herein referred to as the "Credit Agreement (Five Year)") among Nasco International, Inc., a --------------------------- Wisconsin corporation (the "Borrower"), the financial institutions from -------- time to time parties thereto (the "Lenders"), Bank One, Wisconsin, as ------- documentation agent and Bank of America, N.A., as administrative agent for the Lenders (in such capacity, the "Five Year Agreement Agent") and the ------------------------- Amended and Restated Credit Agreement (364 Days) (herein referred to as the "Credit Agreement (364 Days) and together with the Credit Agreement (Five ---------------- Years) as the "Credit Agreements") among the Borrower, the financial ----------------- institutions from time to time parties thereto, Bank One, Wisconsin, as documentation agent and Bank of America, N.A. as administrative agent (in such capacity, the "364 Day Agent" and in both its capacities as the Five Year Agent and the 364 Day Agent, the "Agent"). ----- Ladies and Gentlemen: I am the General Counsel of the Borrower and this letter is being furnished to you as a condition to the occurrence on the date hereof of the Effective Dates (as defined in the Credit Agreements). I have examined executed counterparts of (a) the Credit Agreements, (b) the Notes delivered on the Effective Date to the Agent for the account of Bank One, Wisconsin and Bank of America, N.A. under the Credit Agreements and (c) originals or copies certified to my satisfaction of all such corporate records of the Borrower and agreements and other instruments and certificates of public officials and officers and representatives of the Borrower, and I have made such other investigations, reviewed such other documents and considered such questions of Exhibit H-1 law, as in each case I have deemed necessary or appropriate in connection with the opinions hereinafter expressed. Based on the foregoing, I am of the opinion that: 1. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Wisconsin and is duly qualified to do business and in good standing as a foreign corporation in each jurisdiction where the nature of its business makes such qualification necessary and where the failure to so qualify might have a Materially Adverse Effect (as defined in each Credit Agreement). 2. The Borrower has full power, authority and legal right to conduct its business substantially as presently conducted by it and to own its properties, to execute and deliver the Credit Agreements and the Notes, to borrow under the Credit Agreements, and to perform and observe its obligations under, and the terms and provisions of, the Credit Agreements. 3. The execution and delivery by the Borrower of the Credit Agreements and the Notes and the performance and observance by it of its obligations under, and the terms and provisions of, and the borrowings by it under and the grant of the security interests and other Liens (as defined in each Credit Agreement) under, the Credit Agreements and the Notes, have been duly authorized by all necessary corporate action, require no governmental registrations, filings, consents or approvals, and do not violate or contravene or require any consent under (i) any provision of the certificate of incorporation or by-laws of the Borrower, (ii) any law or governmental regulation, (iii) any order or decree of any court or governmental agency, or (iv) any indenture, agreement or other instrument, in each case to which the Borrower is a party or which is binding upon any of its properties, and will not result in the creation or imposition of any security interest in or other Lien on any of its properties pursuant to the provisions of any agreement (excluding, however, the Credit Agreements and any instrument executed pursuant thereto) or other instrument binding upon or applicable to it. 4. The Credit Agreements and the Notes have been duly executed and delivered on behalf of the Borrower, and the Credit Agreements and the Notes constitute the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, subject, as to enforcement only, to bankruptcy, insolvency, reorganization, moratorium or similar laws at the time in effect affecting the enforceability of rights of creditors generally. 5. Neither the Borrower nor any Significant Subsidiary (as defined in each Credit Agreement) is in default (including after giving effect to the execution and delivery of the Credit Agreements and the making of the initial Loans and the consummation of the other transactions contemplated therein) under any agreement or instrument governing any Indebtedness which would cause an Event of Default under Section 8.1.5 of either Credit Agreement or is in default under any law or governmental regulation or court decree or order the default Exhibit H-2 under which would have a Materially Adverse Effect, nor am I aware of any facts or circumstances which would give rise to any such default. 6. No litigation, labor controversy, arbitration or governmental investigation or proceeding of the character referred to in Section 6.7 of either Credit Agreement is pending, or, to the best of my knowledge (after due inquiry), threatened. I am a member of the Bar of the State of New York and I do not express any opinions herein concerning any laws other than the State of New York. I note that the Loan Documents are governed by Illinois law. For the purpose of the opinion set forth in paragraph 4, however, I have assumed that New York law was applicable. Very truly yours, Steven B. Lapin Exhibit H-3 EXHIBIT I FORM OF LENDER ASSIGNMENT AGREEMENT To: Nasco International, Inc. 901 Janesville Avenue Fort Atkinson, Wisconsin 53538 To: Bank of America, N.A., as Agent 231 South LaSalle Street Chicago, Illinois 60697 NASCO INTERNATIONAL, INC. ------------------------- Ladies and Gentlemen: We refer to clause (b) of Section 10.11.1 of the Amended and Restated Credit Agreement (Five Year), dated as of May 29, 2001 (together with all amendments and other modifications, if any, from time to time thereafter made thereto, the "Credit Agreement"), among Nasco International, Inc., a Wisconsin ---------------- corporation (the "Borrower"), the various financial institutions which are, or -------- shall from time to time become, parties thereto (the "Lenders"), Bank One, ------- Wisconsin as documentation agent and Bank of America, N.A. as administrative agent (in such capacity, the "Agent") for the Lenders. Unless otherwise defined ----- herein or the context otherwise requires, terms used herein have the meanings provided in the Credit Agreement. This agreement is delivered to you pursuant to clause (b) of Section 10.11.1 of the Credit Agreement and also constitutes notice to each of you, pursuant to Section 10.11.1 of the Credit Agreement, of the assignment and delegation to_________________________________ (the "Assignee") of __ % of the -------- Loans and Commitment of________________ (the "Assignor") outstanding under the -------- Credit Agreement on the date hereof and of all related rights and obligations under the Credit Agreement and the other Loan Documents. After giving effect to the foregoing assignment and delegation, the Assignor's and the Assignee's Percentages for the purposes of the Credit Agreement are set forth opposite such Person's name on the signature pages hereof. [Add paragraph dealing with accrued interest and any fees with respect to Loans assigned.] The Assignee hereby acknowledges and confirms that it has received and reviewed to its satisfaction a copy of the Credit Agreement and the exhibits related thereto, together with copies of the documents which were required to be delivered under the Credit Agreement as a condition to the making of the Loans thereunder. The Assignee further confirms and agrees that in becoming a Lender and in making its Commitment and Loans under the Credit Agreement, such Exhibit I-1 actions have and will be made without recourse to, or representation or warranty by, the Agent or the Assignor, and expressly confirms for the benefit of the Agent each of the provisions set forth in Article IX of the Credit Agreement. Except as otherwise provided in the Credit Agreement, effective as of the date of acceptance hereof by the Agent (a) the Assignee (i) shall be deemed automatically to have become a party to the Credit Agreement, have all the rights and obligations of a "Lender" under the Credit Agreement and the other Loan Documents as if it were an original signatory thereto to the extent specified in the second paragraph hereof; and (ii) agrees to be bound by the terms and conditions set forth in the Credit Agreement and the other Loan Documents as if it were an original signatory thereto; and (b) the Assignor shall be released from its obligations under the Credit Agreement and the other Loan Documents to the extent specified in the second paragraph hereof. The Assignor and the Assignee hereby agree that the [Assignor] [Assignee] will pay to the Agent the processing fee referred to in Section 10.11.1 of the Credit Agreement upon the delivery hereof. The Assignee hereby advises each of you of the following administrative details with respect to the assigned Loans and Commitment and requests the Agent to acknowledge receipt of this document: (A) Address for Notices: Domestic Office: Address: Attention: Telephone: Facsimile: Eurodollar Office Address: Attention: Telephone: Exhibit I-2 Facsimile: (B) Payment Instructions: The Assignee agrees to furnish the tax form required by the last paragraph of Section 4.6. (if so required) of the Credit Agreement no later than the date of acceptance hereof by the Agent. Exhibit I-3 This Agreement may be executed by the Assignor and Assignee and accepted by the Agent in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same agreement, and shall be governed by the internal laws of the State of Illinois. Adjusted Percentage [ASSIGNOR] - ------------------- Commitment ______% By:__________________________ and Loans: Title: Adjusted Percentage [ASSIGNEE] - ------------------- Commitment ______% By:__________________________ and Loans: Title: Accepted and Acknowledged this ___ day of __________, 200_ Bank of America, N.A. as Agent By: _____________________________ Title: Exhibit I-4 EXHIBIT J CONFIRMATION Dated as of _______ ___, 2001 To: Bank of America, N.A., individually and as administrative agent (in such capacity, the "Administrative Agent"), and the other financial institutions party to the Restated Credit Agreement referred to below Please refer to the following: (a) the Amended and Restated Credit Agreement dated as of the date hereof (the "Restated Credit Agreement") among NASCO International, Inc. (the "Borrower"), certain lenders, Bank One, Wisconsin, as documentation agent and the Agent; (b) the Pledge Agreement dated as of March 31, 2000 (as amended, the "Pledge Agreement") between Borrower and the Agent; (c) the Security Agreement dated as of March 31, 2000 (as amended, the "Security Agreement") between the Borrower and the Agreement; ------------------ (d) the Original Mortgage dated as of June 25, 1992 executed by the Borrower in favor of the Agent; and (e) the Modesto Mortgage dated as of August 5, 1997 executed by the Borrower in favor of the Agent. Each document referred to in items (b) through (e) above is called a "Credit --------- --- ------ Document". Capitalized terms used but not defined herein shall have the meanings - -------- set forth in the Restated Credit Agreement; The Borrower hereby confirms to the Lenders (as defined in the Restated Credit Agreement) and the Agent that each Credit Document to which the Borrower is a party continues in full force and effect on the date hereof after giving effect to this Confirmation and is the legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms. Exhibit J-1 IN WITNESS WHEREOF, the Borrower has executed this Confirmation to be duly executed and delivered by its officer thereunto duly authorized as the date first above written. NASCO INTERNATIONAL, INC. By:________________________________ Title: Address: 901 Janesville Avenue Fort Atkinson, Wisconsin 53538-0901 Attention: Dean T. Johnson Chief Financial Officer copy to: Geneve Corporation 96 Cummings Point Road Stamford, Connecticut 06902 Telecopier No. 203-348-3103 Attention: Theresa Herbert Vice President Accepted and Agreed as of ______________________ , 2001 BANK OF AMERICA, N.A. By: _______________________________ Title: Exhibit J-2 EX-10.9 6 dex109.txt AMENDED AND RESTATED CREDIT AGREEMENT (364 DAY) Exhibit 10.9 EXECUTION COPY U.S. $2,500,000 AMENDED AND RESTATED CREDIT AGREEMENT (364 DAYS) among NASCO INTERNATIONAL, INC., as the Borrower, and VARIOUS FINANCIAL INSTITUTIONS NOW OR HEREAFTER PARTIES HERETO, as the Lenders, BANK ONE, WISCONSIN as Documentation Agent and BANK OF AMERICA, N.A., as the Administrative Agent for the Lenders BANC OF AMERICA SECURITIES LLC as Sole Lead Arranger and Sole Book Manager TABLE OF CONTENTS
PAGE ARTICLE I. DEFINITIONS AND ACCOUNTING TERMS ............................. 1 SECTION 1.1 Defined Terms ........................................... 1 SECTION 1.2 Use of Defined Terms .................................... 19 SECTION 1.3 Cross-References ........................................ 19 SECTION 1.4 Accounting and Financial Determinations ................. 19 ARTICLE II. COMMITMENTS, BORROWING PROCEDURES AND NOTES ................. 19 SECTION 2.1 Commitments ............................................. 19 SECTION 2.1.1 Commitment of Each Lender ............................. 19 SECTION 2.1.2 Lenders Not Permitted or Required to Make Loans ....... 19 SECTION 2.2 Reduction of Commitment Amount .......................... 20 SECTION 2.3 Borrowing Procedure ..................................... 20 SECTION 2.3.1 Borrowings ............................................ 20 SECTION 2.3.2 All Borrowings ........................................ 20 SECTION 2.4 Continuation and Conversion Elections ................... 20 SECTION 2.5 Funding ................................................. 20 SECTION 2.6 Notes ................................................... 21 ARTICLE III. REPAYMENTS, PREPAYMENTS, INTEREST AND FEES ................. 21 SECTION 3.1 Repayments and Prepayments .............................. 21 SECTION 3.2 Interest Provisions ..................................... 22 SECTION 3.2.1 Rates ................................................. 22 SECTION 3.2.2 Default Rates ......................................... 22 SECTION 3.2.3 Payment Dates ......................................... 23 SECTION 3.3 Fees .................................................... 23 SECTION 3.3.1 [Reserved] ............................................. 23 SECTION 3.3.2 Agents Fee ............................................ 23 SECTION 3.3.3 Non-Use Fees .......................................... 23 SECTION 3.4 Extension of Stated Maturity Date ....................... 24 ARTICLE IV. CERTAIN EURODOLLAR RATE AND OTHER PROVISIONS ................ 24 SECTION 4.1 Eurodollar Rate Lending Unlawful ........................ 24 SECTION 4.2 Deposits Unavailable .................................... 24 SECTION 4.3 Increased Costs, etc. ................................... 25 SECTION 4.4 Funding Losses .......................................... 25 SECTION 4.5 Increased Capital Costs ................................. 25 SECTION 4.6 Taxes ................................................... 26 SECTION 4.7 Payments, Computations, etc ............................. 27 SECTION 4.8 Sharing of Payments ..................................... 27 SECTION 4.9 Setoff .................................................. 28 SECTION 4.10 Use of Proceeds ........................................ 28
ii ARTICLE V. CONDITIONS TO EFFECTIVENESS AND BORROWINGS ..................... 28 SECTION 5.1 Effectiveness ............................................ 28 SECTION 5.1.1 Resolutions, etc. ...................................... 29 SECTION 5.1.2 Delivery of Notes ...................................... 29 SECTION 5.1.3 Credit Agreements ...................................... 29 SECTION 5.1.4 Confirmation ........................................... 29 SECTION 5.1.5 Satisfaction with Tax Sharing Agreement ................ 29 SECTION 5.1.6 Opinions of Counsel .................................... 29 SECTION 5.1.7 Closing Fees, Expenses, etc. ........................... 29 SECTION 5.1.8 No Materially Adverse Effect ........................... 29 SECTION 5.1.9 Satisfactory Legal Form ................................ 29 SECTION 5.1.10 Compliance with Warranties, No Default, etc. .......... 30 SECTION 5.1.11 Consents, etc. ........................................ 30 SECTION 5.2 All Borrowings ........................................... 30 SECTION 5.2.1 Compliance with Warranties, No Default, etc. ........... 30 SECTION 5.2.2 Borrowing Request ...................................... 31 SECTION 5.2.3 Satisfactory Legal Form ................................ 31 ARTICLE VI. REPRESENTATIONS AND WARRANTIES ................................ 32 SECTION 6.1 Organization, etc. ....................................... 32 SECTION 6.2 Due Authorization, Non-Contravention, etc. ............... 32 SECTION 6.3 Government Approval, Regulation, etc. .................... 32 SECTION 6.4 Validity, etc. ........................................... 33 SECTION 6.5 Financial Information .................................... 33 SECTION 6.6 No Material Adverse Change ............................... 33 SECTION 6.7 Litigation, Labor Controversies, etc. .................... 33 SECTION 6.8 Subsidiaries ............................................. 33 SECTION 6.9 Ownership of Properties .................................. 34 SECTION 6.10 Taxes ................................................... 34 SECTION 6.11 Pension and Welfare Plans ............................... 34 SECTION 6.12 Environmental Warranties ................................ 34 SECTION 6.13 Regulations U and X ..................................... 35 SECTION 6.14 Real Property; Mortgage, etc. ........................... 36 SECTION 6.15 The Collateral Documents ................................ 36 SECTION 6.16 Accuracy of Information ................................. 36 SECTION 6.17 Subordinated Debt ....................................... 36 SECTION 6.18 Intellectual Property ................................... 37 ARTICLE VII. COVENANTS .................................................... 37 SECTION 7.1 Affirmative Covenants .................................... 37 SECTION 7.1.1 Financial Information, Reports, Notices, etc. .......... 37 SECTION 7.1.2 Compliance with Laws, etc. ............................. 39 SECTION 7.1.3 Maintenance of Properties .............................. 39
iii SECTION 7.1.4 Insurance .............................................. 39 SECTION 7.1.5 Books and Records ...................................... 40 SECTION 7.1.6 Environmental Covenant ................................. 40 SECTION 7.1.7 Fourth Amendment to Mortgage ........................... 40 SECTION 7.1.8 Modesto Property ....................................... 41 SECTION 7.1.9 Further Assurances. .................................... 42 SECTION 7.2 Negative Covenants ....................................... 42 SECTION 7.2.1 Business Activities .................................... 42 SECTION 7.2.2 Indebtedness ........................................... 42 SECTION 7.2.3 Liens .................................................. 43 SECTION 7.2.4 Financial Condition .................................... 44 SECTION 7.2.5 Investments ............................................ 44 SECTION 7.2.6 Restricted Payments, etc. .............................. 45 SECTION 7.2.7 Capital Expenditures, etc. ............................. 46 SECTION 7.2.8 Take or Pay Contracts .................................. 46 SECTION 7.2.9 Consolidation, Merger, etc. ............................ 46 SECTION 7.2.10 Asset Dispositions, etc. .............................. 46 SECTION 7.2.11 Modification of Tax Sharing Agreement and Subordinated Debt .................................... 47 SECTION 7.2.12 Transactions with Affiliates .......................... 47 SECTION 7.2.13 Inconsistent Agreements ............................... 47 SECTION 7.2.14 Negative Pledges, Restrictive Agreements, etc. ........ 47 SECTION 7.2.15 Management Fees ....................................... 48 SECTION 7.2.16 Tax Sharing Payments .................................. 48 SECTION 7.2.17 Use of Proceeds ....................................... 48 ARTICLE VIII. EVENTS OF DEFAULT .......................................... 48 SECTION 8.1 Listing of Events of Default ............................. 48 SECTION 8.1.1 Non-Payment of Obligations ............................. 48 SECTION 8.1.2 Breach of Warranty ..................................... 49 SECTION 8.1.3 Non-Performance of Certain Covenants and Obligations ... 49 SECTION 8.1.4 Non-Performance of Other Covenants and Obligations ..... 49 SECTION 8.1.5 Default on Other Indebtedness .......................... 49 SECTION 8.1.6 Judgments .............................................. 49 SECTION 8.1.7 Pension Plans .......................................... 49 SECTION 8.1.8 Control of the Borrower ................................ 50 SECTION 8.1.9 Bankruptcy, Insolvency, etc. ........................... 50 SECTION 8.1.10 Impairment of Security, etc. .......................... 50 SECTION 8.2 Action if Bankruptcy ..................................... 51 SECTION 8.3 Action if Other Event of Default ......................... 51 SECTION 8.4 Cumulative Remedies ...................................... 51 ARTICLE IX. THE AGENT .................................................... 51
iv SECTION 9.1 Actions ................................................. 51 SECTION 9.2 Funding Reliance, etc. .................................. 52 SECTION 9.3 Exculpation ............................................. 52 SECTION 9.4 Successor ............................................... 52 SECTION 9.5 Loans by Bank of America ................................ 53 SECTION 9.6 Credit Decisions ........................................ 53 SECTION 9.7 Copies, etc. ............................................ 53 SECTION 9.8 Action Through Agent .................................... 53 SECTION 9.9 Documentation Agents .................................... 53 SECTION 9.10 Collateral Matters ..................................... 54 ARTICLE X. MISCELLANEOUS PROVISIONS ..................................... 54 SECTION 10.1 Waivers, Amendments, etc. .............................. 54 SECTION 10.2 Notices ................................................ 55 SECTION 10.3 Payment of Costs and Expenses .......................... 55 SECTION 10.4 Indemnification ........................................ 56 SECTION 10.5 Survival ............................................... 57 SECTION 10.6 Severability ........................................... 57 SECTION 10.7 Headings ............................................... 57 SECTION 10.8 Execution in Counterparts .............................. 57 SECTION 10.9 Governing Law; Entire Agreement ........................ 58 SECTION 10.10 Successors and Assigns ................................ 58 SECTION 10.11 Sale and Transfer of Loans and Notes; Participations in Loans and Notes ................................... 58 SECTION 10.11.1 Assignments ......................................... 58 SECTION 10.11.2 Participations ...................................... 59 SECTION 10.11.3 Information and Assistance .......................... 60 SECTION 10.12 Other Transactions .................................... 60 SECTION 10.13 Maximum Interest ...................................... 60 SECTION 10.14 Forum Selection and Consent to Jurisdiction ........... 62 SECTION 10.15 Waiver of Jury Trial .................................. 62
SCHEDULES SCHEDULE I -- Disclosure Schedule SCHEDULE II -- Pricing Schedule EXHIBITS EXHIBIT A -- Form of Note EXHIBIT B -- Form of Borrowing Request EXHIBIT C -- Form of Continuation/Conversion Notice v EXHIBIT D -- Copy of Pledge Agreement EXHIBIT E -- Copy of Security Agreement EXHIBIT F -- Form of Opinion of Counsel to the Borrower EXHIBIT G -- Form of Lender Assignment Agreement EXHIBIT H -- Form of Confirmation vi AMENDED AND RESTATED CREDIT AGREEMENT THIS AMENDED AND RESTATED CREDIT AGREEMENT (364 DAYS), dated as of May 29, 2001, among NASCO INTERNATIONAL, INC., a Wisconsin corporation (the "Borrower"), the various financial institutions which are now, or in accordance -------- with Section 10.11.1 hereafter become, parties hereto (collectively, the --------------- "Lenders"), BANK ONE, WISCONSIN, as Documentation Agent (in such capacity, the ------- "Documentation Agent"), and BANK OF AMERICA, N.A., as administrative agent (in ------------------- such capacity, the "Agent") for the Lenders. ----- W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Borrower, various financial institutions and the Agent have entered into a Credit Agreement dated as of March 31, 2000 (the "Existing -------- Credit Agreement"); - ---------------- WHEREAS, the parties hereto have agreed to amend and restate the Existing Credit Agreement so as to, among other things, decrease the amount of the facility and amend certain covenants and various other provisions of the Existing Credit Agreement; WHEREAS, proceeds of the Loans will be used to meet working capital requirements of the Borrower; WHEREAS, the parties hereto intend that this Agreement and the documents executed in connection herewith not effect a novation of the obligations of the Borrower under the Existing Credit Agreement, but merely a restatement of and, where applicable, an amendment to the terms governing such obligations; NOW, THEREFORE, in consideration of the premises and the mutual agreements and covenants herein contained, the parties agree as follows: ARTICLE I DEFINITIONS AND ACCOUNTING TERMS SECTION 1.1 Defined Terms. The following terms (whether or not ------------- underscored) when used in this Agreement, including its preamble and recitals, shall, except where the context otherwise requires, have the following meanings (such meanings to be equally applicable to the singular and plural forms thereof): "Affiliate" of any Person means (a) any other Person which, directly --------- or indirectly, controls, is controlled by or is under common control with such Person (excluding any trustee under, or any committee with responsibility for administering, any Plan) and (b) any Person who is a general partner, director or officer of such Person or of any Person described in the foregoing 1 clause (a). A Person shall be deemed to be "controlled by" any other Person if - ---------- such other Person possesses, directly or indirectly, power (a) to vote 10% or more of the securities (on a fully diluted basis) having ordinary voting power for the election of directors or managing general partners; or (b) to direct or cause the direction of the management and policies of such Person whether by contract or otherwise, or the ownership, direct or indirect or beneficial, of 10% or more of any class of stock of such Person. "Agent" is defined in the preamble and includes each other Person ----- -------- which shall have subsequently been appointed as the successor Agent pursuant to Section 9.4. - ----------- "Agent's Fee Letter" means that certain Appendix A to the Summary of ------------------ Terms and Conditions dated May 29, 2001 regarding fees. "Agreement" means this Amended and Restated Credit Agreement (364 --------- Days) as the same may thereafter from time to time be further amended, supplemented, amended and restated or otherwise modified in accordance with the terms hereof. "Applicable Margin" means the rate per annum determined pursuant to ----------------- Schedule II. - ----------- "Assignee Lender" is defined in Section 10.11.1. --------------- --------------- "Authorized Officer" means, relative to the Borrower, those of its ------------------ officers whose signatures and incumbency shall have been certified to the Agent and the Lenders pursuant to Section 5.1.1. ------------- "Bank of America" means Bank of America, N.A. --------------- "Base Rate" means a fluctuating rate per annum equal to the higher of --------- (a) the Federal Funds Rate plus 1/2 of 1% and, (b) the rate of interest in effect for such day as publicly announced from time to time by Bank of America as its "prime rate." Such rate is a rate set by Bank of America based upon various factors including Bank of America's costs and desired return, general economic conditions and other factors, and is used as a reference point for pricing some loans, which may be priced at, above, or below such announced rate. Any change in such rate announced by Bank of America shall take effect at the opening of business on the day specified in the public announcement of such change. "Base Rate Loan" means a Loan bearing interest at a fluctuating rate -------------- determined by reference to the Base Rate. "Borrower" is defined in the preamble. -------- -------- 2 "Borrowing" means the Loans of the same type and, in the case of Eurodollar Rate Loans, having the same Interest Period made by all Lenders on the same Business Day and pursuant to the same Borrowing Request in accordance with Section 2.1. "Borrowing Request" means a loan request and certificate duly executed by an Authorized Officer of the Borrower, substantially in the form of Exhibit B hereto. "Business Day" means (a) any day which is neither a Saturday or Sunday nor a legal holiday on which banks are authorized or required to be closed in New York, New York, Chicago, Illinois or Ft. Atkinson, Wisconsin; and (b) relative to the making, continuing, prepaying or repaying of any Eurodollar Rate Loans, including with respect to the giving of notices required under this Agreement therefor, any day described in the foregoing clause (a) which is also a day on which dealings in Dollars are carried on in the London interbank market. "Business Plan" means the business plan for the Borrower entitled "Nasco International, Inc. Consolidated Business Plan for Year Ended December 31, 2001", heretofore delivered to the Lenders. "Capital Expenditures" means, for any period, the sum of -------------------- (a) the aggregate amount of all expenditures of the Borrower and its Subsidiaries for fixed or capital assets made during such period which, in accordance with GAAP, would be classified as capital expenditures and, without duplication, all amounts expended under Section 7.2.9(b); and (b) the aggregate amount of all Capitalized Lease Liabilities incurred during such period. "Capitalized Lease Liabilities" means all monetary obligations of the Borrower or any of its Subsidiaries under any leasing or similar arrangement which, in accordance with GAAP, would be classified as capitalized leases, and, for purposes of this Agreement and each other Loan Document, the amount of such obligations shall be the capitalized amount thereof, determined in accordance with GAAP, and the stated maturity thereof shall be the date of the last payment of rent or any other amount due under such lease prior to the first date upon which such lease may be terminated by the lessee without payment of a penalty. "Cash Equivalent Investment" means, at any time: (a) any evidence of Indebtedness issued or guaranteed by the United States Government; 3 (b) commercial paper, maturing not more than nine months from the date of issue, which is issued by (i) a corporation (other than an Affiliate of the Borrower) organized under the laws of any state of the United States or of the District of Columbia and rated at least A-l by Standard & Poor's Ratings Services or P-l by Moody's Investors Service, Inc., or (ii) any Lender (or its holding company); (c) any certificate of deposit or bankers acceptance, maturing not more than one year after such time, which is issued by either (i) a commercial banking institution that is a member of the Federal Reserve System and has a combined capital and surplus and undivided profits of not less than $500,000,000, or (ii) any Lender; or (d) any repurchase agreement entered into with any Lender, any other commercial banking institution of the stature referred to in clause (c)(i) ------------- or any investment banking firm or broker which (directly or through a parent or subsidiary corporation) issues commercial paper maturing not more than nine months from the date of issue with a rating of at least A-1 by Standard & Poor's Ratings Group or P-1 by Moody's Investors Service, Inc., which repurchase agreement (i) is secured by a fully perfected security interest in any obligation of the type described in any of clauses (a) through (c), ----------- --- and (ii) has a market value at the time such repurchase agreement is entered into of not less than 100% of the repurchase obligation of such Lender (or other commercial banking institution) thereunder. "CERCLA" means the Comprehensive Environmental Response, Compensation ------ and Liability Act of 1980, as amended. "CERCLIS" means the Comprehensive Environmental Response Compensation ------- Liability Information System List. "Change in Control" means ----------------- (a) at any time when the aggregate principal amount of Indebtedness outstanding hereunder exceeds $10,000,000, Edward Netter and members of his family shall cease to own and control, individually or in the aggregate, directly or through corporations controlled by Edward Netter and members of his family, for any reason, free 4 and clear of all Liens, options or other encumbrances or rights (other than any pledge of capital stock of Geneve granted in favor of a commercial lender securing Indebtedness, which Indebtedness may not exceed $10,000,000 in principal amount unless and until the outstanding principal amount of all Loans is equal to or less than $10,000,000, it being understood and agreed that foreclosure upon such Lien shall constitute a "Change in Control"), at least 51% of the outstanding shares of capital stock having ordinary voting power for the election of directors of Geneve on a fully diluted basis, other than by reason of death or legal incapacity, in which case a "Change in Control" shall not be deemed to occur until the date which is six months after such death or legal incapacity; or (b) the failure of Geneve to own and control, directly (or indirectly through no more than one intermediate corporation) and free and clear of all Liens, options or other encumbrances or rights, at least 80% of the outstanding shares of capital stock having ordinary voting power for the election of directors of the Borrower on a fully diluted basis. "Code" means the Internal Revenue Code of 1986, as amended, reformed ---- or otherwise modified from time to time. "Collateral Documents" means, collectively, the Pledge Agreement, the -------------------- Security Agreement, the Mortgage, the Fourth Amendment to Mortgage, the Second Amendment to Modesto Mortgage, and any other agreement, document or instrument executed and delivered in connection therewith. "Commitment" means, relative to any Lender, such Lender's obligation ---------- to make Loans pursuant to Section 2.1.1; collectively, for all the Lenders, the ------------- "Commitments". ----------- "Commitment Amount" means, on any date on or prior to the Commitment ----------------- Termination Date, $2,500,000, as such amount may be reduced from time to time pursuant to Section 2.2. ----------- "Commitment Termination Date" means the earliest of --------------------------- (a) the Stated Maturity Date; (b) the date on which the Commitment Amount is terminated in full or reduced to zero pursuant to Section 2.2; and ----------- (c) the date on which any Commitment Termination Event occurs. Upon the occurrence of any event described in clauses (a), (b) or (c), the --- --- --- Commitments shall terminate automatically and without any further action. 5 "Commitment Termination Event" means ---------------------------- (a) the occurrence of any Default described in clauses (a) --- through (d) of Section 8.1.9 with respect to the Borrower or any --- ------------- Significant Subsidiary; or (b) the occurrence and continuance of any other Event of Default and either (i) the declaration of the Loans to be due and payable pursuant to Section 8.3, or ----------- (ii) in the absence of such declaration, the giving of notice by the Agent, acting at the direction of the Required Lenders, to the Borrower that the Commitments have been terminated. "Confirmation" means the Confirmation executed and delivered by the ------------ Borrower pursuant to Section 5.1.4, substantially in the form of Exhibit H ------------- --------- hereto, as amended, supplemented, amended and restated or otherwise modified from time to time. "Consolidated Current Assets" means, as of the close of any month in --------------------------- each Fiscal Year, all amounts which, in accordance with GAAP consistently applied, would be included as current assets on a consolidated balance sheet of the Borrower and each of its Subsidiaries at such time, but in any event not including any cash or Cash Equivalent Investments. "Consolidated Current Assets Level" means, as of the last day of any --------------------------------- Fiscal Quarter, the sum of (i) 80% of all amounts which, in accordance with GAAP consistently applied, would be included as gross accounts receivable on a consolidated balance sheet of the Borrower and each of its Subsidiaries at such time plus (ii) 60% of all amounts which, in accordance with GAAP consistently applied, would be included as gross inventory on a consolidated balance sheet of the Borrower and each of its Subsidiaries at such time. "Consolidated Current Liabilities" means, as of the close of any month -------------------------------- in each Fiscal Year, all amounts which, in accordance with GAAP consistently applied, would be included as current liabilities on a consolidated balance sheet of the Borrower and each of its Subsidiaries at such time, but shall exclude the current portion of long-term Indebtedness. "Consolidated Current Ratio" means, as of the close of any month in -------------------------- each Fiscal Year, the ratio of Consolidated Current Assets to Consolidated Current Liabilities at such time. "Consolidated Debt Service Coverage Ratio" means, as of the close of ---------------------------------------- any Fiscal Quarter, the ratio of: (a) EBITDA computed for the four consecutive Fiscal Quarters ending on the computation date to 6 (b) the sum of (i) Consolidated Interest Expense computed for four consecutive Fiscal Quarters ending on the computation date, plus - ---- (ii) Required Principal Payments as of such computation date. "Consolidated Funded Debt" means, as of the date of any determination ------------------------ thereof, the aggregate outstanding principal amount of all Indebtedness of the Borrower and each of its Subsidiaries of the nature referred to in clauses (a), ----------- (b), (c) and (f) of the definition of "Indebtedness". - --- --- --- ------------ "Consolidated Interest Expense" means, for any Fiscal Quarter, the ----------------------------- aggregate interest expense of the Borrower and each of its Subsidiaries for such Fiscal Quarter, as determined in accordance with GAAP consistently applied, including, without limitation, all commissions, discounts and other fees and charges owed with respect to letters of credit and banker's acceptances and net costs under interest rate swap or exchange agreements and the portion of any obligation under capital leases allocable to interest expense but excluding in any event any amounts payable under the Agent's Fee Letter. "Consolidated Net Income" means, for any period, all amounts which, in ----------------------- conformity with GAAP consistently applied, would be included under net income on a consolidated income statement of the Borrower and each of its Subsidiaries for such period. "Consolidated Net Worth" means, at any time, all amounts which, in ---------------------- accordance with GAAP consistently applied, would be included under shareholders' equity on a consolidated balance sheet of the Borrower and each of its Subsidiaries at such time; provided that, in any event, such amounts are to be -------- net of amounts carried on the books of the Borrower and each of its Subsidiaries for treasury stock. "Contingent Liability" means any agreement, undertaking or arrangement -------------------- by which any Person guarantees, endorses or otherwise becomes or is contingently liable upon (by direct or indirect agreement, contingent or otherwise, to provide funds for payment, to supply funds to, or otherwise to invest in, a debtor, or otherwise to assure a creditor against loss) the indebtedness, obligation or any other liability of any other Person (other than by endorsements of instruments in the course of collection), or guarantees the payment of dividends or other distributions upon the shares of any other Person. The amount of any Person's obligation under any Contingent Liability shall (subject to any limitation set forth therein) be deemed to be the outstanding principal amount (or maximum principal amount, if larger) of the debt, obligation or other liability guaranteed thereby. 7 "Continuation/Conversion Notice" means a notice of continuation or ------------------------------ conversion and certificate duly executed by an Authorized Officer of the Borrower, substantially in the form of Exhibit C hereto. --------- "Controlled Group" means all members of a controlled group of ---------------- corporations and all members of a controlled group of trades or businesses (whether or not incorporated) under common control which, together with the Borrower, are treated as a single employer under Section 414(b) or 414(c) of the Code or section 4001 of ERISA. "Credit Agreement (Five Year)" means the Amended and Restated Credit --------------------------- Agreement (Five Year) of the Borrower dated the date hereof providing for loans in the principal amount of up to $51,000,000, as the same may thereafter from time to time be amended, supplemented, amended and restated or otherwise modified in accordance with the terms thereof. "Default" means any Event of Default or any condition, occurrence or ------- event which, after notice or lapse of time or both, would constitute an Event of Default. "Disclosure Schedule" means the Disclosure Schedule attached hereto as ------------------- Schedule I, as it may be amended, supplemented or otherwise modified from time - ---------- to time by the Borrower with the written consent of the Agent and the Required Lenders. "Dollar" and the sign "$" mean lawful money of the United States. ------ - "Domestic Office" means, relative to any Lender, the office of such --------------- Lender designated as such below its signature hereto or designated in the Lender Assignment Agreement or such other office of a Lender (or any successor or assign of such Lender) within the United States as may be designated from time to time by notice from such Lender to each other Person party hereto. "Effective Date" is defined in Section 5.1. -------------- "Environmental Laws" means all applicable federal, state or local ------------------ statutes, laws, ordinances, codes, rules, regulations and guidelines (including consent decrees and administrative orders) relating to public health and safety and protection of the environment. "EBITDA" means, for any period, Consolidated Net Income for such period ------ plus to the extent deducted in determining such Consolidated Net Income, - ---- Consolidated Interest Expense, income tax expense, depreciation and amortization for such period; provided that for purposes of calculating EBITDA for any -------- Period, the consolidated net income of any Person acquired by the Borrower or any Subsidiary during such period (plus, to the extent deducted in determining such consolidated net income, interest expense, income tax expense, depreciation and amortization of such Person) shall be included on a pro forma basis for such --- ----- period (assuming the consummation of each such acquisition and the incurrence or assumption of any Indebtedness in connection therewith occurred on the first day of such period, but adjusted to add back non-recurring expenses (such as owner compensation) to the extent disclosed to and approved by the Required Lenders) based upon (a) to the extent available, (i) the audited consolidated balance sheet of such 8 acquired Person and its consolidated Subsidiaries as at the end of the fiscal year of such Person preceding the acquisition of such Person and the related audited consolidated statements of income, stockholders' equity and cash flows for such fiscal year and (ii) any subsequent unaudited financial statements for such Person for the period prior to the acquisition of such Person so long as such statements were prepared on a basis consistent with the audited financial statements referred to above or (b) to the extent the items listed in clause (a) ---------- are not available, such historical financial statements and other information as is disclosed to, and approved by, the Required Lenders. "ERISA" means the Employee Retirement Income Security Act of 1974, as ----- amended, and any successor statute of similar import, together with the regulations thereunder, in each case as in effect from time to time. References to sections of ERISA also refer to any successor sections. "Eurodollar Office" means, relative to any Lender, the office of such ----------------- Lender designated as such below its signature hereto or designated in the Lender Assignment Agreement or such other office of a Lender (or any successor or assign of such Lender) as may be designated from time to time by notice from such Lender to the Borrower and the Agent, whether or not outside the United States, which shall be making or maintaining Eurodollar Rate Loans of such Lender hereunder. "Eurodollar Rate" means for any Interest Period with respect to any --------------- Eurodollar Rate Loan, a rate per annum determined by Agent pursuant to the following formula: Eurodollar Rate = Eurodollar Base Rate -------------------- 1.00 - Eurodollar Reserve Percentage Where, "Eurodollar Base Rate" means, for such Interest Period: -------------------- (a) the rate per annum (carried out to the fifth decimal place) equal to the rate determined by Agent to be the offered rate that appears on the page of the Telerate Screen that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (b) in the event the rate referenced in the preceding subsection (a) does not appear on such page or service or such page or service shall cease to be available, the rate per annum (carried out to the fifth decimal place) equal to the rate determined by Agent to be the offered rate on such other page or other service that displays an average British Bankers Association Interest Settlement Rate for deposits in Dollars (for delivery on the 9 first day of such Interest Period) with a term equivalent to such Interest Period, determined as of approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period, or (c) in the event the rates referenced in the preceding subsections (a) and (b) are not available, the rate per annum determined by Agent as the rate of interest at which Dollar deposits (for delivery on the first day of such Interest Period) in same day funds in the approximate amount of the applicable Eurodollar Rate Loan and with a term equivalent to such Interest Period would be offered by its London Branch to major banks in the Offshore Dollar market at their request at approximately 11:00 a.m. (London time) two Business Days prior to the first day of such Interest Period. "Eurodollar Reserve Percentage" means, for any day during any Interest ----------------------------- Period, the reserve percentage (expressed as a decimal, rounded upward to the next 1/100th of 1%) in effect on such day, whether or not applicable to any Bank, under regulations issued from time to time by the Board of Governors of the Federal Reserve System for determining the maximum reserve requirement (including any emergency, supplemental or other marginal reserve requirement) with respect to Eurocurrency funding (currently referred to as "Eurocurrency liabilities"). The Eurodollar Rate for each outstanding Eurodollar Rate Loan shall be adjusted automatically as of the effective date of any change in the Eurodollar Reserve Percentage. The determination of the Eurodollar Reserve Percentage and the Eurodollar Base Rate by Agent shall be conclusive in the absence of manifest error. "Eurodollar Rate Loan" means a Loan bearing interest, at all times during -------------------- an Interest Period applicable to such Loan, at a fixed rate of interest determined by reference to the Eurodollar Rate. "Event of Default" is defined in Section 8.1. ---------------- ----------- "Excess Cash Flow" means, for any period, the remainder of ---------------- (a) Consolidated Net Income for such period, plus ---- (b) to the extent deducted in determining such Consolidated Net Income, income tax expense, depreciation and amortization for such period, plus ---- (c) any decrease in working capital during such period plus ---- (d) any non-cash charges 10 less ---- (e) the sum, without duplication of (i) scheduled repayments of the loans under the Credit Agreement (Five Year) made during such period pursuant to Section 3.1.1 of such agreement, plus ---- (ii) voluntary prepayments of the Loans pursuant to Section ------- 3.1 during such period, --- plus ---- (iii) cash payments made in such period with respect to Capital Expenditures, plus ---- (iv) all federal, state, local and foreign income taxes paid by the Borrower and its Subsidiaries during such period, plus ---- (v) any increases in working capital during such period. "Existing Credit Agreement" is defined in the recitals. ------------------------- "Existing Note" means any promissory note of the Borrower payable to ------------- the initial Lender, executed and delivered by the Borrower in favor of such Lender pursuant to the Existing Credit Agreement, evidencing the aggregate Indebtedness of the Borrower to such Lender resulting from the Loans made to the Borrower under the Existing Credit Agreement. "Federal Funds Rate" means, for any period, a fluctuating interest rate ------------------ per annum equal for each day during such period to (a) the weighted average of the rates on overnight federal funds transactions with members of the Federal Reserve System arranged by federal funds brokers, as published for such day (or, if such day is not a Business Day, for the next preceding Business Day) by the Federal Reserve Bank of New York; or (b) if such rate is not so published for any day which is a Business Day, the average of the quotations for such day on such transactions received by Bank of America from three federal funds brokers of recognized standing selected by it. "Fiscal Quarter" means any quarter of a Fiscal Year. -------------- 11 "Fiscal Year" means any period of twelve consecutive calendar months ----------- ending on December 31; references to a Fiscal Year with a number corresponding to any calendar year (e.g., the "2001 Fiscal Year") refer to the Fiscal Year --- ending on December 31 occurring during such calendar year. "Fourth Amendment to Mortgage" means the Fourth Amendment to Mortgage ---------------------------- executed and delivered by the Borrower pursuant to Section 7.1.7, in form ------------- satisfactory to the Agent, as amended, supplemented, restated, extended, renewed, partially released or otherwise modified from time to time. "F.R.S. Board" means the Board of Governors of the Federal Reserve ------------ System or any successor thereto. "GAAP" is defined in Section 1.4. ---- ----------- "Geneve" means Geneve Corporation, a Delaware corporation which ------ directly owns 80% of the voting stock of Holdings and, indirectly through such ownership interest, owns 80% of the voting stock of the Borrower. "Hazardous Material" means ------------------ (a) any "hazardous substance", as defined by CERCLA; (b) any "hazardous waste", as defined by the Resource Conservation and Recovery Act, as amended; (c) any petroleum product; or (d) any pollutant or contaminant or hazardous, dangerous or toxic chemical, material or substance within the meaning of any other applicable federal, state or local law, regulation, ordinance or requirement (including consent decrees and administrative orders) relating to or imposing liability or standards of conduct concerning any hazardous, toxic or dangerous waste, substance or material, all as amended or hereafter amended. "Hedging Obligations" means, with respect to any Person, all ------------------- liabilities of such Person under interest rate swap agreements, interest rate cap agreements and interest rate collar agreements, and all other agreements or arrangements designed to protect such Person against fluctuations in interest rates or currency exchange rates. "herein", "hereof", "hereto", "hereunder" and similar terms contained ------ ------ ------ --------- in this Agreement or any other Loan Document refer to this Agreement or such other Loan Document, as the case may be, as a whole and not to any particular Section, paragraph or provision of this Agreement or such other Loan Document. 12 "Highest Lawful Rate" means, with respect to any indebtedness owed to ------------------- any Lender hereunder or under any other Loan Document, the maximum nonusurious interest rate, if any, that at any time or from time to time may be contracted for, taken, reserved, charged or received by such Lender with respect to such indebtedness under applicable law. "Holdings" means NASCO Holdings, Inc., a Wisconsin corporation. -------- "Impermissible Qualification" means, relative to the opinion or --------------------------- certification of any independent public accountant as to any financial statement of the Borrower, any qualification or exception to such opinion or certification (a) which is of a "going concern" or similar nature; (b) which relates to the limited scope of examination of matters relevant to such financial statement; or (c) which relates to the treatment or classification of any item in such financial statement and which, as a condition to its removal, would require an adjustment to such item the effect of which would be to cause the Borrower to be in default of any of its obligations under Section 7.2.4. ------------- "including" means including without limiting the generality of any --------- description preceding such term, and, for purposes of this Agreement and each other Loan Document, the parties hereto hereby agree that the rule of ejusdem ------- generis shall not be applicable to limit a general statement, which is followed - ------- by or referable to an enumeration of specific matters, to matters similar to the matters specifically mentioned. "Indebtedness" of any Person means, without duplication: ------------ (a) all obligations of such Person for borrowed money and all obligations of such Person evidenced by bonds, debentures, notes or other similar instruments; (b) all obligations, contingent or otherwise, relative to the face amount of all letters of credit, whether or not drawn, and banker's acceptances issued for the account of such Person; (c) all obligations of such Person as lessee under leases which have been or should be, in accordance with GAAP, recorded as Capitalized Lease Liabilities; (d) all other items which, in accordance with GAAP, would be included as liabilities on the liability side of the balance sheet of such Person as of the date at which Indebtedness is to be determined; (e) net liabilities of such Person under all Hedging Obligations; 13 (f) whether or not so included as liabilities in accordance with GAAP, all obligations of such Person to pay the deferred purchase price of property or services, and indebtedness (excluding prepaid interest thereon) secured by a Lien on property owned or being purchased by such Person (including indebtedness arising under conditional sales or other title retention agreements), whether or not such indebtedness shall have been assumed by such Person or is limited in recourse; and (g) all Contingent Liabilities of such Person in respect of any of the foregoing. For all purposes of this Agreement, the Indebtedness of any Person shall include the Indebtedness of any partnership or joint venture in which such Person is a general partner or a joint venturer. "Indemnified Liabilities" is defined in Section 10.4. ----------------------- "Indemnified Parties" is defined in Section 10.4. ------------------- "Insignificant Subsidiary" means Nasco Exports. ------------------------ "Interest Period" means, relative to any Eurodollar Rate Loans, the period beginning on (and including) the date on which such Eurodollar Rate Loan is made or continued as, or converted into, a Eurodollar Rate Loan pursuant to Section 2.3 or 2.4 and shall end on (but exclude) the day which numerically - ----------- --- corresponds to such date one, two, three or, if available (as determined in the sole discretion of the Lenders), six months thereafter (or, if such month has no numerically corresponding day, on the last Business Day of such month), as the Borrower may select in its relevant notice pursuant to Section 2.3 or 2.4; ----------- --- provided, however, that - -------- ------- (a) the Borrower shall not be permitted to select Interest Periods to be in effect at any one time which have expiration dates occurring on more than five different dates; (b) if such Interest Period would otherwise end on a day which is not a Business Day, such Interest Period shall end on the next following Business Day unless such next following Business Day is the first Business Day of a calendar month, in which case such Interest Period shall end on the Business Day next preceding such numerically corresponding day; (c) Interest Periods shall be selected in a manner such that principal amounts of the Notes required to be repaid pursuant to Section 3.1(b) hereof shall not require the breakage of any Interest -------------- Periods; and (d) no Interest Period may end later than the Stated Maturity Date. "Investment" means, relative to any Person, ---------- 14 (a) any loan or advance made by such Person to any other Person (excluding commission, travel and similar advances to officers and employees made in the ordinary course of business); (b) any Contingent Liability of such Person; and (c) any ownership or similar interest held by such Person in any other Person. The amount of any Investment shall be the original principal or capital amount thereof less all returns of principal or equity thereon (and without adjustment by reason of the financial condition of such other Person) and shall, if made by the transfer or exchange of property other than cash, be deemed to have been made in an original principal or capital amount equal to the fair market value of such property. "Lead Arranger" means Banc of America Securities LLC, in its capacity as ------------- sole lead arranger and sole book manager. "Lender Assignment Agreement" means a Lender Assignment Agreement --------------------------- substantially in the form of Exhibit D hereto. "Lenders" is defined in the preamble. ------- -------- "Lien" means any security interest, mortgage, pledge, hypothecation, ---- assignment, deposit arrangement, encumbrance, lien (statutory or otherwise), charge against or interest in property to secure payment of a debt or performance of an obligation or other priority or preferential arrangement of any kind or nature whatsoever. "Loan" is defined in Section 2.1.1. ---- ------------- "Loan Documents" means, collectively, this Agreement, the Notes, the -------------- Collateral Documents, the Confirmation, and any other document executed in connection or pursuant hereto or thereto from time to time which sets forth that it constitutes a "Loan Document", in each case as amended, supplemented, amended and restated or otherwise modified from time to time. "Materially Adverse Effect" means, relative to any occurrence of whatever ------------------------- nature (including, without limitation, any adverse determination in any litigation, arbitration, or governmental investigation or proceeding), a materially adverse effect on: (a) the consolidated business, assets, revenues, financial condition, operations, or prospects of the Borrower and its Subsidiaries; or (b) the ability of the Borrower to perform any of its payment or other material obligations under this Agreement, the Notes, the Mortgage, any other Collateral Document or any other Loan Document. 15 "Modesto Mortgage" means Deed of Trust, Security Agreement, Assignment of ---------------- Rents and Leases and Fixture Filing dated as of August 5, 1997 as amended, supplemented, restated, extended, reviewed, partially released or otherwise modified from time to time. "Modesto Property" means lots 3 and 4 of Landmark Business Center, as per ---------------- map thereof, recorded October 4, 1988 in Book 33, page 31, Stanislaus County, California Records. "Monthly Payment Date" means the last day of each calendar month or, if any -------------------- such day is not a Business Day, the next succeeding Business Day. "Mortgage" means the Original Mortgage, as amended by the Fourth Amendment -------- to Mortgage, and as amended, supplemented, restated, extended, renewed, partially released or otherwise modified from time to time. "Mortgaged Collateral" means the Collateral (as such term is defined in the -------------------- Mortgage). "Mortgaged Real Property" means the Property (as such term is defined in ----------------------- the Mortgage). "Nasco Exports" means Nasco Exports, Inc., a Wisconsin corporation and a ------------- direct, wholly-owned Subsidiary of the Borrower. "Note" means a promissory note of the Borrower payable to any Lender, ---- executed and delivered by the Borrower in accordance with this Agreement, substantially in the form of Exhibit A hereto (as such promissory note may be --------- amended, endorsed or otherwise modified from time to time), evidencing the aggregate Indebtedness of the Borrower to such Lender resulting from outstanding Loans, and also means all other promissory notes accepted from time to time in substitution therefor or renewal thereof. "Obligations" means all obligations (monetary or otherwise) of the Borrower ----------- arising under or in connection with this Agreement, the Notes, the Mortgage, each other Collateral Document and each other Loan Document. "Original Credit Agreement" means the Third Amended and Restated Credit ------------------------- Agreement dated as of January 2, 1996 among the Borrower, certain Lenders and Bank of America, N.A., as agent. "Original Mortgage" means that certain Mortgage (and Security Agreement) ----------------- executed and delivered by the Borrower pursuant to the Original Credit Agreement, dated as of June 25, 1992, as amended, supplemented, amended and restated and otherwise modified through the date hereof. "Organic Document" means, relative to the Borrower, its certificate of --------------- incorporation, its by-laws and all shareholder agreements, voting trusts and similar arrangements applicable to any of its authorized shares of capital stock. 16 "Participant" is defined in Section 10.11. ----------- "PBGC" means the Pension Benefit Guaranty Corporation and any entity ---- succeeding to any or all of its functions under ERISA. "Pension Plan" means a "pension plan", as such term is defined in section ------------ 3(2) of ERISA, which is subject to Title IV of ERISA (other than a multiemployer plan as defined in section 4001(a)(3) of ERISA), and to which the Borrower or any corporation, trade or business that is, along with the Borrower, a member of a Controlled Group, may have liability, including any liability by reason of having been a substantial employer within the meaning of section 4063 of ERISA at any time during the preceding five years, or by reason of being deemed to be a contributing sponsor under section 4069 of ERISA. "Percentage" means, relative to any Lender, the percentage set forth ---------- opposite its signature hereto or set forth in the Lender Assignment Agreement, as such percentage may be adjusted from time to time pursuant to Lender Assignment Agreement(s) executed by such Lender and its Assignee Lender(s) and delivered pursuant to Section 10.11. ------------- "Person" means any natural person, corporation, partnership, limited ------ liability company, firm, association, trust, government, governmental agency or any other entity, whether acting in an individual, fiduciary or other capacity. "Plan" means any Pension Plan or Welfare Plan. ---- "Pledge Agreement" means the Pledge Agreement, executed and delivered by ---------------- the Borrower, a copy of which is attached as Exhibit D hereto, as amended, --------- supplemented, amended and restated or otherwise modified from time to time. "Quarterly Payment Date" means the last day of each March, June, September ---------------------- and December or, if any such day is not a Business Day, the next succeeding Business Day. "Release" means a "release", as such term is defined in CERCLA. ------- "Required Lenders" means, at any time prior to the Effective Date, Lenders ---------------- having at least 66 2/3% of the Commitments and, from and after the Effective Date, Lenders holding at least 66 2/3% of the then aggregate outstanding principal amount of the Notes then held by the Lenders, or, if no such principal amount is then outstanding, Lenders having at least 66 2/3% of the Commitments. "Required Principal Payments" means the principal amount of the scheduled --------------------------- repayments set forth in Section 3.1.1 of the Credit Agreement (Five Year) for the four consecutive Fiscal Quarters following the date on which such payments are computed. "Resource Conservation and Recovery Act" means the Resource Conservation -------------------------------------- and Recovery Act, 42 U.S.C. Section 690, et seq., as in effect from time to ------ time. 17 "Second Amendment to Modesto Mortgage" means the Second Amendment to the ------------------------------------ Modesto Mortgage executed and delivered by Borrower pursuant to Section 7.1.8, ------------- in form satisfactory to the Agent, as amended, supplemented, restated, extended, renewed, partially released or otherwise modified from time to time. "Security Agreement" means the Security Agreement, executed and delivered ------------------ by the Borrower, a copy of which is attached as Exhibit E hereto, together with --------- the intellectual property agreements relating thereto, as amended, supplemented, amended and restated or otherwise modified from time to time. "Senior Debt" means the remainder of (a) Consolidated Funded Debt minus (b) ----------- ----- Subordinated Debt. "Senior Debt to EBITDA Ratio" means, at any date, the ratio of (a) Senior --------------------------- Debt as of such date to (b) the sum of EBITDA for such period of four consecutive Fiscal Quarters then most recently ended. For purposes of calculating the Senior Debt to EBITDA Ratio as at any date, EBITDA shall be calculated on a pro forma basis (as certified by the Borrower to the Agent) --- ----- assuming all acquisitions made, and all divestitures completed, during the four consecutive Fiscal Quarters then most recently ended had been made on the first day of such period (but without adjustment for expected cost savings or other synergies). "Significant Subsidiaries" means all Subsidiaries of the Borrower other ------------------------ than the Insignificant Subsidiary. "Stated Maturity Date" means March 31, 2002 as such date may be extended -------------------- pursuant to Section 3.4. "Subordinated Debt" means unsecured Indebtedness of the Borrower for money ----------------- borrowed which is subordinated, upon terms satisfactory to the Agent and the Required Lenders in their sole discretion, in right of payment to the payment in full in cash of all Obligations. "Subsidiary" means, with respect to any Person, any corporation of which ---------- more than 50% of the outstanding capital stock having ordinary voting power to elect a majority of the board of directors of such corporation (irrespective of whether at the time capital stock of any other class or classes of such corporation shall or might have voting power upon the occurrence of any contingency) is at the time directly or indirectly owned by such Person, by such Person and one or more other Subsidiaries of such Person, or by one or more other Subsidiaries of such Person. "Taxes" is defined in Section 4.6. ----- ----------- "type" means, relative to any Loan, the portion thereof, if any, being ---- maintained as a Base Rate Loan or a Eurodollar Rate Loan. "United States" or "U.S." means the United States of America, its fifty ------------- --- States and the District of Columbia. 18 "Welfare Plan" means a "welfare plan", as such term is defined in section ------------ 3(1) of ERISA. SECTION 1.2 Use of Defined Terms. Unless otherwise defined or the context -------------------- otherwise requires, terms for which meanings are provided in this Agreement shall have such meanings when used in the Disclosure Schedule and in each Note, Borrowing Request, Continuation/Conversion Notice, Loan Document, notice and other communication delivered from time to time in connection with this Agreement or any other Loan Document. SECTION 1.3 Cross-References. Unless otherwise specified, references in ---------------- this Agreement and in each other Loan Document to any Article or Section are references to such Article or Section of this Agreement or such other Loan Document, as the case may be, and, unless otherwise specified, references in any Article, Section or definition to any clause are references to such clause of such Article, Section or definition. SECTION 1.4 Accounting and Financial Determinations. Unless otherwise --------------------------------------- specified, all accounting terms used herein or in any other Loan Document shall be interpreted, all accounting determinations and computations hereunder or thereunder (including under Section 7.2.4) shall be made, and all financial ------------- statements required to be delivered hereunder or thereunder shall be prepared, in accordance with those generally accepted accounting principles ("GAAP") ---- applied in the preparation of the financial statements referred to in Section 6.5 . ARTICLE II COMMITMENTS, BORROWING PROCEDURES AND NOTES SECTION 2.1 Commitments. On the terms and subject to the conditions of ----------- this Agreement (including Article V), each Lender severally agrees to make --------- revolving loans to the Borrower pursuant to its Commitment as follows: SECTION 2.1.1 Commitment of Each Lender. From time to time on any Business ------------------------- Day occurring prior to the Commitment Termination Date, each Lender will make loans (relative to such Lender, and of any type, its "Loans") to the Borrower ----- equal to such Lender's Percentage of the aggregate amount of the Borrowing requested by the Borrower to be made on such day. The commitment of each Lender described in this Section 2.1.1 is herein referred to as its "Commitment". On ------------- ---------- the terms and subject to the conditions hereof, the Borrower may from time to time borrow, prepay and reborrow Loans. SECTION 2.1.2 Lenders Not Permitted or Required to Make Loans. No Lender ----------------------------------------------- shall be permitted or required to make any Loan if, after giving effect thereto, the aggregate outstanding principal amount of all Loans (a) of all Lenders would exceed the Commitment Amount, or (b) of such Lender would exceed such Lender's Percentage of the Commitment Amount. 19 SECTION 2.2 Reduction of Commitment Amount. The Borrower may, from time to ------------------------------ time on any Business Day occurring after the time of the initial Borrowing hereunder, voluntarily reduce the Commitment Amount; provided, however, that all -------- ------- such reductions shall be irrevocable and shall require at least three Business Days' prior notice to the Agent and be permanent, and any partial reduction of the Commitment Amount shall be in a minimum amount of $500,000 and in an integral multiple of $250,000. SECTION 2.3 Borrowing Procedure. ------------------- SECTION 2.3.1 Borrowings. By delivering a Borrowing Request to the Agent ---------- on or before 9:00 a.m., Chicago time, on a Business Day subsequent to the date of the initial Borrowing hereunder, the Borrower may from time to time irrevocably request, on not less than three nor more than five Business Days notice, that a Borrowing be made in a minimum amount of $500,000 and an integral multiple of $250,000, or in the unused amount of the Commitments. SECTION 2.3.2 All Borrowings. On the terms and subject to the conditions -------------- of this Agreement, each such Borrowing pursuant to Sections 2.3.1 and 2.3.2 -------------- ----- shall be comprised of the type of Loans specified in the Borrowing Request and shall be made on the Business Day specified in such Borrowing Request. On or before 10:00 a.m. (Chicago time), on such Business Day, each Lender shall deposit with the Agent same day funds in an amount equal to such Lender's Percentage of the requested Borrowing. Such deposit will be made to an account which the Agent shall specify from time to time by notice to the Lenders. To the extent funds are received from the Lenders, the Agent shall make such funds available to the Borrower by wire transfer to the account the Borrower shall have specified in its Borrowing Request. No Lender's obligation to make any Loan shall be affected by any other Lender's failure to make any Loan. SECTION 2.4 Continuation and Conversion Elections. By delivering a ------------------------------------- Continuation/Conversion Notice to the Agent on or before 9:00 a.m., Chicago time, on a Business Day, the Borrower may from time to time irrevocably elect, on not less than three nor more than five Business Days' notice, that all, or any portion in an aggregate minimum amount of $500,000 and an integral multiple of $250,000, of any Loans be, in the case of Base Rate Loans, converted into Eurodollar Rate Loans or, in the case of Eurodollar Rate Loans, be converted into a Base Rate Loan (in the absence of delivery of a Continuation/Conversion Notice with respect to any Eurodollar Rate Loan at least three Business Days before the last day of the then current Interest Period with respect thereto, such Eurodollar Rate Loan shall, on such last day, automatically convert to a Base Rate Loan); provided, however, that (a) each such conversion or -------- ------- continuation shall be prorated among the applicable outstanding Loans of all Lenders, and (b) no portion of the outstanding principal amount of any Loans may be continued as, or be converted into, Eurodollar Rate Loans when any Default has occurred and is continuing. SECTION 2.5 Funding. Each Lender may, if it so elects, fulfill its ------- obligation to make, continue or convert Eurodollar Rate Loans hereunder by causing one of its foreign branches or Affiliates (or an international banking facility created by such Lender) to make or maintain such Eurodollar Rate Loan; provided, however, that such Eurodollar Rate Loan shall nonetheless be deemed to - -------- ------- have been made and to be held by such Lender, and the obligation of the Borrower to 20 repay such Eurodollar Rate Loan shall nevertheless be to such Lender for the account of such foreign branch, Affiliate or international banking facility. In addition, the Borrower hereby consents and agrees that, for purposes of any determination to be made for purposes of Section 4.1, 4.2, 4.3 or 4.4, it shall ----------- --- --- --- be conclusively assumed that each Lender elected to fund all Eurodollar Rate Loans by purchasing, as the case may be, Dollar certificates of deposit in the U.S. or Dollar deposits in its Eurodollar Office's interbank eurodollar market. SECTION 2.6 Notes. Each Lender's Loans under its Commitment shall be ----- evidenced by a Note payable to the order of such Lender in a maximum principal amount equal to such Lender's Percentage (as of the Effective Date) of the Commitment Amount. The Note issued hereunder and as of the Effective Date shall be issued in substitution and exchange for, and not in satisfaction or payment of, the Existing Notes and the Indebtedness (together with the obligation to pay accrued interest thereon) originally evidenced by the Existing Notes which is now to be evidenced by the replacement Notes delivered pursuant to this Agreement shall be (and the Borrower hereby acknowledges and agrees that such Indebtedness is) a continuing Indebtedness, and nothing herein contained shall be construed to deem such Existing Notes paid, or to release or terminate any Lien or security interest given to secure such Existing Notes, which Liens and security interests shall continue to secure such Indebtedness as evidenced by such Notes. The Borrower hereby irrevocably authorizes each Lender to make (or cause to be made) appropriate notations on the grid attached to such Lender's Note (or on any continuation of such grid), which notations, if made, shall evidence, inter alia, the date of, the outstanding principal of, and the ---------- interest rate and Interest Period applicable to the Loans evidenced thereby. Such notations shall be conclusive and binding on the Borrower absent manifest error; provided, however, that the failure of any Lender to make any such -------- ------- notations shall not limit or otherwise affect any Obligations of the Borrower. ARTICLE III. REPAYMENTS, PREPAYMENTS, INTEREST AND FEES SECTION 3.1 Repayments and Prepayments. On the Stated Maturity Date, the -------------------------- Borrower shall repay in full the entire unpaid principal amount of all outstanding Loans, together with all accrued and unpaid interest thereon, all fees in connection therewith and all other Obligations hereunder. Prior thereto, the Borrower (a) may, from time to time on any Business Day, make a voluntary prepayment, in whole or in part, of the outstanding principal amount of any Loans; provided, however, that -------- ------- (i) any such prepayment shall be made pro rata among Loans of the --- ---- same type and, if applicable, having the same Interest Period of all Lenders, (ii) no such prepayment of any Eurodollar Rate Loan may be made on any day other than the last day of the Interest Period for such Loan, 21 (iii) all such voluntary prepayments shall require at least three but no more than five Business Days' prior written notice to the Agent, and (iv) all such voluntary partial prepayments shall be in an aggregate minimum amount of $100,000 and an integral multiple of $50,000 in excess thereof; and (b) shall, on each date when any reduction in the Commitment Amount shall become effective, including pursuant to Section 2.2, make a mandatory ----------- prepayment of all Loans equal to the excess, if any, of the aggregate, outstanding principal amount of all Loans over the Commitment Amount as so reduced; and (c) shall, immediately upon any acceleration of the Stated Maturity Date of any Loans pursuant to Section 8.2 or Section 8.3, repay all such ----------- ----------- Loans so accelerated. Each prepayment of any Loans made pursuant to this Section shall be without premium or penalty, except as may be required by Section 4.4. No voluntary ----------- prepayment of principal of any Loans shall cause a reduction in the Commitment Amount. SECTION 3.2 Interest Provisions. Interest on the outstanding principal ------------------- amount of Loans shall accrue and be payable in accordance with this Section 3.2. ----------- SECTION 3.2.1 Rates. Pursuant to an appropriately delivered Borrowing ----- Request or Continuation/Conversion Notice, the Borrower may elect that Loans accrue interest at a rate per annum: (a) on that portion maintained from time to time as a Base Rate Loan, equal to the sum of the Base Rate plus the Applicable Margin from time to time in effect; and (b) on that portion maintained as a Eurodollar Rate Loan, during each Interest Period applicable thereto, equal to the sum of the Eurodollar Rate for such Interest Period plus the Applicable Margin. All Eurodollar Rate Loans shall bear interest from and including the first day of the applicable Interest Period to (but not including) the last day of such Interest Period at the interest rate determined as applicable to such Eurodollar Rate Loan. All Base Rate Loans shall bear interest from and including the date such Loans are made to (but not including) the day such Loans are repaid or converted into Eurodollar Rate Loans. SECTION 3.2.2 Default Rates. So long as any Event of Default shall have ------------- occurred and be continuing hereunder, interest on the unpaid principal amount of the Loans outstanding shall be paid on demand at a rate per annum equal to the Base Rate plus the Applicable Margin for Base Rate Loans plus 2%, and after the date any principal amount of any Loan has become due and payable (whether on the Stated Maturity Date, upon acceleration or otherwise), or after any other monetary Obligation of the Borrower shall have become due and 22 payable, the Borrower shall pay interest (after as well as before judgment) on demand on all of such amounts at a rate per annum equal to the Base Rate plus the Applicable Margin for Base Rate Loans plus 2%. SECTION 3.2.3 Payment Dates. Interest accrued on each Loan shall be ------------- payable, without duplication: (a) upon payment in full thereof; (b) on that portion of the Loans being paid or prepaid, on the date of any such payment or prepayment; (c) with respect to Base Rate Loans, on each Monthly Payment Date occurring after the Effective Date; (d) with respect to Eurodollar Rate Loans, the last day of each applicable Interest Period (and, if such Interest Period shall exceed three months, on the day three months after the commencement of such Interest Period); (e) with respect to any Base Rate Loans converted into Eurodollar Rate Loans on a day when interest would not otherwise have been payable pursuant to clause (c), on the date of such conversion; and ---------- (f) on that portion of any Loans the Stated Maturity Date of which is accelerated pursuant to Section 8.2 or Section 8.3, immediately upon ----------- ----------- such acceleration. Interest accrued on Loans or other monetary Obligations arising under this Agreement or any other Loan Document after the date such amount is due and payable (whether on the Stated Maturity Date, upon acceleration or otherwise) shall be payable upon demand. SECTION 3.3 Fees. The Borrower agrees to pay the fees set forth in this ---- Section 3.3. All such fees shall be non-refundable. - ----------- SECTION 3.3.1 [Reserved]. SECTION 3.3.2 Agent's Fee. The Borrower agrees to pay to the Agent for its ----------- own account on or prior to the occurrence of the Effective Date the fees set forth in the Agent's Fee Letter. SECTION 3.3.3 Non-Use Fees. The Company shall pay to the Agent for the ------------ account of each Lender a non-use fee of .5% on the average daily unused portion of such Lender's Percentage of the Commitment Amount, computed on a quarterly basis in arrears on the last Business Day of each calendar quarter based upon the daily utilization for that quarter as calculated by the Agent. For purposes of calculating utilization under this subsection, the Commitment Amount shall be deemed used to the extent of the principal amount of all Loans 23 then outstanding. Such non-use fee shall accrue from the Effective Date to the Commitment Termination Date and shall be due and payable quarterly in arrears on the last Business Day of each calendar quarter commencing June 30, 2001 through the Commitment Termination Date, with the final payment to be made on the Commitment Termination Date; provided that, in connection with any reduction or -------- termination of the Commitments under Section 2.2, the accrued non-use fee ----------- calculated for the period ending on such date shall also be paid on the date of such reduction or termination with (in the case of a reduction) the following quarterly payment being calculated on the basis of the period from such reduction date to the quarterly payment date. The non-use fees shall accrue at all times after the above-mentioned commencement date, including at any time during which one or more conditions in Article V are not met. --------- SECTION 3.4 Extension of Stated Maturity Date. Ninety days prior to the --------------------------------- Stated Maturity Date, the Borrower may, by notice to the Agent, request that all Lenders extend for 364 additional days the Stated Maturity Date. Such extension so requested shall become effective if (and only if) on or prior to 30 days after such notice, each Lender shall have consented to such extension in writing by notice to the Agent. If a Lender shall not respond to any such request, it shall be deemed to have refused to extend. ARTICLE IV. CERTAIN EURODOLLAR RATE AND OTHER PROVISIONS SECTION 4.1 Eurodollar Rate Lending Unlawful. If any Lender shall -------------------------------- determine (which determination shall, upon notice thereof to the Borrower and the Lenders, be conclusive and binding on the Borrower) that the introduction of or any change in or in the interpretation of any law makes it unlawful, or any central bank or other governmental authority asserts that it is unlawful, for such Lender to make, continue or maintain any Loan as, or to convert any Loan into, a Eurodollar Rate Loan of a certain type, the obligations of all Lenders to make, continue, maintain or convert any such Loans shall, upon such determination, forthwith be suspended until such Lender shall notify the Agent that the circumstances causing such suspension no longer exist, and all Eurodollar Rate Loans of such type shall automatically convert into Base Rate Loans at the end of the then current Interest Periods with respect thereto or sooner, if required by such law or assertion. SECTION 4.2 Deposits Unavailable. If the Agent shall have determined that -------------------- (a) Dollar certificates of deposit or Dollar deposits, as the case may be, in the relevant amount and for the relevant Interest Period are not available to Bank of America in its relevant market; or (b) by reason of circumstances affecting Bank of America's relevant market, adequate means do not exist for ascertaining the interest rate applicable hereunder to Eurodollar Rate Loans of such type, 24 then, upon notice from the Agent to the Borrower and the Lenders, the obligations of all Lenders under Section 2.3 and Section 2.4 to make or continue ----------- ----------- any Loans as, or to convert any Loans into, Eurodollar Rate Loans of such type shall forthwith be suspended until the Agent shall notify the Borrower and the Lenders that the circumstances causing such suspension no longer exist. SECTION 4.3 Increased Costs, etc. The Borrower agrees to reimburse each -------------------- Lender, upon demand, for any increase in the cost to such Lender of, or any reduction in the amount of any sum receivable by such Lender, in respect of making, continuing or maintaining (or of its obligation to make, continue or maintain) any Loans as, or of converting (or of its obligation to convert) any Loans into, Eurodollar Rate Loans (including without limitation by reason of any increase in any reserve requirements or taxes). Each Lender shall promptly notify the Borrower in writing of the occurrence of any such event, such notice to state, in reasonable detail, the reasons therefor and the additional amount required fully to compensate such Lender for such increased cost or reduced amount. Such additional amounts shall be payable by the Borrower directly to such Lender within five days of its receipt of such notice, and such notice shall, in the absence of manifest error, be conclusive and binding on the Borrower. Such Lender will use such method of allocation as it deems reasonable and appropriate. SECTION 4.4 Funding Losses. In the event any Lender shall incur any loss -------------- or expense (including any loss or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired by such Lender to make, continue or maintain any portion of the principal amount of any Loan as, or to convert any portion of the principal amount of any Loan into, a Eurodollar Rate Loan) as a result of (a) any conversion or repayment or prepayment of the principal amount of any Eurodollar Rate Loan on a date other than the scheduled last day of the Interest Period applicable thereto, whether pursuant to Section 3.1 or otherwise; (b) any Loans not being made as Eurodollar Rate Loans in accordance with the Borrower's request therefor; or (c) any Loans not being continued as, or converted into, Eurodollar Rate Loans in accordance with the Continuation/Conversion Notice therefor, then, upon the written notice of such Lender to the Borrower (with a copy to the Agent), the Borrower shall, within five days of its receipt thereof, pay directly to such Lender such amount as will (in the reasonable determination of such Lender) reimburse such Lender for such loss or expense. Such written notice (which shall include calculations in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on the Borrower. SECTION 4.5 Increased Capital Costs. If any change in, or the ----------------------- introduction, adoption, effectiveness, interpretation, reinterpretation or phase-in of, any law or regulation, directive, guideline, decision or request (whether or not having the force of law) of any court, central bank, 25 regulator or other governmental authority affects or would affect the amount of capital required or expected to be maintained by any Lender or any Person controlling such Lender, and such Lender determines (in its sole and absolute discretion) that the rate of return on its or such controlling Person's capital as a consequence of its Commitment or the Loans made by such Lender is reduced to a level below that which such Lender or such controlling Person could have achieved but for the occurrence of any such circumstance, then, in any such case upon notice from time to time by such Lender to the Borrower, the Borrower shall immediately pay directly to such Lender additional amounts sufficient to compensate such Lender or such controlling Person for such reduction in rate of return. A statement of such Lender as to any such additional amount or amounts (including calculations thereof in reasonable detail) shall, in the absence of manifest error, be conclusive and binding on the Borrower. In determining such amount, such Lender may use any method of averaging and attribution that it (in its sole and absolute discretion) shall deem applicable. SECTION 4.6 Taxes. All payments by the Borrower of principal of, and ----- interest on, the Loans and all other amounts payable hereunder shall be made free and clear of and without deduction for any present or future income, excise, stamp or franchise taxes and other taxes, fees, duties, withholdings or other charges of any nature whatsoever imposed by any taxing authority, but excluding franchise taxes and taxes imposed on or measured by any Lender's net income or receipts (such non-excluded items being called "Taxes"). In the event ----- that any withholding or deduction from any payment to be made by the Borrower hereunder is required in respect of any Taxes pursuant to any applicable law, rule or regulation, then the Borrower will (a) pay directly to the relevant authority the full amount required to be so withheld or deducted; (b) promptly forward to the Agent an official receipt or other documentation satisfactory to the Agent evidencing such payment to such authority; and (c) pay to the Agent for the account of the Lenders such additional amount or amounts as is necessary to ensure that the net amount actually received by each Lender will equal the full amount such Lender would have received had no such withholding or deduction been required. Moreover, if any Taxes are directly asserted against the Agent or any Lender with respect to any payment received by the Agent or such Lender hereunder, the Agent or such Lender may pay such Taxes and the Borrower will promptly pay such additional amounts (including any penalties, interest or expenses) as is necessary in order that the net amount received by such person after the payment of such Taxes (including any Taxes on such additional amount) shall equal the amount such person would have received had not such Taxes been asserted. If the Borrower fails to pay any Taxes when due to the appropriate taxing authority or fails to remit to the Agent, for the account of the respective Lenders, the required receipts or other required documentary evidence, the Borrower shall indemnify the Lenders for any incremental Taxes, interest or penalties that may become payable by any Lender as a result of 26 any such failure. For purposes of this Section 4.6, a distribution hereunder by ----------- the Agent or any Lender to or for the account of any Lender shall be deemed a payment by the Borrower. Upon the request of the Borrower or the Agent, each Lender that is organized under the laws of a jurisdiction other than the United States shall, prior to the due date of any payments under the Notes, execute and deliver to the Borrower and the Agent, on or about the first scheduled payment date in each Fiscal Year, one or more (as the Borrower or the Agent may reasonably request) United States Internal Revenue Service Forms W-8BEN or Forms W-8ECI or such other forms of documents (or successor forms or documents), appropriately completed, as may be applicable to establish the extent, if any, to which a payment to such Lender is exempt from withholding or deduction of Taxes. SECTION 4.7 Payments, Computations, etc. Unless otherwise expressly --------------------------- provided, all payments by the Borrower pursuant to this Agreement, the Notes or any other Loan Document shall be made by the Borrower to the Agent for the pro --- rata account of the Lenders entitled to receive such payment. All such payments - ---- required to be made to the Agent shall be made, without setoff, deduction or counterclaim, not later than 10:00 a.m., Chicago time, on the date due, in same day or immediately available funds, to such account as the Agent shall specify from time to time by notice to the Borrower. Funds received after that time shall be deemed to have been received by the Agent on the next succeeding Business Day. The Agent shall promptly remit in same day funds to each Lender its share, if any, of such payments received by the Agent for the account of such Lender. The Borrower hereby authorizes the Agent to charge any account maintained by the Borrower with the Agent or Bank of America for any amount due and payable under this Agreement as and when so due and payable. All interest and fees shall be computed on the basis of the actual number of days (including the first day but excluding the last day) occurring during the period for which such interest or fee is payable over a year comprised of 360 days. Whenever any payment to be made shall otherwise be due on a day which is not a Business Day, such payment shall (except as otherwise required by clause (c) of the definition ---------- of the term "Interest Period" with respect to Eurodollar Rate Loans) be made on --------------- the next succeeding Business Day and such extension of time shall be included in computing interest and fees, if any, in connection with such payment. SECTION 4.8 Sharing of Payments. If any Lender shall obtain any payment or ------------------- other recovery (whether voluntary, involuntary, by application of setoff or otherwise) on account of any Loan (other than pursuant to the terms of Sections -------- 4.3, 4.4 and 4.5) in excess of its pro rata share of payments then or therewith - --- --- --- --- ---- obtained by all Lenders, such Lender shall purchase from the other Lenders such participations in Loans made by them as shall be necessary to cause such purchasing Lender to share the excess payment or other recovery ratably with each of them; provided, however, that if all or any portion of the excess -------- ------- payment or other recovery is thereafter recovered from such purchasing Lender, the purchase shall be rescinded and each Lender which has sold a participation to the purchasing Lender shall repay to the purchasing Lender the purchase price to the ratable extent of such recovery together with an amount equal to such selling Lender's ratable share (according to the proportion of 27 (a) the amount of such selling Lender's required repayment to the purchasing Lender to - -- (b) the total amount so recovered from the purchasing Lender) of any interest or other amount paid or payable by the purchasing Lender in respect of the total amount so recovered. The Borrower agrees that any Lender so purchasing a participation from another Lender pursuant to this Section may, to the fullest extent permitted by law, exercise all its rights of payment (including pursuant to Section 4.9) with respect to such participation as fully ----------- as if such Lender were the direct creditor of the Borrower in the amount of such participation. If under any applicable bankruptcy, insolvency or other similar law, any Lender receives a secured claim in lieu of a setoff to which this Section applies, such Lender shall, to the extent practicable, exercise its rights in respect of such secured claim in a manner consistent with the rights of the Lenders entitled under this Section to share in the benefits of any recovery on such secured claim. SECTION 4.9 Setoff. Each Lender shall, upon the occurrence of any Default ------ described in clauses (a) through (d) of Section 8.1.9 or, with the consent of ----------- --- ------------- the Required Lenders, upon the occurrence of any other Event of Default, have the right to appropriate and apply to the payment of the Obligations owing to it (whether or not then due), and (as security for such Obligations) the Borrower hereby grants to each Lender a continuing security interest in, any and all balances, credits, deposits, accounts or moneys of the Borrower then or thereafter maintained with or otherwise held by such Lender; provided, however, -------- ------- that any such appropriation and application shall be subject to the provisions of Section 4.8. Each Lender agrees promptly to notify the Borrower and the Agent ----------- after any such setoff and application made by such Lender; provided, however, -------- ------- that the failure to give such notice shall not affect the validity of such setoff and application. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff under applicable law or otherwise) which such Lender may have. SECTION 4.10 Use of Proceeds. The Borrower shall apply the proceeds of the --------------- Loans in accordance with the recitals; provided that, in no event shall the -------- ---- proceeds of the Loans be used by the Borrower or any of its Subsidiaries to acquire all or any portion of the ownership or assets of any other Person or entity except as otherwise permitted by this Agreement. ARTICLE V CONDITIONS TO EFFECTIVENESS AND BORROWINGS SECTION 5.1 Effectiveness. This Agreement shall become effective, and all ------------- loans outstanding under the Existing Credit Agreement shall be deemed to be loans hereunder on the date (the "Effective Date") that each of the conditions -------------- precedent set forth in this Section 5.1 have been satisfied. ----------- 28 SECTION 5.1.1 Resolutions, etc. The Agent shall have received from the ----------------- Borrower a certificate, dated the date hereof, of its Secretary or Assistant Secretary as to (a) resolutions of its Board of Directors then in full force and effect authorizing the execution, delivery and performance of this Agreement, the Notes, each Collateral Document and each other Loan Document executed or to be executed by it; and (b) the incumbency and signatures of those of its officers authorized to act with respect to this Agreement, the Notes, each Collateral Document and each other Loan Document executed or to be executed by it, upon which certificate the Agent and each Lender may conclusively rely until the Agent shall have received a further certificate of the Secretary of the Borrower canceling or amending such prior certificate, which further certificate shall be reasonably satisfactory to the Agent. SECTION 5.1.2 Delivery of Notes. The Agent shall have received from the ----------------- Borrower, for the account of each Lender, a duly executed Note, dated as of the date hereof. SECTION 5.1.3 Credit Agreements. The Agent shall have received executed ----------------- counterparts of this Agreement and the Credit Agreement (Five Year) dated as of the date hereof, duly executed by the Borrower, the Agent, and each of the Lenders. SECTION 5.1.4 Confirmation. The Agent shall have received executed ------------ counterparts of the Confirmation, dated as of the date hereof, duly executed by the Borrower SECTION 5.1.5 Satisfaction with Tax Sharing Agreement The Agent and the --------------------------------------- Lenders shall have received true copies (as certified by an authorized officer of the Borrower) of, and reviewed and become satisfied with the provisions of, any tax sharing agreement to which the Borrower has become a party since March 31, 2000. SECTION 5.1.6 Opinions of Counsel. The Agent shall have received opinions, ------------------- dated the date hereof and addressed to the Agent and each Lender, from Steven B. Lapin, general counsel to the Borrower, substantially in the form of Exhibit F --------- hereto. SECTION 5.1.7 Closing Fees, Expenses, etc. The Agent shall have received --------------------------- for its own account all fees, and all costs and expenses for which invoices have been provided, due and payable pursuant to Sections 3.3 and 10.3. ------------ ---- SECTION 5.1.8 No Materially Adverse Effect. No events have occurred which, ---------------------------- as determined by the Agent, individually or in the aggregate, comprise a Materially Adverse Effect since December 31, 2000. SECTION 5.1.9 Satisfactory Legal Form. All documents executed or submitted ----------------------- pursuant hereto by the Borrower or on behalf of the Borrower or any of its Subsidiaries shall be 29 satisfactory in form and substance to the Agent and its counsel; the Agent and its counsel shall have received all information, approvals, opinions, documents or instruments as the Agent or its counsel may reasonably request. SECTION 5.1.10 Compliance with Warranties, No Default, etc. Both before and ------------------------------------------- after the Effective Date, the following statements shall be true and correct: (a) the representations and warranties set forth in Article VI ---------- (excluding, however, those contained in Section 6.7) of this Agreement, ----------- Article III of the Pledge Agreement, Article III of the Security Agreement, and Article I of the Mortgage shall be true and correct in all material respects with the same effect as if then made (unless stated to relate solely to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date); (b) except as disclosed by the Borrower to the Agent and the Lenders pursuant to Section 6.7, ----------- (i) no labor controversy, litigation, arbitration or governmental investigation or proceeding shall be pending or, to the knowledge of the Borrower, threatened against the Borrower or any of its Subsidiaries which might have a Materially Adverse Effect or which purports to affect the legality, validity or enforceability of this Agreement, the Notes, any Collateral Document or any other Loan Document, and (ii) no development shall have occurred in any labor controversy, litigation, arbitration or governmental investigation or proceeding disclosed pursuant to Section 6.7 which might have a Materially ----------- Adverse Effect; and (c) no Default shall have then occurred and be continuing, and neither the Borrower nor any of its Subsidiaries shall be in violation of any law or governmental regulation or court order or decree, the violation of which could have a Materially Adverse Effect. SECTION 5.1.11 Consents, etc. Certified copies of all documents evidencing ------------- any necessary corporate action, consents and governmental approvals (if any) required for the execution, delivery and performance by the Borrower of each document referred to in this Section 5.1. ----------- SECTION 5.2 All Borrowings. The obligation of each Lender to fund any Loan -------------- on the occasion of any Borrowing shall be subject to the satisfaction of each of the conditions precedent set forth in this Section 5.2. ----------- SECTION 5.2.1 Compliance with Warranties, No Default, etc. Both before and ------------------------------------------- after giving effect to any Borrowing (but, if any Default of the nature referred to in Section 8.1.5 shall have occurred with respect to any other Indebtedness, ------------- without giving effect to the 30 application, directly or indirectly, of the proceeds thereof) the following statements shall be true and correct (a) the representations and warranties set forth in Article VI ---------- (excluding, however, those contained in Section 6.7) of this Agreement, ----------- Article III of the Pledge Agreement, Article III of the Security Agreement and Article I of the Mortgage shall be true and correct with the same effect as if then made (unless stated to relate solely to an earlier date, in which case such representations and warranties shall be true and correct as of such earlier date); (b) except as disclosed by the Borrower to the Agent and the Lenders pursuant to Section 6.7 ----------- (i) no labor controversy, litigation, arbitration or governmental investigation or proceeding shall be pending or, to the knowledge of the Borrower, threatened against the Borrower or any of its Subsidiaries which might have a Materially Adverse Effect or which purports to affect the legality, validity or enforceability of this Agreement, the Notes, any Collateral Document or any other Loan Document; and (ii) no development shall have occurred in any labor controversy, litigation, arbitration or governmental investigation or proceeding disclosed pursuant to Section 6.7 which might have a Materially ----------- Adverse Effect; and (c) no Default shall have then occurred and be continuing, and neither the Borrower nor any of its Subsidiaries shall be in violation of any law or governmental regulation or court order or decree, the violation of which could have a Materially Adverse Effect. SECTION 5.2.2 Borrowing Request. The Agent shall have received a Borrowing ----------------- Request for such Borrowing. Each of the delivery of a Borrowing Request and the acceptance by the Borrower of the proceeds of such Borrowing shall constitute a representation and warranty by the Borrower that on the date of such Borrowing (both immediately before and after giving effect to such Borrowing and the application of the proceeds thereof) the statements made in Section 5.2.1 are ------------- true and correct. SECTION 5.2.3 Satisfactory Legal Form. All documents executed or submitted ----------------------- pursuant hereto by the Borrower or any of its Subsidiaries shall be satisfactory in form and substance to the Agent and its counsel; the Agent and its counsel shall have received all information, approvals, opinions, documents or instruments as the Agent or its counsel may reasonably request. 31 ARTICLE VI REPRESENTATIONS AND WARRANTIES In order to induce the Lenders and the Agent to enter into this Agreement and to make Loans hereunder, the Borrower represents and warrants unto the Agent and each Lender as set forth in this Article VI. ---------- SECTION 6.1 Organization, etc. The Borrower and each of its Subsidiaries is ------------------ a corporation validly organized and existing and in good standing under the laws of the State of its incorporation, is duly qualified to do business and is in good standing as a foreign corporation in each jurisdiction where the nature of its business requires such qualification (except where the failure to be so qualified would not have a Materially Adverse Effect), and has full power and authority and holds all requisite governmental licenses, permits and other approvals to enter into and perform its Obligations under this Agreement, the Notes, the Fourth Amendment to Mortgage, the Second Amendment to Modesto Mortgage, each Collateral Document and each other Loan Document and to own and hold under lease its property and to conduct its business substantially as currently conducted by it. SECTION 6.2 Due Authorization, Non-Contravention, etc. The execution, ------------------------------------------ delivery and performance by the Borrower of this Agreement, the Notes, the Fourth Amendment to Mortgage, the Second Amendment to Modesto Mortgage, each other Collateral Document and each other Loan Document executed or to be executed by it are within the Borrower's corporate powers, have been duly authorized by all necessary corporate action, and do not (a) contravene the Borrower's Organic Documents; (b) contravene any contractual restriction, law or governmental regulation or court decree or order binding on or affecting the Borrower; or (c) result in, or require the creation or imposition of, any Lien on any of the Borrower's properties (except pursuant to the Loan Documents). SECTION 6.3 Government Approval, Regulation, etc. No authorization or ------------------------------------- approval or other action by, and no notice to or filing with, any governmental authority or regulatory body or other Person is required for the due execution, delivery or performance by the Borrower of this Agreement, the Notes, the Fourth Amendment to Mortgage, the Second Amendment to Modesto Mortgage, any other Collateral Document or any other Loan Document. The Borrower is not an "investment company" within the meaning of the Investment Company Act of 1940, as amended, or a "holding company", or a "subsidiary company" of a "holding company", or an "affiliate" of a "holding company" or of a "subsidiary company" of a "holding company", within the meaning of the Public Utility Holding Company Act of 1935, as amended. Neither the Borrower nor any of its Subsidiaries is in violation of any provision of the Investment Company 32 Act of 1940, as amended, or the Public Utility Holding Company Act of 1935, as amended, and, without limiting the generality of the foregoing, neither the Borrower nor any of its Subsidiaries has performed, or has omitted to perform, any action which, pursuant to any provision of either such Act, would result in the Borrower being incapable of performing any of its obligations or agreements hereunder or under the Notes, the Fourth Amendment to Mortgage, the Second Amendment to Modesto Mortgage, any other Collateral Document or any other Loan Document executed in connection with or pursuant hereto. SECTION 6.4 Validity, etc. This Agreement and each Original Collateral -------------- Document constitutes, and the Notes, the Fourth Amendment to Mortgage, the Second Amendment to Modesto Mortgage, each other Collateral Document and each other Loan Document executed by the Borrower will, on the due execution and delivery thereof, constitute, the legal, valid and binding obligations of the Borrower enforceable in accordance with their respective terms, except as such enforceability may be limited by applicable bankruptcy, insolvency or similar laws applying to creditors' rights generally or general equitable principles. SECTION 6.5 Financial Information. The consolidated and consolidating --------------------- balance sheets of the Borrower and each of its Subsidiaries as at December 31, 2000 for the Fiscal Year then ended and the related consolidated statements of earnings and cash flow and the related consolidating statement of earnings of the Borrower and each of its Subsidiaries, copies of which have been furnished to the Agent and each Lender, have been prepared in accordance with GAAP consistently applied, and present fairly the consolidated or consolidating, as applicable, financial condition of the corporation(s) covered thereby as at the date thereof and the results of their operations for the period then ended. Neither the Borrower nor any of its Subsidiaries has any material liability, contingent liability, liability for taxes, long-term leases or forward or long-term commitments which are not reflected in the foregoing financial statements (including the footnotes thereto). SECTION 6.6 No Material Adverse Change. Since the respective dates of the -------------------------- financial statements described in Section 6.5, there has been no material ----------- adverse change on a consolidated basis in the financial condition, operations, assets, business, properties or prospects of the Borrower and its Significant Subsidiaries or in the ability of the Borrower to repay the Obligations when due in accordance with the terms thereof. SECTION 6.7 Litigation, Labor Controversies, etc. There is no pending or, ------------------------------------- to the knowledge of the Borrower, threatened litigation, action, proceeding, or labor controversy affecting the Borrower or any of its Significant Subsidiaries, or any of their respective properties, businesses, assets or revenues, which has any reasonable likelihood of having a Materially Adverse Effect or which purports to affect the legality, validity or enforceability of this Agreement, the Notes, any Collateral Document or any other Loan Document. SECTION 6.8 Subsidiaries. The Borrower has no Subsidiaries, except those ------------ Subsidiaries 33 (a) which are identified in Item 6.8 ("Existing Subsidiaries") of -------- the Disclosure Schedule and; or (b) which are permitted to have been acquired after the Effective Date, if any, in accordance with Section 7.2.5 or 7.2.9. ------------- ----- SECTION 6.9 Ownership of Properties. The Borrower and each of its ----------------------- Subsidiaries has good and marketable title to all of the properties and assets, real and personal, tangible and intangible, of any nature whatsoever (including patents, trademarks, trade names, service marks and copyrights) that it owns, and a valid leasehold interest in all of such property which it leases, free and clear of all Liens, charges or claims (including infringement claims with respect to patents, trademarks, copyrights and the like) except as permitted pursuant to Section 7.2.3. ------------- SECTION 6.10 Taxes. Each of the Borrower and its Significant Subsidiaries ----- has filed all tax returns and reports required by law to have been filed by it and has paid all taxes and governmental charges thereby shown to be owing, except any such taxes or charges which are being contested in good faith by appropriate action and for which adequate reserves in accordance with GAAP shall have been set aside on its books. SECTION 6.11 Pension and Welfare Plans. During the twelve-consecutive- ------------------------- month period prior to the initial closing date of the Original Credit Agreement and since such time through and including the date of the occurrence of the Effective Date, no steps have been taken to terminate any Pension Plan, and no contribution failure has occurred with respect to any Pension Plan sufficient to give rise to a Lien under section 302(f) of ERISA. No condition exists or event or transaction has occurred with respect to any Pension Plan which might result in the incurrence by the Borrower or any member of the Controlled Group of any material liability, fine or penalty. Except as disclosed in Item 6.11 ("Post-Retirement Benefits") of the Disclosure Schedule, neither the Borrower nor any member of the Controlled Group has any contingent liability with respect to any post-retirement benefit under a Welfare Plan, other than liability for continuation coverage described in Part 6 of Title I of ERISA. SECTION 6.12 Environmental Warranties. Except as set forth in Item 6.12 ------------------------ --------- ("Environmental Matters") of the Disclosure Schedule: (a) all facilities and property (including underlying groundwater) owned or leased or operated by the Borrower or any of its Subsidiaries have been, and continue to be, owned or leased by the Borrower and its Subsidiaries in material compliance with all Environmental Laws; (b) there have been no past, and there are no pending or, to the best of the Borrower's knowledge, threatened (i) claims, complaints, notices or requests for information received by the Borrower or any of its Subsidiaries with respect to any alleged violation of any Environmental Law, or 34 (ii) complaints, notices or inquiries to the Borrower or any of its Subsidiaries regarding potential liability under any Environmental Law; (c) there have been no Releases of Hazardous Materials at, on or under any property now or previously owned or leased or operated by the Borrower or any of its Subsidiaries that, singly or in the aggregate, have, or may reasonably be expected to have, a Materially Adverse Effect; (d) the Borrower and its Subsidiaries have been issued and are in material compliance with all permits, certificates, approvals, licenses and other authorizations relating to environmental matters and appropriate for their businesses; (e) no property now or previously owned or leased by the Borrower or any of its Subsidiaries is listed or, to the best of the Borrower's knowledge, proposed for listing (with respect to owned property only) on the National Priorities List pursuant to CERCLA, on the CERCLIS or on any similar state list of sites requiring investigation or clean-up; (f) there are no underground storage tanks, active or abandoned, including petroleum storage tanks, on or under any property now or previously owned or leased or operated by the Borrower or any of its Subsidiaries that, singly or in the aggregate, have, or may reasonably be expected to have, a Materially Adverse Effect; (g) neither the Borrower nor any of its Subsidiaries has directly transported or directly arranged for the transportation of any Hazardous Material to any location which is listed or, to the best of the Borrower's knowledge, proposed for listing on the National Priorities List pursuant to CERCLA, on the CERCLIS or on any similar state list or which is the subject of federal, state or local enforcement actions or other investigations which may lead to claims that, singly or in the aggregate, would be material against the Borrower or any of its Significant Subsidiaries for any remedial work, damage to natural resources or personal injury, including claims under CERCLA; (h) there are no polychlorinated biphenyls or friable asbestos present at any property now or previously owned or leased or operated by the Borrower or any of its Subsidiaries that, singly or in the aggregate, have, or may reasonably be expected to have, a Materially Adverse Effect; and (i) no conditions exist at, on or under any property now or previously owned or leased or operated by the Borrower which, with the passage of time, or the giving of notice or both, would give rise to liability which would have, or may reasonably be expected to have, singly or in the aggregate, a Materially Adverse Effect under any Environmental Law. SECTION 6.13 Regulations U and X. The Borrower is not engaged in the ------------------- business of extending credit for the purpose of purchasing or carrying margin stock, and no proceeds of any 35 Loans will be used for a purpose which violates, or would be inconsistent with, F.R.S. Board Regulation U or X. Less than 25% of the assets of the Borrower and the consolidated assets of the Borrower and its Subsidiaries consist of margin stock. Terms for which meanings are provided in F.R.S. Board Regulation U or X or any regulations substituted therefor, as from time to time in effect, are used in this Section with such meanings. SECTION 6.14 Real Property; Mortgage, etc. The Mortgaged Real Property and ----------------------------- the Modesto Property constitute all of the real property in which the Borrower has an ownership interest with a book value in excess of $50,000. SECTION 6.15 The Collateral Documents. The provisions of the Collateral ------------------------ Documents executed by the Borrower or any of its Subsidiaries in favor of Bank of America, as agent for the benefit of the Lenders, are effective to create, in favor of the Lenders, securing the Notes and all other Obligations from time to time outstanding, a legal, valid and enforceable security interest in all right, title and interest of the Borrower and such Subsidiaries in any and all of the collateral described therein, and all appropriate filings and recordings having been made or appropriately provided for, each of such Collateral Documents constitutes a fully perfected security interest in all right, title and interest of the Borrower and such Subsidiaries in such collateral superior in right to any liens, existing or future, which the Borrower or any such Subsidiary or any creditors of or purchasers from, or any other Person, may have against such collateral or interests therein, except to the extent, if any, otherwise provided therein. SECTION 6.16 Accuracy of Information. All factual information heretofore or ----------------------- contemporaneously furnished by or on behalf of the Borrower in writing to the Agent or any Lender for purposes of or in connection with this Agreement or any transaction contemplated hereby (including the Business Plan, true and complete copies of which were furnished to the Agent and each Lender in connection with its execution and delivery hereof) is, and all other such factual information hereafter furnished by or on behalf of the Borrower to the Agent or any Lender will be, true and accurate in every material respect on the date as of which such information is dated or certified and, as to information (other than financial statements but, subject to the proviso below; including the Business Plan) provided prior to the Effective Date, as of the Effective Date, and such information is not, or shall not be, as the case may be, incomplete by omitting to state any material fact necessary to make such information not misleading; provided that projections contained in the Business Plan or other materials - -------- furnished by the Borrower to the Agent or the Lenders were prepared in good faith by the Borrower in a manner consistent with GAAP (as applied in the financial statements referred to in Section 6.5) and represent the Borrower's ----------- reasonable estimates, as of the respective dates thereof, of the Borrower's reasonably expected future performance. The Borrower has furnished the Lenders a true and complete copy of each tax sharing agreement to which it has become a party since March 31, 2000. SECTION 6.17 Subordinated Debt. Notwithstanding any bankruptcy, insolvency, ----------------- reorganization, moratorium or similar proceeding in respect of the Borrower, at all times, (a) the subordination provisions of any Subordinated Debt will be enforceable by the Lender with 36 respect to the Obligations, (b) all Obligations, including the Obligations to pay principal of and interest on the Loans and fees in connection therewith, constitute "Senior Indebtedness" under any Subordinated Debt, and all such Obligations will be entitled to the benefits of subordination created by any Subordinated Debt, and (c) all payments of principal of or interest on any Subordinated Debt made by the Borrower or from the liquidation of its property will be subject to such subordination provisions. The Borrower acknowledges that the Lenders are entering into this Agreement, and making the Loans, in reliance upon the subordination provisions contained in all Subordinated Debt. The Borrower shall have furnished to the Lenders a true and complete copy of the proposed documents for any proposed Subordinated Debt at least ten Business Days prior to the issuance thereof. SECTION 6.18 Intellectual Property. The Borrower has no patents, trademarks --------------------- or copyrights except those listed on the Annexes to the Security Agreement. ARTICLE VII COVENANTS SECTION 7.1 Affirmative Covenants. The Borrower agrees with the Agent and --------------------- each Lender that, so long as the Commitments are outstanding and, thereafter, until all Obligations have been paid and performed in full, the Borrower will perform the obligations set forth in this Section 7.1. ----------- SECTION 7.1.1 Financial Information, Reports, Notices, etc. The Borrower --------------------------------------------- will furnish, or will cause to be furnished, to each Lender and the Agent copies of the following financial statements, reports, notices and information: (a) as soon as available and in any event within 60 days after the end of each of the first three Fiscal Quarters of each Fiscal Year of the Borrower, consolidated and consolidating balance sheets of the Borrower and its Subsidiaries as of the end of such Fiscal Quarter, consolidated statements of earnings and cash flow of the Borrower and its Subsidiaries for such Fiscal Quarter and for the period commencing at the end of the previous Fiscal Year and ending with the end of such Fiscal Quarter and a consolidating statement of earnings of the Borrower and its Subsidiaries for such Fiscal Quarter and for the period commencing at the end of the previous Fiscal Year and ending with the end of such Fiscal Quarter, certified by the chief financial Authorized Officer of the Borrower; (b) as soon as available and in any event within 120 days after the end of each Fiscal Year of the Borrower, an appropriately updated business plan substantially in the form of, and containing the same scope of information as, the Business Plan and a copy of the annual audit report for such Fiscal Year for the Borrower and its Subsidiaries including therein consolidated and consolidating balance sheets of the Borrower and its Subsidiaries as of the end of such Fiscal Year, consolidated statements of earnings and cash flow of the Borrower and its Subsidiaries for such Fiscal Year and consolidating statements of earnings of the Borrower and its Subsidiaries for such Fiscal Year, in each 37 case certified (without any Impermissible Qualification) in a manner acceptable to the Agent and the Required Lenders by KPMG LLP or other independent public accountants of recognized standing acceptable to the Agent and the Required Lenders, together with (i) a certificate from such accountants containing a computation of, and showing compliance with, each of the financial ratios and restrictions contained in Section 7.2.4 and to ------------- the effect that, in making the examination necessary for the signing of such annual report by such accountants, they have not become aware of any Default that has occurred and is continuing, or, if they have become aware of such Default, describing such Default and the steps, if any, being taken to cure it, and (ii) unaudited consolidated and consolidating financial statements for the Borrower and its Subsidiaries prepared on the basis of, and with figures used in the preparation of, such audited financial statements and comprised of balance sheets and statements of earnings and cash flow; (c) as soon as available and in any event within 60 days after the end of each Fiscal Quarter, a certificate, executed by the chief financial Authorized Officer of the Borrower, showing (in reasonable detail and with appropriate calculations and computations in all respects satisfactory to the Agent) compliance with the financial covenants set forth in Section ------- 7.2.4 and with the provisions of Sections 7.2.6, 7.2.7 and 7.2.10 and also ----- -------------- ----- ------ showing the amount of any inter-company advances by the Borrower to any of its Subsidiaries (broken out by Subsidiary); (d) as soon as possible and in any event within three Business Days after the occurrence of each Default, a statement of the chief financial Authorized Officer of the Borrower setting forth details of such Default and within four Business Days thereafter, the action which the Borrower has taken and proposes to take with respect thereto; (e) as soon as possible and in any event within five Business Days after (x) the occurrence of any adverse development with respect to any litigation, action, proceeding or labor controversy described in Section ------- 6.7, or (y) the commencement of any labor controversy, litigation, action, --- proceeding of the type described in Section 6.7, notice thereof and copies ----------- of all documentation relating thereto; (f) promptly after the sending or filing thereof, copies of any reports and registration statements which the Borrower or any of its Subsidiaries may file with the Securities and Exchange Commission or any national securities exchange or pursuant to the Investment Company Act of 1940, as amended, or the Public Utility Holding Company Act of 1935, as amended, and promptly after the receipt of any communication from any governmental authority or agency administering either of such Acts, copies thereof, as well as copies of any reports the Borrower furnishes to its securityholders which the Borrower reasonably determines to be material to the Lender or the Obligations; (g) immediately upon and in any event within five Business Days of becoming aware of the institution of any steps by the Borrower or any other Person to terminate any Pension Plan, or the failure to make a required contribution to any Pension 38 Plan if such failure is sufficient to give rise to a Lien under section 302(f) of ERISA, or the taking of any action with respect to a Pension Plan which could result in the requirement that the Borrower furnish a bond or other security to the PBGC or such Pension Plan, or the occurrence of any event with respect to any Pension Plan which could result in the incurrence by the Borrower of any material liability, fine or penalty, or any material increase in the contingent liability of the Borrower with respect to any post-retirement Welfare Plan benefit, notice thereof and copies of all documentation relating thereto; and (h) such other information respecting the condition or operations, financial or otherwise, of the Borrower or any of its Subsidiaries as any Lender through the Agent may from time to time reasonably request. SECTION 7.1.2 Compliance with Laws, etc. Other than with respect to the -------------------------- Mortgaged Real Property (as to which the provisions of the Mortgage shall govern and control), the Borrower will, and will cause each of its Subsidiaries to, comply in all material respects with all applicable laws, rules, regulations and orders, such compliance to include (without limitation): (a) the maintenance and preservation of its corporate existence and qualification as a foreign corporation (except where the failure to be so qualified would not have a material adverse effect on the consolidated financial condition, operations, assets, business, properties or prospects of the Borrower and its Significant Subsidiaries); and (b) the payment, before the same become delinquent, of all taxes, assessments and governmental charges imposed upon it or upon its property except to the extent being contested in good faith by appropriate action and for which adequate reserves in accordance with GAAP shall have been set aside on its books. SECTION 7.1.3 Maintenance of Properties. Other than with respect to the ------------------------- Mortgaged Real Property (as to which the provisions of the Mortgage shall govern and control), the Borrower will, and will cause each of its Significant Subsidiaries to, maintain, preserve, protect and keep its properties in good repair, working order and condition, and make necessary and proper repairs, renewals and replacements so that its business carried on in connection therewith may be properly conducted in all material respects at all times unless the Borrower determines in good faith that the continued maintenance of any of its properties is no longer economically desirable. SECTION 7.1.4 Insurance. Other than with respect to the Mortgaged Real --------- Property (as to which the provisions of the Mortgage shall govern and control), the Borrower will, and will cause each of its Significant Subsidiaries to, maintain or cause to be maintained with responsible insurance companies insurance with respect to its properties and business (including business interruption insurance) against such casualties and contingencies and of such types and in such amounts as is customary in the case of similar businesses and will, upon request of the 39 Agent, furnish to each Lender at reasonable intervals a certificate of an Authorized Officer of the Borrower setting forth the nature and extent of all insurance maintained by the Borrower and its Subsidiaries in accordance with this Section. SECTION 7.1.5 Books and Records. The Borrower will, and will cause each of ----------------- its Significant Subsidiaries to, keep books and records which accurately reflect all of its material business affairs and transactions and permit the Agent and each Lender or any of their respective representatives, at reasonable times and intervals, to visit all of its offices, to discuss its financial matters with its officers and independent public accountant (and the Borrower hereby authorizes such independent public accountant to discuss the Borrower's financial matters with each Lender or its representatives whether or not any representative of the Borrower is present) and to examine (and, at the expense of the Borrower, photocopy extracts from) any of its books or other corporate records. The Borrower shall pay any fees of such independent public accountant incurred in connection with the Agent's or any Lender's exercise of its rights pursuant to this Section. SECTION 7.1.6 Environmental Covenant. The Borrower will, and will cause ---------------------- each of its Subsidiaries to, (a) use and operate all of its facilities and properties in material compliance with all Environmental Laws, keep all necessary permits, approvals, certificates, licenses and other authorizations relating to environmental matters in effect and remain in material compliance therewith, and handle all Hazardous Materials in material compliance with all applicable Environmental Laws; (b) immediately and in any event within five Business Days notify the Agent and provide copies upon receipt of all written claims, complaints, notices or inquiries relating to the condition of its facilities and properties or compliance with Environmental Laws, and shall promptly take all action to seek to cure and have dismissed with prejudice to the satisfaction of the relevant governmental authorities and agencies any actions and proceedings relating to compliance with Environmental Laws; and (c) provide such information and certifications which the Agent may reasonably request from time to time to evidence compliance with this Section 7.1.6. ------------- SECTION 7.1.7 Fourth Amendment to Mortgage. No later than 90 days after the ---------------------------- date hereof, the Borrower shall deliver to the Agent executed counterparts of the Fourth Amendment to Mortgage, duly executed by the Borrower, together with (a) evidence of the completion (or satisfactory arrangements for the completion) of all recordings and filings (including fixture filings) of the Fourth Amendment to Mortgage as may be necessary or desirable, in the reasonable opinion of the Agent and its counsel, to create (and continue) a valid, perfected first priority mortgage or deed of trust Lien, of record, against the properties purported to be covered thereby; 40 (b) a mortgagee's title insurance policy endorsement in favor of the Agent and the Lenders in amounts and in form and substance and issued by issuers, in each case reasonably satisfactory to the Agent, with respect to the Mortgaged Real Property, insuring that title to such Mortgaged Real Property is marketable and that the interest created by the Mortgage constitutes a valid, perfected first mortgage Lien, of record, on the title to such property free and clear of all defects and encumbrances other than as approved by the Agent, and such policy shall also include such endorsements as the Agent shall request and shall be accompanied by evidence of the payment in full of all premiums thereon; (c) an opinion of Wisconsin counsel, dated a date satisfactory to the Agent, addressed to the Agent and each Lender, in form of satisfactory to the Agent and each Lender and (d) evidence reasonably satisfactory to the Agent that the Borrower has in effect the insurance with respect to the Mortgaged Real Property required to be carried by the Borrower pursuant to the terms of the Mortgage, such evidence to include, without limitation (i) a loss payable endorsement, in form satisfactory to the Agent, naming the Agent, as agent for the Lenders, as a loss payee with respect to all casualty insurance policies and (ii) an endorsement naming the Agent, as agent for the Lenders, as an additional insured with respect to all liability insurance policies. SECTION 7.1.8 Modesto Property. No later than 90 days after the date ---------------- hereof, the Borrower shall deliver to the Agent executed counterparts of an Second Amendment to Modesto Mortgage, duly executed by the Borrower, together with (a) evidence of the completion (or satisfactory arrangements for the completion) of all recordings and filings (including fixture filings) of the Second Amendment to Modesto Mortgage as may be necessary or desirable, in the reasonable opinion of the Agent and its counsel, to create (and continue) a valid, perfected first priority mortgage or deed of trust Lien, of record, against the properties purported to be covered thereby; (b) a mortgagee's title insurance policy endorsement in favor of the Agent and the Lenders in amounts and in form and substance and issued by issuers, in each case reasonably satisfactory to the Agent, with respect to the Modesto Property, insuring that title to such Modesto Property is marketable and that the interest created by the Modesto Mortgage constitutes a valid, perfected first mortgage Lien, of record, on the title to such property free and clear of all defects and encumbrances other than as approved by the Agent, and such policy shall also include such endorsements as the Agent shall request and shall be accompanied by evidence of the payment in full of all premiums thereon; (c) an opinion of California counsel, dated a date satisfactory to the Agent, addressed to the Agent and each Lender, in form of satisfactory to the Agent and each Lender and 41 (d) evidence reasonably satisfactory to the Agent that the Borrower has in effect the insurance with respect to the Modesto Property required to be carried by the Borrower pursuant to the terms of the Modesto Mortgage, such evidence to include, without limitation (i) a loss payable endorsement, in form satisfactory to the Agent, naming the Agent, as agent for the Lenders, as a loss payee with respect to all casualty insurance policies and (ii) an endorsement naming the Agent, as agent for the Lenders, as an additional insured with respect to all liability insurance policies. SECTION 7.1.9 Further Assurances. Promptly upon the written request of the ------------------ Agent, or the Required Lenders, the Borrower shall, and shall cause each Subsidiary to, execute, acknowledge, deliver, record, re-record, file, re-file, register and re-register, any and all such further acts, deeds, conveyances, security agreements, mortgages, assignments, estoppel certificates, financing statements and continuations thereof, termination statements, notices of assignment, transfers, certificates, assurances and other instruments the Agent or the Required Lenders as the case may be, may reasonably request from time to time in order (a) to ensure that (i) the Obligations are secured by substantially all assets of the Borrower and (ii) the Obligations are secured by substantially all of the assets of each Subsidiary (including, promptly upon the acquisition or creation thereof, any Subsidiary created or acquired after the date hereof), (b) to perfect and maintain the validity, effectiveness and priority of any of the Loan Documents and the Liens intended to be created thereby, and (c) to better assure, convey, grant, assign, transfer, preserve, protect and confirm to the Agent and the Lenders the rights granted or now or hereafter intended to be granted to the Agent and the Lenders under any Loan Documents or under any other document executed in connection therewith. Contemporaneously with the execution and delivery of any document referred to above, the Borrower shall, and shall cause each Subsidiary to, deliver all resolutions, opinions and corporate documents as the Agent or the Required Lenders may reasonably request to confirm the enforceability of such document and the perfection of the security interest created thereby, if applicable. SECTION 7.2 Negative Covenants. The Borrower agrees with the Agent and each ------------------ Lender that, so long as the Commitments shall be outstanding and, thereafter, until all Obligations have been paid and performed in full, the Borrower will perform the obligations set forth in this Section 7.2. ----------- SECTION 7.2.1 Business Activities. The Borrower will not, and will not ------------------- permit any of its Subsidiaries to, engage in any business activity, other than the business of selling, primarily through mail order and electronic means, teaching aids and equipment to educators and specialized equipment and supplies to farmers, ranchers, laboratories, hospitals and emergency services, and in the financial services business and such activities as may be incidental or directly related thereto. SECTION 7.2.2 Indebtedness. The Borrower will not, and will not permit any ------------ of its Subsidiaries to, create, incur, assume or suffer to exist or otherwise become or be liable in respect of any Indebtedness, other than, without duplication, the following: (a) Indebtedness in respect of the Loans and other Obligations; 42 (b) unsecured Indebtedness incurred in the ordinary course of business (including open accounts extended by suppliers on normal trade terms in connection with purchases of goods and services, but excluding Indebtedness incurred through the borrowing of money and Contingent Liabilities); (c) Indebtedness of the Borrower and its Subsidiaries in respect of Capitalized Lease Liabilities to the extent permitted in Section 7.2.7; ------------- (d) Indebtedness under the Credit Agreement (Five Year); (e) Indebtedness of the Borrower comprising reimbursement obligations in respect of letters of credit issued to support imported merchandise purchased from time to time by the Borrower, provided that the aggregate -------- amount of all such letters of credit and, in turn, of all such reimbursement obligations, shall not exceed $500,000; and (f) Indebtedness of the Borrower incurred in connection with the Guaranty, dated as of April 16, 2001 in favor of J-Star Industries, Inc. pursuant to which the Borrower has guaranteed the obligations of NHI, LLC under the Environmental Remediation and Indemnification Agreement, dated as of April 16, 2001, by and between NHI, LLC and J-Star Industries, Inc. and the Environmental Escrow Agreement, dated as of April 16, 2001, by and between NHI, LLC and J-Star Industries, Inc. SECTION 7.2.3 Liens. The Borrower will not, and will not permit any of its ----- Subsidiaries to, create, incur, assume or suffer to exist any Lien upon any of its property, revenues or assets, whether now owned or hereafter acquired, except: (a) Liens securing payment of the Obligations and the "Obligations" under the Credit Agreement (Five Year), granted pursuant to any Loan Document; (b) Other than with respect to the Mortgaged Real Property and the Modesto Property (as to which the provisions of the Mortgage and the Modesto Mortgage shall govern and control), liens for taxes, assessments or other governmental charges or levies not at the time delinquent or thereafter payable without penalty or being contested in good faith by appropriate action and for which adequate reserves in accordance with GAAP shall have been set aside on its books; (c) Liens of carriers, warehousemen, mechanics, materialmen and landlords incurred in the ordinary course of business for sums not overdue or being contested in good faith by appropriate action and for which adequate reserves in accordance with GAAP shall have been set aside on its books; (d) Liens incurred in the ordinary course of business in connection with worker's compensation, unemployment insurance or other forms of governmental insurance or benefits, or to secure performance of tenders, statutory obligations, leases 43 and contracts (other than for borrowed money) entered into in the ordinary course of business or to secure obligations on surety or appeal bonds; (e) judgment Liens in existence less than 15 days after the entry thereof or with respect to which execution has been stayed or the payment of which is covered in full (subject to a customary deductible) by insurance maintained with responsible insurance companies; (f) Liens to secure the reimbursement obligations permitted under Section 7.2.2(e) on the merchandise financed with the letters of credit ---------------- described therein; and (g) Permitted Encumbrances (as defined in the Mortgage) with respect to the Mortgaged Real Property and the Modesto Property. SECTION 7.2.4 Financial Condition. The Borrower hereby covenants and agrees ------------------- as set forth below: (a) Current Ratio. The Borrower will not permit its Consolidated ------------- Current Ratio, as of the end of any month during any Fiscal Year, to be less than 2.0 to 1. (b) Consolidated Net Worth. The Borrower will not permit its ---------------------- Consolidated Net Worth, at any time during any Fiscal Year, to be less than an amount equal to the sum of (i) $8,000,000 plus (ii) an amount equal to ---- 50% of Consolidated Net Income for the period from the date hereof to the date of determination thereof (if positive). (c) Consolidated Current Assets Levels. The Borrower will not permit ---------------------------------- its Consolidated Current Assets Level, as of the last day of any Fiscal Quarter, to be less than the amounts set forth below: Fiscal Quarter Amount -------------- ------ March 31 $27,000,000 June 30 $31,000,000 September 30 $34,000,000 December 31 $25,000,000 (d) Consolidated Debt Service Coverage Ratio. The Borrower will not ---------------------------------------- permit its Consolidated Debt Service Coverage Ratio to be less than (x) 1.25 to 1 from the Effective Date through September 29, 2001, (y) 1.50 to 1 from September 30, 2001 through December 30, 2001 and (2) 1.75 to 1 thereafter. SECTION 7.2.5 Investments. The Borrower will not, and will not permit any ----------- of its Subsidiaries to, make, incur, assume or suffer to exist any Investment in any other Person, except: (a) Cash Equivalent Investments; 44 (b) without duplication, Investments permitted as Indebtedness pursuant to Section 7.2.2; ------------- (c) without duplication, Investments permitted as Capital Expenditures pursuant to Section 7.2.7; and ------------- (d) (i) Investments made prior to the Effective Date in its Subsidiaries, (ii) from and after the Effective Date and in the ordinary course of business, Investments by the Borrower in its Subsidiaries in an aggregate amount not to exceed $3,000,000 at any one time outstanding, or by any such Subsidiary in any of its Subsidiaries, by way of contributions to capital or loans or advances and (iii) from and after the Effective Date, Investments by the Borrower in Geneve in an aggregate amount not to exceed $3,000,000 at any one time outstanding (provided, that all such -------- Investments shall be by way of loans to Geneve made by the Borrower and evidenced by one or more promissory notes (each such promissory note to be in form and substance reasonably satisfactory to the Agent) duly executed and delivered in pledge to the Agent; provided, however, that - -------- ------- (e) any Investment which when made complies with the requirements of the definition of the term "Cash Equivalent Investment" may continue to be -------------------------- held notwithstanding that such Investment if made thereafter would not comply with such requirements; and (f) no Investment otherwise permitted by clause (b), (c) or (d) shall ---------- --- --- be permitted to be made if, immediately before or after giving effect thereto, any Default shall have occurred and be continuing. SECTION 7.2.6 Restricted Payments, etc. On and at all times after the ------------------------- Effective Date: (a) the Borrower will not declare, pay or make any dividend or distribution (in cash, property or obligations) on any shares of any class of capital stock (now or hereafter outstanding) of the Borrower or on any warrants, options or other rights with respect to any shares of any class of capital stock (now or hereafter outstanding) of the Borrower (other than dividends or distributions payable in its common stock or warrants to purchase its common stock or splitups or reclassifications of its stock into additional or other shares of its common stock), or apply, or permit any of its Subsidiaries to apply, any of its funds, property or assets to the purchase, redemption, sinking fund or other retirement of, or agree or permit any of its Subsidiaries to purchase or redeem, any shares of any class of capital stock (now or hereafter outstanding) of, the Borrower, or warrants, options or other rights with respect to any shares of any class of capital stock (now or hereafter outstanding) of the Borrower; 45 (b) the Borrower will not prepay any other Indebtedness or prepay or repay any Subordinated Debt, except as expressly permitted under clause (d) ---------- of Section 7.2.2; and ------------- (c) the Borrower will not, and will not permit any Subsidiary to, make any deposit for any of the foregoing purposes; provided, however, that,(i) the Borrower may pay a dividend of up to $1,800,000 - -------- ------- to Holdings from the date hereof to December 31, 2001 and (ii) each year thereafter the Borrower may pay a dividend up to an amount equal to 50% of the Excess Cash Flow for the preceding Fiscal Year (so long as the Borrower has first made the mandatory prepayment of the loans under the Credit Agreement (Five Year) pursuant to Section 3.1.2(d) therein). SECTION 7.2.7 Capital Expenditures, etc. The Borrower will not, and will -------------------------- not permit any of its Subsidiaries to, make or commit to make Capital Expenditures in any Fiscal Year in excess of $2,700,000 in the aggregate. SECTION 7.2.8 Take or Pay Contracts. The Borrower will not, and will not --------------------- permit any of its Subsidiaries to, enter into or be a party to any arrangement for the purchase of materials, supplies, other property or services if such arrangement by its express terms requires that payment be made by the Borrower or such Subsidiary regardless of whether such materials, supplies, other property or services are delivered or furnished to it, unless the aggregate amount payable under all such arrangements shall not exceed $100,000 in any calendar year. SECTION 7.2.9 Consolidation, Merger, etc. The Borrower will not, and will --------------------------- not permit any of its Subsidiaries to, liquidate or dissolve, consolidate with, or merge into or with, any other corporation, or purchase or otherwise acquire all or substantially all of the assets of any Person (or of any division thereof) except (a) any such Subsidiary may liquidate or dissolve voluntarily into, and may merge with and into, the Borrower or any wholly-owned Subsidiary, and the assets or stock of any Subsidiary may be purchased or otherwise acquired by the Borrower or any wholly-owned Subsidiary; and (b) so long as no Default has occurred and is continuing or would occur after giving effect thereto, the Borrower or any of its Subsidiaries may purchase all or substantially all of the assets of any Person, or acquire such Person by merger, if permitted (without duplication) by Section 7.2.7 to be made as a Capital Expenditure (provided that any ------------- -------- amounts so expended shall count as Capital Expenditures for purposes of Section 7.2.7). ------------- SECTION 7.2.10 Asset Dispositions, etc. The Borrower will not, and will not ------------------------ permit any of its Subsidiaries to, sell, transfer, lease, contribute or otherwise convey, or grant options, warrants or other rights with respect to, all or any part of its assets (including accounts receivable and capital stock of Subsidiaries) to any Person, other than the sale of inventory in the ordinary 46 course of business, unless (a) permitted by Section 7.2.6 or 7.2.9 or (b) in ------------- ----- addition to the exceptions provided in the foregoing clause (a), the net book ---------- value of such assets, together with the net book value of all other assets sold, transferred, leased, contributed or conveyed by the Borrower or any of its Subsidiaries pursuant to this clause (b) since the Effective Date, does not ---------- exceed $250,000. SECTION 7.2.11 Modification of Tax Sharing Agreement and Subordinated Debt. ----------------------------------------------------------- The Borrower will not consent to any amendment, supplement or other modification of any of the terms or provisions contained in, or applicable to, the tax sharing agreement delivered to the Lenders pursuant to this Agreement or, after the issuance thereof, the terms or provisions of any Subordinated Debt. SECTION 7.2.12 Transactions with Affiliates. The Borrower will not, and ---------------------------- will not permit any Significant Subsidiary to, enter into, or cause, suffer or permit to exist: (a) any arrangement or contract with any of its other Affiliates of a nature customarily entered into by Persons which are Affiliates of each other for tax or financial reporting purposes (including, without limitation, management or similar contracts or arrangements relating to the allocation of revenues, taxes and expenses or otherwise) unless such arrangement or contract is fair and equitable to the Borrower or such Significant Subsidiary; or (b) any other transaction, arrangement or contract with any of its other Affiliates which would not be entered into by a prudent Person in the position of the Borrower or such Significant Subsidiary with, or which is on terms which are less favorable than are obtainable from, any Person which is not one of its Affiliates. SECTION 7.2.13 Inconsistent Agreements. The Borrower will not enter into ----------------------- any agreement containing any provision which would be violated or breached by any borrowing by the Borrower made hereunder or by the performance by the Borrower of its obligations hereunder or under any instrument executed pursuant hereto. SECTION 7.2.14 Negative Pledges, Restrictive Agreements, etc. The Borrower ---------------------------------------------- will not, and will not permit any of its Subsidiaries to, enter into any agreement (excluding this Agreement and any other Loan Document) prohibiting (a) the creation or assumption of any Lien upon its properties, revenues or assets, whether now owned or hereafter acquired, or the ability of the Borrower to amend or otherwise modify this Agreement or any other Loan Document; or (b) the ability of any Subsidiary to make any payments, directly or indirectly, to the Borrower by way of dividends, advances, repayments of loans or advances, reimbursements of management and other intercompany charges, expenses and accruals or other returns on investments, or any other agreement or arrangement which restricts 47 the ability of any such Subsidiary to make any payment, directly or indirectly, to the Borrower. SECTION 7.2.15 Management Fees. The Borrower will not, and will not permit --------------- any of its Subsidiaries to, pay management or similar fees to any Affiliate (other than payments by any of the Borrower's Subsidiaries to the Borrower) without the written approval of the Required Lenders which, when aggregated with all other management fees paid by the Borrower and its Subsidiaries in any Fiscal Year, would exceed the amounts set forth below opposite such Fiscal Year: Fiscal Year Amount ----------- ------ 2001 $1,611,624 2002 $1,708,321 2003 $1,810,821 2004 $1,919,470 2005 $2,034,638 2006 $2,156,716 provided that, in any event and at all times, no management fees may be paid - -------- when any Default has occurred and is continuing or would occur after giving effect thereto. SECTION 7.2.16 Tax Sharing Payments. The Borrower will not, and will not -------------------- permit any of its Subsidiaries to, make any tax sharing payments to Holdings which, when aggregated with all other tax sharing payments made by the Borrower and its Subsidiaries in any Fiscal Quarter, would exceed the estimated quarterly tax sharing payments required to be made pursuant to the tax sharing agreement heretofore delivered to the Lenders pursuant to this Agreement; provided that, -------- in any event and at all times, no tax sharing payment may be paid when any Default has occurred and is continuing or would occur after giving effect thereto. SECTION 7.2.17 Use of Proceeds. The Borrower will not use the proceeds of --------------- the Loans for any purpose other than to meet working capital needs. ARTICLE VIII EVENTS OF DEFAULT SECTION 8.1 Listing of Events of Default. Each of the following events or ---------------------------- occurrences described in this Section 8.1 shall constitute an "Event of ----------- -------- Default". - ------- SECTION 8.1.1 Non-Payment of Obligations. The Borrower shall default in the -------------------------- payment or prepayment when due of any principal of any Loan, or the Borrower shall default 48 (and such default shall continue unremedied for a period of five days) in the payment when due of any interest on any Loan or any other Obligation. SECTION 8.1.2 Breach of Warranty. Any representation or warranty of the ------------------ Borrower or any of its other Affiliates made or deemed to be made hereunder or in any other Loan Document or in any other writing or certificate furnished by or on behalf of the Borrower or any of its Affiliates to the Agent or any Lender for the purposes of or in connection with this Agreement or any such other Loan Document (including any certificates delivered pursuant to Article V) is or --------- shall be incorrect when made in any material respect. SECTION 8.1.3 Non-Performance of Certain Covenants and Obligations. The ---------------------------------------------------- Borrower shall default in the due performance and observance of any of its obligations under Section 7.2.1 through 7.2.16. ------------- ------ SECTION 8.1.4 Non-Performance of Other Covenants and Obligations. The -------------------------------------------------- Borrower shall default in the due performance and observance of any other agreement contained herein or in any other Loan Document (other than the Mortgage), and such default shall continue unremedied for a period of 30 days after notice thereof shall have been given to the Borrower by the Agent or an Event of Default shall occur under (and as defined in) the Mortgage. SECTION 8.1.5 Default on Other Indebtedness. A default shall occur in the ----------------------------- payment when due (subject to any applicable grace period), whether by acceleration or otherwise, of any Indebtedness (other than the Loans) equal to or in excess of $1,000,000 of the Borrower or any of the Borrower's Significant Subsidiaries, or a default shall occur in the performance or observance of any obligation or condition with respect to such Indebtedness if the effect of such default is to accelerate the maturity of any such Indebtedness or such default shall continue unremedied for any applicable period of time sufficient to permit the holder or holders of such Indebtedness, or any trustee or agent for such holders, to cause such Indebtedness to become due and payable prior to its expressed maturity. SECTION 8.1.6 Judgments. Any judgment or order for the payment of money in --------- excess of $250,000 shall be rendered against the Borrower or any of its Significant Subsidiaries and there shall be any period of 30 consecutive days during which a stay of enforcement of such judgment or order, by reason of a pending appeal or otherwise, shall not be in effect or, during such 30 day period, enforcement proceedings shall have been commenced by any creditor and not stayed or withdrawn. SECTION 8.1.7 Pension Plans. Any of the following events shall occur with ------------- respect to any Pension Plan (a) the institution of any steps by the Borrower, any member of its Controlled Group or any other Person to terminate a Pension Plan if, as a result of such termination, the Borrower or any such member could be required to make a contribution to such Pension Plan, or could reasonably expect to incur a liability or obligation to such Pension Plan, in excess of $250,000; or 49 (b) a contribution failure occurs with respect to any Pension Plan sufficient to give rise to a Lien under section 302(f) of ERISA. SECTION 8.1.8 Control of the Borrower. Any Change in Control shall ----------------------- occur. SECTION 8.1.9 Bankruptcy, Insolvency, etc. The Borrower or any of its --------------------------- Significant Subsidiaries shall (a) become insolvent or generally fail to pay, or admit in writing its inability or unwillingness to pay, debts as they become due; (b) apply for, consent to, or acquiesce in, the appointment of a trustee, receiver, sequestrator or other custodian for the Borrower or any of its Significant Subsidiaries or any property of any thereof, or make a general assignment for the benefit of creditors; (c) in the absence of such application, consent or acquiescence, permit or suffer to exist the appointment of a trustee, receiver, sequestrator or other custodian for the Borrower or any of its Significant Subsidiaries or for a substantial part of the property of any thereof, and such trustee, receiver, sequestrator or other custodian shall not be discharged within 60 days, provided that the Borrower and each Significant Subsidiary hereby expressly authorizes the Agent and each Lender to appear in any court conducting any relevant proceeding during such 60-day period to preserve, protect and defend their rights under the Loan Documents; (d) permit or suffer to exist the commencement of any bankruptcy, reorganization, debt arrangement or other case or proceeding under any bankruptcy or insolvency law, or any dissolution, winding up or liquidation proceeding, in respect of the Borrower or any of its Significant Subsidiaries, and, if any such case or proceeding is not commenced by the Borrower or such Significant Subsidiary, such case or proceeding shall be consented to or acquiesced in by the Borrower or such Significant Subsidiary or shall result in the entry of an order for relief or shall remain for 60 days undismissed, provided that the Borrower and each Significant Subsidiary hereby expressly authorizes the Agent and each Lender to appear in any court conducting any such case or proceeding during such 60-day period to preserve, protect and defend their rights under the Loan Documents; or (e) take any action authorizing, or in furtherance of, any of the foregoing. SECTION 8.1.10 Impairment of Security, etc. Any Collateral Document or any --------------------------- other Loan Document, or any Lien granted thereunder, shall (except in accordance with its terms), in whole or in part, terminate, cease to be effective or cease to be the legally valid, binding and enforceable obligation of any Obligor party thereto; the Borrower, any other Obligor or any other party shall, directly or indirectly, contest in any manner such effectiveness, validity, 50 binding nature or enforceability; or any Lien securing any Obligation shall, in whole or in part, cease to be a perfected first priority Lien. SECTION 8.2 Action if Bankruptcy. If any Event of Default described in -------------------- clauses (a) through (d) of Section 8.1.9 shall occur, the outstanding principal - ----------- --- ------------- amount of all outstanding Loans and all other Obligations shall automatically be and become immediately due and payable, and the Commitments shall automatically be terminated, without notice or demand. SECTION 8.3 Action if Other Event of Default. If any Event of Default -------------------------------- (other than any Event of Default described in clauses (a) through (d) of Section ----------- --- ------- 8.1.9) shall occur for any reason, whether voluntary or involuntary, and be - ----- continuing, the Agent, upon the direction of the Required Lenders, shall by notice to the Borrower declare the Commitments to be terminated and all or any portion of the outstanding principal amount of the Loans and other Obligations to be due and payable, whereupon the full unpaid amount of such Loans and other Obligations which shall be so declared due and payable shall be and become immediately due and payable, without further notice, demand or presentment. SECTION 8.4 Cumulative Remedies. The remedies provided herein are ------------------- cumulative and not exclusive of any remedies provided by law. ARTICLE IX THE AGENT SECTION 9.1 Actions. Each Lender hereby appoints Bank of America as its ------- Agent under and for purposes of this Agreement, the Notes, each Collateral Document and each other Loan Document. Each Lender authorizes the Agent to act on behalf of such Lender under this Agreement, the Notes, each Collateral Document and each other Loan Document and, in the absence of other written instructions from the Required Lenders received from time to time by the Agent (with respect to which the Agent agrees that it will comply, except as otherwise provided in this Section or as otherwise advised by counsel), to exercise such powers hereunder and thereunder as are specifically delegated to or required of the Agent by the terms hereof and thereof, together with such powers as may be reasonably incidental thereto. Each Lender hereby indemnifies (which indemnity shall survive any termination of this Agreement) the Agent, pro rata according --- ---- to such Lender's Percentage, from and against any and all liabilities, obligations, losses, damages, claims, costs or expenses of any kind or nature whatsoever which may at any time be imposed on, incurred by, or asserted against, the Agent in any way relating to or arising out of this Agreement, the Notes, any Collateral Document and any other Loan Document, including reasonable attorneys' fees, and as to which the Agent is not reimbursed by the Borrower; provided, however, that no Lender shall be liable for the payment of any portion - -------- ------- of such liabilities, obligations, losses, damages, claims, costs or expenses which are determined by a court of competent jurisdiction in a final proceeding to have resulted solely from the Agent' s gross negligence or wilful misconduct. The Agent shall not be required to take any action hereunder, under the Notes, under any Collateral Document or under any other Loan Document, or to prosecute or defend any suit in respect of this Agreement, the Notes, any Collateral Document or any other Loan Document, unless it is indemnified hereunder to its satisfaction. If 51 any indemnity in favor of the Agent shall be or become, in the Agent's determination, inadequate, the Agent may call for additional indemnification from the Lenders and cease to do the acts indemnified against hereunder until such additional indemnity is given. SECTION 9.2 Funding Reliance, etc. Unless the Agent shall have been --------------------- notified by telephone, confirmed in writing, by any Lender by 4:00 p.m., Chicago time, on the day prior to the date of any proposed Borrowing that such Lender will not make available the amount which would constitute its Percentage of the Loans of such proposed Borrowing, the Agent may assume that such Lender has made such amount available to the Agent and, in reliance upon such assumption, make available to the Borrower a corresponding amount. If and to the extent that such Lender shall not have made such amount available to the Agent, such Lender and the Borrower severally agree to repay the Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date the Agent made such amount available to the Borrower to the date such amount is repaid to the Agent, at the interest rate applicable at the time to Loans. SECTION 9.3 Exculpation. Neither the Agent nor any of its directors, ----------- officers, employees or agents shall be liable to any Lender for any action taken or omitted to be taken by it under this Agreement, the Notes, any Collateral Document or any other Loan Document, or in connection herewith or therewith, except for its own wilful misconduct or gross negligence, nor responsible for any recitals or warranties herein or therein, nor for the effectiveness, enforceability, validity or due execution of this Agreement, the Notes, any Collateral Document or any other Loan Document, nor for the creation, perfection or priority of any Liens purported to be created by any of the Loan Documents, or the validity, genuineness, enforceability, existence, value or sufficiency of any collateral security, nor to make any inquiry respecting the performance by the Borrower of its obligations hereunder or under the Notes, any Collateral Document or any other Loan Document. Any such inquiry which may be made by the Agent shall not obligate it to make any further inquiry or to take any action. The Agent shall be entitled to rely upon advice of counsel concerning legal matters and upon any notice, consent, certificate, statement or writing which the Agent believes to be genuine and to have been presented by a proper Person. SECTION 9.4 Successor. The Agent may resign as such at any time upon at --------- least 30 days' prior notice to the Borrower and all Lenders. If the Agent at any time shall resign, the Required Lenders may appoint another Lender as a successor Agent which shall thereupon become the Agent hereunder. If no successor Agent shall have been so appointed by the Required Lenders, and shall have accepted such appointment, within 30 days after the retiring Agent's giving notice of resignation, then the retiring Agent may, on behalf of the Lenders, appoint a successor Agent, which shall be one of the Lenders or a commercial banking institution organized under the laws of the U.S. (or any State thereof) or a U.S. branch or agency of a commercial banking institution, and having a combined capital and surplus of at least $500,000,000. Upon the acceptance of any appointment as Agent hereunder by a successor Agent, such successor Agent shall be entitled to receive from the retiring Agent such documents of transfer and assignment as such successor Agent may reasonably request, and shall thereupon 52 succeed to and become vested with all rights, powers, privileges and duties of the retiring Agent, and the retiring Agent shall be discharged from its duties and obligations under this Agreement. After any retiring Agent's resignation hereunder as the Agent, the provisions of (a) this Article IX shall inure to its benefit as to any actions ---------- taken or omitted to be taken by it while it was the Agent under this Agreement; and (b) Section 10.3 and Section 10.4 shall continue to inure to its ------------ ------------ benefit. SECTION 9.5 Loans by Bank of America. Bank of America shall have the ------------------------ same rights and powers with respect to (x) the Loans made by it or any of its Affiliates, and (y) the Notes held by it or any of its Affiliates as any other Lender and may exercise the same as if it were not the Agent. Bank of America and its Affiliates may accept deposits from, lend money to, and generally engage in any kind of business with the Borrower or any Subsidiary or Affiliate of the Borrower as if Bank of America were not the Agent hereunder. SECTION 9.6 Credit Decisions. Each Lender acknowledges that it has, ---------------- independently of the Agent and each other Lender, and based on such Lender's review of the financial information of the Borrower, this Agreement, the other Loan Documents (the terms and provisions of which being satisfactory to such Lender) and such other documents, information and investigations as such Lender has deemed appropriate, made its own credit decision to extend its Commitment. Each Lender also acknowledges that it will, independently of the Agent and each other Lender, and based on such other documents, information and investigations as it shall deem appropriate at any time, continue to make its own credit decisions as to exercising or not exercising from time to time any rights and privileges available to it under this Agreement or any other Loan Document. SECTION 9.7 Copies, etc. The Agent shall give prompt notice to each ----------- Lender of each notice or request required to be given by the Agent to the Lenders pursuant to the terms of this Agreement (unless concurrently delivered to the Lenders by the Borrower). The Agent will distribute to each Lender each document or instrument received for the account of the Lenders and copies of all other communications received by the Agent from the Borrower for distribution to the Lenders by the Agent in accordance with the terms of this Agreement. SECTION 9.8 Action Through Agent. All actions taken with respect to any -------------------- collateral security or guaranties provided under the Loan Documents shall be taken solely by the Agent, and no Lender shall have any right to take any actions individually with respect thereto. SECTION 9.9 Documentation Agents. None of the Lenders identified on the -------------------- facing page or signature pages of this Agreement as a "documentation agent" shall have any right, power, obligation, liability, responsibility or duty under this Agreement other than those applicable to all Lenders as such. Each Lender acknowledges that it has not relied, and will not rely, on any of the Lenders so identified in deciding to enter into this Agreement or in taking or not taking action hereunder. 53 SECTION 9.10 Collateral Matters. (a) The Agent is authorized on behalf ------------------ of all the Lenders, without the necessity of any notice to or further consent from the Lenders, from time to time to take any action with respect to any Collateral or the Collateral Documents which may be necessary to perfect and maintain perfected the security interest in and Liens upon the Collateral granted pursuant to the Collateral Documents. (b) The Lenders irrevocably authorize the Agent, at its option and in its discretion, to release any Lien granted to or held by the Agent upon any Collateral (i) upon termination of the Commitments and payment in full of all Loans and all other Obligations known to the Agent and payable under this Agreement or any other Loan Document; (ii) constituting property sold or to be sold or disposed of as part of or in connection with any disposition permitted hereunder; (iii) constituting property in which the Borrower or any Subsidiary owned no interest at the time the Lien was granted or any time thereafter; (iv) constituting property leased to the Borrower or any Subsidiary under a lease which has expired or been terminated in a transaction permitted under this Agreement or is about to expire and which has not been, and is not intended by the Borrower or such Subsidiary to be, renewed or extended;(v) consisting of an instrument evidencing Indebtedness or other debt instrument, if the indebtedness evidenced thereby has been paid in full; or (vi) if approved, authorized or ratified in writing by the Required Lenders or all of the Lenders, as the case may be, as provided in subsection 10.1(d). Upon request by the Agent at any ------------------ time, the Lenders will confirm in writing the Agent's authority to release particular types or items of Collateral pursuant to this subsection 9.10(a), ------------------ provided that the absence of any such confirmation for whatever reason shall not - -------- affect the Agent's rights under this Section 9.11. ------------ (c) Each Lender agrees with and in favor of each other (which agreement shall not be for the benefit of the Borrower or any Subsidiary) that the Borrower's obligation to such Lender under this Agreement and the other Loan Documents is not and shall not be secured by any real property collateral now or hereafter acquired by such Lender other than the Mortgaged Real Property and the Modesto Property. ARTICLE X MISCELLANEOUS PROVISIONS SECTION 10.1 Waivers, Amendments, etc. The provisions of this Agreement ------------------------ and of each other Loan Document may from time to time be amended, modified or waived, if such amendment, modification or waiver is in writing and consented to by the Borrower and the Required Lenders; provided, however, that no such -------- ------- amendment, modification or waiver which would: (a) modify any requirement hereunder that any particular action be taken by all the Lenders or by the Required Lenders shall be effective unless consented to by each Lender; (b) modify this Section 10.1, change the definition of "Required ------------ -------- Lenders", increase the Commitment Amount or the Percentage of any Lender, ------- reduce any fees 54 described in Article III, release any collateral security, except as ----------- otherwise specifically provided or contemplated in this Agreement or in any Loan Document, or extend the Commitment Termination Date shall be made without the consent of each Lender and each holder of a Note; (c) extend the due date for, or reduce the amount of, any scheduled repayment or prepayment of principal of or interest on any Loan (or reduce the principal amount of or rate of interest on any Loan) shall be made without the consent of the holder of that Note evidencing such Loan; or (d) affect adversely the interests, rights or obligations of the Agent in its capacity as the Agent shall be made without consent of the Agent. No failure or delay on the part of the Agent, any Lender or the holder of any Note in exercising any power or right under this Agreement or any other Loan Document shall operate as a waiver thereof, nor shall any single or partial exercise of any such power or right preclude any other or further exercise thereof or the exercise of any other power or right. No notice to or demand on the Borrower in any case shall entitle it to any notice or demand in similar or other circumstances. No waiver or approval by the Agent, any Lender or the holder of any Note under this Agreement or any other Loan Document shall, except as may be otherwise stated in such waiver or approval, be applicable to subsequent transactions. No waiver or approval hereunder shall require any similar or dissimilar waiver or approval thereafter to be granted hereunder. SECTION 10.2 Notices. All notices and other communications provided to ------- any party hereto under this Agreement or any other Loan Document shall be in writing or by facsimile and addressed, delivered or transmitted to such party at its address or facsimile number set forth below its signature hereto or set forth in the Lender Assignment Agreement or at such other address or facsimile number as may be designated by such party in a notice to the other parties. Any notice, if mailed and properly addressed with postage prepaid or if properly addressed and sent by pre-paid courier service, shall be deemed given when received; any notice, if transmitted by facsimile, shall be deemed given when transmitted (upon receipt of electronic confirmation of transmission). SECTION 10.3 Payment of Costs and Expenses. The Borrower agrees to pay ----------------------------- on demand all expenses of the Agent and the Lead Arranger (including the fees and out-of-pocket expenses of counsel to the Agent and the Lead Arranger (including the reasonable allocated cost of internal legal services and all disbursements of internal counsel) and of local counsel, if any, who may be retained by counsel to the Agent and the Lead Arranger) in connection with (a) the negotiation, preparation, execution and delivery of this Agreement, the Notes, each Collateral Document and of each other Loan Document, including schedules and exhibits, and any amendments, waivers, consents, supplements or other modifications to this Agreement, the Notes, any Collateral Document or any other Loan Document as may from time to time hereafter be required or requested, whether or not the transactions contemplated hereby or thereby are consummated; 55 (b) the filing, recording, refiling or rerecording of the Fourth Amendment to Mortgage, the Second Amendment to Modesto Mortgage, the Pledge Agreement and the Security Agreement and/or any Uniform Commercial Code financing statements relating thereto and all amendments, supplements and modifications to any thereof and any and all other documents or instruments of further assurance required to be filed or recorded or refiled or rerecorded by the terms hereof or of the Mortgage, the Pledge Agreement or the Security Agreement; (c) the preparation and review of the form of any document or instrument relevant to this Agreement, the Notes, any Collateral Document or any other Loan Document; and (d) the administration of this Agreement, the Notes, the Collateral Documents and the other Loan Documents and the consideration of legal questions relevant hereto and thereto. The Borrower further agrees to pay, and to hold the Agent and the Lenders harmless from all liability for, any stamp or other taxes which may be payable in connection with the execution or delivery of this Agreement, the borrowings hereunder, or the issuance of the Notes or any other Loan Documents. The Borrower also agrees to reimburse the Agent, the Lead Arranger and each Lender upon demand for all reasonable out-of-pocket expenses (including reasonable attorneys' fees and legal expenses) incurred by the Agent or the Lead Arranger or such Lender in connection with (x) the negotiation of any restructuring or "work-out", whether or not consummated, of any Obligations, and (y) the enforcement of any Obligations. SECTION 10.4 Indemnification. In consideration of the execution and --------------- delivery of this Agreement by each Lender and the extension of the Commitments, the Borrower hereby indemnifies, exonerates and holds the Agent and each Lender and each of their respective officers, directors, employees and agents (collectively, the "Indemnified Parties") free and harmless from and against any ------------------- and all actions, causes of action, suits, losses, costs, liabilities and damages, and expenses incurred in connection therewith (irrespective of whether any such Indemnified Party is a party to the action for which indemnification hereunder is sought), including reasonable attorneys' fees and disbursements (collectively, the "Indemnified Liabilities"), incurred by the Indemnified ----------------------- Parties or any of them as a result of, or arising out of, or relating to (a) any transaction financed or to be financed in whole or in part, directly or indirectly, with the proceeds of any Loan; (b) the entering into and performance of this Agreement and any other Loan Document by any of the Indemnified Parties (including any action brought by or on behalf of the Borrower as the result of any determination by the Required Lenders pursuant to Article V not to fund any Loans); --------- 56 (c) any investigation, litigation or proceeding related to any acquisition or proposed acquisition by the Borrower or any of its Subsidiaries of all or any portion of the stock or assets of any Person, whether or not the Agent or such Lender is party thereto; (d) any investigation, litigation or proceeding related to any Aenvironmental cleanup, audit, compliance or other matter relating to the protection of the environment or the Release by the Borrower or any of its Subsidiaries of any Hazardous Material; and (e) the presence on or under, or the escape, seepage, leakage, spillage, discharge, emission, discharging or releases from, any real property owned or operated by the Borrower or any Subsidiary thereof of any Hazardous Material (including any losses, liabilities, damages, injuries, costs, expenses or claims asserted or arising under any Environmental Law), regardless of whether caused by, or within the control of, the Borrower or such Subsidiary, except for any such Indemnified Liabilities arising for the account of a particular Indemnified Party by reason of the relevant Indemnified Party's gross negligence or wilful misconduct. If and to the extent that the foregoing undertaking may be unenforceable for any reason, the Borrower hereby agrees to make the maximum contribution to the payment and satisfaction of each of the Indemnified Liabilities which is permissible under applicable law. SECTION 10.5 Survival. The obligations of the Borrower under Sections -------- -------- 4.3, 4.4, 4.5, 4.6, 10.3 and 10.4, and the obligations of the Lenders under - --- --- --- --- ---- ---- Section 9.1, shall in each case survive any termination of this Agreement, the - ----------- payment in full of all Obligations and the termination of all Commitments. The representations and warranties made by the Borrower in this Agreement and in each other Loan Document shall survive the execution and delivery of this Agreement and each such other Loan Document. SECTION 10.6 Severability. Any provision of this Agreement, the Notes, ------------ any Collateral Document or any other Loan Document which is prohibited or unenforceable in any jurisdiction shall, as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Agreement, the Notes, any Collateral Document or such Loan Document or affecting the validity or enforceability of such provision in any other jurisdiction. SECTION 10.7 Headings. The various headings of this Agreement and of each -------- other Loan Document are inserted for convenience only and shall not affect the meaning or interpretation of this Agreement or such other Loan Document or any provisions hereof or thereof. SECTION 10.8 Execution in Counterparts. This Agreement may be executed by ------------------------- the parties hereto in several counterparts, each of which shall be executed by the Borrower and the Agent and be deemed to be an original and all of which shall constitute together but one and the same agreement. 57 SECTION 10.9 Governing Law; Entire Agreement. THIS AGREEMENT, THE NOTES, ------------------------------- EACH COLLATERAL DOCUMENT AND EACH OTHER LOAN DOCUMENT SHALL EACH BE DEEMED TO BE A CONTRACT MADE UNDER AND GOVERNED BY THE INTERNAL LAWS OF THE STATE OF ILLINOIS, EXCEPT AS TO ANY COLLATERAL DOCUMENT WHICH EXPRESSLY SPECIFIES THAT THE LAWS OF ANOTHER STATE SHALL GOVERN SUCH DOCUMENT. This Agreement, the Notes, the Collateral Documents and the other Loan Documents constitute the entire understanding among the parties hereto with respect to the subject matter hereof and supersede any prior agreements, written or oral, with respect thereto. SECTION 10.10 Successors and Assigns. This Agreement shall be binding upon ---------------------- and shall inure to the benefit of the parties hereto and their respective successors and assigns; provided, however, that: -------- ------- (a) the Borrower may not assign or transfer its rights or obligations hereunder without the prior written consent of the Agent and all Lenders; and (b) the rights of sale, assignment and transfer of the Lenders are subject to Section 10.11. ------------- SECTION 10.11 Sale and Transfer of Loans and Notes; Participations in ------------------------------------------------------- Loans and Notes. Each Lender may assign, or sell participations in, its Loans - --------------- and Commitment to one or more other Persons in accordance with this Section ------- 10.11. - ----- SECTION 10.11.1 Assignments. Any Lender, with notice to the Borrower and ----------- the Agent, but without the consent of the Borrower or the Agent, may assign and delegate to any of its Affiliates or any other Lender, or with the consent of the Borrower and the Agent one or more commercial banks or other financial institutions or funds (each such Affiliate, Lender, commercial bank, financial institution or fund described as being the Person to whom such assignment and delegation is to be made, being hereinafter referred to as an "Assignee -------- Lender"), all or any fraction of such Lender's total Loans (which assignment and - ------ delegation shall be of a constant, and not a varying, percentage of all the assigning Lender's Loans) in a minimum aggregate amount of $2,500,000; provided, -------- however, that any such Assignee Lender will comply, if applicable, with the - ------- provisions contained in the last sentence of Section 4.6 and further, provided, ----------- ------- -------- however, that the Borrower and the Agent shall be entitled to continue to deal - ------- solely and directly with such Lender in connection with the interests so assigned and delegated to an Assignee Lender until (a) written notice of such assignment and delegation, together with payment instructions, addresses and related information with respect to such Assignee Lender, shall have been given to the Borrower and the Agent by such Lender and such Assignee Lender; (b) such Assignee Lender shall have executed and delivered to the Borrower and the Agent a Lender Assignment Agreement, accepted by the Agent; and 58 (c) the processing fees described below shall have been paid. From and after the date that the Agent accepts such Lender Assignment Agreement, (x) the Assignee Lender thereunder shall be deemed automatically to have become a party hereto and to the extent that rights and obligations hereunder have been assigned and delegated to such Assignee Lender in connection with such Lender Assignment Agreement, shall have the rights and obligations of a Lender hereunder and under the other Loan Documents, (y) the assignor Lender, to the extent that rights and obligations hereunder have been assigned and delegated by it in connection with such Lender Assignment Agreement, shall be released from its obligations hereunder and under the other Loan Documents and (z) the assignor Lender and the Assignee Lender shall have the respective Percentages set forth in the Lender Assignment Agreement. Within five Business Days after its receipt of notice that the Agent has received an executed Lender Assignment Agreement, the Borrower shall execute and deliver to the Agent (for delivery to the relevant Assignee Lender) a new Note evidencing such Assignee Lender's assigned Loans and, if the assignor Lender has retained Loans hereunder, a replacement Note in the principal amount of the Loans retained by the assignor Lender hereunder (such Note to be in exchange for, but not in payment of, that Note then held by such assignor Lender). Each such Note shall be dated the date of the predecessor Note. The assignor Lender shall mark the predecessor Note "exchanged" and deliver it to the Borrower. Accrued interest on that part of the predecessor Note evidenced by the new Note, and accrued fees, shall be paid as provided in the Lender Assignment Agreement. Accrued interest on that part of the predecessor Note evidenced by the replacement Note shall be paid to the assignor Lender. Accrued interest and accrued fees shall be paid at the same time or times provided in the predecessor Note and in this Agreement. Unless otherwise agreed to by the Agent, such assignor Lender or such Assignee Lender must also pay a processing fee to the Agent upon delivery of any Lender Assignment Agreement in the amount of $5,000. Any attempted assignment and delegation not made in accordance with this Section 10.11.1 shall be null and --------------- void. SECTION 10.11.2 Participations. Any Lender may at any time sell to one or -------------- more commercial banks or other Persons (each of such commercial banks and other Persons being herein called a "Participant") participating interests in any of ----------- the Loans or other interests of such Lender hereunder; provided, however, that -------- ------ (a) no participation contemplated in this Section 10.11 shall relieve ------------- such Lender from its other obligations hereunder or under any other Loan Document; (b) such Lender shall remain solely responsible for the performance of such other obligations; (c) the Borrower and the Agent shall continue to deal solely and directly with such Lender in connection with such Lender's rights and obligations under this Agreement and each of the other Loan Documents; (d) no Participant, unless such Participant is an Affiliate of such Lender, or is itself a Lender, shall be entitled to require such Lender to take or refrain from taking any 59 action hereunder or under any other Loan Document, except that such Lender may agree with any Participant that such Lender will not, without such Participant's consent, take any actions of the type described in clause (b) ---------- or (c) of Section 10.1; and --- ------------ (e) the Borrower shall not be required to pay any amount under Section 4.6 that is greater than the amount which it would have been ----------- required to pay had no participating interest been sold. The Borrower acknowledges and agrees that each Participant, for purposes of Sections 4.3, 4.4, 4.5, 4.6, 4.8, 4.9, 10.3 and 10.4, shall be considered a - ------------ --- --- --- --- --- ---- ---- Lender. SECTION 10.11.3 Information and Assistance. The Borrower hereby agrees to -------------------------- provide prompt and reasonable assistance with respect to any contemplated or proposed assignments or participations, and hereby further agrees that any information supplied to a Lender pursuant hereto may be supplied by such Lender to any bona fide potential assignee or participant. SECTION 10.12 Other Transactions. Nothing contained herein shall preclude ------------------ the Agent or any other Lender from engaging in any transaction, in addition to those contemplated by this Agreement or any other Loan Document, with the Borrower or any of its Affiliates in which the Borrower or such Affiliate is not restricted hereby from engaging with any other Person. SECTION 10.13 Maximum Interest. (a) It is the intention of the parties ---------------- hereto that each Lender shall conform strictly to usury laws applicable to it. Accordingly, the parties hereto stipulate and agree that none of the terms and provisions contained in the Notes, this Agreement, any Collateral Document or any other Loan Document shall ever be construed to create a contract to pay to any Lender for the use, forbearance, or retention of money at a rate in excess of the Highest Lawful Rate applicable to such Lender, and that for purposes hereof, "interest" shall include the aggregate of all charges or other consideration which constitute interest under applicable law and are contracted for, taken, reserved, charged, or received under any of this Agreement, the Notes, the Collateral Documents or the other Loan Documents or otherwise in connection with the transactions contemplated by this Agreement. Further, if the transactions contemplated hereby would be usurious as to any Lender under laws applicable to it, then, in that event, notwithstanding anything to the contrary in the Notes, this Agreement, any Collateral Document or in any other Loan Document or agreement entered into in connection with or as security for the Notes, it is agreed as follows: the aggregate of all consideration which constitutes interest under law applicable to each such Lender that is contracted for, taken, reserved, charged, or received by such Lender under the Notes, this Agreement, or under any of the other aforesaid Loan Documents or agreements or otherwise in connection with the Notes shall under no circumstances exceed the maximum amount allowed by the law applicable to such Lender, and any excess shall be credited by such Lender on the principal amount of the Indebtedness of the Borrower owed to such Lender (or, if the principal amount of such Indebtedness shall have been paid in full, to the extent such interest has been received by a Lender it shall be refunded by such Lender to the Borrower). The provisions of this Section 10.13(a) shall control over all other provisions of ---------------- this Agreement, the Notes, the Collateral 60 Documents and the other Loan Documents which may be in apparent conflict herewith. The parties further stipulate and agree that, without limitation on the foregoing, all calculations of the rate or amount of interest contracted for, taken, reserved, charged or received under any of this Agreement, the Notes, the Collateral Documents and the other Loan Documents which are made for the purpose of determining whether such rate or amount exceed the Highest Lawful Rate shall be made, to the extent permitted by applicable law, by amortizing, prorating, allocating, and spreading during the period of the full stated term of the Indebtedness, and if longer and if permitted by applicable law, until payment in full, all interest at any time so contracted for, taken, reserved, charged, or received. (b) If at any time the effective rate of interest which would otherwise apply to any Indebtedness hereunder or evidenced by any Lender's Notes would exceed the Highest Lawful Rate applicable to such Lender (taking into account the interest rate applicable to such Indebtedness pursuant to the other provisions of this Agreement, plus all additional charges and consideration which have been contracted for, taken, reserved, charged, or received under this Agreement, such Lender's Notes, the Collateral Documents, and the other Loan Documents, or any of them, and which additional charges or consideration (the "Additional Charges") constitute interest with respect to such Indebtedness), ------------------ the effective interest rate to apply to such Indebtedness made by such Lender shall be limited to the Highest Lawful Rate, but any subsequent reductions in the interest rate applicable to such Indebtedness owed to such Lender shall not reduce the effective interest rate to apply to such Indebtedness owed to such Lender below the Highest Lawful Rate applicable to such Lender until the total amount of interest accrued on such Indebtedness equals the amount of interest which would have accrued if the interest rate from time to time applicable to such Indebtedness owed to such Lender had at all times been in effect with respect to such Indebtedness pursuant to the other provisions of this Agreement and the other Loan Documents and if the Lenders had collected all Additional Charges called for under this Agreement, the Notes, the Collateral Documents and the other Loan Documents. If at maturity or final payment of such Lender's Obligations the total amount of interest paid to any Lender hereunder and under the other Loan Documents (including amounts designated as "interest" plus any Additional Charges which constitute interest with respect to such Lenders, and taking into account the limitations of the first sentence of this Section ------- 10.13(b)) is less than the total amount of such "interest" which would have been - -------- paid if all amounts were paid as required by this Agreement (without giving effect to this Section 10.13) and the other Loan Documents (the amount of the ------------- difference described above, the "Deficiency"), then the Borrower agrees, to the ---------- fullest extent permitted by the laws applicable to such Lender, to pay to such Lender an amount equal to the lesser of (i) the difference between (1) the amount of such "interest" which would have accrued on such Lender's Notes if the Highest Lawful Rate had at all times been in effect, and (2) the amount of interest actually paid on such Lender's Notes (including amounts designated as "interest" plus any Additional Charges which constitute interest with respect to such Lender's Notes) and (ii) the amount of the Deficiency. (c) Notwithstanding anything to the contrary contained above in this Section 10.13, it is understood and agreed that (i) all representations and - ------------- warranties contained in this Agreement, in the Collateral Documents and in the other Loan Documents have been made without reliance 61 upon, or giving effect to, the provisions of Section 10.13(a) and (ii) that the ---------------- Lenders have relied upon the accuracy of such representations and warranties. Furthermore, the Borrower acknowledges and agrees that each Lender shall, to the fullest extent permitted by law, be entitled to recover damages from the Borrower in the event of a material misrepresentation by the Borrower. SECTION 10.14 Forum Selection and Consent to Jurisdiction. ANY LITIGATION ------------------------------------------- BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT, THE NOTES, ANY COLLATERAL DOCUMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE LENDERS OR THE BORROWER SHALL BE BROUGHT AND MAINTAINED EXCLUSIVELY IN THE COURTS OF THE STATE OF ILLINOIS OR IN THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS; PROVIDED, HOWEVER, THAT -------- ------- ANY SUIT SEEKING ENFORCEMENT AGAINST ANY COLLATERAL OR OTHER PROPERTY MAY BE BROUGHT, AT THE AGENT'S OPTION, IN THE COURTS OF ANY JURISDICTION WHERE SUCH COLLATERAL OR OTHER PROPERTY MAY BE FOUND. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY SUBMITS TO THE JURISDICTION OF THE COURTS OF THE STATE OF ILLINOIS AND OF THE UNITED STATES DISTRICT COURT FOR THE NORTHERN DISTRICT OF ILLINOIS FOR THE PURPOSE OF ANY SUCH LITIGATION AS SET FORTH ABOVE AND IRREVOCABLY AGREES TO BE BOUND BY ANY JUDGMENT RENDERED THEREBY IN CONNECTION WITH SUCH LITIGATION. THE BORROWER FURTHER IRREVOCABLY CONSENTS TO THE SERVICE OF PROCESS BY REGISTERED MAIL, POSTAGE PREPAID, OR BY PERSONAL SERVICE WITHIN OR WITHOUT THE STATE OF ILLINOIS. THE BORROWER HEREBY EXPRESSLY AND IRREVOCABLY WAIVES, TO THE FULLEST EXTENT PERMITTED BY LAW, ANY OBJECTION WHICH IT MAY HAVE OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH LITIGATION BROUGHT IN ANY SUCH COURT REFERRED TO ABOVE AND ANY CLAIM THAT ANY SUCH LITIGATION HAS BEEN BROUGHT IN AN INCONVENIENT FORUM. TO THE EXTENT THAT THE BORROWER HAS OR HEREAFTER MAY ACQUIRE ANY IMMUNITY FROM JURISDICTION OF ANY COURT OR FROM ANY LEGAL PROCESS (WHETHER THROUGH SERVICE OR NOTICE, ATTACHMENT PRIOR TO JUDGMENT, ATTACHMENT IN AID OF EXECUTION OR OTHERWISE) WITH RESPECT TO ITSELF OR ITS PROPERTY, THE BORROWER HEREBY IRREVOCABLY WAIVES SUCH IMMUNITY IN RESPECT OF ITS OBLIGATIONS UNDER THIS AGREEMENT, THE NOTES, THE COLLATERAL DOCUMENTS AND THE OTHER LOAN DOCUMENTS. SECTION 10.15 Waiver of Jury Trial. THE AGENT, THE LENDERS AND THE -------------------- BORROWER HEREBY KNOWINGLY, VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHTS THEY MAY HAVE TO A TRIAL BY JURY IN RESPECT OF 62 ANY LITIGATION BASED HEREON, OR ARISING OUT OF, UNDER, OR IN CONNECTION WITH, THIS AGREEMENT, THE NOTES, ANY COLLATERAL DOCUMENT OR ANY OTHER LOAN DOCUMENT, OR ANY COURSE OF CONDUCT, COURSE OF DEALING, STATEMENTS (WHETHER ORAL OR WRITTEN) OR ACTIONS OF THE AGENT, THE LENDERS OR THE BORROWER. THE BORROWER ACKNOWLEDGES AND AGREES THAT IT HAS RECEIVED FULL AND SUFFICIENT CONSIDERATION FOR THIS PROVISION (AND EACH OTHER PROVISION OF EACH OTHER LOAN DOCUMENT TO WHICH IT IS A PARTY) AND THAT THIS PROVISION IS A MATERIAL INDUCEMENT FOR THE AGENT AND THE LENDERS ENTERING INTO THIS AGREEMENT AND EACH SUCH COLLATERAL DOCUMENT AND EACH SUCH OTHER LOAN DOCUMENT. 63 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by their respective officers thereunto duly authorized as of the day and year first above written. NASCO INTERNATIONAL, INC. By: /s/ Dean T. Johnson ------------------------------ Title: Chief Financial Officer Address: 901 Janesville Avenue Fort Atkinson, WI 53538-0901 Telecopier No.: 920-563-0234 Attention: Dean T. Johnson Chief Financial Officer Copy to: Geneve Corporation 96 Cummings Point Road Stamford, Connecticut 06902 Telecopier No.: 203-348-3103 Attention: Theresa Herbert Vice President BANK OF AMERICA, N.A. as Agent By: /s/ Gary R. Peet ----------------------- Title: Managing Director Address: 231 South LaSalle Street Chicago, Illinois 60697 Telecopier No.: 312-987-0889 Attention: Debra Basler Vice President S-1 PERCENTAGE LENDERS ---------- ------- 53.2710% BANK OF AMERICA, N.A. By: /s/ Gary R. Peet ------------------------ Title: Managing Director Domestic Office: 231 South LaSalle Street Chicago, Illinois 60697 Telecopy No.: 312-987-0889 Attention: Debra Basler Vice President Eurodollar Office: 231 South LaSalle Street Chicago, Illinois 60697 S-2 46.7290% BANK ONE, WISCONSIN By: /s/ Paul C. Fuerst -------------------------------- Title: Senior Vice President Domestic Office: 111 East Wisconsin Avenue Mail Code WI1-2032 Milwaukee, Wisconsin 53202 Telecopy No.: (414) 765-2176 Attention: Mark Bruss S-3 EXHIBIT A NOTE $1,331,775.00 Date: May 29, 2001 FOR VALUE RECEIVED, Nasco International, Inc., a Wisconsin corporation (the "Borrower") hereby unconditionally promises to pay to the order of Bank of America, N.A. (the "Lender"): (1) prior to or on the Stated Maturity Date the principal amount of One million three hundred thirty-one thousand seven hundred seventy-five Dollars ($1,331,775.00), or, if less, the aggregate unpaid principal amount of Loans advanced by the Lender to such Borrower pursuant to the Amended and Restated Credit Agreement (364 Day) dated as of May 29, 2001 (as amended and in effect from time to time, the "Credit Agreement"), among the Borrower, BankOne, Wisconsin, as Documentation Agent, Bank of America, N.A. as Administrative Agent, and the various financial institutions (including the Lender) which are, or may from time to time become parties thereto; and (2) interest on the principal balance hereof from time to time outstanding from the Effective Date (as defined in the Credit Agreement) through and including the maturity date hereof at the times and at the rates provided in the Credit Agreement. This Note evidences borrowings under and has been issued by the Borrower in accordance with the terms of the Credit Agreement. The Lender and any holder hereof is entitled to the benefits of the Credit Agreement and the other Loan Documents, and may enforce the agreements of the Borrower contained therein, and any holder hereof may exercise the respective remedies provide for thereby or otherwise available in respect thereof, all in accordance with the respective terms thereof. All capitalized terms used in this Note and not otherwise defined herein shall have the same meanings herein as in the Credit Agreement. The Borrower irrevocably authorizes the Lender to make or cause to be made, at or about the date of any Loan made to such Borrower or at the time of receipt of any payment of principal of this Note, an appropriate notation on the grid attached to this Note, or the continuation of such grid, or any other similar record, including computer records, reflecting the making of such Loan or (as the case may be) the receipt of such payment. The outstanding amount of the Loans set forth on the grid attached to this Note, or the continuation of such grid, or any other similar record including computer records, maintained by the Lender with respect Exhibit A-1 to any Loans made to the Borrower shall be prima facie evidence of the principal ----------- amount thereof owing and unpaid by the Borrower to the Lender, but the failure to record, or any error in so recording, any such amount on any such grid, continuation or other record shall not limit or otherwise affect the obligation of the Borrower hereunder or under the Credit Agreement to make payments of principal and of interest on this Note when due. The Borrower has the right in certain circumstances and the obligation under certain other circumstances to prepay the whole or part of the principal of this Note severally owing by the Borrower on the terms and conditions specified in the Credit Agreement. If any one or more of the Events of Default shall occur and be continuing with respect to the Borrower, the entire unpaid principal amount of this Note owing by such Borrower and all of the unpaid interest accrued thereon may become or be declared due and payable in the manner and with the effect provided in the Credit Agreement. No delay or omission on the part of the Lender or any holder hereof in exercising any right hereunder shall operate as a waiver of such right or of any other rights of the Lender or such holder, nor shall any delay, omission or waiver on any one occasion be deemed a bar or waiver of the same or any other right on any further occasion. Except to the extent otherwise provided in the Credit Agreement, the Borrower hereby waives presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note, and assents to any extension or postponement of time of payment or any other indulgence, to any substitution, exchange or release of collateral and to the addition or release of any other party or person primarily or secondarily liable. THIS NOTE AND THE OBLIGATIONS OF THE BORROWER HEREUNDER SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF ILLINOIS. IN WITNESS WHEREOF, the undersigned has caused this Note to be executed as of the day and year first above written. NASCO INTERNATIONAL, INC. By: /s/ Dean T. Johnson -------------------------- Title: Chief Financial Officer Exhibit A-2 EXHIBIT A NOTE $1,168,225.00 Date: May 29, 2001 FOR VALUE RECEIVED, Nasco International, Inc., a Wisconsin corporation (the "Borrower") hereby unconditionally promises to pay to the order of Bank One, Wisconsin (the "Lender"): (a) prior to or on the Stated Maturity Date the principal amount of One million one hundred sixty-eight thousand two hundred twenty-five Dollars ($1,168,225.00), or, if less, the aggregate unpaid principal amount of Loans advanced by the Lender to such Borrower pursuant to the Amended and Restated Credit Agreement (364 Days) dated as of May 29, 2001 (as amended and in effect from time to time, the "Credit Agreement"), among the Borrower, Bank One, Wisconsin, as Documentation Agent, Bank of America, N.A. as Administrative Agent, and the various financial institutions (including the Lender) which are, or may from time to time become parties thereto; and (b) interest on the principal balance hereof from time to time outstanding from the date of this Loan through and including the maturity date hereof at the times and at the rates provided in the Credit Agreement. This Note evidences borrowings under and has been issued by the Borrower in accordance with the terms of the Credit Agreement. The Lender and any holder hereof is entitled to the benefits of the Credit Agreement and the other Loan Documents, and may enforce the agreements of the Borrower contained therein, and any holder hereof may exercise the respective remedies provide for thereby or otherwise available in respect thereof, all in accordance with the respective terms thereof. All capitalized terms used in this Note and not otherwise defined herein shall have the same meanings herein as in the Credit Agreement. The Borrower irrevocably authorizes the Lender to make or cause to be made, at or about the date of any Loan made to such Borrower or at the time of receipt of any payment of principal of this Note, an appropriate notation on the grid attached to this Note, or the continuation of such grid, or any other similar record, including computer records, reflecting the making of such Loan or (as the case may be) the receipt of such payment. The outstanding amount of the Loans set forth on the grid attached to this Note, or the continuation of such grid, or any other similar record including computer records, maintained by the Lender with respect to any Loans made to the Borrower shall be prima facie ----- ----- evidence of the principal amount thereof owing and unpaid by the Borrower to the Lender, but the failure to record, or any error is so recording, any such amount on any such grid, continuation or other record shall not limit or Exhibit A-3 otherwise affect the obligation of the Borrower hereunder of under the Credit Agreement to make payments of principal and of interest on this Note when due. The Borrower has the right in certain circumstances and the obligation under certain other circumstances to prepay the whole or part of the principal of this Note severally owing by the Borrower on the terms and conditions specified in the Credit Agreement. If any one or more of the Events of Default shall occur and be continuing with respect to the Borrower, the entire unpaid principal amount of this Note owing by such Borrower and all of the unpaid interest accrued thereon may become or be declared due and payable in the manner and with the effect provided in the Credit Agreement. No delay or omission on the part of the Lender or any holder hereof in exercising any right hereunder shall operate as a waiver of such right or of any other rights of the Lender or such holder, nor shall any delay, omission or waiver on any one occasion be deemed a bar or waiver of the same or any other right on any further occasion. Except to the extent otherwise provided in the Credit Agreement, the Borrower hereby waives presentment, demand, notice, protest and all other demands and notices in connection with the delivery, acceptance, performance, default or enforcement of this Note, and assents to any extension or postponement of time of payment or any other indulgence, to any substitution, exchange or release of collateral and to the addition or release of any other party or person primarily or secondarily liable. THIS NOTE AND THE OBLIGATIONS OF THE BORROWER HEREUNDER SHALL FOR ALL PURPOSES BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF ILLINOIS. IN WITNESS WHEREOF, the undersigned has caused this Note to be executed as of the day and year first above written. NASCO INTERNATIONAL, INC. By: /s/ Dean T. Johnson -------------------------- Title: Chief Financial Officer Exhibit A-4 EXHIBIT B FORM OF BORROWING REQUEST Bank of America, N.A., as Administrative Agent 231 S. LaSalle Street Chicago, IL 60697 Attention: [Name] [Title] Ladies and Gentlemen: This Borrowing Request is delivered to you pursuant to Section 2.3 of the ----------- Amended and Restated Credit Agreement (364 Days), dated as of May 29, 2001 (together with all amendments, if any, from time to time made thereto, the "Credit Agreement"), among Nasco International, Inc., a Wisconsin corporation ---------------- (the "Borrower"), certain financial institutions which are, or may from time to -------- time become parties thereto, Bank One, Wisconsin, as documentation agent and Bank of America, N.A., as administrative agent (the "Agent"). Unless otherwise ----- defined herein or the context otherwise requires, terms used herein have the meanings provided in the Credit Agreement. The Borrower hereby requests that a Loan be made in the aggregate principal amount of $ __________ on ___________, 200_ as a [Eurodollar Rate Loan having an Interest Period of ________] [Base Rate Loan]. The Borrower hereby acknowledges that, pursuant to Section 5.2.2 of the ------------- Credit Agreement, each of the delivery of this Borrowing Request and the acceptance by the Borrower of the proceeds of the Loans requested hereby constitute a representation and warranty by the Borrower that, on the date of such Loans, and before and after giving effect thereto and to the application of the proceeds therefrom, all statements set forth in Section 5.2.1 are true and ------------- correct in all material respects. The Borrower agrees that if prior to the time of the Borrowing requested hereby any matter certified to herein by it will not be true and correct at such time as if then made, it will immediately so notify the Agent. Except to the extent, if any, that prior to the time of the Borrowing requested hereby the Agent shall receive written notice to the contrary from the Borrower, each matter certified to herein shall be deemed once again to be certified as true and correct at the date of such Borrowing as if then made. Please transfer the proceeds of the Borrowing to the accounts of the following persons at the financial institutions indicated: Exhibit B-1 Amount to Person to be Paid Name, Address, etc. be Transferred ----------------- of Transferee Lender -------------- -------------------- Name Account No. ---- ---------- $____________ ____________ ______________ ____________________ ____________________ Attention: _________ $____________ ____________ ______________ ____________________ ____________________ Attention: _________ Balance of such The Borrower ______________ ____________________ proceeds ____________________ Attention: _________ The Borrower has caused this Borrowing Request to be executed and delivered, and the certification and warranties contained herein to be made, by its duly Authorized Officer this day of ____________, 200_. NASCO INTERNATIONAL, INC. By:_________________________________ Title: Exhibit B-2 EXHIBIT C FORM OF CONTINUATION/CONVERSION NOTICE Bank of America, N.A., as Administrative Agent 231 S. LaSalle Street Chicago, IL 60697 Attention: [Name] [Title] Ladies and Gentlemen: This Continuation/Conversion Notice is delivered to you pursuant to Section ------- 2.4 of the Amended and Restated Credit Agreement (364 Days), dated as of May 29, - --- 2001 (together with all amendments, if any, from time to time made thereto, the "Credit Agreement"), among Nasco International, Inc., a Wisconsin corporation ---------------- (the "Borrower"), certain financial institutions which are, or may from time to -------- time become parties thereto, Bank One, Wisconsin, as documentation agent and Bank of America, N.A., as administrative agent, (the "Agent"). Unless otherwise ----- defined herein or the context otherwise requires, terms used herein have the meanings provided in the Credit Agreement. The Borrower hereby requests that on ________ , 200_, (1) $______ of the presently outstanding principal amount of the Loans originally made on ________, 200_ [and $____________ of the presently outstanding principal amount of the originally made on ___________, 200_], (2) and all presently being maintained as * [Base Rate Loans] [Eurodollar Rate Loans], (3) be [converted into] [continued as], (4) [Eurodollar Rate Loans having an Interest Period of __ months] [Base Rate Loans]. The Borrower hereby: (a) certifies and warrants that no Default has occurred and is continuing; and ___________________ * Select appropriate interest rate option. Exhibit C-1 (b) agrees that if prior to the time of such continuation or conversion any matter certified to herein by it will not be true and correct at such time as if then made, it will immediately so notify the Agent. Except to the extent, if any, that prior to the time of the continuation or conversion requested hereby the Agent shall receive written notice to the contrary from the Borrower, each matter certified to herein shall be deemed to be certified at the date of such continuation or conversion as if then made. The Borrower has caused this Continuation/Conversion Notice to be executed and delivered, and the certification and warranties contained herein to be made, by its Authorized Officer this __day of __________, 200_. NASCO INTERNATIONAL, INC. By:_____________________________________ Title: Exhibit C-2 EXHIBIT D [COPY OF EXECUTED PLEDGE AGREEMENT TO BE ATTACHED] Exhibit D-1 EXHIBIT E [COPY OF EXECUTED SECURITY AGREEMENT TO BE ATTACHED] Exhibit E-1 EXHIBIT F FORM OF OPINION OF COUNSEL __________, 2001 Bank of America, N.A. as Administrative Agent 231 South LaSalle Street Chicago, Illinois 60697 -and- The Lenders from time to time parties to the Credit Agreement referred to below. Re: Amended and Restated Credit Agreement (Five Year) (herein referred to as the "Credit Agreement (Five Year)") among Nasco International, Inc., a --------------------------- Wisconsin corporation (the "Borrower"), the financial institutions from -------- time to time parties thereto (the "Lenders"), Bank One, Wisconsin, as ------- documentation agent and Bank of America, N.A., as administrative agent for the Lenders (in such capacity, the "Five Year Agreement Agent") and the ------------------------- Amended and Restated Credit Agreement (364 Days) (herein referred to as the ---------------- "Credit Agreement (364 Days) and together with the Credit Agreement (Five Years) as the "Credit Agreements") among the Borrower, the financial ----------------- institutions from time to time parties thereto, Bank One, Wisconsin, as documentation agent and Bank of America, N.A. as administrative agent (in such capacity, the "364 Day Agent" and in both its capacities as the Five Year Agent and the 364 Day Agent, the "Agent"). ----- Ladies and Gentlemen: I am the General Counsel of the Borrower and this letter is being furnished to you as a condition to the occurrence on the date hereof of the Effective Dates (as defined in the Credit Agreements). I have examined executed counterparts of (a) the Credit Agreements, (b) the Notes delivered on the Effective Date to the Agent for the account of Bank One, Wisconsin and Bank of America, N.A. under the Credit Agreements and (c) originals or copies certified to my satisfaction of all such corporate records of the Borrower and agreements and other instruments and certificates of public officials and officers and representatives of the Borrower, and I have made such other investigations, reviewed such other documents and considered such questions of Exhibit F-1 law, as in each case I have deemed necessary or appropriate in connection with the opinions hereinafter expressed. Based on the foregoing, I am of the opinion that: 1. The Borrower is a corporation duly organized, validly existing and in good standing under the laws of the State of Wisconsin and is duly qualified to do business and in good standing as a foreign corporation in each jurisdiction where the nature of its business makes such qualification necessary and where the failure to so qualify might have a Materially Adverse Effect (as defined in each Credit Agreement). 2. The Borrower has full power, authority and legal right to conduct its business substantially as presently conducted by it and to own its properties, to execute and deliver the Credit Agreements and the Notes, to borrow under the Credit Agreements, and to perform and observe its obligations under, and the terms and provisions of, the Credit Agreements. 3. The execution and delivery by the Borrower of the Credit Agreements and the Notes and the performance and observance by it of its obligations under, and the terms and provisions of, and the borrowings by it under and the grant of the security interests and other Liens (as defined in each Credit Agreement) under, the Credit Agreements and the Notes, have been duly authorized by all necessary corporate action, require no governmental registrations, filings, consents or approvals, and do not violate or contravene or require any consent under (i) any provision of the certificate of incorporation or by-laws of the Borrower, (ii) any law or governmental regulation, (iii) any order or decree of any court or governmental agency, or (iv) any indenture, agreement or other instrument, in each case to which the Borrower is a party or which is binding upon any of its properties, and will not result in the creation or imposition of any security interest in or other Lien on any of its properties pursuant to the provisions of any agreement (excluding, however, the Credit Agreements and any instrument executed pursuant thereto) or other instrument binding upon or applicable to it. 4. The Credit Agreements and the Notes have been duly executed and delivered on behalf of the Borrower, and the Credit Agreements and the Notes constitute the legal, valid and binding obligations of the Borrower enforceable against the Borrower in accordance with their respective terms, subject, as to enforcement only, to bankruptcy, insolvency, reorganization, moratorium or similar laws at the time in effect affecting the enforceability of rights of creditors generally. 5. Neither the Borrower nor any Significant Subsidiary (as defined in each Credit Agreement) is in default (including after giving effect to the execution and delivery of the Credit Agreements and the making of the initial Loans and the consummation of the other transactions contemplated therein) under any agreement or instrument governing any Indebtedness which would cause an Exhibit F-2 Event of Default under Section 8.1.5 of either Credit Agreement or is in default under any law or governmental regulation or court decree or order the default under which would have a Materially Adverse Effect, nor am I aware of any facts or circumstances which would give rise to any such default. 6. No litigation, labor controversy, arbitration or governmental investigation or proceeding of the character referred to in Section 6.7 of either Credit Agreement is pending, or, to the best of my knowledge (after due inquiry), threatened. I am a member of the Bar of the State of New York and I do not express any opinions herein concerning any laws other than the State of New York. I note that the Loan Documents are governed by Illinois law. For the purpose of the opinion set forth in paragraph 4, however, I have assumed that New York law was applicable. Very truly yours, Steven B. Lapin Exhibit F-3 EXHIBIT G FORM OF LENDER ASSIGNMENT AGREEMENT To: Nasco International, Inc. 901 Janesville Avenue Fort Atkinson, Wisconsin 53538 To: Bank of America, N.A., as Agent 231 South LaSalle Street Chicago, Illinois 60697 NASCO INTERNATIONAL, INC. ------------------------ Ladies and Gentlemen: We refer to clause (b) of Section 10.11.1 of the Amended and Restated Credit Agreement (364 Days), dated as of May 29, 2001 (together with all amendments and other modifications, if any, from time to time thereafter made thereto, the "Credit Agreement"), among Nasco International, Inc., a Wisconsin ---------------- corporation (the "Borrower"), the various financial institutions which are, or -------- shall from time to time become, parties thereto (the "Lenders"), Bank One, ------- Wisconsin as documentation agent and Bank of America, N.A. as administrative agent (in such capacity, the "Agent") for the Lenders. Unless otherwise defined ----- herein or the context otherwise requires, terms used herein have the meanings provided in the Credit Agreement. This agreement is delivered to you pursuant to clause (b) of Section 10.11.1 of the Credit Agreement and also constitutes notice to each of you, pursuant to Section 10.11.1 of the Credit Agreement, of the assignment and delegation to _____________________ (the "Assignee") of __% of the Loans and -------- Commitment of _______________ (the "Assignor") outstanding under the Credit -------- Agreement on the date hereof and of all related rights and obligations under the Credit Agreement and the other Loan Documents. After giving effect to the foregoing assignment and delegation, the Assignor's and the Assignee's Percentages for the purposes of the Credit Agreement are set forth opposite such Person's name on the signature pages hereof. [Add paragraph dealing with accrued interest and any fees with respect to Loans assigned.] The Assignee hereby acknowledges and confirms that it has received and reviewed to its satisfaction a copy of the Credit Agreement and the exhibits related thereto, together with copies of the documents which were required to be delivered under the Credit Agreement as a condition to the making of the Loans thereunder. The Assignee further confirms and agrees that in becoming a Lender and in making its Commitment and Loans under the Credit Agreement, such actions have and will be made without recourse to, or representation or warranty by, the Agent or Exhibit G-1 the Assignor, and expressly confirms for the benefit of the Agent each of the provisions set forth in Article IX of the Credit Agreement. Except as otherwise provided in the Credit Agreement, effective as of the date of acceptance hereof by the Agent (a) the Assignee (i) shall be deemed automatically to have become a party to the Credit Agreement, have all the rights and obligations of a "Lender" under the Credit Agreement and the other Loan Documents as if it were an original signatory thereto to the extent specified in the second paragraph hereof; and (ii) agrees to be bound by the terms and conditions set forth in the Credit Agreement and the other Loan Documents as if it were an original signatory thereto; and (b) the Assignor shall be released from its obligations under the Credit Agreement and the other Loan Documents to the extent specified in the second paragraph hereof. The Assignor and the Assignee hereby agree that the [Assignor] [Assignee] will pay to the Agent the processing fee referred to in Section 10.11.1 of the Credit Agreement upon the delivery hereof. The Assignee hereby advises each of you of the following administrative details with respect to the assigned Loans and Commitment and requests the Agent to acknowledge receipt of this document: (A) Address for Notices: Domestic Office : Address: Attention: Telephone: Facsimile: Eurodollar Office Address: Attention: Telephone: Exhibit G-2 Facsimile: (B) Payment Instructions: The Assignee agrees to furnish the tax form required by the last paragraph of Section 4.6. (if so required) of the Credit Agreement no later than the date of acceptance hereof by the Agent. Exhibit G-3 This Agreement may be executed by the Assignor and Assignee and accepted by the Agent in separate counterparts, each of which when so executed and delivered shall be deemed to be an original and all of which taken together shall constitute one and the same agreement, and shall be governed by the internal laws of the State of Illinois. Adjusted Percentage [ASSIGNOR] - ------------------- Commitment ______% By:_______________________________ and Loans: Title: Adjusted Percentage [ASSIGNEE] - ------------------- Commitment ______% By:_______________________________ and Loans: Title: Accepted and Acknowledged this ___ day of ________, 200_ Bank of America, N.A. as Agent By: _____________________________ Title:___________________________ Exhibit G-4 EXHIBIT H CONFIRMATION Dated as of _______ ___, 2001 To: Bank of America, N.A., individually and as administrative agent (in such capacity, the "Administrative Agent"), and the other financial institutions party to the Restated Credit Agreement referred to below Please refer to the following: (a) the Amended and Restated Credit Agreement dated as of the date hereof (the "Restated Credit Agreement") among NASCO International, Inc. (the "Borrower"), certain lenders, Bank One, Wisconsin, as documentation agent and the Agent; (b) the Pledge Agreement dated as of March 31, 2000 (as amended, the "Pledge Agreement") between Borrower and the Agent; (c) the Security Agreement dated as of March 31, 2000 (as amended, the "Security Agreement") between the Borrower and the Agreement; (d) the Original Mortgage dated as of June 25, 1992 executed by the Borrower in favor of the Agent; and (e) the Modesto Mortgage dated as of August 5, 1997 executed by the Borrower in favor of the Agent. Each document referred to in items (b) through (e) above is called a -------- - "Credit Document". Capitalized terms used but not defined herein shall have the --------------- meanings set forth in the Restated Credit Agreement; The Borrower hereby confirms to the Lenders (as defined in the Restated Credit Agreement) and the Agent that each Credit Document to which the Borrower is a party continues in full force and effect on the date hereof after giving effect to this Confirmation and is the legal, valid and binding obligation of the Borrower, enforceable against the Borrower in accordance with its terms. Exhibit H-1 IN WITNESS WHEREOF, the Borrower has executed this Confirmation to be duly executed and delivered by its officer thereunto duly authorized as the date first above written. NASCO INTERNATIONAL, INC. By: Title: Address: 901 Janesville Avenue Fort Atkinson, Wisconsin 53538-0901 Attention: Dean T. Johnson Chief Financial Officer copy to: Geneve Corporation 96 Cummings Point Road Stamford, Connecticut 06902 Telecopier No. 203-348-3103 Attention: Theresa Herbert Vice President Accepted and Agreed as of ___________, 2001 BANK OF AMERICA, N.A. By: _______________________________ Title:_____________________________ EX-10.12 7 dex1012.txt SECOND AMENDED AND RESTATED MORTGAGE Exhibit 10.12
Second Amended and Restated Mortgage Document Number Title of Document - -------------------------------------------------------------------------------- Record this document with the Register of Deeds ------------------------------------------------ Name and Return Address Mayer, Brown & Platt 350 S. Grand Avenue 25th Floor Los Angeles, CA 90071 --------------------------------------- 05-14-09-21-001 05-14-09-21 05-140-09-12-64 --------------------------------------- (Parcel Identification Number) 05-14-09-12-65 05-14-09-12-66 05-14-09-12-67 05-14-09-12-68 05-14-09-12-081 05-14-09-12-82
TABLE OF CONTENTS Page ARTICLE I COVENANTS AND AGREEMENTS OF THE MORTGAGOR ........................ 7 SECTION 1.1. Payment of Secured Obligations and Other Obligations ...... 7 SECTION 1.2. Title to Collateral, etc .................................. 8 SECTION 1.3. Title Insurance ........................................... 8 SECTION 1.3.1. Title Insurance Endorsement ........................ 9 SECTION 1.3.2. [INTENTIONALLY OMITTED] ............................ 9 SECTION 1.3.3. [INTENTIONALLY OMITTED] ............................ 9 SECTION 1.3.4. Title Insurance Proceeds ........................... 9 SECTION 1.4. Recordation ............................................... 9 SECTION 1.5. Payment of Impositions, etc ............................... 9 SECTION 1.6. Insurance and Legal Requirements .......................... 10 SECTION 1.7. Security Interests, etc ................................... 11 SECTION 1.8. Permitted Contests ........................................ 11 SECTION 1.9. Leases .................................................... 12 SECTION 1.10. Compliance with Instruments ............................... 12 SECTION 1.11. Maintenance and Repair, etc ............................... 12 SECTION 1.12. Alterations, Additions, etc ............................... 13 SECTION 1.13. Acquired Property Subject to Lien ......................... 13 SECTION 1.14. Assignment of Leases, Rents, Proceeds, etc ................ 14 SECTION 1.15. No Claims Against the Mortgagee ........................... 17 SECTION 1.16. Indemnification Against Obligations ....................... 17 SECTION 1.17. No Credit for Payment of Taxes ............................ 18 SECTION 1.18. Offering of the Notes ..................................... 19 SECTION 1.19. Hazardous Material and Wastes ............................. 19 ARTICLE II INSURANCE; DAMAGE, DESTRUCTION OR TAKING, ETC .................... 19 SECTION 2.1. Insurance ................................................. 19 SECTION 2.1.1. Risks to be Insured ................................ 19 SECTION 2.1.2. Policy Provisions .................................. 20 SECTION 2.1.3. Delivery of Policies, etc .......................... 21
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TABLE OF CONTENTS (continued) Page SECTION 2.1.4. Separate Insurance .................................. 21 SECTION 2.2. Damage, Destruction or Taking; Mortgagor to Give Notice; Assignment of Awards ....................................... 21 SECTION 2.3. Application of Proceeds and Awards ......................... 22 SECTION 2.4. Total Taking and Total Destruction ......................... 24 ARTICLE III EVENTS OF DEFAULT; REMEDIES, ETC ................................. 25 SECTION 3.1. Events of Default; Acceleration ............................ 25 SECTION 3.2. Legal Proceedings; Foreclosure ............................. 26 SECTION 3.3. Power of Sale .............................................. 27 SECTION 3.4. Uniform Commercial Code Remedies ........................... 28 SECTION 3.5. Mortgagee Authorized to Execute Deeds, etc ................. 28 SECTION 3.6. Purchase of Collateral by Mortgagee ........................ 29 SECTION 3.7. Receipt a Sufficient Discharge to Purchaser ................ 29 SECTION 3.8. Waiver of Appraisement, Valuation, etc ..................... 29 SECTION 3.9. Sale a Bar Against Mortgagor ............................... 29 SECTION 3.10. Application of Proceeds of Sale and Other Moneys ........... 29 SECTION 3.11. Appointment of Receiver .................................... 31 SECTION 3.12. Possession, Management and Income .......................... 31 SECTION 3.13. Right of Mortgagee to Perform Mortgagor's Covenants, etc ... 31 SECTION 3.14. Subrogation ................................................ 32 SECTION 3.15. Remedies, etc., Cumulative ................................. 32 SECTION 3.16. Provisions Subject to Applicable Law ....................... 32 SECTION 3.17. No Waiver, etc ............................................. 33 SECTION 3.18. Compromise of Actions, etc ................................. 33 SECTION 3.19. Foreclosure Without Deficiency Judgment .................... 33 ARTICLE IV DEFINITIONS ...................................................... 33 SECTION 4.1. Terms Defined in this Mortgage ............................. 33
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TABLE OF CONTENTS (continued) Page SECTION 4.2. Use of Defined Terms ..................................... 36 SECTION 4.3. Credit Agreement Definitions ............................. 36 ARTICLE V MISCELLANEOUS .................................................. 36 SECTION 5.1. Further Assurances; Financing Statements ................. 36 SECTION 5.1.1. Further Assurances ................................ 36 SECTION 5.1.2. Financing Statements .............................. 37 SECTION 5.2. Additional Security ...................................... 37 SECTION 5.3. Defeasance; Partial Release, etc ......................... 37 SECTION 5.3.1. Defeasance ........................................ 37 SECTION 5.3.2. Partial Release etc ............................... 37 SECTION 5.4. Notices, etc ............................................. 38 SECTION 5.5. Waivers, Amendments, etc ................................. 38 SECTION 5.6. Cross-References ......................................... 38 SECTION 5.7. Headings ................................................. 38 SECTION 5.8. Governing Law ............................................ 38 SECTION 5.9. Successors and Assigns, etc .............................. 38 SECTION 5.10. Loan Document ............................................ 38 SECTION 5.11. Severability ............................................. 39 SECTION 5.12. Amended and Restated Mortgage ............................ 39
iii TABLE OF CONTENTS Page ACKNOWLEDGEMENTS Schedule 1 - Description of the Land Schedule 2 - Permitted Encumbrances iv ================================================================================ NASCO INTERNATIONAL, INC., Mortgagor, and BANK OF AMERICA, N.A., as Agent, Mortgagee _________________________ SECOND AMENDED AND RESTATED MORTGAGE (and Security Agreement and Assignment of Leases and Rents) ___________________________ Dated as of August 21, 2001 This instrument affects real and personal property located in the County of Jefferson, State of Wisconsin. ================================================================================ Record and return to: Mayer, Brown & Platt 350 South Grand Avenue, 25/th/ Floor Los Angeles, California 90071 Attention: Boise A. Ding, Esq. SECOND AMENDED AND RESTATED MORTGAGE (and Security Agreement and Assignment of Leases and Rents) ----------------------------------------------------------- This Second Amended and Restated Mortgage (and Security Agreement and Assignment of Leases and Rents) (this "Mortgage") has been executed by NASCO -------- INTERNATIONAL, INC., a Wisconsin corporation, having an address at 901 Janesville Avenue, Fort Atkinson, Wisconsin 53538-0901 (the "Mortgagor")to BANK --------- OF AMERICA, N.A.(successor in interest to Bank of America National Trust and Savings Association and Continental Bank, N.A.), having an address at 231 South LaSalle Street, Chicago, Illinois 60697, Attention: Ms. Debra Basler, as agent --------- for the various financial institutions (the "Lenders") which are, or may from ------- time to time hereafter become, parties to the Credit Agreements, as hereinafter defined (herein together with its successors and assigns acting as agent at the time under such Credit Agreements, the "Mortgagee"). --------- W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Mortgagor is on the date of delivery hereof the owner of fee title to the parcel or parcels of land described in Schedule 1 hereto (the ---------- "Land") and of the Improvements (such term and other capitalized terms used in ---- this Mortgage having the respective meanings specified or referred to in Article ------- 4); - - WHEREAS, pursuant to (i) an Amended and Restated Credit Agreement (Five Year) dated May 29, 2001 (the "Credit Agreement (Five Year)") and (ii) an ---------------- --------- Amended and Restated Credit Agreement (364 Days) dated May 29, 2001 (the "Credit ------ Agreement (364 Days)") each among Mortgagor, certain lenders, Bank One, - ------------------- Wisconsin, as documentation agent and Mortgagee, as administrative agent [the Credit Agreement (Five Year) and the Credit Agreement (364 Days) being collectively referred to as the "Credit Agreements"] the lenders thereunder have ----------------- extended certain credit (herein referred to collectively as the "Loans"), which ----- Loans are evidenced by Notes issued under the Credit Agreements (the indebtedness evidenced by such Notes is sometimes hereinafter referred to as the "Secured Obligations")to the Mortgagor, including for, among other things, ------------------- meeting working capital requirements of the Mortgagor with respect to the Credit Agreement (364 Days) and financing the AMEP Acquisition with respect to the Credit Agreement (5 Year). WHEREAS, the Credit Agreement (Five Year) and the Credit Agreement (364 Days) amended and restated in their entirety, -2- respectively, that certain Credit Agreement (Five Year) dated March 31, 2000 (the "Original Credit Agreement (Five Year)") and a Credit Agreement (364 Days) ------------------------------------ dated March 31, 2000 (the "Original Credit Agreement (364 Days)") [the Original ----------------------------------- Credit Agreement (364 Days) and the Original Credit Agreement (5 Year) being collectively referred to as the "Original Credit Agreements"]. Under the -------------------------- Original Credit Agreements the lenders thereunder extended credit to Mortgagor to refinance certain loans extended to Mortgagor under a Third Amended and Restated Credit Agreement, dated as of January 2, 1996, as amended, supplemented and otherwise modified prior to the date of the Original Credit Agreements ("The --- First Refinanced Credit Agreement"); - --------------------------------- WHEREAS, under the Original Credit Agreements, the Mortgagor was required to execute that certain Amended and Restated Mortgage (the "Existing Mortgage") ----------------- dated June 26, 2000 recorded on July 26, 2000 in Volume 11578, Page 199 in the Register of Deeds of Jefferson County, Wisconsin (the "Official Records"), which ---------------- Existing Mortgage amended and restated that certain Mortgage (and Security Agreement) dated June 25, 1992 recorded on July 2, 1992 in Volume 808 of Records Page 183 as Document No. 890374 in the Official Records of Jefferson County, Wisconsin, as amended by amendments recorded as Document Nos. 927262 and 951471 executed in connection with the First Refinanced Credit Agreement, pursuant to which the Mortgagor granted to the Agent a security interest in, among other things, the Collateral (as hereinafter defined); WHEREAS, it is an obligation of Mortgagor under the Credit Agreements that Mortgagor execute and deliver this Mortgage which serves as a "Fourth Amendment to Mortgage" as defined under the Credit Agreements; WHEREAS, as used in this Mortgage the term "Obligations" means and includes ----------- all of the following: (a) the principal of and interest on the Secured Obligations; (b) all other indebtedness of any kind arising under, and all amounts of any kind which, at any time become due and owing to the Mortgagee under or with respect to the Credit Agreements, the Notes, this Mortgage, the Collateral Documents referred to in the Credit Agreements, and any other document, agreement or other instrument delivered pursuant to or in connection with the Credit Agreements or this Mortgage (herein collectively called the "Loan ---- Documents"); - --------- -3- (c) all of the covenants, obligations and agreements and the truth and completeness of all representations and warranties, of the Mortgagor, in, under or pursuant to the Loan Documents; (d) any and all advances, costs and expenses including, without limitation, all costs of enforcement and collection, paid or incurred by the Mortgagee to protect any of the Collateral (as hereinafter defined), perform any obligation of the Mortgagor or any other Person under or with respect to the Loan Documents or collect any amount owing to the Mortgagee and the Lenders which is secured or evidenced hereby or by any other Loan Document; and (e) interest on all of the foregoing; NOW, THEREFORE, for good and valuable consideration the receipt of which is hereby acknowledged, and in order to induce the Lenders to make Loans to the Mortgagor from time to time pursuant to the Credit Agreements, the Mortgagor hereby enters into this Mortgage which amends and restates in its entirety the Existing Mortgage. G R A N T : ----------- FOR and in consideration of the premises, and of the mutual covenants herein contained, and in order to secure the full, timely and proper payment and performance of and compliance with each and every one of the Obligations, the Mortgagor hereby irrevocably grants, bargains, sells, mortgages, warrants, aliens, demises, releases, hypothecates, pledges, assigns, transfers and conveys to the Mortgagee and its successors and assigns, forever, all of the following (the "Collateral"): ---------- (a) Real Estate. All of the Land and all additional lands and estates ----------- therein now owned or hereafter acquired by the Mortgagor for use or development with the Land or any portion thereof and which is made subject to the lien hereof from time to time by supplemental mortgage or otherwise, together with all and singular the tenements, rights, easements, hereditaments, rights of way, privileges, liberties, appendages and appurtenances now or hereafter belonging or in anywise pertaining to the Land and such additional lands and estates therein (including, without limitation, all rights relating to storm and sanitary sewer, water, gas, electric, railway and telephone services); all development rights, air rights, riparian rights, water, water rights, water stock, all rights in, to -4- and with respect to any and all oil, gas, coal, minerals and other substances of any kind or character underlying or relating to the Land and such additional lands and estates therein and any interest therein; all estate, claim, demand, right, title or interest of the Mortgagor in and to any street, road, highway or alley, vacated or other, adjoining the Land or any part thereof and such additional lands and estates therein; all strips and gores belonging, adjacent or pertaining to the Land or such additional lands and estates; and any after-acquired title to any of the foregoing (herein collectively called the "Real Estate"); ----------- (b) Improvements. All buildings, structures and other improvements and any ------------ additions and alterations thereto or replacements thereof, now or hereafter built, constructed or located upon the Real Estate; and all furnishings, fixtures, fittings, appliances, apparatus, equipment, machinery, building and construction materials and other articles of every kind and nature whatsoever and all replacements thereof, now or hereafter affixed or attached to, placed upon or used in any way in connection with the complete and comfortable use, enjoyment, occupation, operation, development and maintenance of the Real Estate or such buildings, structures and other improvements now or hereafter owned by the Mortgagor, including, but not limited to, partitions, furnaces, boilers, oil burners, radiators and piping, plumbing and bathroom fixtures, refrigeration, heating, ventilating, air conditioning and sprinkler systems, other fire prevention and extinguishing apparatus and materials, vacuum cleaning systems, gas and electric fixtures, incinerators, compactors, elevators, engines, motors, generators and all other articles of property which are considered fixtures under applicable law (such buildings, structures and other improvements and such other property are herein collectively referred to as the "Improvements"; the ------------ Real Estate and the Improvements are collectively referred to as the "Property"); -------- (c) Goods. All building materials, goods, construction materials, ----- appliances (including, without limitation, stoves, ranges, ovens, disposals, refrigerators, water fountains and coolers, fans, heaters, dishwashers, clothes washers and dryers, water heaters, hood and fan combinations, kitchen equipment, laundry equipment, kitchen cabinets and other similar equipment), stocks, beds, mattresses, bedding and linens, supplies, -5- blinds, window shades, drapes, carpets, floor coverings, office equipment, growing plants and shrubberies, control devices, equipment (including window cleaning, building cleaning, swimming pool, recreational, monitoring, garbage, pest control and other equipment), motor vehicles, tools, furnishings, furniture, lighting, non-structural additions to the Real Estate and Improvements and all other tangible property of any kind or character, together with all replacements thereof, now or hereafter owned by the Mortgagor and located on or in or used or useful in connection with the complete and comfortable use, enjoyment, occupation, operation, development and maintenance of the Property, regardless of whether or not located on or in the Property or located elsewhere for purposes of storage, fabrication or otherwise, exclusive of any of the foregoing items of property owned by tenants of portions of the Improvements (herein collectively referred to as the "Goods"); ----- (d) Intangibles. All goodwill, trademarks, trade names, option rights, ----------- purchase contracts, books and records and general intangibles of the Mortgagor relating to the Property and all accounts, contract rights, instruments, chattel paper and other rights of the Mortgagor for the payment of money for property sold or lent, for services rendered, for money lent, or for advances or deposits made, and any other intangible property of the Mortgagor relating to the Property, but specifically excluding rights of the Mortgagor in, to and under contracts with providers of goods or services in connection with the maintenance and operation of the Property (herein collectively referred to as the "Intangibles"); ----------- (e) Plans. All rights of the Mortgagor in and to all plans and ----- specifications, designs, drawings and other information, materials and matters heretofore or hereafter prepared relating to the Improvements or any construction on the Real Estate (herein collectively referred to as the "Plans"); ----- (f) Permits. All rights of the Mortgagor in, to and under all permits, ------- franchises, licenses, approvals and other authorizations respecting the use, occupation and operation of the Property and every part thereof and respecting any business or other activity conducted on or from the Property, and any product or proceed thereof or therefrom, including, without limitation, all building permits, certificates of occupancy and other licenses, -6- permits and approvals issued by governmental authorities having jurisdiction (herein collectively called the "Permits"); ------- (g) Leases of Furniture, Furnishings and Equipment. All right, title ---------------------------------------------- and interest of the Mortgagor as lessee in, to and under any leases of furniture, furnishings and equipment now or hereafter installed in or at any time used in connection with the Property; (h) Proceeds. All proceeds of the conversion, voluntary or involuntary -------- of any of the foregoing into cash or liquidated claims, including, without limitation, proceeds of insurance and condemnation awards (herein collectively referred to as "Proceeds"); and -------- (i) Other Property. All other property and rights of the Mortgagor of -------------- every kind and character relating to the Property, and all proceeds and products of any of the foregoing. AND, without limiting any of the other provisions of this Mortgage, the Mortgagor expressly grants to the Mortgagee, as secured party, a security interest in all of those portions of the Collateral which are or may be subject to the State Uniform Commercial Code provisions applicable to secured transactions; TO HAVE AND TO HOLD the Collateral unto the Mortgagee and its successors and assigns, forever. FURTHER to secure the full, timely and proper payment and performance of the Obligations, the Mortgagor hereby covenants and agrees with and warrants to the Mortgagee as follows: ARTICLE I COVENANTS AND AGREEMENTS OF THE MORTGAGOR ----------------------------------------- SECTION 1.1. Payment of Secured Obligations and Other Obligations. The ---------------------------------------------------- Mortgagor agrees that it will duly and punctually pay: (a) the principal of and interest on the Secured Obligations at the time outstanding in accordance with the terms thereof and hereof, and -7- (b) when and as due and payable from time to time in accordance with the terms hereof or of any other applicable Loan Document, all other Obligations. SECTION 1.2. Title to Collateral, etc. The Mortgagor represents and ------------------------ warrants to and covenants with the Mortgagee that: (a) as of the date hereof and at all times hereafter while this Mortgage is outstanding, the Mortgagor is the absolute owner of the legal and beneficial title to the Property and to all other property included in the Collateral, and has good and marketable title in fee simple absolute to the Property, subject in each case only to this Mortgage and the encumbrances set forth in Schedule 2 hereto (the ---------- "Permitted Encumbrances"); ---------------------- (b) the Mortgagor has good and lawful right, power and authority to execute this Mortgage and to convey, transfer, assign, mortgage and grant a security interest in the Collateral, all as provided herein; (c) this Mortgage has been duly executed, acknowledged and delivered on behalf of the Mortgagor, all consents and other actions required to be taken by the officers, directors, shareholders and partners, as the case may be, of the Mortgagor have been duly and fully given and performed and this Mortgage constitutes the legal, valid and binding obligation of the Mortgagor, enforceable against the Mortgagor in accordance with its terms; (d) the Mortgagor, at its expense, will warrant and defend to the Mortgagee and any purchaser under the power of sale herein or at any foreclosure sale such title to the Collateral and the first mortgagel ien and first priority perfected security interest of this Mortgage thereon and therein against all claims and demands and will maintain, preserve and protect such lien and security interest and will keep this Mortgage a valid, direct first mortgage lien of record on and a first priority perfected security interest in the Collateral, subject only to the Permitted Encumbrances; and (e) the Mortgagor will maintain and preserve its corporate existence and good standing under the laws of the State. SECTION 1.3. Title Insurance. --------------- -8- SECTION 1.3.1. Title Insurance Endorsement. Concurrently with the execution --------------------------- and delivery of this Mortgage, the Mortgagor, at its expense, has obtained and delivered to the Mortgagee a modification endorsement to Mortgagee's existing lender's title policy relating to the Property in form and substance satisfactory to Mortgagee and insuring that the lien of this Mortgage is a valid, first priority lien on the Property. The Mortgagor has duly paid in full all premiums and other charges due in connection with the issuance of such endorsement. SECTION 1.3.2. [INTENTIONALLY OMITTED] SECTION 1.3.3. [INTENTIONALLY OMITTED] SECTION 1.3.4. Title Insurance Proceeds. All proceeds received by and ------------------------ payable to the Mortgagee for any loss under the loan policy or policies of title insurance referenced in Section 1.3.1, or under any policy or policies of title ------------- insurance delivered to the Mortgagee in substitution therefor or replacement thereof, shall be the property of the Mortgagee and shall be applied by the Mortgagee in accordance with the provisions of Section 2.3. ----------- SECTION 1.4. Recordation. The Mortgagor, at its expense, will at all ----------- times cause this Mortgage and any instruments amendatory hereof or supplemental hereto and any instruments of assignment hereof or thereof (and any appropriate financing statements or other instruments and continuations thereof) and each other instrument delivered in connection with any Loan Document and intended thereunder to be recorded, registered and filed and to be kept recorded, registered and filed, in such manner and in such places, and will pay all such recording, registration, filing fees, taxes and other charges, and will comply with all such statutes and regulations as may be required by law in order to establish, preserve, perfect and protect the lien and security interest of this Mortgage as a valid, direct first mortgage lien and first priority perfected security interest in the Collateral, subject only to Permitted Encumbrances. The Mortgagor will pay or cause to be paid, and will indemnify the Mortgagee in respect of, all taxes (including interest and penalties) at any time payable in connection with the filing and recording of this Mortgage and any and all supplements and amendments hereto. SECTION 1.5. Payment of Impositions, etc. Subject to Section 1.8 --------------------------- ----------- (relating to permitted contests), the Mortgagor will pay or cause to be paid within 30 days after the same become a lien, but in any event before the same would become delinquent -9- and before any fine, penalty, interest or cost may be added for non-payment, all taxes, assessments, water and sewer rates, charges, license fees, inspection fees and other governmental levies or payments, of every kind and nature whatsoever, general and special, ordinary and extraordinary, unforeseen as well as foreseen, which at any time may be assessed, levied, confirmed, imposed or which may become a lien upon the Collateral, or any portion thereof, or which are payable with respect thereto, or upon the rents, issues, income or profits thereof, or on the occupancy, operation, use, possession or activities thereof, whether any or all of the same be levied directly or indirectly or as excise taxes or as income taxes, and all taxes, assessments or charges which may be levied on the Secured Obligations, or the interest thereon (collectively, the "Impositions"). The Mortgagor will deliver to the Mortgagee, upon request, ----------- copies of official receipts or other satisfactory proof evidencing such payments. Notwithstanding the foregoing provisions of this Section 1.5, the ----------- Mortgagee agrees that if the Mortgagor (through inadvertence), fails to make payment of any Imposition which is in a de minimis amount (which shall be an -- ------- amount less than or equal to $5,000), then the Mortgagee shall not declare an Event of Default as a result of such failure, provided (i) within five (5) days after the Mortgagor receives notice of such unpaid Imposition, the Mortgagor makes payment thereof and (ii) the Collateral is not, in the Mortgagee's judgment, in any danger of being subjected to judicial proceedings, sold, lost, forfeited or interfered with. SECTION 1.6. Insurance and Legal Requirements. Subject to Section 1.8 -------------------------------- ----------- (relating to permitted contests), the Mortgagor, at its expense, will comply, or cause compliance with (a) all provisions of any insurance policy covering or applicable to the Collateral or any part thereof, all requirements of the issuer of any such policy, and all orders, rules, regulations and other requirements of the National Board of Fire Underwriters (or any other body exercising similar functions) applicable to or affecting the Collateral or any part thereof or any use or condition of the Collateral or any part thereof (collectively, the "Insurance Requirements"); and ---------------------- (b) all laws, including Environmental Laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations, directions and requirements of all governments, departments, commissions, boards, property owners associations, courts, authorities, agencies, -10- officials and officers, foreseen or unforeseen, ordinary or extraordinary, which now or at any time hereafter may be applicable to the Collateral or any part thereof, or any of the adjoining sidewalks, curbs, vaults and vault space, if any, streets or ways, or any use or condition of the Collateral or any part thereof (collectively, the "Legal Requirements"); ------------------ whether or not compliance therewith shall require structural changes in or interference with the use and enjoyment of the Collateral or any part thereof. SECTION 1.7. Security Interests, etc. The Mortgagor will not directly ----------------------- or indirectly create or permit or suffer to be created or to remain, and will promptly discharge or cause to be discharged, any deed of trust, mortgage, encumbrance or charge on, pledge of, security interest in or conditional sale or other title retention agreement with respect to or any other lien on or in the Collateral or any part thereof or the interest of the Mortgagor, the Mortgagee therein or any Proceeds thereof or Rents (as hereinafter defined) or other sums arising therefrom, other than (a) Permitted Encumbrances and (b) liens of mechanics, materialmen, suppliers or vendors or rights thereto incurred in the ordinary course of the business of the Mortgagor for sums not yet due or any such liens or rights thereto which are at the time being contested as permitted by Section 1.8. The Mortgagor will not postpone the payment of any sums for ----------- which liens of mechanics, materialmen, suppliers or vendors or rights thereto have been incurred (unless such liens or rights thereto are at the time being contested as permitted by Section 1.8), or enter into any contract under which ----------- payment of such sums is postponable (unless such contract expressly provides for the legal, binding and effective waiver of any such liens or rights thereto), in either case, for more than 60 days after the completion of the action giving rise to such liens or rights thereto. SECTION 1.8. Permitted Contests. After prior written notice to the ------------------ Mortgagee, the Mortgagor at its expense may contest, or cause to be contested, by appropriate action conducted in good faith, the amount or validity or application, in whole or in part, of any Imposition, Legal Requirement or Insurance Requirement or lien of a mechanic, materialman, supplier or vendor (including, without limitation, any lien of any mechanic, materialman, supplier or vendor arising from alterations or additions performed by the Mortgagor pursuant to the provisions of Section 1.12), provided that, (a) in the case of ------------ -------- ---- an unpaid Imposition, lien, encumbrance or charge, such -11- proceedings shall suspend the collection thereof from the Mortgagor, the Mortgagee, and the Collateral (including any rent or other income therefrom) and shall not interfere with the payment of any such rent or income, (b) neither the Collateral nor any rent or other income therefrom nor any part thereof or interest therein would be in any danger of being sold, forfeited, lost or interfered with, (c) in the case of a Legal Requirement, neither the Mortgagor nor the Mortgagee would be in danger of any civil or criminal liability for failure to comply therewith, (d) the Mortgagor shall have furnished such security, if any, as may be required in the proceedings or as may be requested by the Mortgagee, (e) the non-payment of the whole or any part of any Imposition will not result in the delivery of a tax deed to the Collateral or any part thereof because of such non-payment, (f) the payment of any sums required to be paid with respect to the Secured Obligations or under this Mortgage (other than any unpaid Imposition, lien, encumbrance or charge at the time being contested in accordance with this Section 1.8) shall not be interfered with or otherwise ----------- affected, and (g) in the case of any Insurance Requirement, the failure of the Mortgagor to comply therewith shall not affect the validity of any insurance required to be maintained by the Mortgagor under Section 2.1. ----------- SECTION 1.9. Leases. The Mortgagor represents and warrants to the ------ Mortgagee that, as of the date hereof, there are no Leases (as hereinafter defined) with respect to all or any portion of the Property. The Mortgagor covenants and agrees with the Mortgagee that, after the date hereof, the Mortgagor will not enter into any Lease of all or any portion of the Property without first obtaining the written consent of the Mortgagee. SECTION 1.10. Compliance with Instruments. The Mortgagor at its --------------------------- expense will promptly comply with all rights of way or use, privileges, franchises, servitudes, licenses, easements, tenements, hereditaments and appurtenances forming a part of the Property and all instruments creating or evidencing the same, in each case, to the extent compliance therewith is required of the Mortgagor under the terms thereof. The Mortgagor will not take any action which may result in a forfeiture or termination of the rights afforded to the Mortgagor under any such instruments and will not, without the prior written consent of the Mortgagee, amend in any material respect any of such instruments. SECTION 1.11. Maintenance and Repair, etc. Subject to the provisions --------------------------- of Section 1.12, the Mortgagor will keep or cause to ------------ -12- be kept all presently and subsequently erected or acquired Improvements and the sidewalks, curbs, vaults and vault space, if any, located on or adjoining the same, and the streets and the ways adjoining the same, in good order and repair and in such a fashion that the value and utility of the Collateral will not be diminished, and, at its sole cost and expense, will promptly make or cause to be made all necessary and appropriate repairs, replacements and renewals thereof, whether interior or exterior, structural or nonstructural, ordinary or extraordinary, foreseen or unforeseen. All repairs, replacements and renewals shall be substantially equal in quality to the original Improvements. The Mortgagor at its expense will do or cause to be done all shoring of foundations and walls of any building or other Improvements on the Property and (to the extent permitted by law) of the ground adjacent thereto, and every other act necessary or appropriate for the preservation and safety of the Property by reason of or in connection with any excavation or other building operation upon the Property and upon any adjoining property, whether or not the Mortgagor shall, by any Legal Requirement, be required to take such action or be liable for failure to do so. SECTION 1.12. Alterations, Additions, etc. So long as no Event of Default ---------------------------- shall have occurred and be continuing, the Mortgagor shall have the right at any time and from time to time to make or cause to be made reasonable alterations of and additions to the Property or any part thereof, provided that any alteration -------- ---- or addition: (a) shall not change the general character of the Property or reduce the fair market value thereof below its value immediately before such alteration or addition, or impair the usefulness of the Property; (b) is effected with due diligence, in a good and workmanlike manner and in compliance with all Legal Requirements and Insurance Requirements; and (c) is promptly and fully paid for, or caused to be paid for, by the Mortgagor. SECTION 1.13. Acquired Property Subject to Lien. All property at any time --------------------------------- acquired by the Mortgagor and provided or required by this Mortgage to be or become subject to the lien and security interest hereof, whether such property is acquired by exchange, purchase, construction or otherwise, shall forthwith become subject to the lien and security interest of this Mortgage without further action on the part of the Mortgagor or the Mortgagee. The Mortgagor, at its expense, will execute and deliver to (and will record and file as provided in Section 1.4) an instrument supplemental to this Mortgage satisfactory in ----------- substance and form to the Mortgagee, whenever -13- such an instrument is necessary under applicable law to subject to the lien and security interest of this Mortgage all right, title and interest of the Mortgagor in and to all property provided or required by this Mortgage to be subject to the lien and security interest hereof and acquired by the Mortgagor since the date of this Mortgage or the date of the most recent supplemental instrument so subjecting property to the lien and security interest hereof, whichever is later. SECTION 1.14. Assignment of Leases, Rents, Proceeds, etc. ------------------------------------------ (a) As part of the consideration for the Secured Obligations, and not as additional security therefor, Mortgagor hereby absolutely assigns and transfers to Mortgagee all the right, title and interest of Mortgagor in and to (i) all leases, licenses, occupancy agreements, concessions and other arrangements, oral or written, now existing or hereafter entered into, whereby any Person agrees to pay money or any other consideration for the use, possession or occupancy of, or any estate in, the Property or any portion thereof or interest therein, and all proceeds thereof (herein collectively referred to as the "Leases"), (ii) all rents, issues, profits, ------ royalties, avails, income and other benefits derived or owned, directly or indirectly, by the Mortgagor from the Property, including, without limitation, all rents and other consideration payable by tenants, claims against guarantors, and any cash or other securities deposited to secure performance by tenants, under the Leases, and all proceeds thereof (herein collectively referred to as "Rents") and (iii) all Proceeds. In addition, ----- Mortgagor hereby gives to and confers upon Mortgagee the right, power and authority to exercise all of Mortgagor's options, rights and remedies under the Leases and collect the Rents and Proceeds. Mortgagor hereby irrevocably appoints Mortgagee its true and lawful attorney-in-fact, coupled with an interest, at the option of Mortgagee, at any time and from time to time, to demand, receive and enforce payment, to give receipts, releases and satisfactions, to exercise all of Mortgagor's options, rights and remedies under the Leases and to sue, in the name of Mortgagor or Mortgagee, for all Rents and Proceeds, and apply the same to the Obligations secured hereby; provided, however, that Mortgagor shall have a license to collect such Rents and Proceeds as provided in Section 1.14(c) below. The assignment of -------------- the Leases, Rents and Proceeds contained herein is intended to be an absolute assignment from -14- Mortgagor to Mortgagee and not merely the passing of a security interest and shall be effective immediately upon the recording of this Mortgage. Mortgagor hereby waives any requirement that a receiver be appointed for the Collateral or that Mortgagee take possession of the Collateral in order for such assignment of the Leases, Rents and Proceeds to become effective. Nothing herein shall be construed as obligating Mortgagee to perform any of Mortgagor's obligations under any of the Leases or other agreements relating to the Collateral. (b) Mortgagor acknowledges and agrees that the acceptance by Mortgagee of the assignments of the Leases, Rents and Proceeds with all of the rights, powers, privileges and authority so created, shall not, prior to entry upon and taking of possession of the Property by Mortgagee, be deemed or construed to constitute Mortgagee a mortgagee in possession nor thereafter or at any time or in any event obligate Mortgagee to appear in or defend any action or proceeding relating to the Leases or to the Property, or to take any action hereunder, or to expend any money or incur any expenses or perform or discharge any obligation, duty or liability under the Leases or other agreements relating to the Collateral, or to assume any obligation or responsibility for any security deposits or other deposits delivered to Mortgagor by lessees thereunder and not assigned and delivered to Mortgagee, nor shall Mortgagee be liable in any way for any injury or damage to person or property sustained by any person or persons, firm or corporation, in or about the Property. (c) Notwithstanding the absolute, present and irrevocable assignment, grant and conveyance by Mortgagor to Mortgagee of the Leases, Rents and Proceeds contained in this Mortgage, except as is otherwise provided in this Mortgage, a license and permission is hereby given to the Mortgagor, so long as no Event of Default has occurred and is continuing hereunder, to collect, receive and apply such Rents, Proceeds and other rents, income, proceeds and benefits as they become due and payable, but not in advance thereof, and in accordance with all of the other terms, conditions and provisions hereof and of the Leases, contracts, agreements and other instruments with respect to which such payments are made or such other benefits are conferred. Upon the occurrence of an Event of Default,(i) such license and permission shall terminate immediately and automatically, without notice to the Mortgagor or any other -15- Person, and shall not be reinstated upon a cure of such Event of Default without the express written consent of the Mortgagee and (ii) Mortgagee shall immediately be entitled to exercise all rights under the Leases and to the possession of all Rents and Proceeds, and to collect, receive and apply all Rents, Proceeds and all other rents, income, proceeds and benefits from the Collateral, including all right, title and interest of the Mortgagor in any escrowed sums or deposits or any portion thereof or interest therein, whether or not the Mortgagee takes possession of the Collateral or any part thereof. Furthermore, at the Mortgagee's option, upon the occurrence of an Event of Default hereunder, Mortgagee may: (i) enter upon and take possession of the Property for the purpose of collecting Rents, Proceeds and said rents, income, proceeds and other benefits; (ii) dispossess by the customary summary proceedings any tenant, purchaser or other Person defaulting in the payment of any amount when and as due and payable, or in the performance of any other obligation, under the Lease, contract or other instrument to which said Rents, Proceeds or other rents, income, proceeds or benefits relate; (iii) let or convey the Collateral or any portion thereof or any interest therein; and (iv) apply Rents, Proceeds and such rents, income, proceeds and other benefits, after the payment of all necessary fees, charges and expenses, on account of the Obligations in accordance with Section 3.10. ------------ (d) Mortgagor hereby agrees to indemnify and hold Mortgagee harmless of and from any and all liability, loss, damage or expense that it may or might incur under or by reason of the assignments contained herein, or for any action taken by Mortgagee hereunder, or by reason or in defense of any and all claims and demands whatsoever that may be asserted against Mortgagee arising out of the Leases, including without limitation any claim by any lessees of credit for rental paid to and received by Mortgagor, but not delivered to Mortgagee, for any period under the Leases more than one (1) month in advance of the due date thereof. Should Mortgagee incur any such liability, loss, damage or expense, the amount thereof -16- (including reasonable attorneys' fees) with interest thereon at the Default Rate shall be payable by Mortgagor immediately without demand, shall be secured by this Mortgage, and shall be part of the Obligations. SECTION 1.15. No Claims Against the Mortgagee. Nothing contained in this ------------------------------- Mortgage shall constitute any consent or request by the Mortgagee, express or implied, for the performance of any labor or the furnishing of any materials or other property in respect of the Property or any part thereof, or be construed to permit the making of any claim against the Mortgagee in respect of labor or services or the furnishing of any materials or other property or any claim that any lien based on the performance of such labor or the furnishing of any such materials or other property is prior to the lien and security interest of this Mortgage. All contractors, subcontractors, vendors and other persons dealing ------------------------------------------------------------------ with the Property, or with any persons interested therein, are hereby required - ------------------------------------------------------------------------------ to take notice of the provisions of this Section. - ------------------------------------------------ SECTION 1.16. Indemnification Against Obligations. The Mortgagor will ----------------------------------- protect, indemnify, save harmless and defend the Mortgagee, each commercial banking institution (a "Participant") which pursuant to a participation ----------- agreement has purchased a participation in any portion of the Loans or the Commitment, or both, and each Lender (collectively, the "Indemnified Parties" ------------------- and individually, an Indemnified Party") from and against any and all ----------------- liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including, without limitation, attorneys' fees and expenses) imposed upon or incurred by or asserted against any Indemnified Party by reason of (a) ownership of an interest in this Mortgage, the Notes or the Property, (b) any accident, injury to or death of persons or loss of or damage to or loss of the use of property occurring on or about the Property or any part thereof or the adjoining sidewalks, curbs, vaults and vault spaces, if any, streets, alleys or ways, (c) any use, non-use or condition of the Property or any part thereof or the adjoining sidewalks, curbs, vaults and vault spaces, if any, streets, alleys or ways, (d) any failure on the part of the Mortgagor to perform or comply with any of the terms of this Mortgage, (e) performance of any labor or services or the furnishing of any materials or other property in respect of the Collateral or any part thereof made or suffered to be made by or on behalf of the Mortgagor, (f) any negligence or tortious act on the part of the Mortgagor or any of its agents, contractors, lessees, licensees or invitees, (g) any work in connection with any alterations, changes, new -17- construction or demolition of or additions to the Property, or (h) (i) any Hazardous Material on, in, under or affecting all or any portion of the Property, the groundwater, or any surrounding areas, (ii) any misrepresentation, inaccuracy or breach of any warranty, covenant or agreement contained or referred to in Section 1.19, (iii) any violation or claim of violation by the ------------ Mortgagor of any Environmental Laws, or (iv) the imposition of any lien for damages caused by or the recovery of any costs for the cleanup, release or threatened release of Hazardous Material. If any action or proceeding be commenced, to which action or proceeding any Indemnified Party is made a party by reason of the execution of this Mortgage or the Notes, or in which it becomes necessary to defend or uphold the lien of this Mortgage, all sums paid by the Indemnified Parties, for the expense of any litigation to prosecute or defend the rights and lien created hereby, shall be paid by the Mortgagor to such Indemnified Parties, as the case may be, as hereinafter provided. The Mortgagor will pay and save the Indemnified Parties harmless against any and all liability with respect to any intangible personal property tax or similar imposition of the State or any subdivision or authority thereof now or hereafter in effect, to the extent that the same may be payable by the Indemnified Parties in respect of this Mortgage or any Secured Obligation. All amounts payable to the Indemnified Parties under this Section 1.16 shall be deemed indebtedness secured by this ------------ Mortgage and any such amounts which are not paid within 10 days after written demand therefor by any Indemnified Party shall bear interest at the Default Rate from the date of such demand. In case any action, suit or proceeding is brought against any Indemnified Party by reason of any such occurrence, the Mortgagor, upon request of such Indemnified Party, will, at the Mortgagor's expense, resist and defend such action, suit or proceeding or cause the same to be resisted or defended by counsel designated by the Mortgagor and approved by such Indemnified Party. The obligations of the Mortgagor under this Section 1.16 shall survive ------------ any discharge or reconveyance of this Mortgage or payment in full of the Secured Obligations. SECTION 1.17. No Credit for Payment of Taxes. The Mortgagor shall not be ------------------------------ entitled to any credit against the Obligations by reason of the payment of any tax on the Property or any part thereof or by reason of the payment of any other Imposition, and shall not apply for or claim any deduction from the taxable value of the Property or any part thereof by reason of this Mortgage. -18- SECTION 1.18. Offering of the Notes. Neither the Mortgagor nor any Person --------------------- acting on behalf of the Mortgagor has directly or indirectly offered the Notes or any portion thereof or any similar security to, or solicited any offer to buy any of the same from, any Person other than the Mortgagee. Neither the Mortgagor nor any Person acting on behalf of the Mortgagor has taken or will take any action which would subject the issuance of the Notes to the provisions of section 5 of the Securities Act of 1933, as amended. SECTION 1.19. Hazardous Material and Wastes. Neither the Mortgagor nor, to ----------------------------- the best knowledge of Mortgagor, any other Person has ever caused or permitted any Hazardous Material to be held or disposed of on or at the Property or at any other property legally or beneficially owned by the Mortgagor. The Mortgagor further represents and warrants to the Mortgagee as set forth in Section 6.12 of the Credit Agreements and agrees to perform the obligations set forth in Sections 7.1.6 of the Credit Agreements. ARTICLE II INSURANCE; DAMAGE, DESTRUCTION OR TAKING, ETC. --------------------------------------------- SECTION 2.1. Insurance. --------- SECTION 2.1.1. Risks to be Insured. The Mortgagor will, at its expense, ------------------- maintain or cause to be maintained with insurance carriers approved by the Mortgagee (a) insurance with respect to the Improvements against loss or damage by fire, lightning and such other risks as are included in standard "all-risk" policies, in amounts sufficient to prevent the Mortgagor and the Mortgagee from becoming a co-insurer of any partial loss under the applicable policies, but in any event in amounts not less than the then full insurable value (actual replacement value) of the Improvements, as determined by the Mortgagor in accordance with generally accepted insurance practice and approved by the Mortgagee or, upon the request of the Mortgagee as determined at the Mortgagor's expense by the insurer or insurers or by an expert approved by the Mortgagee, (b) commercial general liability, including bodily injury and property damage, insurance, with personal injury endorsement, applicable to the Property in such amounts as are usually carried by Persons operating similar properties in the same general locality, but in any event with a limit of not less than $3,000,000 per person for bodily injury liability, a limit of not less than $5,000,000 per occurrence for bodily injury liability and $500,000 for all claims for property damage liability with respect to any one -19- occurrence, (c) explosion insurance in respect of any steam and pressure boilers and similar apparatus located in the Property in such amounts as are usually carried by persons operating similar properties in the same general locality, but in any event in an amount not less than $500,000, (d) worker's compensation insurance to the full extent required by applicable law for all employees of the Mortgagor engaged in any work on or about the Property and employer's liability insurance with a limit of not less than $3,000,000 for each occurrence, (e) all-risk, builders' risk insurance with respect to the Property during any period during which there is any construction work being performed, against loss or damage by fire or other risks, including vandalism, malicious mischief and sprinkler leakage, as are included in so-called "extended coverage" clauses at the time available, (f) business interruption insurance in an amount reasonably satisfactory to the Mortgagee, and (g) such other insurance with respect to the Property in such amounts and against such insurable hazards as the Mortgagee from time to time may reasonably require by written notice to the Mortgagor. SECTION 2.1.2. Policy Provisions. All insurance maintained by the Mortgagor ----------------- pursuant to Section 2.1.1 shall (a) (except for worker's compensation insurance) ------------- name the Mortgagor as the named insured and the Mortgagee as an additional insured and loss payee, (b) (except for worker's compensation and commercial general liability insurance) provide that the proceeds for any losses shall be adjusted by the Mortgagor subject to the approval of the Mortgagee in the event the proceeds shall exceed $100,000, and shall be payable to the Mortgagee, to be held and applied as provided in Section 2.3, (c) include effective waivers by ----------- the insurer of all rights of subrogation against the Mortgagee, the indebtedness secured by this Mortgage and the Property and all claims for insurance premiums against the Mortgagee, (d) provide that any losses shall be payable notwithstanding (i) any act, failure to act or negligence of or violation of warranties, declarations or conditions contained in such policy by any named insured, (ii) the occupation or use of the Property for purposes more hazardous than permitted by the terms thereof, (iii) any foreclosure or other action or proceeding taken by the Mortgagee pursuant to any provision of this Mortgage, or (iv) any change in title or ownership of the Property, (e) provide that no cancellation, reduction in amount or material change in coverage thereof or any portion thereof shall be effective until at least 30 days after receipt by the Mortgagee of written notice thereof, and (f) be satisfactory in all other respects to the Mortgagee. Any insurance maintained pursuant to this Section 2.1 ----------- may be evidenced by blanket -20- insurance policies covering the Property and other properties or assets of the Mortgagor, provided that any such policy shall specify the portion, if less than -------- ---- all, of the total coverage of such policy that is allocated to the Property and shall in all other respects comply with the requirements of this Section 2.1. ----------- SECTION 2.1.3. Delivery of Policies, etc. The Mortgagor will deliver to the -------------------------- Mortgagee, promptly upon request, (a) the originals (or, at the Mortgagee's option, certificates) of all policies evidencing all insurance required to be maintained under Section 2.1.1 (or, in the case of blanket policies, ------------- certificates thereof by the insurers together with a counterpart of each blanket policy), and (b) evidence as to the payment of all premiums due thereon (with respect to commercial general liability insurance policies, all installments for the current year due thereon to such date), provided that the Mortgagee shall -------- ---- not be deemed by reason of its custody of such policies to have knowledge of the contents thereof. The Mortgagor will also deliver to the Mortgagee not later than 30 days prior to the expiration of any policy a binder or certificate of the insurer evidencing the replacement thereof and not later than 15 days prior to the expiration of such policy an original copy of the new policy (or, in the case of a replacement blanket policy, a certificate thereof of the insurer together with a counterpart of the blanket policy). In the event the Mortgagor shall fail to effect or maintain any insurance required to be effected or maintained pursuant to the provisions of this Section 2.1, the Mortgagor will ----------- indemnify the Mortgagee against damage, loss or liability resulting from all risks for which such insurance should have been effected or maintained. SECTION 2.1.4. Separate Insurance. The Mortgagor will not take out separate ------------------ insurance concurrent in form or contributing in the event of loss with that required to be maintained pursuant to this Section 2.1. ----------- SECTION 2.2. Damage, Destruction or Taking; Mortgagor to Give Notice; ------------------------------------------------------- Assignment of Awards. In case of - -------------------- (a) any damage to or destruction of the Collateral or any part thereof, or (b) any taking, whether for permanent or temporary use, of all or any part of the Collateral or any interest therein or right accruing thereto, as the result of or in anticipation of the exercise of the right of condemnation or eminent domain, or a change of grade affecting the Collateral or any portion thereof (a "Taking"), or the ------ -21- commencement of any proceedings or negotiations which may result in a Taking, the Mortgagor will promptly give written notice thereof to the Mortgagee, generally describing the nature and extent of such damage or destruction and the Mortgagor's best estimate of the cost of restoring the Collateral, or the nature of such proceedings or negotiations and the nature and extent of the Taking which might result therefrom, as the case may be. The Mortgagee shall be entitled to all insurance proceeds payable on account of such damage or destruction and to all awards or payments allocable to the Collateral on account of such Taking, and the Mortgagor hereby irrevocably assigns, transfers and sets over to the Mortgagee all rights of the Mortgagor to any such proceeds, awards or payments and irrevocably authorizes and empowers the Mortgagee, at its option, in the name of the Mortgagor or otherwise, to file and prosecute what would otherwise be the Mortgagor's claim for any such proceeds, award or payment and to collect, receipt for and retain the same for disposition in accordance with Section 2.3. The Mortgagor will pay all reasonable costs and expenses ----------- incurred by the Mortgagee in connection with any such damage, destruction or Taking and seeking and obtaining any insurance proceeds, awards or payments in respect thereof. SECTION 2.3. Application of Proceeds and Awards. The Mortgagee may, at its ---------------------------------- option, apply all amounts recovered under any insurance policy required to be maintained by the Mortgagor hereunder and all awards received by it on account of any Taking in any one or more of the following ways: (a) to the payment of the reasonable costs and expenses incurred by the Mortgagee in obtaining any such insurance proceeds or awards, including the fees and expenses of attorneys and insurance and other experts and consultants, the costs of litigation, arbitration, mediation, investigations and other judicial, administrative or other proceedings and all other out-of-pocket expenses; (b) Ratably, to the payment of any Obligation secured by this Mortgage other than indebtedness with respect to the Secured Obligations; (c) Ratably, to the payment of the principal of the Secured Obligations and any interest (including post-petition interest payable in any proceedings for bankruptcy under applicable law ("Post-Petition ------------- Interest") to the -------- -22- extent such interest is an Obligation) accrued and unpaid thereon, without regard to whether any portion or all of such amounts shall be matured or unmatured, together with interest at the Default Rate on any overdue principal and (to the extent permitted by applicable law) interest; and, in case such amount shall be insufficient to pay in full all such amounts, then such amount shall be applied, first, to the payment of all amounts of ----- interest (including Post-Petition Interest to the extent such interest is an Obligation) accrued on the Secured Obligations and unpaid, second, to ------ the payment of all amounts of principal at the time outstanding; (d) to fulfill any of the other covenants contained herein as the Mortgagee may determine; (e) to the Mortgagor for application to the cost of restoring the Collateral and the replacement of Goods destroyed, damaged or taken; or (f) to the Mortgagor. Notwithstanding the foregoing provisions of this Section 2.3 to the ----------- contrary, and if each of the following conditions is satisfied, the Mortgagee, upon request of the Mortgagor, shall apply insurance proceeds or condemnation awards received by it to the restoration or replacement of the Collateral, to the extent necessary for the restoration or replacement thereof: (i) there shall then exist no uncured material Default; (ii) the Mortgagor shall furnish to the Mortgagee a certificate of an architect or engineer reasonably acceptable to the Mortgagee stating (x) that the Collateral is capable of being restored, prior to the maturity of the Loans, to substantially the same condition as existed prior to the casualty or Taking, (y) the aggregate estimated direct and indirect costs of such restoration and (z) as to any Taking, that the property taken in such Taking, or sold under threat thereof, is not necessary to the Mortgagor's customary use or occupancy of the Property; and (iii) in the event that the estimated cost of restoration set forth in the certificate of such architect or engineer (and such revisions to such estimate as are from time to time made) exceeds the -23- net insurance proceeds or condemnation awards actually received from time to time, the Mortgagor shall deposit the amount of such excess with the Mortgagee. In the event that such insurance proceeds or condemnation awards are to be utilized in the restoration of the Collateral, the Mortgagee shall disburse such Proceeds and the additional amounts deposited by the Mortgagor for such restoration after receipt of a written request for disbursement, on not less than five nor more than twelve Business Days' notice and, to the extent applicable, in accordance with customary construction loan procedures and conditions. In the event that such insurance or condemnation awards are to be utilized to replace the Collateral so destroyed or taken, the Mortgagee shall disburse such Proceeds after receipt of a written request for disbursement, on not less than five nor more than twelve Business Days' notice simultaneously with the acquisition of such replacement property by the Mortgagor. In the event that, after the restoration or replacement of the Collateral, any insurance or condemnation awards shall remain, such amount shall be paid to the Mortgagor. Insurance proceeds and condemnation awards shall be invested in the manner reasonably requested by the Mortgagor and approved by the Mortgagee, and all interest earned thereon shall be applied as provided in this Section 2.3. If, ----------- prior to the receipt by the Mortgagee of such insurance proceeds or condemnation awards, the Collateral shall have been sold on foreclosure, the Mortgagee shall have the right to receive said insurance proceeds or condemnation awards to the extent of any deficiency found to be due upon such sale, with legal interest thereon, whether or not a deficiency judgment shall have been sought or recovered or denied, and the reasonable attorneys' fees, costs and disbursements incurred by the Mortgagee in connection with the collection of such award or payment. SECTION 2.4. Total Taking and Total Destruction. In the event of a Total ---------------------------------- Destruction or a Total Taking, the Mortgagee shall apply all amounts recovered under any insurance policy referred to in Section 2.1.1 and all awards received ------------- by it on account of any such Taking as follows: (a) first, to the payment of the reasonable costs and expenses incurred by the Mortgagee in obtaining any such insurance proceeds or awards, including the fees and expenses of attorneys and insurance and other experts and consultants, the costs of litigation, arbitration, mediation, investigations and other judicial, -24- administrative or other proceedings and all other out-of-pocket expenses; (b) second, Ratably, to the payment of any Obligation secured by this Mortgage other than indebtedness with respect to the Secured Obligations; (c) third, Ratably, to the payment of the principal of the Secured Obligations and any interest (including Post-Petition Interest to the extent such interest is an Obligation) accrued and unpaid thereon, without regard to whether any portion or all of such amounts shall be matured or unmatured, together with interest at the Default Rate on any overdue principal and (to the extent permitted by applicable law) interest; and, in case such amount shall be insufficient to pay in full all such amounts, then such amount shall be applied, first, to the payment of all amounts of ----- interest (including Post-Petition Interest to the extent such interest is an Obligation) accrued on the Secured Obligations and unpaid, and second, ------ to the payment of all amounts of principal at the time outstanding; (d) fourth, to fulfill any of the other covenants contained herein as the Mortgagee may determine; and (e) fifth, the balance, if any, to the Mortgagor. ARTICLE III EVENTS OF DEFAULT; REMEDIES, ETC. -------------------------------- SECTION 3.1. Events of Default; Acceleration. If any one or more of the ------------------------------- following events (herein called "Events of Default") shall occur: ----------------- (a) if an "Event of Default" under and as defined in any of the Credit Agreements shall have occurred; or (b) if the Mortgagor shall default in the due and punctual performance or observance of any of its obligations under Section 1.4, 1.5, ----------- --- 1.7, 1.9, or 2.1; or --- --- --- (c) if the Mortgagor shall fail to duly and punctually perform or comply with any provision of this Mortgage other than the provisions referred to in clause (a) or (b) of this Section 3.1 and such default shall --------- - ----------- continue unremedied for a period of 30 days after the date -25- that notice of such nonperformance or noncompliance is delivered to the Mortgagor; or (d) if the Mortgagor shall, directly or indirectly, voluntarily or involuntarily, by operation of law or otherwise, sell, convey, transfer, assign, grant a security interest in or otherwise dispose of the Collateral or any portion thereof or estate or interest therein; or (e) if subsequent to the date of this Mortgage the law of the State shall be changed by statutory enactment, judicial decision, regulation or otherwise, so as (i) to deduct from the value of land for the purpose of taxation (for state, county, municipal or other purpose) any lien or charge thereon, or (ii) to change the taxation of deeds of trust, mortgages or debts secured by land or the manner of collecting any such taxation, so as to affect this Mortgage, and thereafter, within 30 days following receipt of a written request from the Mortgagee, the Mortgagor shall have failed to enter into a lawful and binding agreement with the Mortgagee, satisfactory in substance and form to the Mortgagee, obligating the Mortgagor to reimburse the Mortgagee for any increase in taxation imposed on the Mortgagee by reason of any of the foregoing; then and in any such event the Mortgagee may at any time thereafter exercise any right or remedy granted to the Mortgagee under the Credit Agreements or the other Loan Documents or available to the Mortgagee at law or in equity including, without limitation, declare, by written notice to the Mortgagor, the Secured Obligations and all other Obligations to be due and payable immediately or on a date specified in such notice, and on such date the same shall be and become due and payable, together with interest accrued thereon, without presentment, demand, protest or notice, all of which the Mortgagor hereby waives. The Mortgagor will pay on demand all costs and expenses, including, without limitation, attorneys' fees and expenses, incurred by or on behalf of the Mortgagee in enforcing this Mortgage or the Secured Obligations or any other Loan Document, or occasioned by any default hereunder or thereunder. SECTION 3.2. Legal Proceedings; Foreclosure. If an Event of Default shall ------------------------------ have occurred and be continuing, the Mortgagee at any time may, at its election, proceed at law or in equity or otherwise to enforce the payment of the Secured Obligations in accordance with the terms hereof and thereof and to foreclose the lien of this Mortgage as against all or any part of the Collateral and to have the same sold under the judgment or -26- decree of a court of competent jurisdiction. The Mortgagee shall be entitled to recover in such proceedings all costs incident thereto, including attorneys' fees and expenses in such amounts as may be fixed by the court. If the Mortgagee commences a foreclosure action, the same shall be conducted pursuant to Wis. Stats. Chapter 846 (as the same may be amended from time to time). SECTION 3.3. Power of Sale. If the unpaid principal amount of and interest ------------- on the Secured Obligations shall have become due and payable (whether at maturity or as an installment of combined principal and interest or by reason of any prepayment requirement or by declaration or acceleration or otherwise) and shall not have been paid, the Mortgagee may sell, assign, transfer and deliver the whole or, from time to time, any part of the Collateral, or any interest in any part thereof, at any private sale or at public auction, with or without demand, advertisement or notice, for cash, on credit or for other property, for immediate or future delivery, and for such price or prices and on such terms as the Mortgagee in its uncontrolled discretion may determine, or as may be required by law. Without limiting the authority granted in the immediately preceding sentence, the Mortgagee shall, without demand on the Mortgagor, after the lapse of such time as may then be required by law following the recordation of the notice of default, and notice of default and notice of sale having been given as then required by law, sell the Collateral on the date and at the time and place designated in the notice of sale, either as a whole or in separate parcels and in such order as the Mortgagee may determine, but subject to any statutory right of the Mortgagor to direct the order in which such property, if consisting of several known lots, parcels or interests, shall be sold, at public auction to the highest bidder, the purchase price payable in lawful money of the United States at the time of sale. The Person conducting the sale may, for any cause deemed expedient, postpone the sale from time to time until it shall be completed and, in every such case, notice of postponement shall be given by public declaration thereof by such Person at the time and place last appointed for the sale; provided that, if the sale is postponed for longer than one day -------- ---- beyond the day designated in the notice of sale, notice of sale, notice of the time, date and place of sale shall be given in the same manner as the original notice of sale. The Mortgagee shall execute and deliver to the purchaser at any such sale a Mortgagee's deed conveying the property so sold, but without any covenant or warranty, express or implied. The recitals in such Mortgagee's deed of any matters or facts shall be conclusive proof of the truthfulness -27- thereof. Any Person, including the Mortgagee, may bid at the sale. The Mortgagee shall apply the proceeds of the sale, to the extent consistent with this Mortgage, to the payment of (a) the costs and expenses of exercising the power of sale and of the sale, including the payment of attorneys' fees and costs, (b) the cost of any evidence of title procured in connection with such sale, (c) all sums expended under the terms hereof in conjunction with any default provision hereof, not then repaid, with accrued interest at the Default Rate from the date of incurrence, (d) all amounts then secured by this Mortgage, including the outstanding principal amount of the Secured Obligations, together with interest accrued and unpaid thereon, and (e) the remainder, if any, to the Person or Persons legally entitled thereto, or the Mortgagee, in the Mortgagee's discretion, may deposit the balance of such proceeds with any court or public official authorized to receive such proceeds. SECTION 3.4. Uniform Commercial Code Remedies. If an Event of Default shall -------------------------------- have occurred and be continuing, the Mortgagee may exercise from time to time and at any time any rights and remedies available to it under applicable law upon default in the payment of indebtedness, including, without limitation, any right or remedy available to it as a secured party under the Uniform Commercial Code of the State. The Mortgagor shall, promptly upon request by the Mortgagee, assemble the Collateral, or any portion thereof generally described in such request, and make them available to the Mortgagee at such place or places designated by the Mortgagee and reasonably convenient to the Mortgagee and the Mortgagor. If the Mortgagee elects to proceed under the Uniform Commercial Code of the State to dispose of portions of the Collateral, the Mortgagee, at its option, may give the Mortgagor notice of the time and place of any public sale of any such property, or of the date after which any private sale or other disposition thereof is to be made, by sending notice by registered or certified first class mail, postage prepaid, to the Mortgagor at least ten days before the time of the sale or other disposition. If any notice of any proposed sale, assignment or transfer by the Mortgagee of any portion of the Collateral or any interest therein is required by law, the Mortgagor conclusively agrees that ten days' notice to the Mortgagor of the date, time and place (and, in the case of a private sale, the terms) thereof is reasonable. SECTION 3.5. Mortgagee Authorized to Execute Deeds, etc. The Mortgagor ------------------------------------------ irrevocably appoints the Mortgagee the true and lawful attorney of the Mortgagor, in its name and stead and on -28- its behalf, for the purpose of effectuating, after the occurrence and during the continuation of an Event of Default, any sale, assignment, transfer or delivery for the enforcement hereof, whether pursuant to power of sale, foreclosure or otherwise, to execute and deliver all such deeds, bills of sale, assignments, releases and other instruments as may be designated in any such request. SECTION 3.6. Purchase of Collateral by Mortgagee. The Mortgagee may be a ----------------------------------- purchaser of the Collateral or of any part thereof or of any interest therein at any sale thereof, whether pursuant to power of sale, foreclosure or otherwise, and the Mortgagee may apply upon the purchase price thereof the indebtedness secured hereby. Such purchaser shall, upon any such purchase, acquire good title to the properties so purchased, free of the security interest and lien of this Mortgage and free of all rights of redemption in the Mortgagor. SECTION 3.7. Receipt a Sufficient Discharge to Purchaser. Upon any sale of ------------------------------------------- the Collateral or any part thereof or any interest therein, whether pursuant to power of sale, foreclosure or otherwise, the receipt of the Mortgagee or the officer making the sale under judicial proceedings shall be a sufficient discharge to the purchaser for the purchase money, and such purchaser shall not be obliged to see to the application thereof. SECTION 3.8. Waiver of Appraisement, Valuation, etc. The Mortgagor hereby -------------------------------------- waives, to the fullest extent it may lawfully do so, the benefit of all appraisement, valuation, stay, extension and redemption laws now or hereafter in force and all rights of marshaling in the event of any sale of the Collateral or any part thereof or any interest therein. SECTION 3.9. Sale a Bar Against Mortgagor. Any sale of the Collateral or ---------------------------- any part thereof or any interest therein under or by virtue of this Mortgage, whether pursuant to power of sale, foreclosure or otherwise, shall forever be a bar against the Mortgagor. SECTION 3.10. Application of Proceeds of Sale and Other Moneys. The ------------------------------------------------ proceeds of any sale of the Collateral or any part thereof or any interest therein under or by virtue of this Mortgage, whether pursuant to power of sale, foreclosure or otherwise, and all other moneys at any time held by the Mortgagee as part of the Collateral, shall be applied as follows: -29- First: to the payment of the reasonable costs and expenses of such sale ----- (including, without limitation, the cost of evidence of title and the costs and expenses, if any, of taking possession of, retaining custody over, repairing, managing, operating, maintaining and preserving the Collateral or any part thereof prior to such sale), all reasonable costs and expenses incurred by the Mortgagee or any other Person in obtaining or collecting any insurance proceeds, condemnation awards or other amounts received by the Mortgagee, all reasonable costs and expenses of any receiver of the Collateral or any part thereof, and any Impositions or other charges or expenses prior to the security interest or lien of this Mortgage, which the Mortgagee may consider it necessary or desirable to pay; Second: Ratably, to the payment of any indebtedness secured by this ------ Mortgage, other than indebtedness with respect to the Secured Obligations at the time outstanding, which the Mortgagee may consider it necessary or desirable to pay; Third: Ratably, to the payment of all amounts of principal of and interest ----- (including Post-Petition Interest to the extent such interest is an Obligation) at the time due and payable on the Secured Obligations at the time outstanding (whether due by reason of maturity or by reason of any prepayment requirement or by declaration or acceleration or otherwise), including interest at the Default Rate on any overdue principal and (to the extent permitted under applicable law) on any overdue interest; and, in case such moneys shall be insufficient to pay in full the amounts so due and unpaid with respect to the Secured Obligations at the time outstanding, then, first, to the payment of all amounts of interest ----- (including Post-Petition Interest to the extent such interest is an Obligation) at the time due and payable on the Secured Obligations and, second, to the ------ payment of all amounts of principal at the time due and payable on the Secured Obligations; and Fourth: the balance, if any, held by the Mortgagee after payment in full of ------ all amounts referred to in subdivisions First, Second and Third, above, shall, ----- ------ ----- unless a court of competent jurisdiction may otherwise direct by final order not subject to appeal, be paid to or upon the direction of the Mortgagor. -30- SECTION 3.11. Appointment of Receiver. If an Event of Default shall have ----------------------- occurred and be continuing, the Mortgagee shall, as a matter of right and without regard to the adequacy of any security for the indebtedness secured hereby or the solvency of the Mortgagor, be entitled to the appointment of a receiver for all or any part of the Collateral, whether such receivership be incidental to a proposed sale of the Collateral or otherwise, and the Mortgagor hereby consents to the appointment of such a receiver and will not oppose any such appointment and agrees that all expenses of such receivership shall be borne by the Mortgagor and shall be an Obligation secured by this Mortgage. SECTION 3.12. Possession, Management and Income. If an Event of Default --------------------------------- shall have occurred and be continuing, in addition to, not in limitation of, the rights and remedies provided in Section 1.14, the Mortgagee, upon five days' ------------ notice to the Mortgagor, may enter upon and take possession of the Collateral or any part thereof by force, summary proceeding, ejectment or otherwise and may remove the Mortgagor and all other Persons and any and all property therefrom and may hold, operate, maintain, repair, preserve and manage the same and receive all earnings, income, Rents, issues and Proceeds accruing with respect thereto or any part thereof. The Mortgagee shall be under no liability for or by reason of any such taking of possession, entry, removal or holding, operation or management, except that any amounts so received by the Mortgagee shall be applied to pay all costs and expenses of so entering upon, taking possession of, holding, operating, maintaining, repairing, preserving and managing the Collateral or any part thereof, and any Impositions or other charges prior to the lien and security interest of this Mortgage which the Mortgagee may consider it necessary or desirable to pay, and any balance of such amounts shall be applied as provided in Section 3.10. ------------ SECTION 3.13. Right of Mortgagee to Perform Mortgagor's Covenants, etc. -------------------------------------------------------- If the Mortgagor shall fail to make any payment or perform any act required to be made or performed hereunder or under the Credit Agreements or the other Loan Documents, the Mortgagee, without notice to or demand upon the Mortgagor and without waiving or releasing any obligation or Default, may (but shall be under no obligation to) at any time thereafter make such payment or perform such act for the account and at the expense of the Mortgagor, and may enter upon the Collateral for such purpose and take all such action thereon as, in the Mortgagee's opinion, may be necessary or appropriate therefor, -31- provided that the Mortgagee shall have no right to perform any covenant of the - -------- Mortgagor under Section 1.19 (or Section 1.4 to the extent that it includes any ------------ ----------- of the matters more specifically described in Section 1.19) until the entire ------------ outstanding principal amount of the Secured Obligations shall have become due and payable by reason of the declaration of the Mortgagee or the Lenders or the maturity of the Notes. No such entry and no such action shall be deemed an eviction of any lessee of the Property or any part thereof. All sums so paid by the Mortgagee and all costs and expenses (including, without limitation, attorneys' fees and expenses) so incurred, together with interest thereon at the Default Rate from the date of payment or incurring, shall constitute additional indebtedness secured by this Mortgage and shall be paid by the Mortgagor to the Mortgagee on demand. SECTION 3.14. Subrogation. To the extent that the Mortgagee, on or after ----------- the date hereof, pays any sum due under any provision of any Legal Requirement or any instrument creating any lien prior or superior to the lien of this Mortgage, or the Mortgagor or any other Person pays any such sum with the proceeds of the Loans evidenced by the Notes, the Mortgagee shall have and be entitled to a lien on the Collateral equal in priority to the lien discharged, and the Mortgagee shall be subrogated to, and receive and enjoy all rights and liens possessed, held or enjoyed by, the holder of such lien, which shall remain in existence and benefit the Mortgagee in securing the Obligations. SECTION 3.15. Remedies, etc., Cumulative. Each right, power and remedy -------------------------- of the Mortgagee provided for in this Mortgage or now or hereafter existing at law or in equity or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for in this Mortgage or the other Loan Documents, or now or hereafter existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by the Mortgagee of any one or more of the rights, powers or remedies provided for in this Mortgage, or now or hereafter existing at law or in equity or by statute or otherwise shall not preclude the simultaneous or later exercise by the Mortgagee of any or all such rights, powers or remedies. SECTION 3.16. Provisions Subject to Applicable Law. All rights, powers ------------------------------------ and remedies provided in this Mortgage may be exercised only to the extent that the exercise thereof does not violate any applicable provisions of law and are intended to be limited to the extent necessary so that they will not render -32- this Mortgage invalid, unenforceable or not entitled to be recorded, registered or filed under the provisions of any applicable law. If any term of this Mortgage or any application thereof shall be invalid or unenforceable, the remainder of this Mortgage and any other application of such term shall not be affected thereby. SECTION 3.17. No Waiver, etc. No failure by the Mortgagee to insist upon -------------- the strict performance of any term hereof or of any other Loan Document, or to exercise any right, power or remedy consequent upon a breach hereof or thereof, shall constitute a waiver of any such term or of any such breach. No waiver of any breach shall affect or alter this Mortgage, which shall continue in full force and effect with respect to any other then existing or subsequent breach. By accepting payment or performance of any of the Obligations before or after its due date, the Mortgagee shall not be deemed to have waived its right either to require prompt payment or performance when due of all other Obligations payable hereunder or to declare a default for failure to effect such prompt payment or performance. SECTION 3.18. Compromise of Actions, etc. Any action, suit or proceeding -------------------------- brought by the Mortgagee pursuant to any of the terms of this Mortgage, the Credit Agreements, any other Loan Document, or otherwise, and any claim made by the Mortgagee hereunder or thereunder, may be compromised, withdrawn or otherwise dealt with by the Mortgagee without any notice to or approval of the Mortgagor. SECTION 3.19. Foreclosure Without Deficiency Judgment. The Mortgagor --------------------------------------- agrees to the provisions of Wis. Stats. Sec. 846.103, as ay apply to the Collateral, as such Section may be amended or renumbered from time to time. ARTICLE IV DEFINITIONS ----------- SECTION 4.1. Terms Defined in this Mortgage. When used herein the ------------------------------ following terms have the following meanings: "Collateral": see the granting clause. ---------- --------------- "Credit Agreement (Five Year)": see the second recital. ---------------- ------ ------- "Credit Agreement (364 Days)": see the second recital. ---------------- ------ ------- "Credit Agreements": see the second recital. ----------------- ------ ------- -33- "Default" means any Event of Default or any condition or event which, ------- after notice or lapse of time, or both, would constitute an Event of Default. "Default Rate" means the per annum rate of interest specified in ------------ Section 3.2.2 of the Credit Agreements. "Event of Default": see Section 3.1. ---------------- ----------- "Existing Mortgage": see the fourth recital. ----------------- ------ ------- "First Refinanced Credit Agreement": see the third recital. --------------------------------- ----- ------- "Goods": see clause (c) of the granting clause. ----- ---------- -------- ------ "herein", "hereof", "hereto", and "hereunder" and similar terms refer ------ ---- ------ --------- to this Mortgage and not to any particular Section, paragraph or provision of this Mortgage. "Impositions": see Section 1.5. ----------- ----------- "Improvements": see clause (b) of the granting clause. ------------ ---------- -------- ------ "Indemnified Parties": see Section 1.16. ------------------- ------------ "Insurance Requirements": see paragraph (a) of Section 1.6. ---------------------- ------------- ----------- "Intangibles": see clause (d) of the granting clause. ----------- ---------- -------- ------ "Land": see the first recital. ---- ----- ------- "Leases": see paragraph (a) of Section 1.14. ------ ------------- ------------ "Legal Requirements": see paragraph (b) of Section 1.6. ------------------ ------------- ----------- "Lenders": see the preamble. ------- -------- "Loans": see the second recital. ----- ------ ------- "Loan Document": see clause (b) of the sixth recital. ------------- ---------- ----- ------- "Mortgage": see the preamble. -------- -------- "Mortgagee": see the preamble. --------- -------- "Mortgagor": see the preamble. --------- -------- -34- "Notes": means, collectively, the "Notes" as defined in the Credit ---- Agreement (Five Year) and "Notes" as defined in the Credit Agreement (364 Days). "Obligations": see the sixth recital. ----------- ----- ------- "Official Records": see the fourth recital. ---------------- ------ ------- "Original Credit Agreement (5 Year)": see the third recital. ---------------------------------- ----- ------- "Original Credit Agreement (364 Days)": see the third recital. ------------------------------------ ----- ------- "Original Credit Agreements": see the third recital. -------------------------- ----- ------- "Permits": see clause (f) of the granting clause. ------- ---------- -------- ------ "Permitted Encumbrances": see Section 1.2. ---------------------- ----------- "Person" means a corporation, an association, a partnership, an ------ organization, a business, an individual, a government or political subdivision thereof or a governmental agency or officer. "Plans": see clause (e) of the granting clause. ----- ---------- -------- ------ "Post-Petition Interest": see Section 2.3. ---------------------- ----------- "Proceeds": see clause (h) of the granting clause. -------- ---------- -------- ------ "Property": see clause (b) of the granting clause. -------- ---------- -------- ------ "Ratable" or "Ratably" means, in the context of a distribution of ------- ------- Collateral or Proceeds, an allocation of such Collateral or Proceeds among the Lenders pro rata in accordance with their respective portion of the aggregate --- ---- dollar amount of the Obligations to which the distribution is being applied. "Real Estate": see clause (a) of the granting clause. ----------- ---------- -------- ------ "Rents": see paragraph (a) of Section 1.14. ----- ------------- ------------ "Secured Obligations": see the second recital. ------------------- ------ ------- "State": means the State of Wisconsin. ----- "Taking": see clause (b) of Section 2.2. ------ ---------- ----------- -35- "Total Destruction" means any damage to or destruction of the ----------------- Improvements or any part thereof which, in the reasonable estimation of the Mortgagee shall require the expenditure of an amount in excess of $500,000 to restore the Improvements to substantially the same condition of the Improvements immediately prior to such damage or destruction. "Total Taking" means a Taking, whether permanent or for temporary use, ------------ which, in the reasonable judgment of the Mortgagee, shall substantially interfere with the normal operation of the Property by the Mortgagor. SECTION 4.2. Use of Defined Terms. Terms for which meanings are -------------------- provided in this Mortgage shall, unless otherwise defined or the context otherwise requires, have such meanings when used in any certificate and any opinion, notice or other communication delivered from time to time in connection with this Mortgage or pursuant hereto. SECTION 4.3. Credit Agreement Definitions. Unless otherwise defined ---------------------------- herein or the context otherwise requires, capitalized terms used in this Mortgage, including its preamble and recitals, have the meanings provided in the Credit Agreements. ARTICLE V MISCELLANEOUS ------------- SECTION 5.1. Further Assurances; Financing Statements. ---------------------------------------- SECTION 5.1.1. Further Assurances. The Mortgagor, at its expense, will ------------------ execute, acknowledge and deliver all such instruments and take all such other action as the Mortgagee from time to time may reasonably request: (a) better to subject to the lien and security interest of this Mortgage all or any portion of the Collateral, (b) to perfect, publish notice or protect the validity of the lien and security interest of this Mortgage, (c) to preserve and defend the title to the Collateral and the rights of the Mortgagee therein against the claims of all Persons as long as this Mortgage shall remain undischarged, -36- (d) better to subject to the lien and security interest of this Mortgage or to maintain or preserve the lien and security interest of this Mortgage with respect to any replacement or substitution for any Improvements or any other after-acquired property, or (e) in order further to effectuate the purposes of this Mortgage and to carry out the terms hereof and to better assure and confirm to the Mortgagee its rights, powers and remedies hereunder. SECTION 5.1.2. Financing Statements. Notwithstanding any other -------------------- provision of this Mortgage, the Mortgagor hereby agrees that, without notice to or the consent or signature of the Mortgagor, the Mortgagee may file with the appropriate public officials such financing statements, continuation statements, amendments and similar documents as are or may become necessary to perfect, preserve or protect the security interest granted by this Mortgage. SECTION 5.2. Additional Security. Without notice to or consent of the ------------------- Mortgagor, and without impairment of the security interest and lien and rights created by this Mortgage, the Mortgagee may accept from the Mortgagor or any other Person additional security for the Secured Obligations. Neither the giving of this Mortgage nor the acceptance of any such additional security shall prevent the Mortgagee from resorting, first, to such additional security, or, first, to the security created by this Mortgage, or concurrently to both, in any case without affecting the Mortgagee's lien and rights under this Mortgage. SECTION 5.3. Defeasance; Partial Release, etc. -------------------------------- SECTION 5.3.1. Defeasance. If the Mortgagor shall pay, in full, the ---------- principal of and premium, if any, and interest on the Secured Obligations in accordance with the terms thereof and hereof and all other sums payable hereunder by the Mortgagor and shall comply with all the terms, conditions and requirements hereof and of the Secured Obligations, then on such date, this Mortgage shall be (except as provided herein) null and void and of no further force and effect and the Collateral shall thereupon be, and be deemed to have been, reconveyed, released and discharged from this Mortgage without further notice on the part of either the Mortgagor or the Mortgagee. SECTION 5.3.2. Partial Release etc. The Mortgagee may, at any time and ------------------- from time to time, without liability therefor, and -37- without prior notice to the Mortgagor, release, reconvey any part of the Collateral, consent to the making of any map or plat of the Property, join in granting any easement thereon or join in any extension agreement or agreement subordinating the lien of this Mortgage or enter into any other agreement in connection with the Collateral. SECTION 5.4. Notices, etc. All notices and other communications ------------ provided to the Mortgagor or the Mortgagee under this Mortgage shall be given in the manner and with the effect specified in the Credit Agreements. The foregoing incorporation by reference of the Mortgagor's mailing address shall be deemed to be a request by the Mortgagor that a copy of any notice of default and of any notice of sale hereunder be mailed to the Mortgagor at such address as provided by law. SECTION 5.5. Waivers, Amendments, etc. The provisions of this ------------------------ Mortgage may be amended, discharged or terminated and the observance or performance of any provision of this Mortgage may be waived, either generally or in a particular instance and either retroactively or prospectively, only by an instrument in writing executed by the Mortgagor and the Mortgagee. SECTION 5.6. Cross-References. References in this Mortgage and in ---------------- each instrument executed pursuant hereto to any Section or Article are, unless otherwise specified, to such Section or Article of this Mortgage or such instrument, as the case may be, and references in any Section, Article or definition to any clause are, unless otherwise specified, to such clause of such Section, Article or definition. SECTION 5.7. Headings. The various headings of this Mortgage and of -------- each instrument executed pursuant hereto are inserted for convenience only and shall not affect the meaning or interpretation of this Mortgage or such instrument or any provisions hereof or thereof. SECTION 5.8. Governing Law. This Mortgage shall be deemed to be a ------------- ontract made under and governed by the laws of the State. SECTION 5.9. Successors and Assigns, etc. This Mortgage shall be --------------------------- binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. SECTION 5.10. Loan Document. This Mortgage is a Loan Document ------------- executed pursuant to the Credit Agreements and shall (unless otherwise expressly indicated herein) be construed, -38- administered and applied in accordance with the terms and provisions thereof, including Article X thereof. --------- SECTION 5.11. Severability. Any provision of this Mortgage or any ------------ other Loan Document which is prohibited or unenforceable in any jurisdiction shall as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Mortgage or such Loan Document or affecting the validity or unenforceability of such provision in any other jurisdiction. SECTION 5.12. Amended and Restated Mortgage. This Mortgage amends and ----------------------------- restates in its entirety the Existing Mortgage. -39- IN WITNESS WHEREOF, the Mortgagor has caused this Mortgage to be duly executed as of the day and year first above written. MORTGAGOR: ATTEST: NASCO INTERNATIONAL, INC., a Wisconsin corporation ____________________________ Name:_______________________ By:________________________________________ [Assistant] Secretary Name:______________________________________ Title:_____________________________________ [Corporate Seal] ACKNOWLEDGMENT STATE OF ________________________________________) )ss.: COUNTY OF _______________________________________) On this the _____ day of __________, 2001, before me, ___________________, the undersigned officer, personally appeared ______________, who acknowledged himself to be the __________ of NASCO INTERNATIONAL, INC., a Wisconsin corporation, and that he, as such ______________, being authorized so to do, executed the foregoing instrument for the purposes therein contained, by signing the name of the corporation by himself as ______________. In witness whereof I hereunto set my hand and official seal. __________________________________ __________________________________ Title of Officer SCHEDULE 1 ---------- Description of the Land ----------------------- PARCEL 1: Lots 1 and 2 of Certified Survey Map No. 203, recorded in the Register of Deeds office for Jefferson County on February 25, 1973 in Volume 1 of Certified Survey Maps at page 255, as Document No. 705845, being a part of the West 1/2 of the Northeast 1/4 of Section 9, in the City of Fort Atkinson, Jefferson County, Wisconsin. Also a parcel of land abutting the North line of Lot 1 described as follows: Beginning at an iron pipe marking the Northwest corner of said Lot 2; thence North 13(degrees)30' East, 13.35 feet along the Northerly extension of the West line of said Lot 2 to an iron pipe marking the Northeast corner of Lot 1; thence North 60(degrees)50'30" East, 85.61 feet to an iron pipe; thence South 27(degrees)29'00" West, 73.49 feet to a point on the North line of said Lot 2; thence North 76(degrees)30' West, 45.41 feet along said North line to the point of beginning, except the following: Beginning at the Southeast corner of Lot 2 said Certified Survey Map No. 203; thence North 13(degrees)30' East, 85.18 feet to the Northeast corner of said Lot 2; thence North 76(degrees)30' West, 207.64 feet to a point on the West property line of Lot 2 of Certified Survey Map No. 1084; thence Southwesterly 84 feet more or less along the West line of said Lot 2 of Certified Survey Map No. 1084 extended to the point of intersection of said West line extended and the North right of way line of James Place; thence Southeasterly 215 feet more or less along the North right of way line of James Place; thence Southeasterly 215 feet more or less along the North right of way line of James Place to the point of beginning. Tax Key No.: 05-14-09-21-001 Address: Vacant Land PARCEL 2: Commencing at a point on the center line of the highway leading from Fort Atkinson to Janesville 289.9 feet South of the North line of Section 9, Township 5 North, Range 14 East, in the City of Fort Atkinson, Jefferson County, Wisconsin (measured at right angles to said North Section Line); thence East 330.38 feet; thence South 17(degrees)44'30" West, 275.77 feet; thence South 51(degrees)16' West, 85.61 feet; thence North 86(degrees)04'30" West, 268.26 feet to the point on the center line of the aforesaid highway; thence Northerly along the center line of said highway to the point of beginning, being a part of the North 1/2 of said Section 9. Tax Key No.: 05-14-09-21 Address: 901 Janesville Ave. PARCEL 3: Lot 1, Block 9, Fair Oaks Addition to Fort Atkinson, Jefferson County, Wisconsin. Tax Key No.: 05-140-09-12-64 Address: Vacant Land PARCEL 4: Lot 2, in Block 9, according to the recorded Plat of Fair Oaks Addition to the City of Fort Atkinson, Jefferson County, Wisconsin. Tax Key No.: 05-14-09-12-65 Address: 918 Erick St. PARCEL 5: PARCEL A: Beginning on the South line of Lot 2, Block 9, Fair Oaks Addition to the City of Fort Atkinson, Jefferson County, Wisconsin, at a point 123.72 feet North 87(degrees)19' West of the Southeast corner of said Lot; thence North 87(degrees)19' West, 144.87 feet to the Southwest corner of said Lot 2; thence South 2(degrees)41' West, 102.33 feet; thence South 87(degrees)19' East, 134.87 feet; thence North 2(degrees)41' East, 102.33 feet to the place of beginning. PARCEL B: Beginning at the Southeast corner of Lot 2, Block 9, Fair Oaks Addition to the City of Fort Atkinson, Jefferson County, Wisconsin; thence North 87(degrees)19' West, 123.72 feet; thence South 2(degrees)41' West, 102.33 feet; thence South 87(degrees)19' East, 100 feet to an iron stake on the West line of Erick Street, being the point of curvature of a curve with a radius of 1217.41 feet; thence North 16(degrees)28' East, along the chord of said curve a distance of 105.16 feet to the place of beginning. Tax Key No.: 05-14-09-12-66 Address: 932 Erick St. PARCEL 6: Commencing at the Southwest corner of Lot 2, Block 9, Fair Oaks Addition to the City of Fort Atkinson, Jefferson County, Wisconsin; thence South 16(degrees)0'28" West, 105.16 feet along the chord of a curve having a radius of 1217.41 feet to the point of beginning; thence South 18(degrees)29' West, 118.20 feet; thence South 63(degrees)29' West, 42.42 feet along the chord of a circle having a radius of 30 feet; thence North 71(degrees)31' West 50 feet; thence North 18(degrees)29' East, 125.56 feet; thence South 87(degrees)19' East, 83.14 feet to the point of beginning. Tax Key No.: 05-14-09-12-67 Address: 1000 Erick St. PARCEL 7: Lot 1 of Certified Survey Map No. 56, recorded September 24, 1970 in Volume 1 of Certified Survey Maps at page 76, as Document No. 688223, being a part of the Northwest 1/4 of the Northeast 1/4 of Section 9, Township 5 North, Range 14 East, in the City of Fort Atkinson, Jefferson County, Wisconsin. Tax Key No.: 05-14-09-12-68 Address: 610 Talcott Ave. PARCEL 8: Beginning at a point on the center line of the highway leading from Fort Atkinson to Janesville and on the North line of the Northwest 1/4 of Section 9-5-14, City of Fort Atkinson, Jefferson County, Wisconsin; thence Southerly along the centerline of said highway to a point 289.9 feet South of the North line of said 1/4 Section (measured at right angles to said North Section line); thence East and parallel to said North line 997.32 feet; thence North and parallel to the East line of said Section 9, 287.2 feet to the North line of said Section 9; thence West along the North line of said Section 9 to the point of beginning, except the North 33 feet thereof sold to the City of Fort Atkinson for street purposes by Quit Claim Deed recorded March 17, 1955 in Volume 289 page 541. Tax Key No.: 05-14-09-12-081 Address: 1405 Larson Rd. PARCEL 9: Lot 1 of Certified Survey Map No. 1084, recorded January 20, 1978 in Volume 3 of Certified Survey Maps at page 626, as Document No. 748437, being a part of the Northwest 1/4 and Northeast 1/4 of Section 9, City of Fort Atkinson, Jefferson County, Wisconsin. Also part of Lot 2 of said Certified Survey Map No. 1084, described as follows: Beginning at a 1 inch iron pipe at the Northeast corner of said Lot 2 of Certified Survey Map No. 1084; thence North 87(degrees)45'48" West, along the North line of said Lot 2 of Certified Survey Map No. 1084, 456.55 feet to a 1 inch iron pipe at the Northwest corner of said Lot 2 of Certified Survey Map No. 1084; thence South 20(degrees)18'42" West, along the Westerly line of said Lot 2 of Certified Survey Map No. 1084 and its extension, 359.21 feet to a 1 inch iron pipe being a point on a curve on the Northerly line of James Place; thence along said Northerly line, being the arc of a curve, concave Southwesterly, having a radius of 898.74 feet, a tangent bearing of South 76(degrees)07'05" East and a chord that bears South 76(degrees)14'47" East, 4.03 feet to a 1 inch iron pipe; thence North 20(degrees)18'42" East, 81.84 feet to a 1 inch iron pipe; thence North 53(degrees)27'36" East, 302.56 feet to a 1 inch iron pipe; thence South 87(degrees)45'48" East, 302.20 feet to a 1 inch iron pipe; thence North 02(degrees)41' East, along the East line of said Lot 2 of Certified Survey Map No. 1084, 75.00 feet to the point of beginning. Tax Key No.: 05-14-09-12-82 Address: 1405 Larsen Rd. SCHEDULE 2 Permitted Encumbrances 1. Liens for taxes and assessments, not yet due and payable. 2. Utility Easement granted to Wisconsin Telephone Company recorded in the Register of Deeds office for Jefferson County on January 10, 1920 in Volume 4 of Miscellaneous at page 635. 3. Utility Easement granted to Wisconsin Gas and Electric Company recorded in the Register of Deeds office for Jefferson County on December 2, 1921 in Volume 167 of Records at page 364. 4. Utility Easement granted to Wisconsin Gas and Electric Company recorded in the Register of Deeds office for Jefferson County on January 8, 1947 in Volume 15 of Miscellaneous at page 164. 5. Sewer and Waterline Agreement and related rights recorded on March 4, 1949 in Volume 17 of Miscellaneous at page 31. 6. Utility Easement granted to Wisconsin Gas and Electric Company recorded in the Register of Deeds office for Jefferson County on June 10, 1950 in Volume 18 of Miscellaneous at page 82. 7. Utility Easement granted to Wisconsin Bell, Inc., recorded in the Register of Deeds office for Jefferson County on March 15, 1988 in Volume 713 of Records at page 882, as Document No. 838917. 8. Sanitary Sewer Easement, recorded in Register of Deeds office for Jefferson County on March 9, 1981 in Volume 608 of Records at page 641, as Document No. 774949. 9. Utility Easement granted to Wisconsin Electric Power Company recorded in the Register of Deeds office for Jefferson County on October 13, 1978 in Volume 577 of Records at page 396. 10. Sanitary Sewer Easement, recorded in Register of deeds office for Jefferson County on July 20, 1988 in Volume 720 of Records at page 250, as Document No. 842698. 11. Easement contained in Quit Claim Deed, recorded in Register of Deeds office for Jefferson County on August 22, 1997 in Volume 1001 of Records at page 955, as Document No. 978160. EX-10.13 8 dex1013.txt SECOND AMENDED AND RESTATED DEED OF TRUST Exhibit 10.13 Second Amended and Restated Deed of Trust, Security Agreement, Assignment of Rents and Leases, and Fixture Filing TABLE OF CONTENTS
Page ARTICLE I COVENANTS AND AGREEMENTS OF THE TRUSTOR ......................................... 7 SECTION 1.1. Payment of Secured Obligations and Other Obligations ..................... 7 SECTION 1.2. Title to Collateral, etc ................................................. 7 SECTION 1.3. Title Insurance .......................................................... 8 SECTION 1.4. Recordation .............................................................. 9 SECTION 1.5. Payment of Impositions, etc .............................................. 9 SECTION 1.6. Insurance and Legal Requirements ......................................... 10 SECTION 1.7. Security Interests, etc .................................................. 10 SECTION 1.8. Permitted Contests ....................................................... 11 SECTION 1.9. Leases ................................................................... 12 SECTION 1.10. Compliance with Instruments .............................................. 12 SECTION 1.11. Maintenance and Repair, etc .............................................. 12 SECTION 1.12. Alterations, Additions, etc .............................................. 13 SECTION 1.13. Acquired Property Subject to Lien ........................................ 13 SECTION 1.14. Assignment of Leases, Rents, Proceeds, etc ............................... 13 SECTION 1.15. No Claims Against the Beneficiary ........................................ 16 SECTION 1.16. Indemnification Against Obligations ...................................... 16 SECTION 1.17. No Credit for Payment of Taxes ........................................... 18 SECTION 1.18. Offering of the Notes .................................................... 18 SECTION 1.19. Hazardous Material and Wastes ............................................ 18 ARTICLE II INSURANCE; DAMAGE, DESTRUCTION OR TAKING, ETC ................................... 19 SECTION 2.1. Insurance ................................................................ 19 SECTION 2.2. Damage, Destruction or Taking; Trustor to Give Notice; Assignment of Awards ..................................... 21 SECTION 2.3. Application of Proceeds and Awards ....................................... 22 SECTION 2.4. Total Taking and Total Destruction ....................................... 24 ARTICLE III EVENTS OF DEFAULT; REMEDIES, ETC ................................................ 25 SECTION 3.1. Events of Default; Acceleration .......................................... 25 SECTION 3.2. Legal Proceedings; Foreclosure ........................................... 26 SECTION 3.3. Power of Sale ............................................................ 26
-i- TABLE OF CONTENTS (continued)
Page SECTION 3.4. Uniform Commercial Code Remedies ........................................ 28 SECTION 3.5. Beneficiary Authorized to Execute Deeds, etc ............................ 28 SECTION 3.6. Purchase of Collateral by Beneficiary ................................... 28 SECTION 3.7. Receipt a Sufficient Discharge to Purchaser ............................. 29 SECTION 3.8. Waiver of Appraisement, Valuation, etc .................................. 29 SECTION 3.9. Sale a Bar Against Trustor .............................................. 29 SECTION 3.10. Application of Proceeds of Sale and Other Moneys ........................ 29 SECTION 3.11. Appointment of Receiver ................................................. 30 SECTION 3.12. Possession, Management and Income ....................................... 30 SECTION 3.13. Right of Beneficiary to Perform Trustor's Covenants, etc ................ 31 SECTION 3.14. Subrogation ............................................................. 31 SECTION 3.15. Remedies, etc., Cumulative .............................................. 32 SECTION 3.16. Provisions Subject to Applicable Law .................................... 32 SECTION 3.17. No Waiver, etc .......................................................... 32 SECTION 3.18. Compromise of Actions, etc .............................................. 33 ARTICLE IV DEFINITIONS .................................................................... 33 SECTION 4.1. Terms Defined in this Deed of Trust ..................................... 33 SECTION 4.2. Use of Defined Terms .................................................... 35 SECTION 4.3. Credit Agreement Definitions ............................................ 36 ARTICLE V MISCELLANEOUS .................................................................. 36 SECTION 5.1. Further Assurances; Financing Statements ................................ 36 SECTION 5.2. Additional Security ..................................................... 37 SECTION 5.3. Defeasance; Partial Release, etc ........................................ 37 SECTION 5.4. Notices, etc ............................................................ 37 SECTION 5.5. Waivers, Amendments, etc ................................................ 38 SECTION 5.6. Cross-References ........................................................ 38 SECTION 5.7. Headings ................................................................ 38
-ii- TABLE OF CONTENTS (continued)
Page SECTION 5.8. Governing Law .............................................. 38 SECTION 5.9. Successors and Assigns, etc ................................ 38 SECTION 5.10. Loan Document .............................................. 38 SECTION 5.11. Severability ............................................... 38 SECTION 5.12. SPECIAL PROVISIONS MODIFYING OR AFFECTING THIS DEED OF TRUST BY REASON OF THE STATE IN WHICH THE LAND IS LOCATED .................. 38 SECTION 5.13. Amended and Restated Deed of Trust ......................... 46
-iii- ACKNOWLEDGEMENTS Schedule 1 - Description of the Land Schedule 2 - Permitted Encumbrances -iv- (For Recorder's Use Only) Recording Requested By and When Recorded, Mail To: Boise A. Ding, Esq. Mayer, Brown & Platt 350 South Grand Avenue, 25th Floor Los Angeles, California 90071 - -------------------------------------------------------------------------------- (Space above this line for recorder's use) Second Amended and Restated Deed of Trust, Security Agreement, Assignment of Rents and Leases, and Fixture Filing Dated as of August 21, 2001 This Second Amended and Restated Deed of Trust, Security Agreement, Assignment of Rents and Leases, and Fixture Filing (this "Deed of Trust") has ------------- been executed by NASCO INTERNATIONAL, INC., a Wisconsin corporation, having an address at 901 Janesville Avenue, Fort Atkinson, Wisconsin 53538-0901 (the "Trustor") in favor of COMMONWEALTH LAND TITLE INSURANCE COMPANY, as trustee, ------- having an address of 888 West 6th Street, 4th Floor, Los Angeles, California 90017 ("Trustee"), for the benefit of BANK OF AMERICA, N.A. (successor in ------- interest to Bank of America National Trust and Savings Association and Continental Bank, N.A.), having an address at 231 South LaSalle Street, Chicago, Illinois 60697, Attention: Ms. Debra Basler, as agent for the various financial --------- institutions (the "Lenders") which are, or may from time to time hereafter ------- become, parties to the Credit Agreements, as hereinafter defined (herein together with its successors and assigns acting as agent at the time under such Credit Agreements, the "Beneficiary"), ----------- W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Trustor is on the date of delivery hereof the owner of fee title to the parcel or parcels of land described in Schedule 1 hereto (the ---------- "Land") and of the Improvements (such term and other capitalized terms used in ---- this Deed of Trust having the respective meanings specified or referred to in Article 4); --------- WHEREAS, pursuant to (i) an Amended and Restated Credit Agreement (Five Year) dated May 29, 2001 (the "Credit Agreement (Five Year)") and (ii) an ---------------- --------- Amended and Restated Credit Agreement (364 Days) dated May 29, 2001 (the "Credit ------ Agreement (364 Days)") each among Trustor, certain lenders, Bank One, Wisconsin, - -------------------- as documentation agent and Beneficiary, as administrative agent [the Credit Agreement (Five Year) and the Credit Agreement (364 Days) being collectively referred to as the "Credit Agreements"] the lenders thereunder have extended ----------------- certain credit (herein referred to collectively as the "Loans"), which Loans are ----- evidenced by Notes issued under the Credit Agreements (the indebtedness evidenced by such Notes is sometimes hereinafter referred to as the "Secured ------- Obligations") to the Grantor, including for, among other things, meeting working - ----------- capital requirements of Trustor with respect to the Credit Agreement (364 Days) and financing the AMEP Acquisition with respect to the Credit Agreement (5 Year). WHEREAS, the Credit Agreement (Five Year) and the Credit Agreement (364 Days) amended and restated in their entirety, respectively, that certain Credit Agreement (Five Year) dated March 31, 2000 (the "Original Credit Agreement (Five ------------------------------- Year)") and a Credit Agreement (364 Days) (the "Original Credit Agreement (364 - ---- ------------------------- --- Days)") dated March 31, 2000 [the Original Credit Agreement (364 Days) and the - ---- Original Credit Agreement (5 Year) being collectively referred to as the "Original Credit Agreements"]. Under the Original Credit Agreements the lenders -------------------------- thereunder extended credit to Trustor to refinance certain loans extended to Trustor under a Third Amended and Restated Credit Agreement, dated as of January 2, 1996, as amended, supplemented and otherwise modified prior to the date of the Original Credit Agreements (the "First Refinanced Credit Agreement"); --------------------------------- WHEREAS, under the Original Credit Agreements, the Trustor was required to execute and deliver that certain Amended and Restated Deed of Trust, Security Agreement, Assignment of Rents and Leases, and Fixture Filing (the "Existing -------- Deed of Trust") dated June 26, 2000 recorded on July 26, 2000 as Document No. - ------------- 000-0060206-06 in the Recorder's Office of Stanislaus County, California (the "Official Records"), pursuant to which the Trustor granted to the Agent a security interest in, among other things, the Collateral (as hereinafter defined); WHEREAS, it is an obligation of Trustor under the Credit Agreements that Trustor execute and deliver this Deed of Trust -2- which serves as a "Second Amendment to Modesto Mortgage" as defined under the Credit Agreements; WHEREAS, as used in this Deed of Trust the term "Obligations" means and ----------- includes all of the following: (a) the principal of and interest on the Secured Obligations; (b) all other indebtedness of any kind arising under, and all amounts of any kind which, at any time become due and owing to the Beneficiary under or with respect to the Credit Agreements, the Notes, this Deed of Trust, the Collateral Documents referred to in the Credit Agreements, and any other document, agreement or other instrument delivered pursuant to or in connection with the Credit Agreements or this Deed of Trust (herein collectively called the "Loan Documents"); -------------- (c) all of the covenants, obligations and agreements and the truth and completeness of all representations and warranties, of the Trustor, in, under or pursuant to the Loan Documents; (d) any and all advances, costs and expenses including, without limitation, all costs of enforcement and collection, paid or incurred by the Beneficiary to protect any of the Collateral (as hereinafter defined), perform any obligation of the Trustor or any other Person under or with respect to the Loan Documents or collect any amount owing to the Beneficiary and the Lenders which is secured or evidenced hereby or by any other Loan Document; and (e) interest on all of the foregoing. NOW, THEREFORE, for good and valuable consideration the receipt of which is hereby acknowledged, and in order to induce the Lenders to make Loans to the Trustor from time to time pursuant to the Credit Agreements, the Trustor hereby enters into this Deed of Trust which amends and restates in its entirety the Existing Deed of Trust. G R A N T: --------- FOR and in consideration of the premises, and of the mutual covenants herein contained, and in order to secure the full, timely and proper payment and performance of and compliance with each and every one of the Obligations, except for the -3- Obligations under Section 10.4(d) and 10.4(e) of the Credit Agreements which are --------------- ------- expressly unsecured, the Trustor hereby irrevocably grants, bargains, sells, mortgages, warrants, aliens, demises, releases, hypothecates, pledges, assigns, transfers and conveys unto Trustee IN TRUST, WITH POWER OF SALE, for the benefit and security of the Beneficiary and its successors and assigns, forever, all of the following (the "Collateral"): ---------- (a) Real Estate. All of the Land and all additional lands and estates ----------- therein now owned or hereafter acquired by the Trustor for use or development with the Land or any portion thereof and which is made subject to the lien hereof from time to time by supplemental deed of trust or otherwise, together with all and singular the tenements, rights, easements, hereditaments, rights of way, privileges, liberties, appendages and appurtenances now or hereafter belonging or in anywise pertaining to the Land and such additional lands and estates therein (including, without limitation, all rights relating to storm and sanitary sewer, water, gas, electric, railway and telephone services); all development rights, air rights, riparian rights, water, water rights, water stock, all rights in, to and with respect to any and all oil, gas, coal, minerals and other substances of any kind or character underlying or relating to the Land and such additional lands and estates therein and any interest therein; all estate, claim, demand, right, title or interest of the Trustor in and to any street, road, highway or alley, vacated or other, adjoining the Land or any part thereof and such additional lands and estates therein; all strips and gores belonging, adjacent or pertaining to the Land or such additional lands and estates; and any after-acquired title to any of the foregoing (herein collectively called the "Real Estate"); ----------- (b) Improvements. All buildings, structures and other improvements ------------ and any additions and alterations thereto or replacements thereof, now or hereafter built, constructed or located upon the Real Estate; and all furnishings, fixtures, fittings, appliances, apparatus, equipment, machinery, building and construction materials and other articles of every kind and nature whatsoever and all replacements thereof, now or hereafter affixed or attached to, placed upon or used in any way in connection with the complete and comfortable use, enjoyment, occupation, operation, development and maintenance of the Real Estate or such buildings, structures and other -4- improvements now or hereafter owned by the Trustor, including, but not limited to, partitions, furnaces, boilers, oil burners, radiators and piping, plumbing and bathroom fixtures, refrigeration, heating, ventilating, air conditioning and sprinkler systems, other fire prevention and extinguishing apparatus and materials, vacuum cleaning systems, gas and electric fixtures, incinerators, compactors, elevators, engines, motors, generators and all other articles of property which are considered fixtures under applicable law (such buildings, structures and other improvements and such other property are herein collectively referred to as the "Improvements"; the Real Estate and the Improvements are collectively ------------ referred to as the "Property"); -------- (c) Goods. All building materials, goods, construction materials, ----- appliances (including, without limitation, stoves, ranges, ovens, disposals, refrigerators, water fountains and coolers, fans, heaters, dishwashers, clothes washers and dryers, water heaters, hood and fan combinations, kitchen equipment, laundry equipment, kitchen cabinets and other similar equipment), stocks, beds, mattresses, bedding and linens, supplies, blinds, window shades, drapes, carpets, floor coverings, office equipment, growing plants and shrubberies, control devices, equipment (including window cleaning, building cleaning, swimming pool, recreational, monitoring, garbage, pest control and other equipment), motor vehicles, tools, furnishings, furniture, lighting, non-structural additions to the Real Estate and Improvements and all other tangible property of any kind or character, together with all replacements thereof, now or hereafter owned by the Trustor and located on or in or used or useful in connection with the complete and comfortable use, enjoyment, occupation, operation, development and maintenance of the Property, regardless of whether or not located on or in the Property or located elsewhere for purposes of storage, fabrication or otherwise, exclusive of any of the foregoing items of property owned by tenants of portions of the Improvements (herein collectively referred to as the "Goods"); ----- (d) Intangibles. All goodwill, trademarks, trade names, option ----------- rights, purchase contracts, books and records and general intangibles of the Trustor relating to the Property and all accounts, contract rights, instruments, chattel paper and other rights of the Trustor for the payment of money for property sold or lent, for services -5- rendered, for money lent, or for advances or deposits made, and any other intangible property of the Trustor relating to the Property, but specifically excluding rights of the Trustor in, to and under contracts with providers of goods or services in connection with the maintenance and operation of the Property (herein collectively referred to as the "Intangibles"); ----------- (e) Plans. All rights of the Trustor in and to all plans and ----- specifications, designs, drawings and other information, materials and matters heretofore or hereafter prepared relating to the Improvements or any construction on the Real Estate (herein collectively referred to as the "Plans"); ----- (f) Permits. All rights of the Trustor in, to and under all permits, ------- franchises, licenses, approvals and other authorizations respecting the use, occupation and operation of the Property and every part thereof and respecting any business or other activity conducted on or from the Property, and any product or proceed thereof or therefrom, including, without limitation, all building permits, certificates of occupancy and other licenses, permits and approvals issued by governmental authorities having jurisdiction (herein collectively called the "Permits"); ------- (g) Leases of Furniture, Furnishings and Equipment. All right, title ---------------------------------------------- and interest of the Trustor as lessee in, to and under any leases of furniture, furnishings and equipment now or hereafter installed in or at any time used in connection with the Property; (h) Proceeds. All proceeds of the conversion, voluntary or involuntary -------- of any of the foregoing into cash or liquidated claims, including, without limitation, proceeds of insurance and condemnation awards (herein collectively referred to as "Proceeds"); and -------- (i) Other Property. All other property and rights of the Trustor of -------------- every kind and character relating to the Property, and all proceeds and products of any of the foregoing. AND, without limiting any of the other provisions of this Deed of Trust, the Trustor expressly grants to the Beneficiary, as secured party, a security interest in all of those portions of the Collateral which are or may be subject to the State -6- Uniform Commercial Code provisions applicable to secured transactions; TO HAVE AND TO HOLD the Collateral unto the Trustee for the benefit of Beneficiary and its successors and assigns, forever. FURTHER to secure the full, timely and proper payment and performance of the Obligations, the Trustor hereby covenants and agrees with and warrants to the Beneficiary as follows: ARTICLE I COVENANTS AND AGREEMENTS OF THE TRUSTOR --------------------------------------- SECTION 1.1. Payment of Secured Obligations and Other Obligations. The ---------------------------------------------------- Trustor agrees that it will duly and punctually pay: (a) the principal of and interest on the Secured Obligations at the time outstanding in accordance with the terms thereof and hereof, and (b) when and as due and payable from time to time in accordance with the terms hereof or of any other applicable Loan Document, all other Obligations. SECTION 1.2. Title to Collateral, etc. The Trustor represents and ------------------------ warrants to and covenants with the Beneficiary that: (a) as of the date hereof and at all times hereafter while this Deed of Trust is outstanding, the Trustor is the absolute owner of the legal and beneficial title to the Property and to all other property included in the Collateral, and has good and marketable title in fee simple absolute to the Property, subject in each case only to this Deed of Trust and the encumbrances set forth in Schedule 2 hereto (the ---------- "Permitted Encumbrances"); ---------------------- (b) the Trustor has good and lawful right, power and authority to execute this Deed of Trust and to convey, transfer, assign, mortgage and grant a security interest in the Collateral, all as provided herein; (c) this Deed of Trust has been duly executed, acknowledged and delivered on behalf of the Trustor, all consents and other actions required to be taken by the officers, directors, shareholders and partners, as the case -7- may be, of the Trustor have been duly and fully given and performed and this Deed of Trust constitutes the legal, valid and binding obligation of the Trustor, enforceable against the Trustor in accordance with its terms; (d) the Trustor, at its expense, will warrant and defend to the Beneficiary and any purchaser under the power of sale herein or at any foreclosure sale such title to the Collateral and the first deed of trust lien and first priority perfected security interest of this Deed of Trust thereon and therein against all claims and demands and will maintain, preserve and protect such lien and security interest and will keep this Deed of Trust a valid, direct first deed of trust lien of record on and a first priority perfected security interest in the Collateral, subject only to the Permitted Encumbrances; and (e) the Trustor will maintain and preserve its corporate existence and good standing under the laws of the State. SECTION 1.3. Title Insurance. --------------- SECTION 1.3.1. SECTION 1.3.1. Title Insurance Endorsement. Concurrently with the execution and delivery of this Deed of Trust, the Trustor, at its expense, has obtained and delivered to the Beneficiary a modification endorsement to Beneficiary's existing lender's title policy relating to the Property in form and substance satisfactory to Beneficiary and insuring that the lien of this Deed of Trust is a valid, first priority lien on the Property. The Trustor has duly paid in full all premiums and other charges due in connection with the issuance of such endorsement. SECTION 1.3.2. [INTENTIONALLY OMITTED] SECTION 1.3.3. [INTENTIONALLY OMITTED] SECTION 1.3.4. Title Insurance Proceeds. All proceeds received by ------------------------ and payable to the Beneficiary for any loss under the loan policy or policies of title insurance referenced in Section 1.3.1, or under any policy or policies of ------------- title insurance delivered to the Beneficiary in substitution therefor or replacement thereof, shall be the property of the Beneficiary and shall be applied by the Beneficiary in accordance with the provisions of Section 2.3. ----------- -8- SECTION 1.4. Recordation. The Trustor, at its expense, will at all times ----------- cause this Deed of Trust and any instruments amendatory hereof or supplemental hereto and any instruments of assignment hereof or thereof (and any appropriate financing statements or other instruments and continuations thereof) and each other instrument delivered in connection with any Loan Document and intended thereunder to be recorded, registered and filed and to be kept recorded, registered and filed, in such manner and in such places, and will pay all such recording, registration, filing fees, taxes and other charges, and will comply with all such statutes and regulations as may be required by law in order to establish, preserve, perfect and protect the lien and security interest of this Deed of Trust as a valid, direct first deed of trust lien and first priority perfected security interest in the Collateral, subject only to Permitted Encumbrances. The Trustor will pay or cause to be paid, and will indemnify the Beneficiary in respect of, all taxes (including interest and penalties) at any time payable in connection with the filing and recording of this Deed of Trust and any and all supplements and amendments hereto. SECTION 1.5. Payment of Impositions, etc. Subject to Section 1.8 (relating --------------------------- ----------- to permitted contests), the Trustor will pay or cause to be paid within 30 days after the same become a lien, but in any event before the same would become delinquent and before any fine, penalty, interest or cost may be added for non-payment, all taxes, assessments, water and sewer rates, charges, license fees, inspection fees and other governmental levies or payments, of every kind and nature whatsoever, general and special, ordinary and extraordinary, unforeseen as well as foreseen, which at any time may be assessed, levied, confirmed, imposed or which may become a lien upon the Collateral, or any portion thereof, or which are payable with respect thereto, or upon the rents, issues, income or profits thereof, or on the occupancy, operation, use, possession or activities thereof, whether any or all of the same be levied directly or indirectly or as excise taxes or as income taxes, and all taxes, assessments or charges which may be levied on the Secured Obligations, or the interest thereon (collectively, the "Impositions"). The Trustor will deliver to ----------- the Beneficiary, upon request, copies of official receipts or other satisfactory proof evidencing such payments. Notwithstanding the foregoing provisions of this Section 1.5, the Beneficiary agrees that if the Trustor (through inadvertence), - ----------- fails to make payment of any Imposition which is in a de minimis amount (which -- ------- shall be an amount less than or equal to $5,000), then the Beneficiary shall not declare an Event of Default as a result of such failure, -9- provided (i) within five (5) days after the Trustor receives notice of such unpaid Imposition, the Trustor makes payment thereof and (ii) the Collateral is not, in the Beneficiary's judgment, in any danger of being subjected to judicial proceedings, sold, lost, forfeited or interfered with. SECTION 1.6. Insurance and Legal Requirements. Subject to Section 1.8 -------------------------------- ----------- (relating to permitted contests), the Trustor, at its expense, will comply, or cause compliance with (a) all provisions of any insurance policy covering or applicable to the Collateral or any part thereof, all requirements of the issuer of any such policy, and all orders, rules, regulations and other requirements of the National Board of Fire Underwriters (or any other body exercising similar functions) applicable to or affecting the Collateral or any part thereof or any use or condition of the Collateral or any part thereof (collectively, the "Insurance Requirements"); and ---------------------- (b) all laws, including Environmental Laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations, directions and requirements of all governments, departments, commissions, boards, property owners associations, courts, authorities, agencies, officials and officers, foreseen or unforeseen, ordinary or extraordinary, which now or at any time hereafter may be applicable to the Collateral or any part thereof, or any of the adjoining sidewalks, curbs, vaults and vault space, if any, streets or ways, or any use or condition of the Collateral or any part thereof (collectively, the "Legal Requirements"); ------------------ whether or not compliance therewith shall require structural changes in or interference with the use and enjoyment of the Collateral or any part thereof. SECTION 1.7. Security Interests, etc. The Trustor will not directly or ----------------------- indirectly create or permit or suffer to be created or to remain, and will promptly discharge or cause to be discharged, any deed of trust, mortgage, encumbrance or charge on, pledge of, security interest in or conditional sale or other title retention agreement with respect to or any other lien on or in the Collateral or any part thereof or the interest of the Trustor, the Beneficiary therein or any Proceeds thereof or Rents (as hereinafter defined) or other sums arising therefrom, other than (a) Permitted Encumbrances and (b) liens of -10- mechanics, materialmen, suppliers or vendors or rights thereto incurred in the ordinary course of the business of the Trustor for sums not yet due or any such liens or rights thereto which are at the time being contested as permitted by Section 1.8. The Trustor will not postpone the payment of any sums for which - ----------- liens of mechanics, materialmen, suppliers or vendors or rights thereto have been incurred (unless such liens or rights thereto are at the time being contested as permitted by Section 1.8), or enter into any contract under which ----------- payment of such sums is postponable (unless such contract expressly provides for the legal, binding and effective waiver of any such liens or rights thereto), in either case, for more than 60 days after the completion of the action giving rise to such liens or rights thereto. SECTION 1.8. Permitted Contests. After prior written notice to the ------------------ Beneficiary, the Trustor at its expense may contest, or cause to be contested, by appropriate action conducted in good faith, the amount or validity or application, in whole or in part, of any Imposition, Legal Requirement or Insurance Requirement or lien of a mechanic, materialman, supplier or vendor (including, without limitation, any lien of any mechanic, materialman, supplier or vendor arising from alterations or additions performed by the Trustor pursuant to the provisions of Section 1.12), provided that, (a) in the case of ------------ -------- ---- an unpaid Imposition, lien, encumbrance or charge, such proceedings shall suspend the collection thereof from the Trustor, the Beneficiary, and the Collateral (including any rent or other income therefrom) and shall not interfere with the payment of any such rent or income, (b) neither the Collateral nor any rent or other income therefrom nor any part thereof or interest therein would be in any danger of being sold, forfeited, lost or interfered with, (c) in the case of a Legal Requirement, neither the Trustor nor the Beneficiary would be in danger of any civil or criminal liability for failure to comply therewith, (d) the Trustor shall have furnished such security, if any, as may be required in the proceedings or as may be requested by the Beneficiary, (e) the non-payment of the whole or any part of any Imposition will not result in the delivery of a tax deed to the Collateral or any part thereof because of such non-payment, (f) the payment of any sums required to be paid with respect to the Secured Obligations or under this Deed of Trust (other than any unpaid Imposition, lien, encumbrance or charge at the time being contested in accordance with this Section 1.8) shall not be interfered with or otherwise ----------- affected, and (g) in the case of any Insurance Requirement, the failure of the Trustor to comply therewith shall not affect the validity of -11- any insurance required to be maintained by the Trustor under Section 2.1. ----------- SECTION 1.9. Leases. The Trustor represents and warrants to the Beneficiary ------ that, as of the date hereof, there are no Leases (as hereinafter defined) with respect to all or any portion of the Property. The Trustor covenants and agrees with the Beneficiary that, after the date hereof, the Trustor will not enter into any Lease of all or any portion of the Property without first obtaining the written consent of the Beneficiary. SECTION 1.10. Compliance with Instruments. The Trustor at its expense will --------------------------- promptly comply with all rights of way or use, privileges, franchises, servitudes, licenses, easements, tenements, hereditaments and appurtenances forming a part of the Property and all instruments creating or evidencing the same, in each case, to the extent compliance therewith is required of the Trustor under the terms thereof. The Trustor will not take any action which may result in a forfeiture or termination of the rights afforded to the Trustor under any such instruments and will not, without the prior written consent of the Beneficiary, amend in any material respect any of such instruments. SECTION 1.11. Maintenance and Repair, etc. Subject to the provisions of --------------------------- Section 1.12, the Trustor will keep or cause to be kept all presently and - ------------ subsequently erected or acquired Improvements and the sidewalks, curbs, vaults and vault space, if any, located on or adjoining the same, and the streets and the ways adjoining the same, in good order and repair and in such a fashion that the value and utility of the Collateral will not be diminished, and, at its sole cost and expense, will promptly make or cause to be made all necessary and appropriate repairs, replacements and renewals thereof, whether interior or exterior, structural or nonstructural, ordinary or extraordinary, foreseen or unforeseen. All repairs, replacements and renewals shall be substantially equal in quality to the original Improvements. The Trustor at its expense will do or cause to be done all shoring of foundations and walls of any building or other Improvements on the Property and (to the extent permitted by law) of the ground adjacent thereto, and every other act necessary or appropriate for the preservation and safety of the Property by reason of or in connection with any excavation or other building operation upon the Property and upon any adjoining property, whether or not the Trustor shall, by any Legal Requirement, be required to take such action or be liable for failure to do so. -12- SECTION 1.12. Alterations, Additions, etc. So long as no Event of Default ---------------------------- shall have occurred and be continuing, the Trustor shall have the right at any time and from time to time to make or cause to be made reasonable alterations of and additions to the Property or any part thereof, provided that any alteration -------- ---- or addition: (a) shall not change the general character of the Property or reduce the fair market value thereof below its value immediately before such alteration or addition, or impair the usefulness of the Property; (b) is effected with due diligence, in a good and workmanlike manner and in compliance with all Legal Requirements and Insurance Requirements; and (c) is promptly and fully paid for, or caused to be paid for, by the Trustor. SECTION 1.13. Acquired Property Subject to Lien. All property at any time --------------------------------- acquired by the Trustor and provided or required by this Deed of Trust to be or become subject to the lien and security interest hereof, whether such property is acquired by exchange, purchase, construction or otherwise, shall forthwith become subject to the lien and security interest of this Deed of Trust without further action on the part of the Trustor or the Beneficiary. The Trustor, at its expense, will execute and deliver to (and will record and file as provided in Section 1.4) an instrument supplemental to this Deed of Trust satisfactory in ----------- substance and form to the Beneficiary, whenever such an instrument is necessary under applicable law to subject to the lien and security interest of this Deed of Trust all right, title and interest of the Trustor in and to all property provided or required by this Deed of Trust to be subject to the lien and security interest hereof and acquired by the Trustor since the date of this Deed of Trust or the date of the most recent supplemental instrument so subjecting property to the lien and security interest hereof, whichever is later. SECTION 1.14. Assignment of Leases, Rents, Proceeds, etc. ------------------------------------------ (a) As part of the consideration for the Secured Obligations, and not as additional security therefor, Trustor hereby absolutely assigns and transfers to Beneficiary all the right, title and interest of Trustor in and to (i) all leases, licenses, occupancy agreements, concessions and other arrangements, oral or written, now existing or hereafter entered into, whereby any Person agrees to pay money or any other consideration for the use, possession or occupancy of, or any estate in, the Property or any portion thereof or interest therein, and all proceeds thereof (herein collectively referred to as the "Leases"), (ii) all rents, issues, profits, ------ royalties, -13- avails, income and other benefits derived or owned, directly or indirectly, by the Trustor from the Property, including, without limitation, all rents and other consideration payable by tenants, claims against guarantors, and any cash or other securities deposited to secure performance by tenants, under the Leases, and all proceeds thereof (herein collectively referred to as "Rents") and (iii) all Proceeds. In addition, Trustor hereby gives to ----- and confers upon Beneficiary the right, power and authority to exercise all of Trustor's options, rights and remedies under the Leases and collect the Rents and Proceeds. Trustor hereby irrevocably appoints Beneficiary its true and lawful attorney-in-fact, coupled with an interest, at the option of Beneficiary, at any time and from time to time, to demand, receive and enforce payment, to give receipts, releases and satisfactions, to exercise all of Trustor's options, rights and remedies under the Leases and to sue, in the name of Trustor or Beneficiary, for all Rents and Proceeds, and apply the same to the Obligations secured hereby; provided, however, that Trustor shall have a license to collect such Rents and Proceeds as provided in Section 1.14(c) below. The assignment of the Leases, Rents and Proceeds --------------- contained herein is intended to be an absolute assignment from Trustor to Beneficiary and not merely the passing of a security interest and shall be effective immediately upon the recording of this Deed of Trust. Trustor hereby waives any requirement that a receiver be appointed for the Collateral or that Beneficiary take possession of the Collateral in order for such assignment of the Leases, Rents and Proceeds to become effective. Nothing herein shall be construed as obligating Beneficiary to perform any of Trustor's obligations under any of the Leases or other agreements relating to the Collateral. (b) Trustor acknowledges and agrees that the acceptance by Beneficiary of the assignments of the Leases, Rents and Proceeds with all of the rights, powers, privileges and authority so created, shall not, prior to entry upon and taking of possession of the Property by Beneficiary, be deemed or construed to constitute a mortgagee in possession nor thereafter or at any time or in any event obligate Beneficiary to appear in or defend any action or proceeding relating to the Leases or to the Property, or to take any action hereunder, or to expend any money or incur any expenses or perform or discharge any obligation, duty or liability under the Leases or other -14- agreements relating to the Collateral, or to assume any obligation or responsibility for any security deposits or other deposits delivered to Trustor by lessees thereunder and not assigned and delivered to Beneficiary, nor shall Beneficiary be liable in any way for any injury or damage to person or property sustained by any person or persons, firm or corporation, in or about the Property. (c) Notwithstanding the absolute, present and irrevocable assignment, grant and conveyance by Trustor to Beneficiary of the Leases, Rents and Proceeds contained in this Deed of Trust, except as is otherwise provided in this Deed of Trust, a license and permission is hereby given to the Trustor, so long as no Event of Default has occurred and is continuing hereunder, to collect, receive and apply such Rents, Proceeds and other rents, income, proceeds and benefits as they become due and payable, but not in advance thereof, and in accordance with all of the other terms, conditions and provisions hereof and of the Leases, contracts, agreements and other instruments with respect to which such payments are made or such other benefits are conferred. Upon the occurrence of an Event of Default,(i) such license and permission shall terminate immediately and automatically, without notice to the Trustor or any other Person, and shall not be reinstated upon a cure of such Event of Default without the express written consent of the Beneficiary and (ii) Beneficiary shall immediately be entitled to exercise all rights under the Leases and to the possession of all Rents and Proceeds, and to collect, receive and apply all Rents, Proceeds and all other rents, income, proceeds and benefits from the Collateral, including all right, title and interest of the Trustor in any escrowed sums or deposits or any portion thereof or interest therein, whether or not the Beneficiary takes possession of the Collateral or any part thereof. Furthermore, at the Beneficiary's option, upon the occurrence of an Event of Default hereunder, Beneficiary may: (i) enter upon and take possession of the Property for the purpose of collecting Rents, Proceeds and said rents, income, proceeds and other benefits; (ii) dispossess by the customary summary proceedings any tenant, purchaser or other Person defaulting in the payment of any amount when and as due and payable, or in the performance of any other obligation, under the Lease, contract or other -15- instrument to which said Rents, Proceeds or other rents, income, proceeds or benefits relate; (iii) let or convey the Collateral or any portion thereof or any interest therein; and (iv) apply Rents, Proceeds and such rents, income, proceeds and other benefits, after the payment of all necessary fees, charges and expenses, on account of the Obligations in accordance with Section ------- 3.10. ---- (d) Trustor hereby agrees to indemnify and hold Beneficiary harmless of and from any and all liability, loss, damage or expense that it may or might incur under or by reason of the assignments contained herein, or for any action taken by Beneficiary hereunder, or by reason or in defense of any and all claims and demands whatsoever that may be asserted against Beneficiary arising out of the Leases, including without limitation any claim by any lessees of credit for rental paid to and received by Trustor, but not delivered to Beneficiary, for any period under the Leases more than one (1) month in advance of the due date thereof. Should Beneficiary incur any such liability, loss, damage or expense, the amount thereof (including reasonable attorneys' fees) with interest thereon at the Default Rate shall be payable by Trustor immediately without demand, shall be secured by this Deed of Trust, and shall be part of the Obligations. SECTION 1.15. No Claims Against the Beneficiary. Nothing contained in this --------------------------------- Deed of Trust shall constitute any consent or request by the Beneficiary, express or implied, for the performance of any labor or the furnishing of any materials or other property in respect of the Property or any part thereof, or be construed to permit the making of any claim against the Beneficiary in respect of labor or services or the furnishing of any materials or other property or any claim that any lien based on the performance of such labor or the furnishing of any such materials or other property is prior to the lien and security interest of this Deed of Trust. All contractors, subcontractors, -------------------------------- vendors and other persons dealing with the Property, or with any persons - ------------------------------------------------------------------------ interested therein, are hereby required to take notice of the provisions of this - -------------------------------------------------------------------------------- Section. - ------- SECTION 1.16 Indemnification Against Obligations. The Trustor will protect, ----------------------------------- indemnify, save harmless and defend the Beneficiary, each commercial banking institution (a -16- "Participant") which pursuant to a participation agreement has purchased a ----------- participation in any portion of the Loans or the Commitment, or both, and each Lender (collectively, the "Indemnified Parties" and individually, an Indemnified ------------------- ----------- Party") from and against any and all liabilities, obligations, claims, damages, - ----- penalties, causes of action, costs and expenses (including, without limitation, attorneys' fees and expenses) imposed upon or incurred by or asserted against any Indemnified Party by reason of (a) ownership of an interest in this Deed of Trust, the Notes or the Property, (b) any accident, injury to or death of persons or loss of or damage to or loss of the use of property occurring on or about the Property or any part thereof or the adjoining sidewalks, curbs, vaults and vault spaces, if any, streets, alleys or ways, (c) any use, non-use or condition of the Property or any part thereof or the adjoining sidewalks, curbs, vaults and vault spaces, if any, streets, alleys or ways, (d) any failure on the part of the Trustor to perform or comply with any of the terms of this Deed of Trust, (e) performance of any labor or services or the furnishing of any materials or other property in respect of the Collateral or any part thereof made or suffered to be made by or on behalf of the Trustor, (f) any negligence or tortious act on the part of the Trustor or any of its agents, contractors, lessees, licensees or invitees, (g) any work in connection with any alterations, changes, new construction or demolition of or additions to the Property, or (h) (i) any Hazardous Material on, in, under or affecting all or any portion of the Property, the groundwater, or any surrounding areas, (ii) any misrepresentation, inaccuracy or breach of any warranty, covenant or agreement contained or referred to in Section 1.19, (iii) any violation or claim of violation by the ------------ Trustor of any Environmental Laws, or (iv) the imposition of any lien for damages caused by or the recovery of any costs for the cleanup, release or threatened release of Hazardous Material. If any action or proceeding be commenced, to which action or proceeding any Indemnified Party is made a party by reason of the execution of this Deed of Trust or the Notes, or in which it becomes necessary to defend or uphold the lien of this Deed of Trust, all sums paid by the Indemnified Parties, for the expense of any litigation to prosecute or defend the rights and lien created hereby, shall be paid by the Trustor to such Indemnified Parties, as the case may be, as hereinafter provided. The Trustor will pay and save the Indemnified Parties harmless against any and all liability with respect to any intangible personal property tax or similar imposition of the State or any subdivision or authority thereof now or hereafter in effect, to the extent that the same may be payable by the Indemnified Parties in respect of this Deed of Trust or any Secured -17- Obligation. All amounts payable to the Indemnified Parties under this Section ------- 1.16 shall be deemed indebtedness secured by this Deed of Trust and any such - ---- amounts which are not paid within 10 days after written demand therefor by any Indemnified Party shall bear interest at the Default Rate from the date of such demand. In case any action, suit or proceeding is brought against any Indemnified Party by reason of any such occurrence, the Trustor, upon request of such Indemnified Party, will, at the Trustor's expense, resist and defend such action, suit or proceeding or cause the same to be resisted or defended by counsel designated by the Trustor and approved by such Indemnified Party. The obligations of the Trustor under this Section 1.16 shall survive any discharge ------------ or reconveyance of this Deed of Trust or payment in full of the Secured Obligations. SECTION 1.17. No Credit for Payment of Taxes. The Trustor shall not be ------------------------------ entitled to any credit against the Obligations by reason of the payment of any tax on the Property or any part thereof or by reason of the payment of any other Imposition, and shall not apply for or claim any deduction from the taxable value of the Property or any part thereof by reason of this Deed of Trust. SECTION 1.18. Offering of the Notes. Neither the Trustor nor any Person --------------------- acting on behalf of the Trustor has directly or indirectly offered the Notes or any portion thereof or any similar security to, or solicited any offer to buy any of the same from, any Person other than the Beneficiary. Neither the Trustor nor any Person acting on behalf of the Trustor has taken or will take any action which would subject the issuance of the Notes to the provisions of section 5 of the Securities Act of 1933, as amended. SECTION 1.19. Hazardous Material and Wastes. Neither the Trustor nor, to ----------------------------- the best knowledge of Trustor, any other Person has ever caused or permitted any Hazardous Material to be held or disposed of on or at the Property or at any other property legally or beneficially owned by the Trustor. The Trustor further represents and warrants to the Beneficiary as set forth in Section 6.12 of the Credit Agreements and agrees to perform the obligations set forth in Sections 7.1.6 of the Credit Agreements. -18- ARTICLE II INSURANCE; DAMAGE, DESTRUCTION OR TAKING, ETC. --------------------------------------------- SECTION 2.1. Insurance. --------- SECTION 2.1.1. Risks to be Insured. The Trustor will, at its ------------------- expense, maintain or cause to be maintained with insurance carriers approved by the Beneficiary (a) insurance with respect to the Improvements against loss or damage by fire, lightning and such other risks as are included in standard "all-risk" policies, in amounts sufficient to prevent the Trustor and the Beneficiary from becoming a co-insurer of any partial loss under the applicable policies, but in any event in amounts not less than the then full insurable value (actual replacement value) of the Improvements, as determined by the Trustor in accordance with generally accepted insurance practice and approved by the Beneficiary or, upon the request of the Beneficiary as determined at the Trustor's expense by the insurer or insurers or by an expert approved by the Beneficiary, (b) commercial general liability, including bodily injury and property damage, insurance, with personal injury endorsement, applicable to the Property in such amounts as are usually carried by Persons operating similar properties in the same general locality, but in any event with a limit of not less than $3,000,000 per person for bodily injury liability, a limit of not less than $5,000,000 per occurrence for bodily injury liability and $500,000 for all claims for property damage liability with respect to any one occurrence, (c) explosion insurance in respect of any steam and pressure boilers and similar apparatus located in the Property in such amounts as are usually carried by persons operating similar properties in the same general locality, but in any event in an amount not less than $500,000, (d) worker's compensation insurance to the full extent required by applicable law for all employees of the Trustor engaged in any work on or about the Property and employer's liability insurance with a limit of not less than $3,000,000 for each occurrence, (e) all-risk, builders' risk insurance with respect to the Property during any period during which there is any construction work being performed, against loss or damage by fire or other risks, including vandalism, malicious mischief and sprinkler leakage, as are included in so-called "extended coverage" clauses at the time available, (f) business interruption insurance in an amount reasonably satisfactory to the Beneficiary, and (g) such other insurance with respect to the Property in such amounts and against such -19- insurable hazards as the Beneficiary from time to time may reasonably require by written notice to the Trustor. SECTION 2.1.2. Policy Provisions. All insurance maintained by the Trustor ----------------- pursuant to Section 2.1.1 shall (a) (except for worker's compensation insurance) ------------- name the Trustor as the named insured and the Beneficiary as an additional insured and loss payee, (b) (except for worker's compensation and commercial general liability insurance) provide that the proceeds for any losses shall be adjusted by the Trustor subject to the approval of the Beneficiary in the event the proceeds shall exceed $100,000, and shall be payable to the Beneficiary, to be held and applied as provided in Section 2.3, (c) include effective waivers by ----------- the insurer of all rights of subrogation against the Beneficiary, the indebtedness secured by this Deed of Trust and the Property and all claims for insurance premiums against the Beneficiary, (d) provide that any losses shall be payable notwithstanding (i) any act, failure to act or negligence of or violation of warranties, declarations or conditions contained in such policy by any named insured, (ii) the occupation or use of the Property for purposes more hazardous than permitted by the terms thereof, (iii) any foreclosure or other action or proceeding taken by the Beneficiary pursuant to any provision of this Deed of Trust, or (iv) any change in title or ownership of the Property, (e) provide that no cancellation, reduction in amount or material change in coverage thereof or any portion thereof shall be effective until at least 30 days after receipt by the Beneficiary of written notice thereof, and (f) be satisfactory in all other respects to the Beneficiary. Any insurance maintained pursuant to this Section 2.1 may be evidenced by blanket insurance policies covering the Property - ----------- and other properties or assets of the Trustor, provided that any such policy -------- ---- shall specify the portion, if less than all, of the total coverage of such policy that is allocated to the Property and shall in all other respects comply with the requirements of this Section 2.1. ----------- SECTION 2.1.3. Delivery of Policies, etc. The Trustor will deliver to the ------------------------- Beneficiary, promptly upon request, (a) the originals (or, at the Beneficiary's option, certificates) of all policies evidencing all insurance required to be maintained under Section 2.1.1 (or, in the case of blanket policies, ------------- certificates thereof by the insurers together with a counterpart of each blanket policy), and (b) evidence as to the payment of all premiums due thereon (with respect to commercial general liability insurance policies, all installments for the -20- current year due thereon to such date), provided that the Beneficiary shall not -------- ---- be deemed by reason of its custody of such policies to have knowledge of the contents thereof. The Trustor will also deliver to the Beneficiary not later than 30 days prior to the expiration of any policy a binder or certificate of the insurer evidencing the replacement thereof and not later than 15 days prior to the expiration of such policy an original copy of the new policy (or, in the case of a replacement blanket policy, a certificate thereof of the insurer together with a counterpart of the blanket policy). In the event the Trustor shall fail to effect or maintain any insurance required to be effected or maintained pursuant to the provisions of this Section 2.1, the Trustor will ----------- indemnify the Beneficiary against damage, loss or liability resulting from all risks for which such insurance should have been effected or maintained. SECTION 2.1.4. Separate Insurance. The Trustor will not take out ------------------ separate insurance concurrent in form or contributing in the event of loss with that required to be maintained pursuant to this Section 2.1. ----------- SECTION 2.2. Damage, Destruction or Taking; Trustor to Give Notice; ------------------------------------------------------ Assignment of Awards. In case of - -------------------- (a) any damage to or destruction of the Collateral or any part thereof, or (b) any taking, whether for permanent or temporary use, of all or any part of the Collateral or any interest therein or right accruing thereto, as the result of or in anticipation of the exercise of the right of condemnation or eminent domain, or a change of grade affecting the Collateral or any portion thereof (a "Taking"), or the commencement of any ------ proceedings or negotiations which may result in a Taking, the Trustor will promptly give written notice thereof to the Beneficiary, generally describing the nature and extent of such damage or destruction and the Trustor's best estimate of the cost of restoring the Collateral, or the nature of such proceedings or negotiations and the nature and extent of the Taking which might result therefrom, as the case may be. The Beneficiary shall be entitled to all insurance proceeds payable on account of such damage or destruction and to all awards or payments allocable to the Collateral on account of such Taking, and the Trustor hereby irrevocably assigns, transfers and sets over to the Beneficiary all rights of the Trustor to any such proceeds, awards or payments and irrevocably authorizes and -21- empowers the Beneficiary, at its option, in the name of the Trustor or otherwise, to file and prosecute what would otherwise be the Trustor's claim for any such proceeds, award or payment and to collect, receipt for and retain the same for disposition in accordance with Section 2.3. The Trustor will pay all ----------- reasonable costs and expenses incurred by the Beneficiary in connection with any such damage, destruction or Taking and seeking and obtaining any insurance proceeds, awards or payments in respect thereof. SECTION 2.3. Application of Proceeds and Awards. The Beneficiary may, at ---------------------------------- its option, apply all amounts recovered under any insurance policy required to be maintained by the Trustor hereunder and all awards received by it on account of any Taking in any one or more of the following ways: (a) to the payment of the reasonable costs and expenses incurred by the Beneficiary in obtaining any such insurance proceeds or awards, including the fees and expenses of attorneys and insurance and other experts and consultants, the costs of litigation, arbitration, mediation, investigations and other judicial, administrative or other proceedings and all other out-of-pocket expenses; (b) Ratably, to the payment of any Obligation secured by this Deed of Trust other than indebtedness with respect to the Secured Obligations; (c) Ratably, to the payment of the principal of the Secured Obligations and any interest (including post-petition interest payable in any proceedings for bankruptcy under applicable law ("Post-Petition ------------- Interest") to the extent such interest is an Obligation) accrued and unpaid -------- thereon, without regard to whether any portion or all of such amounts shall be matured or unmatured, together with interest at the Default Rate on any overdue principal and (to the extent permitted by applicable law) interest; and, in case such amount shall be insufficient to pay in full all such amounts, then such amount shall be applied, first, to the payment of all ----- amounts of interest (including Post-Petition Interest to the extent such interest is an Obligation) accrued on the Secured Obligations and unpaid, second, to the payment of all amounts of principal at the time outstanding; ------ (d) to fulfill any of the other covenants contained herein as the Beneficiary may determine; -22- (e) to the Trustor for application to the cost of restoring the Collateral and the replacement of Goods destroyed, damaged or taken; or (f) to the Trustor. Notwithstanding the foregoing provisions of this Section 2.3 to the ----------- contrary, and if each of the following conditions is satisfied, the Beneficiary, upon request of the Trustor, shall apply insurance proceeds or condemnation awards received by it to the restoration or replacement of the Collateral, to the extent necessary for the restoration or replacement thereof: (i) there shall then exist no uncured material Default; (ii) the Trustor shall furnish to the Beneficiary a certificate of an architect or engineer reasonably acceptable to the Beneficiary stating (x) that the Collateral is capable of being restored, prior to the maturity of the Loans, to substantially the same condition as existed prior to the casualty or Taking, (y) the aggregate estimated direct and indirect costs of such restoration and (z) as to any Taking, that the property taken in such Taking, or sold under threat thereof, is not necessary to the Trustor's customary use or occupancy of the Property; and (iii) in the event that the estimated cost of restoration set forth in the certificate of such architect or engineer (and such revisions to such estimate as are from time to time made) exceeds the net insurance proceeds or condemnation awards actually received from time to time, the Trustor shall deposit the amount of such excess with the Beneficiary. In the event that such insurance proceeds or condemnation awards are to be utilized in the restoration of the Collateral, the Beneficiary shall disburse such Proceeds and the additional amounts deposited by the Trustor for such restoration after receipt of a written request for disbursement, on not less than five nor more than twelve Business Days' notice and, to the extent applicable, in accordance with customary construction loan procedures and conditions. In the event that such insurance or condemnation awards are to be utilized to replace the Collateral so destroyed or taken, the Beneficiary shall disburse such Proceeds after receipt of a written request for disbursement, on not less than five nor more than twelve -23- Business Days' notice simultaneously with the acquisition of such replacement property by the Trustor. In the event that, after the restoration or replacement of the Collateral, any insurance or condemnation awards shall remain, such amount shall be paid to the Trustor. Insurance proceeds and condemnation awards shall be invested in the manner reasonably requested by the Trustor and approved by the Beneficiary, and all interest earned thereon shall be applied as provided in this Section 2.3. If, prior to the receipt by the Beneficiary of such ----------- insurance proceeds or condemnation awards, the Collateral shall have been sold on foreclosure, the Beneficiary shall have the right to receive said insurance proceeds or condemnation awards to the extent of any deficiency found to be due upon such sale, with legal interest thereon, whether or not a deficiency judgment shall have been sought or recovered or denied, and the reasonable attorneys' fees, costs and disbursements incurred by the Beneficiary in connection with the collection of such award or payment. SECTION 2.4. Total Taking and Total Destruction. In the event of a Total ---------------------------------- Destruction or a Total Taking, the Beneficiary shall apply all amounts recovered under any insurance policy referred to in Section 2.1.1 and all awards received ------------- by it on account of any such Taking as follows: (a) first, to the payment of the reasonable costs and expenses incurred by the Beneficiary in obtaining any such insurance proceeds or awards, including the fees and expenses of attorneys and insurance and other experts and consultants, the costs of litigation, arbitration, mediation, investigations and other judicial, administrative or other proceedings and all other out-of-pocket expenses; (b) second, Ratably, to the payment of any Obligation secured by this Deed of Trust other than indebtedness with respect to the Secured Obligations; (c) third, Ratably, to the payment of the principal of the Secured Obligations and any interest (including Post-Petition Interest to the extent such interest is an Obligation) accrued and unpaid thereon, without regard to whether any portion or all of such amounts shall be matured or unmatured, together with interest at the Default Rate on any overdue principal and (to the extent permitted by applicable law) interest; and, in case such amount shall be insufficient to pay in full all such amounts, then such amount shall be applied, first, to the payment of all ----- -24- amounts of interest (including Post-Petition Interest to the extent such interest is an Obligation) accrued on the Secured Obligations and unpaid, and second, to the payment of all amounts of principal at the time ------ outstanding; (d) fourth, to fulfill any of the other covenants contained herein as the Beneficiary may determine; and (e) fifth, the balance, if any, to the Trustor. ARTICLE III EVENTS OF DEFAULT; REMEDIES, ETC. --------------------------------- SECTION 3.1. Events of Default; Acceleration. If any one or more of the ------------------------------- following events (herein called "Events of Default") shall occur: ----------------- (a) if an "Event of Default" under and as defined in any of the Credit Agreements shall have occurred; or (b) if the Trustor shall default in the due and punctual performance or observance of any of its obligations under Section 1.4, 1.5, 1.7, 1.9, ----------- --- --- --- or 2.1; or --- (c) if the Trustor shall fail to duly and punctually perform or comply with any provision of this Deed of Trust other than the provisions referred to in clause (a) or (b) of this Section 3.1 and such default shall continue ---------- --- ----------- unremedied for a period of 30 days after the date that notice of such nonperformance or noncompliance is delivered to the Trustor; or (d) if the Trustor shall, directly or indirectly, voluntarily or involuntarily, by operation of law or otherwise, sell, convey, transfer, assign, grant a security interest in or otherwise dispose of the Collateral or any portion thereof or estate or interest therein; or (e) if subsequent to the date of this Deed of Trust the law of the State shall be changed by statutory enactment, judicial decision, regulation or otherwise, so as (i) to deduct from the value of land for the purpose of taxation (for state, county, municipal or other purpose) any lien or charge thereon, or (ii) to change the taxation of deeds of trust, mortgages or debts secured by land or the manner of collecting any such taxation, so as to affect this Deed of Trust, and thereafter, within 30 days -25- following receipt of a written request from the Beneficiary, the Trustor shall have failed to enter into a lawful and binding agreement with the Beneficiary, satisfactory in substance and form to the Beneficiary, obligating the Trustor to reimburse the Beneficiary for any increase in taxation imposed on the Beneficiary by reason of any of the foregoing; then and in any such event the Beneficiary may at any time thereafter exercise any right or remedy granted to the Beneficiary under the Credit Agreements or the other Loan Documents or available to the Beneficiary at law or in equity including, without limitation, declare, by written notice to the Trustor, the Secured Obligations and all other Obligations to be due and payable immediately or on a date specified in such notice, and on such date the same shall be and become due and payable, together with interest accrued thereon, without presentment, demand, protest or notice, all of which the Trustor hereby waives. The Trustor will pay on demand all costs and expenses, including, without limitation, attorneys' fees and expenses, incurred by or on behalf of the Beneficiary in enforcing this Deed of Trust or the Secured Obligations or any other Loan Document, or occasioned by any default hereunder or thereunder. SECTION 3.2. Legal Proceedings; Foreclosure. If an Event of Default shall ------------------------------ have occurred and be continuing, the Beneficiary at any time may, at its election, proceed at law or in equity or otherwise to enforce the payment of the Secured Obligations in accordance with the terms hereof and thereof and to foreclose the lien of this Deed of Trust as against all or any part of the Collateral and to have the same sold under the judgment or decree of a court of competent jurisdiction. The Beneficiary shall be entitled to recover in such proceedings all costs incident thereto, including attorneys' fees and expenses in such amounts as may be fixed by the court. SECTION 3.3 Power of Sale. If the unpaid principal amount of and interest ------------- on the Secured Obligations shall have become due and payable (whether at maturity or as an installment of combined principal and interest or by reason of any prepayment requirement or by declaration or acceleration or otherwise) and shall not have been paid, the Beneficiary may sell, assign, transfer and deliver the whole or, from time to time, any part of the Collateral, or any interest in any part thereof, at any private sale or at public auction, with or without demand, advertisement or notice, for cash, on credit or for other property, for immediate or future delivery, and for -26- such price or prices and on such terms as the Beneficiary in its uncontrolled discretion may determine, or as may be required by law. Without limiting the authority granted in the immediately preceding sentence, the Beneficiary shall, without demand on the Trustor, after the lapse of such time as may then be required by law following the recordation of the notice of default, and notice of default and notice of sale having been given as then required by law, sell the Collateral on the date and at the time and place designated in the notice of sale, either as a whole or in separate parcels and in such order as the Beneficiary may determine, but subject to any statutory right of the Trustor to direct the order in which such property, if consisting of several known lots, parcels or interests, shall be sold, at public auction to the highest bidder, the purchase price payable in lawful money of the United States at the time of sale. The Person conducting the sale may, for any cause deemed expedient, postpone the sale from time to time until it shall be completed and, in every such case, notice of postponement shall be given by public declaration thereof by such Person at the time and place last appointed for the sale; provided that, if the sale is postponed for longer than one day -------- ---- beyond the day designated in the notice of sale, notice of sale, notice of the time, date and place of sale shall be given in the same manner as the original notice of sale. The Beneficiary shall execute and deliver to the purchaser at any such sale a Beneficiary's deed conveying the property so sold, but without any covenant or warranty, express or implied. The recitals in such Beneficiary's deed of any matters or facts shall be conclusive proof of the truthfulness thereof. Any Person, including the Beneficiary, may bid at the sale. The Beneficiary shall apply the proceeds of the sale, to the extent consistent with this Deed of Trust, to the payment of (a) the costs and expenses of exercising the power of sale and of the sale, including the payment of attorneys' fees and costs, (b) the cost of any evidence of title procured in connection with such sale, (c) all sums expended under the terms hereof in conjunction with any default provision hereof, not then repaid, with accrued interest at the Default Rate from the date of incurrence, (d) all amounts then secured by this Deed of Trust, including the outstanding principal amount of the Secured Obligations, together with interest accrued and unpaid thereon, and (e) the remainder, if any, to the Person or Persons legally entitled thereto, or the Beneficiary, in the Beneficiary's discretion, may deposit the balance of such proceeds with any court or public official authorized to receive such proceeds. -27- SECTION 3.4. Uniform Commercial Code Remedies. If an Event of Default shall -------------------------------- have occurred and be continuing, the Beneficiary may exercise from time to time and at any time any rights and remedies available to it under applicable law upon default in the payment of indebtedness, including, without limitation, any right or remedy available to it as a secured party under the Uniform Commercial Code of the State. The Trustor shall, promptly upon request by the Beneficiary, assemble the Collateral, or any portion thereof generally described in such request, and make them available to the Beneficiary at such place or places designated by the Beneficiary and reasonably convenient to the Beneficiary and the Trustor. If the Beneficiary elects to proceed under the Uniform Commercial Code of the State to dispose of portions of the Collateral, the Beneficiary, at its option, may give the Trustor notice of the time and place of any public sale of any such property, or of the date after which any private sale or other disposition thereof is to be made, by sending notice by registered or certified first class mail, postage prepaid, to the Trustor at least ten days before the time of the sale or other disposition. If any notice of any proposed sale, assignment or transfer by the Beneficiary of any portion of the Collateral or any interest therein is required by law, the Trustor conclusively agrees that ten days' notice to the Trustor of the date, time and place (and, in the case of a private sale, the terms) thereof is reasonable. SECTION 3.5. Beneficiary Authorized to Execute Deeds, etc. The Trustor -------------------------------------------- irrevocably appoints the Beneficiary the true and lawful attorney of the Trustor, in its name and stead and on its behalf, for the purpose of effectuating, after the occurrence and during the continuation of an Event of Default, any sale, assignment, transfer or delivery for the enforcement hereof, whether pursuant to power of sale, foreclosure or otherwise, to execute and deliver all such deeds, bills of sale, assignments, releases and other instruments as may be designated in any such request. SECTION 3.6. Purchase of Collateral by Beneficiary. The Beneficiary may be ------------------------------------- a purchaser of the Collateral or of any part thereof or of any interest therein at any sale thereof, whether pursuant to power of sale, foreclosure or otherwise, and the Beneficiary may apply upon the purchase price thereof the indebtedness secured hereby. Such purchaser shall, upon any such purchase, acquire good title to the properties so purchased, free of the security interest and lien of this Deed of Trust and free of all rights of redemption in the Trustor. -28- SECTION 3.7. Receipt a Sufficient Discharge to Purchaser. Upon any sale of ------------------------------------------- the Collateral or any part thereof or any interest therein, whether pursuant to power of sale, foreclosure or otherwise, the receipt of the Beneficiary or the officer making the sale under judicial proceedings shall be a sufficient discharge to the purchaser for the purchase money, and such purchaser shall not be obliged to see to the application thereof. SECTION 3.8. Waiver of Appraisement, Valuation, etc. The Trustor hereby -------------------------------------- waives, to the fullest extent it may lawfully do so, the benefit of all appraisement, valuation, stay, extension and redemption laws now or hereafter in force and all rights of marshaling in the event of any sale of the Collateral or any part thereof or any interest therein. SECTION 3.9. Sale a Bar Against Trustor. Any sale of the Collateral or any -------------------------- part thereof or any interest therein under or by virtue of this Deed of Trust, whether pursuant to power of sale, foreclosure or otherwise, shall forever be a bar against the Trustor. SECTION 3.10. Application of Proceeds of Sale and Other Moneys. The ------------------------------------------------ proceeds of any sale of the Collateral or any part thereof or any interest therein under or by virtue of this Deed of Trust, whether pursuant to power of sale, foreclosure or otherwise, and all other moneys at any time held by the Beneficiary as part of the Collateral, shall be applied as follows: First: to the payment of the reasonable costs and expenses of such ----- sale (including, without limitation, the cost of evidence of title and the costs and expenses, if any, of taking possession of, retaining custody over, repairing, managing, operating, maintaining and preserving the Collateral or any part thereof prior to such sale), all reasonable costs and expenses incurred by the Beneficiary or any other Person in obtaining or collecting any insurance proceeds, condemnation awards or other amounts received by the Beneficiary, all reasonable costs and expenses of any receiver of the Collateral or any part thereof, and any Impositions or other charges or expenses prior to the security interest or lien of this Deed of Trust, which the Beneficiary may consider it necessary or desirable to pay; Second: Ratably, to the payment of any indebtedness secured by this ------ Deed of Trust, other than indebtedness with -29- respect to the Secured Obligations at the time outstanding, which the Beneficiary may consider it necessary or desirable to pay; Third: Ratably, to the payment of all amounts of principal of and ----- interest (including Post-Petition Interest to the extent such interest is an Obligation) at the time due and payable on the Secured Obligations at the time outstanding (whether due by reason of maturity or by reason of any prepayment requirement or by declaration or acceleration or otherwise), including interest at the Default Rate on any overdue principal and (to the extent permitted under applicable law) on any overdue interest; and, in case such moneys shall be insufficient to pay in full the amounts so due and unpaid with respect to the Secured Obligations at the time outstanding, then, first, to the payment of all amounts of interest (including ----- Post-Petition Interest to the extent such interest is an Obligation) at the time due and payable on the Secured Obligations and, second, to the payment ------ of all amounts of principal at the time due and payable on the Secured Obligations; and Fourth: the balance, if any, held by the Beneficiary after payment in ------ full of all amounts referred to in subdivisions First, Second and Third, ------ ----- above, shall, unless a court of competent jurisdiction may otherwise direct by final order not subject to appeal, be paid to or upon the direction of the Trustor. SECTION 3.11. Appointment of Receiver. If an Event of Default shall have ----------------------- occurred and be continuing, the Beneficiary shall, as a matter of right and without regard to the adequacy of any security for the indebtedness secured hereby or the solvency of the Trustor, be entitled to the appointment of a receiver for all or any part of the Collateral, whether such receivership be incidental to a proposed sale of the Collateral or otherwise, and the Trustor hereby consents to the appointment of such a receiver and will not oppose any such appointment and agrees that all expenses of such receivership shall be borne by the Trustor and shall be an Obligation secured by this Deed of Trust. SECTION 3.12. Possession, Management and Income. If an Event of Default --------------------------------- shall have occurred and be continuing, in addition to, not in limitation of, the rights and remedies provided in Section 1.14, the Beneficiary, upon five days' ------------ notice to the Trustor, may enter upon and take possession of the -30- Collateral or any part thereof by force, summary proceeding, ejectment or otherwise and may remove the Trustor and all other Persons and any and all property therefrom and may hold, operate, maintain, repair, preserve and manage the same and receive all earnings, income, Rents, issues and Proceeds accruing with respect thereto or any part thereof. The Beneficiary shall be under no liability for or by reason of any such taking of possession, entry, removal or holding, operation or management, except that any amounts so received by the Beneficiary shall be applied to pay all costs and expenses of so entering upon, taking possession of, holding, operating, maintaining, repairing, preserving and managing the Collateral or any part thereof, and any Impositions or other charges prior to the lien and security interest of this Deed of Trust which the Beneficiary may consider it necessary or desirable to pay, and any balance of such amounts shall be applied as provided in Section 3.10. ------------ SECTION 3.13. Right of Beneficiary to Perform Trustor's Covenants, --------------------------------------------------- etc. If the Trustor shall fail to make any payment or perform any act required - --- to be made or performed hereunder or under the Credit Agreements or the other Loan Documents, the Beneficiary, without notice to or demand upon the Trustor and without waiving or releasing any obligation or Default, may (but shall be under no obligation to) at any time thereafter make such payment or perform such act for the account and at the expense of the Trustor, and may enter upon the Collateral for such purpose and take all such action thereon as, in the Beneficiary's opinion, may be necessary or appropriate therefor, provided that -------- ---- the Beneficiary shall have no right to perform any covenant of the Trustor under Section 1.19 (or Section 1.4 to the extent that it includes any of the matters - ------------ ----------- more specifically described in Section 1.19) until the entire outstanding ------------ principal amount of the Secured Obligations shall have become due and payable by reason of the declaration of the Beneficiary or the Lenders or the maturity of the Notes. No such entry and no such action shall be deemed an eviction of any lessee of the Property or any part thereof. All sums so paid by the Beneficiary and all costs and expenses (including, without limitation, attorneys' fees and expenses) so incurred, together with interest thereon at the Default Rate from the date of payment or incurring, shall constitute additional indebtedness secured by this Deed of Trust and shall be paid by the Trustor to the Beneficiary on demand. SECTION 3.14. Subrogation. To the extent that the Beneficiary, on or ----------- after the date hereof, pays any sum due under -31- any provision of any Legal Requirement or any instrument creating any lien prior or superior to the lien of this Deed of Trust, or the Trustor or any other Person pays any such sum with the proceeds of the Loans evidenced by the Notes, the Beneficiary shall have and be entitled to a lien on the Collateral equal in priority to the lien discharged, and the Beneficiary shall be subrogated to, and receive and enjoy all rights and liens possessed, held or enjoyed by, the holder of such lien, which shall remain in existence and benefit the Beneficiary in securing the Obligations. SECTION 3.15. Remedies, etc., Cumulative. Each right, power and remedy -------------------------- of the Beneficiary provided for in this Deed of Trust or now or hereafter existing at law or in equity or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for in this Deed of Trust or the other Loan Documents, or now or hereafter existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by the Beneficiary of any one or more of the rights, powers or remedies provided for in this Deed of Trust, or now or hereafter existing at law or in equity or by statute or otherwise shall not preclude the simultaneous or later exercise by the Beneficiary of any or all such rights, powers or remedies. SECTION 3.16. Provisions Subject to Applicable Law. All rights, powers ------------------------------------ and remedies provided in this Deed of Trust may be exercised only to the extent that the exercise thereof does not violate any applicable provisions of law and are intended to be limited to the extent necessary so that they will not render this Deed of Trust invalid, unenforceable or not entitled to be recorded, registered or filed under the provisions of any applicable law. If any term of this Deed of Trust or any application thereof shall be invalid or unenforceable, the remainder of this Deed of Trust and any other application of such term shall not be affected thereby. SECTION 3.17. No Waiver, etc. No failure by the Beneficiary to insist -------------- upon the strict performance of any term hereof or of any other Loan Document, or to exercise any right, power or remedy consequent upon a breach hereof or thereof, shall constitute a waiver of any such term or of any such breach. No waiver of any breach shall affect or alter this Deed of Trust, which shall continue in full force and effect with respect to any other then existing or subsequent breach. By accepting payment or performance of any of the Obligations before or after its due date, the Beneficiary shall not be deemed to have waived its right either to require prompt payment -32- or performance when due of all other Obligations payable hereunder or to declare a default for failure to effect such prompt payment or performance. SECTION 3.18. Compromise of Actions, etc. Any action, suit or -------------------------- proceeding brought by the Beneficiary pursuant to any of the terms of this Deed of Trust, the Credit Agreements, any other Loan Document, or otherwise, and any claim made by the Beneficiary hereunder or thereunder, may be compromised, withdrawn or otherwise dealt with by the Beneficiary without any notice to or approval of the Trustor. ARTICLE IV DEFINITIONS ----------- SECTION 4.1. Terms Defined in this Deed of Trust. When used herein the ----------------------------------- following terms have the following meanings: "Beneficiary": see the preamble. ----------- "Collateral": see the granting clause. ---------- "Credit Agreement (Five Year)": see the second recital. ---------------- ------ ------- "Credit Agreement (364 Days)": see the second recital. ---------------- ------ ------- "Credit Agreements": see the second recital. ----------------- ------ ------- "Deed of Trust": see the preamble. ------------- "Default" means any Event of Default or any condition or event which, ------- after notice or lapse of time, or both, would constitute an Event of Default. "Default Rate" means the per annum rate of interest specified in ------------ Section 3.2.2 of the Credit Agreements. "Event of Default": see Section 3.1. ---------------- "Existing Deed of Trust": see the fourth recital. ---------------------- ------ ------- "First Refinanced Credit Agreement": see the third recital. --------------------------------- ----- ------- "Goods": see clause (c) of the granting clause. ----- ---------- -------- ------ -33- "herein", "hereof", "hereto", and "hereunder" and similar terms refer ------ ------ ------ --------- to this Deed of Trust and not to any particular Section, paragraph or provision of this Deed of Trust. "Impositions": see Section 1.5. ----------- ----------- "Improvements": see clause (b) of the granting clause. ------------ ---------- -------- ------ "Indemnified Parties": see Section 1.16. ------------------- ------------ "Insurance Requirements": see paragraph (a) of Section 1.6. ---------------------- ------------- ----------- "Intangibles": see clause (d) of the granting clause. ----------- ---------- -------- ------ "Land": see the first recital. ---- ----- ------- "Leases": see paragraph (a) of Section 1.14. ------ ------------- ------------ "Legal Requirements": see paragraph (b) of Section 1.6. ------------------ ------------- ----------- "Lenders": see the preamble. ------- -------- "Loans": see the second recital. ---- ------ ------- "Loan Document": see clause (b) of the sixth recital. ------------- ---------- ----- ------- "Notes": means, collectively, the "Notes" as defined in the Credit ----- Agreement (Five Year) and "Notes" as defined in the Credit Agreement (364 Days). "Obligations": see the sixth recital. ----------- ----- ------- "Official Records": see the fourth recital. ---------------- ------ ------- "Original Credit Agreement (5 Year)": see the third recital. ---------------------------------- ----- ------- "Original Credit Agreement (364 Days)": see the third recital. ------------------------------------ ----- ------- "Original Credit Agreements": see the third recital. -------------------------- ----- ------- "Permits": see clause (f) of the granting clause. ------- ---------- -------- ------ "Permitted Encumbrances": see Section 1.2. ---------------------- ----------- "Person" means a corporation, an association, a partnership, an ------ organization, a business, an individual, a -34- government or political subdivision thereof or a governmental agency or officer. "Plans": see clause (e) of the granting clause. ----- ---------- -------- ------ "Post-Petition Interest": see Section 2.3. ---------------------- ----------- "Proceeds": see clause (h) of the granting clause. -------- ---------- -------- ------ "Property": see clause (b) of the granting clause. -------- ---------- -------- ------ "Ratable" or "Ratably" means, in the context of a distribution of ------- ------- Collateral or Proceeds, an allocation of such Collateral or Proceeds among the Lenders pro rata in accordance with their respective portion of the aggregate --- ---- dollar amount of the Obligations to which the distribution is being applied. "Real Estate": see clause (a) of the granting clause. ----------- ---------- -------- ------ "Rents": see paragraph (a) of Section 1.14. ----- ------------- ------------ "Secured Obligations": see the second recital. ------------------- ------ ------- "State": means the State of California. ----- "Taking": see clause (b) of Section 2.2. ------ ---------- ------------ "Total Destruction" means any damage to or destruction of the Improvements or any part thereof which, in the reasonable estimation of the Beneficiary shall require the expenditure of an amount in excess of $500,000 to restore the Improvements to substantially the same condition of the Improvements immediately prior to such damage or destruction. "Total Taking" means a Taking, whether permanent or for temporary use, which, in the reasonable judgment of the Beneficiary, shall substantially interfere with the normal operation of the Property by the Trustor. "Trustee": see the preamble. ------- -------- "Trustor": see the preamble. ------- -------- SECTION 4.2. Use of Defined Terms. Terms for which meanings are -------------------- provided in this Deed of Trust shall, unless otherwise defined or the context otherwise requires, have such meanings when used in any certificate and any opinion, notice or other communication delivered from time to time in connection with this Deed of Trust or pursuant hereto. -35- SECTION 4.3. Credit Agreement Definitions. Unless otherwise defined herein ---------------------------- or the context otherwise requires, capitalized terms used in this Deed of Trust, including its preamble and recitals, have the meanings provided in the Credit Agreements. ARTICLE V MISCELLANEOUS SECTION 5.1. Further Assurances; Financing Statements. ---------------------------------------- SECTION 5.1.1. Further Assurances. The Trustor, at its expense, will ------------------ execute, acknowledge and deliver all such instruments and take all such other action as the Beneficiary from time to time may reasonably request: (a) better to subject to the lien and security interest of this Deed of Trust all or any portion of the Collateral, (b) to perfect, publish notice or protect the validity of the lien and security interest of this Deed of Trust, (c) to preserve and defend the title to the Collateral and the rights of the Beneficiary therein against the claims of all Persons as long as this Deed of Trust shall remain undischarged, (d) better to subject to the lien and security interest of this Deed of Trust or to maintain or preserve the lien and security interest of this Deed of Trust with respect to any replacement or substitution for any Improvements or any other after-acquired property, or (e) in order further to effectuate the purposes of this Deed of Trust and to carry out the terms hereof and to better assure and confirm to the Beneficiary its rights, powers and remedies hereunder. SECTION 5.1.2. Financing Statements. Notwithstanding any other -------------------- provision of this Deed of Trust, the Trustor hereby agrees that, without notice to or the consent or signature of the Trustor, the Beneficiary may file with the appropriate public officials such financing statements, continuation statements, amendments and similar documents as are or may -36- become necessary to perfect, preserve or protect the security interest granted by this Deed of Trust. SECTION 5.2. Additional Security. Without notice to or consent of the ------------------- Trustor, and without impairment of the security interest and lien and rights created by this Deed of Trust, the Beneficiary may accept from the Trustor or any other Person additional security for the Secured Obligations. Neither the giving of this Deed of Trust nor the acceptance of any such additional security shall prevent the Beneficiary from resorting, first, to such additional security, or, first, to the security created by this Deed of Trust, or concurrently to both, in any case without affecting the Beneficiary's lien and rights under this Deed of Trust. SECTION 5.3. Defeasance; Partial Release, etc. -------------------------------- SECTION 5.3.1. Defeasance. If the Trustor shall pay, in full, the ---------- principal of and premium, if any, and interest on the Secured Obligations in accordance with the terms thereof and hereof and all other sums payable hereunder by the Trustor and shall comply with all the terms, conditions and requirements hereof and of the Secured Obligations, then on such date, this Deed of Trust shall be (except as provided herein) null and void and of no further force and effect and the Collateral shall thereupon be, and be deemed to have been, reconveyed, released and discharged from this Deed of Trust without further notice on the part of either the Trustor or the Beneficiary. SECTION 5.3.2. Partial Release etc. The Beneficiary may, at any time ------------------- and from time to time, without liability therefor, and without prior notice to the Trustor, release, reconvey any part of the Collateral, consent to the making of any map or plat of the Property, join in granting any easement thereon or join in any extension agreement or agreement subordinating the lien of this Deed of Trust or enter into any other agreement in connection with the Collateral. SECTION 5.4. Notices, etc. All notices and other communications provided ------------ to the Trustor or the Beneficiary under this Deed of Trust shall be given in the manner and with the effect specified in the Credit Agreements. The foregoing incorporation by reference of the Trustor's mailing address shall be deemed to be a request by the Trustor that a copy of any notice of default and of any notice of sale hereunder be mailed to the Trustor at such address as provided by law. -37- SECTION 5.5. Waivers, Amendments, etc. The provisions of this Deed of ------------------------ Trust may be amended, discharged or terminated and the observance or performance of any provision of this Deed of Trust may be waived, either generally or in a particular instance and either retroactively or prospectively, only by an instrument in writing executed by the Trustor and the Beneficiary. SECTION 5.6. Cross-References. References in this Deed of Trust and in ---------------- each instrument executed pursuant hereto to any Section or Article are, unless otherwise specified, to such Section or Article of this Deed of Trust or such instrument, as the case may be, and references in any Section, Article or definition to any clause are, unless otherwise specified, to such clause of such Section, Article or definition. SECTION 5.7. Headings. The various headings of this Deed of Trust and of -------- each instrument executed pursuant hereto are inserted for convenience only and shall not affect the meaning or interpretation of this Deed of Trust or such instrument or any provisions hereof or thereof. SECTION 5.8. Governing Law. This Deed of Trust shall be deemed to be a ------------- contract made under and governed by the laws of the State. SECTION 5.9. Successors and Assigns, etc. This Deed of Trust shall be --------------------------- binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. SECTION 5.10. Loan Document. This Deed of Trust is a Loan Document ------------- executed pursuant to the Credit Agreements and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions thereof, including Article X thereof. SECTION 5.11. Severability. Any provision of this Deed of Trust or any ------------ other Loan Document which is prohibited or unenforceable in any jurisdiction shall as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Deed of Trust or such Loan Document or affecting the validity or unenforceability of such provision in any other jurisdiction. SECTION 5.12. SPECIAL PROVISIONS MODIFYING OR AFFECTING THIS DEED OF TRUST ------------------------------------------------------------ BY REASON OF THE STATE IN WHICH THE LAND IS LOCATED. By virtue of the fact that - --------------------------------------------------- the said real estate is -38- located in the State of California, the provisions set forth below shall be applicable to this Deed of Trust, and to the extent applicable, shall modify, affect and supplement the other provisions hereof. (a) Foreclosure by Power of Sale. Should Beneficiary elect to foreclose by exercise of the power of sale herein contained, Beneficiary shall notify Trustee and shall deposit with Trustee this Deed of Trust and such receipts and evidence of expenditures made and secured hereby as Trustee may require. (i) Upon receipt of such notice from Beneficiary, Trustee shall cause to be recorded, mailed or delivered to Trustor such notice of default and election to sell as is then required by law and by this Deed of Trust. Trustee shall, without demand on Trustor, after lapse of such time as may then be required by law and after recordation of such notice of default and after notice of sale has been given as required by law, sell the Property at time and place of sale fixed by it in said notice of sale, either as a whole, or in separate lots or parcels or items as Trustee shall deem expedient, and in such order as it may determine, at public auction, to the highest bidder for cash in lawful money of the United States payable at the time of sale. Trustee shall deliver to such purchaser or purchasers thereof its good and sufficient deed or deeds conveying the property so sold, but without any covenant or warranty, express or implied. The recitals in such deed of any matters or facts shall be conclusive proof of the truthfulness thereof. Any person, including without limitation Trustor, Trustee or Beneficiary, may purchase at such sale and Trustor hereby covenants to warrant and defend the title of such purchaser or purchasers. If allowed by law, Beneficiary, if it is the purchaser, may credit bid the outstanding amount of the indebtedness secured hereby toward payment of the purchase price. Trustor hereby expressly waives any right of redemption after sale that Trustor may have at the time of sale or that may apply to the sale. (ii) After deducting all costs, fees and expenses of Trustee and of this Deed of Trust, including costs of evidence of title in connection with sale and reasonable Trustee's and attorneys' fees for conducting the sale, Trustee shall apply the proceeds -39- of sale to payment of all sums expended under the terms hereof and not then repaid (with accrued interest at the Default Rate), and to all other sums then secured hereby in accordance with Section 3.10 of this Deed of Trust, and the remainder, if any, to ------------ the person or persons legally entitled thereto. (iii) Trustee may postpone sale of all or any portion of the Property by public announcement at such time and place of sale, and from time to time thereafter may postpone such sale by public announcement at the time fixed by the preceding postponement or by subsequently noticed sale, and without further notice make such sale at the time fixed by the last postponement; or Trustee may, in its discretion, give a new notice of sale. Beneficiary may rescind any such notice of default at any time before Trustee's sale by executing a notice of rescission and recording the same. The recordation of such notice shall constitute a cancellation of any prior declaration of default and demand for sale and of any acceleration of maturity of the indebtedness secured hereby effected by any prior declaration or notice of default. The exercise by Beneficiary of the right of rescission shall not constitute a waiver of any default and demand for sale, or notices of default and of election to cause the said real estate to be sold, nor otherwise affect any of the Loan Documents or this Deed of Trust, or any of the rights, obligations or remedies of Beneficiary or Trustee hereunder. (b) Full Reconveyance. Upon written request of Beneficiary stating that all sums secured hereby have been paid, and upon surrender of this Deed of Trust to Trustee for cancellation and retention and upon payment by Trustor of Trustee's fees, Trustee shall reconvey to Trustor, or the person or persons legally entitled thereto, without warranty, any portion of the Property then held hereunder. The recitals in such reconveyance of any matters or facts shall be conclusive proof of the truthfulness thereof. The grantee in any reconveyance may be described as "the person or persons legally entitled thereto." (c) Trustee. The following provisions apply to Trustee: -40- (i) Trustee accepts this trust when this Deed of Trust, duly executed and acknowledged, is made a public record as provided by law, and by its acceptance hereof, Trustee covenants faithfully to perform and fulfill the trusts herein created, being liable, however, only for willful negligence or misconduct, and Trustee hereby waives any statutory fee and agrees to accept reasonable compensation, in lieu thereof, for any services rendered by it in accordance with the terms hereof. (ii) At any time and from time to time, without liability therefor and without notice, upon written request of Beneficiary, Trustee shall (1) consent in writing to the making of any map or plat of the said real estate, (2) join in granting any easement thereon, (3) join in any extension agreement or any agreement subordinating the lien or charge hereof. (iii) Trustee may resign at any time upon giving thirty (30) days' notice in writing to Trustor and to Beneficiary. (iv) Beneficiary may, from time to time, by written instrument executed and acknowledged by Beneficiary, mailed to Trustor and recorded in the county in which the said real estate is located, and by otherwise complying with the provisions of the applicable law of the State of California, substitute a successor or successors to the person or persons then named herein or acting hereunder as Trustee. (d) Beneficiary Statements. Trustor agrees to pay Beneficiary for each statement of Beneficiary as to the obligations secured hereby, furnished at Trustor's request, the maximum fee allowed by law, or if there be no maximum fee, then such reasonable fee as is charged by Beneficiary as of the time said statement is furnished. Trustor further agrees to pay the charges of Beneficiary for any other service rendered Trustor, or on its behalf, in connection with this Deed of Trust or the Obligations secured hereby, including without limitation the delivery to an escrow holder of a request for full or partial reconveyance of this Deed of Trust, transmitting records pertaining to this Deed of Trust and the Obligations secured hereby to show a new owner of the said real estate, and replacing an existing policy of insurance held hereunder with another such policy. -41- (e) Actions Affecting the Collateral. Trustor, at Trustor's expense, shall appear in and contest any action or proceeding purporting to affect the Collateral or the security hereof or the rights or powers of Beneficiary or Trustee. Trustor shall pay all costs and expenses incurred by Beneficiary or Trustee, including the cost of evidence of title and attorneys' fees, in any such action or proceeding in which Beneficiary or Trustee may appear. (f) Insurance Losses and Proceeds. In the event of loss, Trustor shall give immediate written notice to the insurance carrier and Beneficiary. Trustor hereby authorizes and empowers Beneficiary, at Beneficiary's option and in Beneficiary's sole discretion as attorney-in-fact for Trustor, to pay premiums, to make proof of loss, to adjust and compromise any claim under insurance policies, to appear in and prosecute any action arising from such insurance policies, to collect and receive insurance proceeds, and to deduct therefrom Beneficiary's expenses in the collection of such proceeds. Trustor further authorizes Beneficiary, at Beneficiary's option (1) to hold the balance of such proceeds to be used for the cost of reconstruction, restoration or repair (hereinafter in this subsection referred to as "reconstruction") of the said real estate, or (2) to apply the balance of such proceeds to the payment of the sums secured by this Deed of Trust, whether or not then due; provided, however, that Beneficiary shall hold the balance of any proceeds actually received by Beneficiary and make such proceeds available to Trustor for the costs of reconstruction of the said real estate if all of the following conditions are satisfied within sixty (60) days from the date of the damage or destruction: (i) Trustor is not in default hereunder and no event has occurred and no fact exists which with notice and/or lapse of time would constitute an Event of Default. (ii) Trustor satisfies Beneficiary that after the reconstruction is completed, the value of the Collateral, as determined by Beneficiary in its reasonable discretion, will be not less than the value of the Property (including land and improvements) determined by Beneficiary at the time of the recording of this Deed of Trust. -42- (iii) Beneficiary has been given satisfactory proof that expenditure of such proceeds (and, where applicable, the additional funds referred to in clause (iv) below) will fully restore the Improvements free and clear of all liens other than this Deed of Trust and any other liens or encumbrances permitted by Beneficiary under this Deed of Trust. (iv) If such proceeds shall be insufficient to restore or rebuild the Improvements, Trustor shall have deposited with Beneficiary funds which, together with such insurance proceeds, shall be sufficient to complete the reconstruction of the Improvements. (v) Trustor has delivered to Beneficiary the plans and specifications and a construction contract for the work of reconstruction in form and content acceptable to Beneficiary with an architect and a contractor acceptable to Beneficiary. (vi) If Trustor shall fail within a reasonable time, subject to delays beyond its control, to complete reconstruction of the Improvements, then Beneficiary, at its option, may complete such reconstruction for or on behalf of Trustor, and for such purpose Beneficiary may do all necessary acts. (vii) Such damage or destruction has not resulted in an impairment of the security interest created by this Deed of Trust that will continue after the completion of reconstruction or, if there is such an impairment of the security interest created hereunder, said insurance proceeds shall be applied towards the Obligations and any other sums secured hereby to the extent of the impairment of the security interest created hereunder. (viii) If the insurance proceeds are held by Beneficiary to be used to reimburse Trustor for the cost of reconstruction of the said real estate, then (1) the said real estate shall be promptly and diligently restored by Trustor to the equivalent of its condition immediately prior to the casualty in accordance with the original plans and specifications or to such other condition as Beneficiary may approve in writing, (2) disbursements of such insurance proceeds shall be in accordance with disbursement procedures acceptable to Beneficiary, and (3) any -43- proceeds actually received by Beneficiary and not required to reconstruct the said real estate or satisfy the conditions set forth in subparagraphs (i) through (viii) of this subsection shall be applied towards the Obligations secured hereby. Beneficiary may commingle any such award or settlement held by it with its other general funds. Beneficiary shall not be obligated to pay interest in respect of any such award or settlement held by it nor shall Trustor be entitled to a credit against any of the Obligations, except and to the extent the award or settlement are applied thereto pursuant to this subsection. Without limitation of the foregoing, Beneficiary shall have the right at all times to apply such insurance proceeds to the cure of any Event of Default or the performance of any obligations of Trustor under the Loan Documents. (ix) If the insurance proceeds are applied to the payment of the Obligations secured by this Deed of Trust, any such application shall be in such order as set forth in Section ------- 6.1(ii) of the Security Agreement and shall constitute a ------- voluntary prepayment subject to any prepayment premiums or fees provided in any of the other Loan Documents. Beneficiary may apply such insurance proceeds to such prepayment premiums or fees. Nothing herein contained shall be deemed to excuse Trustor from repairing or maintaining the said real estate as provided herein or restoring all damage or destruction to the said real estate, regardless of whether or not there are insurance proceeds available to Trustor or whether any such proceeds are sufficient in amount, and the application or release by Beneficiary of any insurance proceeds shall not cure or waive any default or notice of default under this Deed of Trust or invalidate any act done pursuant to such notice. (g) Copies of Notices. Trustor hereby requests that a copy of any notice of default and any notice of sale hereunder be mailed to it at the address set forth on the first page of this Deed of Trust. (h) CCP Section 736. Beneficiary shall have all of the rights, privileges and remedies of a secured lender under California Code of Civil Procedure Section 736. -44- (i) Attorneys' Fees. If any Event of Default occurs, Trustor shall pay all costs of enforcement and collection, including but not limited to, reasonable attorneys' fees, whether or not such enforcement and collection includes the filing of a lawsuit. As used in this Deed of Trust and in the other Loan Documents, the term "attorneys' fees" or "attorneys' fees and costs" shall mean the fees and expenses of counsel to the parties hereto, which may include printing, photostating, duplicating and other expenses, air freight charges, and fees billed for law clerks, paralegals, librarians and others not admitted to the bar but performing services under the supervision of an attorney. The terms "attorneys' fees" or "attorneys' fees and costs" shall also include, without limitation, all such fees and expenses incurred with respect to appeals, arbitrations, bankruptcy proceedings and any post-judgment proceedings to collect any judgment, and whether or not any action or proceeding is brought with respect to the matter for which said fees and expenses were incurred. The provisions allowing for the recovery of post-judgment fees, costs and expenses are separate and several and shall survive the merger of the applicable Loan Document into any judgment. (j) This Deed of Trust is both a real property lien and also a "security agreement" and a "financing statement" within the meaning of the California Uniform Commercial Code. The Collateral includes both real and personal property and all of Trustor's other right, title and interest, whether tangible or intangible, in the Collateral. By executing and delivering this Deed of Trust, Trustor grants to Trustee for the benefit of Beneficiary, as security for the obligations secured hereby, a security interest in the Collateral to the full extent that any of the Collateral may be subject to the California Uniform Commercial Code. Notwithstanding the grant of such security interest to Trustee, the beneficial owner and holder of such security interest is Beneficiary, Beneficiary will be deemed the "secured party" with respect to such security interest for all purposes of the California Uniform Commercial Code and will be so identified on all financing statements filed in connection therewith, and Beneficiary shall be entitled upon the occurrence of an Event of Default to exercise all the remedies of a secured party under the California Uniform Commercial Code as well as all other rights and remedies available at law or in equity. -45- (k) Controlling Provisions. In the event of any conflict between this Section 5.12 and any other provisions of this Deed of Trust, the provisions of this Section 5.12 shall control. SECTION 5.13. Amended and Restated Deed of Trust. This Deed of Trust ---------------------------------- amends and restates in its entirety the Existing Deed of Trust. -46- IN WITNESS WHEREOF, the Trustor has caused this Deed of Trust to be duly executed as of the day and year first above written. Trustor: NASCO INTERNATIONAL, INC., a Wisconsin corporation By: _____________________________ Name: Title: ACKNOWLEDGMENT STATE OF __________________ ) ) SS.: COUNTY OF _________________ ) On ____________, 2001, before me, _____________________________, a Notary Public in and for said State, personally appeared __________________________ and _________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. Signature ________________________________ (Seal) SCHEDULE 1 DESCRIPTION OF THE LAND ----------------------- That certain land situated in the county of Stanislaus, State of California described as follows: Lots 3 and 4 of Landmark Business Center, as per map thereof Recorded October 4, 1988 in Book 33 of Maps at Page 31, Stanislaus County Records, as per that certain Lot Line Adjustment Recorded June 1, 1994 as Instrument No. 94-54790. SCHEDULE 2 PERMITTED ENCUMBRANCES ---------------------- 1. A document subject to all the terms, provisions and conditions therein contained. Entitled: Agreement for Annexation Dated: None shown Executed by: Salida Sanitary District and SPOA Members Recorded: September 20, 1989 under Recorder's Serial No. 074357 of Official Records 2. An easement for the purposes shown below and rights incidental thereto as shown or as offered for dedication on the recorded map shown below. Purpose: public utility easement Affects: Northerly and Easterly 10 feet 3. Covenants, conditions and restrictions (deleting any restrictions indicating any preference, limitation or discrimination based on race, color, religion, sex, handicap, familial status or national origin) as set forth in the document. Recorded: April 18, 1989, Official Records under Recorder's Serial No. 27422. Re-recorded: April 24, 1989, of Official Records, under Recorder's Serial No. 28951. "Declaration of Annexation", as follows: Recorded: February 21, 1992, of Official Records, under Recorder's Serial No. 014936. 4. A document subject to all the terms, provisions and conditions therein contained. Entitled: Notice of Merger No. 94-03 Dated: May 12, 1994 Executed by: Tom Swafford, Nasco Real Property Co. Recorded: June 1, 1994 of Official Records under Recorder's Serial No. 94-0054790-00 5. An easement for the purpose shown below and rights incidental thereto as set forth in document. Granted to: Modesto Irrigation District, an irrigation district Purpose: public utilities Recorded: October 13, 1994 of Official Records, under Recorder's Serial No. 94-009786100 EX-10.14 9 dex1014.txt DEED OF TRUST, SECURITY AGREEMENT, (ETC.) Exhibit 10.14 Deed of Trust, Security Agreement, Assignment of Rents and Leases, and Fixture Filing TABLE OF CONTENTS
Page ARTICLE I COVENANTS AND AGREEMENTS OF THE GRANTOR ................................................. 6 SECTION 1.1. Payment of Secured Obligations and Other Obligations ........................... 6 SECTION 1.2. Title to Collateral, etc ....................................................... 6 SECTION 1.3. Title Insurance. ............................................................... 7 SECTION 1.4. Recordation .................................................................... 8 SECTION 1.5. Payment of Impositions, etc .................................................... 8 SECTION 1.6. Insurance and Legal Requirements ............................................... 9 SECTION 1.7. Security Interests, etc ........................................................ 10 SECTION 1.8. Permitted Contests ............................................................. 10 SECTION 1.9. Leases ......................................................................... 11 SECTION 1.10. Compliance with Instruments .................................................... 11 SECTION 1.11. Maintenance and Repair, etc .................................................... 11 SECTION 1.12. Alterations, Additions, etc .................................................... 12 SECTION 1.13. Acquired Property Subject to Lien .............................................. 12 SECTION 1.14. Assignment of Leases, Rents, Proceeds, etc. .................................... 13 SECTION 1.15. No Claims Against the Beneficiary .............................................. 15 SECTION 1.16. Indemnification Against Obligations ............................................ 16 SECTION 1.17. No Credit for Payment of Taxes ................................................. 17 SECTION 1.18. Offering of the Notes .......................................................... 17 SECTION 1.19. Hazardous Material and Wastes .................................................. 18 ARTICLE II INSURANCE; DAMAGE, DESTRUCTION OR TAKING, ETC. ......................................... 18 SECTION 2.1. Insurance. ..................................................................... 18 SECTION 2.2. Damage, Destruction or Taking; Grantor to Give Notice; Assignment of Awards .... 20 SECTION 2.3. Application of Proceeds and Awards ............................................. 21 SECTION 2.4. Total Taking and Total Destruction ............................................. 23 ARTICLE III EVENTS OF DEFAULT; REMEDIES, ETC. ..................................................... 24 SECTION 3.1. Events of Default; Acceleration ................................................ 24 SECTION 3.2. Legal Proceedings; Foreclosure ................................................. 25 SECTION 3.3. Power of Sale .................................................................. 26
-i- TABLE OF CONTENTS (continued)
Page SECTION 3.4. Uniform Commercial Code Remedies .................................... 26 SECTION 3.5. Beneficiary Authorized to Execute Deeds, etc ........................ 27 SECTION 3.6. Purchase of Collateral by Beneficiary ............................... 27 SECTION 3.7. Receipt a Sufficient Discharge to Purchaser ......................... 27 SECTION 3.8. Waiver of Appraisement, Valuation, etc .............................. 28 SECTION 3.9. Sale a Bar Against Grantor .......................................... 28 SECTION 3.10. Application of Proceeds of Sale and Other Moneys .................... 28 SECTION 3.11. Appointment of Receiver ............................................. 29 SECTION 3.12. Possession, Management and Income ................................... 29 SECTION 3.13. Right of Beneficiary to Perform Grantor's Covenants, etc ............ 30 SECTION 3.14. Subrogation ......................................................... 30 SECTION 3.15. Remedies, etc., Cumulative .......................................... 31 SECTION 3.16. Provisions Subject to Applicable Law ................................ 31 SECTION 3.17. No Waiver, etc ...................................................... 31 SECTION 3.18. Compromise of Actions, etc .......................................... 31 ARTICLE IV DEFINITIONS ................................................................. 32 SECTION 4.1. Terms Defined in this Deed of Trust .................................. 32 SECTION 4.2. Use of Defined Terms ................................................. 34 SECTION 4.3. Credit Agreement Definitions ......................................... 34 ARTICLE V MISCELLANEOUS ................................................................ 34 SECTION 5.1. Further Assurances; Financing Statements. ............................ 34 SECTION 5.2. Additional Security .................................................. 35 SECTION 5.3. Defeasance; Partial Release, etc. .................................... 36 SECTION 5.4. Notices, etc ......................................................... 36 SECTION 5.5. Waivers, Amendments, etc ............................................. 36 SECTION 5.6. Cross-References ..................................................... 36 SECTION 5.7. Headings ............................................................. 37 SECTION 5.8. Governing Law ........................................................ 37
-ii- TABLE OF CONTENTS (continued) Page SECTION 5.9. Successors and Assigns, etc .............................................. 37 SECTION 5.10. Loan Document ........................................................... 37 SECTION 5.11. Severability ............................................................ 37 SECTION 5.12. Accommodation Provisions ................................................ 37
ACKNOWLEDGEMENTS Schedule 1 - Description of the Land Schedule 2 - Permitted Encumbrances -iii- (For Recorder's Use Only) Recording Requested By and When Recorded, Mail To: Boise A. Ding, Esq. Mayer, Brown & Platt 350 South Grand Avenue, 25th Floor Los Angeles, California 90071 - -------------------------------------------------------------------------------- (Space above this line for recorder's use) Deed of Trust, Security Agreement, Assignment of Rents and Leases, and Fixture Filing Dated as of August 21, 2001 This Deed of Trust, Security Agreement, Assignment of Rents and Leases, and Fixture Filing (this "Deed of Trust") has been executed by AMERICAN EDUCATIONAL ------------- PRODUCTS, INC., a Colorado corporation, having an address at 401 Hickory Drive, Fort Collins, CO 80524 (the "Grantor") in favor of THE PUBLIC TRUSTEE FOR THE ------- COUNTY OF LARIMER, STATE OF COLORADO, as trustee ("Trustee"), for the benefit of ------- BANK OF AMERICA, N.A.(successor in interest to Bank of America National Trust and Savings Association and Continental Bank, N.A.), having an address at 231 South LaSalle Street, Chicago, Illinois 60697, Attention: Ms. Debra Basler, as --------- agent for the various financial institutions (the "Lenders") which are, or may ------- from time to time hereafter become, parties to the Credit Agreement, as hereinafter defined (herein together with its successors and assigns acting as agent at the time under such Credit Agreement, the "Beneficiary"), ----------- W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Grantor is on the date of delivery hereof the owner of fee title to the parcel or parcels of land described in Schedule 1 hereto (the ---------- "Land") and of the Improvements (such term and other capitalized terms used in ---- this Deed of Trust having the respective meanings specified or referred to in Article 4); - --------- WHEREAS, pursuant to an Amended and Restated Credit Agreement (Five Year) dated May 29, 2001 (the "Credit Agreement") among Nasco International, Inc. ---------------- ("Nasco"), certain lenders, Bank One, Wisconsin, as documentation agent and ----- Beneficiary, as administrative agent the lenders thereunder have extended certain credit (herein referred to collectively as the "Loans"), which Loans are ----- evidenced by Notes issued under the Credit Agreement (the indebtedness evidenced by such Notes is sometimes hereinafter referred to as the "Secured ------- Obligations")to Nasco, including for, among other things, financing the AMEP - ----------- Acquisition. WHEREAS, Grantor shall derive substantial benefit from the AMEP Acquisition and whereas Beneficiary would not have entered into the Credit Agreement but for Grantor's agreement to execute and deliver this Deed of Trust which serves as an "AMEP Mortgage" as defined under the Credit Agreement; WHEREAS, as used in this Deed of Trust the term "Obligations" means and ----------- includes all of the following: (a) the principal of and interest on the Secured Obligations; (b) all other indebtedness of any kind arising under, and all amounts of any kind which, at any time become due and owing to the Beneficiary under or with respect to the Credit Agreement, the Notes, this Deed of Trust, the Collateral Documents referred to in the Credit Agreement, and any other document, agreement or other instrument delivered pursuant to or in connection with the Credit Agreement or this Deed of Trust (herein collectively called the "Loan Documents"); -------------- (c) all of the covenants, obligations and agreements and the truth and completeness of all representations and warranties, of Nasco and/or Grantor, in, under or pursuant to the Loan Documents; (d) any and all advances, costs and expenses including, without limitation, all costs of enforcement and collection, paid or incurred by the Beneficiary to protect any of the Collateral (as hereinafter defined), perform any obligation of Nasco, Grantor or any other Person under or with respect to the Loan Documents or collect any amount owing to the Beneficiary and the Lenders which is secured or evidenced hereby or by any other Loan Document; and -2- (e) interest on all of the foregoing. NOW, THEREFORE, for good and valuable consideration the receipt of which is hereby acknowledged, and in order to induce the Lenders to make Loans to Nasco from time to time pursuant to the Credit Agreement, the Grantor hereby enters into this Deed of Trust. G R A N T : ---------- FOR and in consideration of the premises, and of the mutual covenants herein contained, and in order to secure the full, timely and proper payment and performance of and compliance with each and every one of the Obligations, the Grantor hereby irrevocably grants, bargains, sells, mortgages, warrants, aliens, demises, releases, hypothecates, pledges, assigns, transfers and conveys unto Trustee IN TRUST, WITH POWER OF SALE, for the benefit and security of the Beneficiary and its successors and assigns, forever, all of the following (the "Collateral"): ---------- (a) Real Estate. All of the Land and all additional lands and estates ----------- therein now owned or hereafter acquired by the Grantor for use or development with the Land or any portion thereof and which is made subject to the lien hereof from time to time by supplemental deed of trust or otherwise, together with all and singular the tenements, rights, easements, hereditaments, rights of way, privileges, liberties, appendages and appurtenances now or hereafter belonging or in anywise pertaining to the Land and such additional lands and estates therein (including, without limitation, all rights relating to storm and sanitary sewer, water, gas, electric, railway and telephone services); all development rights, air rights, riparian rights, water, water rights, water stock, all rights in, to and with respect to any and all oil, gas, coal, minerals and other substances of any kind or character underlying or relating to the Land and such additional lands and estates therein and any interest therein; all estate, claim, demand, right, title or interest of the Grantor in and to any street, road, highway or alley, vacated or other, adjoining the Land or any part thereof and such additional lands and estates therein; all strips and gores belonging, adjacent or pertaining to the Land or such additional lands and estates; and any after-acquired title to any of the foregoing (herein collectively called the "Real Estate"); ----------- -3- (b) Improvements. All buildings, structures and other improvements and ------------ any additions and alterations thereto or replacements thereof, now or hereafter built, constructed or located upon the Real Estate; and all furnishings, fixtures, fittings, appliances, apparatus, equipment, machinery, building and construction materials and other articles of every kind and nature whatsoever and all replacements thereof, now or hereafter affixed or attached to, placed upon or used in any way in connection with the complete and comfortable use, enjoyment, occupation, operation, development and maintenance of the Real Estate or such buildings, structures and other improvements now or hereafter owned by the Grantor, including, but not limited to, partitions, furnaces, boilers, oil burners, radiators and piping, plumbing and bathroom fixtures, refrigeration, heating, ventilating, air conditioning and sprinkler systems, other fire prevention and extinguishing apparatus and materials, vacuum cleaning systems, gas and electric fixtures, incinerators, compactors, elevators, engines, motors, generators and all other articles of property which are considered fixtures under applicable law (such buildings, structures and other improvements and such other property are herein collectively referred to as the "Improvements"; the Real Estate and the Improvements are ------------ collectively referred to as the "Property"); -------- (c) Goods. All building materials, goods, construction materials, ----- appliances (including, without limitation, stoves, ranges, ovens, disposals, refrigerators, water fountains and coolers, fans, heaters, dishwashers, clothes washers and dryers, water heaters, hood and fan combinations, kitchen equipment, laundry equipment, kitchen cabinets and other similar equipment), stocks, beds, mattresses, bedding and linens, supplies, blinds, window shades, drapes, carpets, floor coverings, office equipment, growing plants and shrubberies, control devices, equipment (including window cleaning, building cleaning, swimming pool, recreational, monitoring, garbage, pest control and other equipment), motor vehicles, tools, furnishings, furniture, lighting, non-structural additions to the Real Estate and Improvements and all other tangible property of any kind or character, together with all replacements thereof, now or hereafter owned by the Grantor and located on or in or used or useful in connection with the complete and comfortable use, enjoyment, occupation, operation, development and maintenance of the Property, -4- regardless of whether or not located on or in the Property or located elsewhere for purposes of storage, fabrication or otherwise, exclusive of any of the foregoing items of property owned by tenants of portions of the Improvements (herein collectively referred to as the "Goods"); ----- (d) Intangibles. All goodwill, trademarks, trade names, option rights, ----------- purchase contracts, books and records and general intangibles of the Grantor relating to the Property and all accounts, contract rights, instruments, chattel paper and other rights of the Grantor for the payment of money for property sold or lent, for services rendered, for money lent, or for advances or deposits made, and any other intangible property of the Grantor relating to the Property, but specifically excluding rights of the Grantor in, to and under contracts with providers of goods or services in connection with the maintenance and operation of the Property (herein collectively referred to as the "Intangibles"); ----------- (e) Plans. All rights of the Grantor in and to all plans and ----- specifications, designs, drawings and other information, materials and matters heretofore or hereafter prepared relating to the Improvements or any construction on the Real Estate (herein collectively referred to as the "Plans"); ----- (f) Permits. All rights of the Grantor in, to and under all permits, ------- franchises, licenses, approvals and other authorizations respecting the use, occupation and operation of the Property and every part thereof and respecting any business or other activity conducted on or from the Property, and any product or proceed thereof or therefrom, including, without limitation, all building permits, certificates of occupancy and other licenses, permits and approvals issued by governmental authorities having jurisdiction (herein collectively called the "Permits"); ------- (g) Leases of Furniture, Furnishings and Equipment. All right, title ---------------------------------------------- and interest of the Grantor as lessee in, to and under any leases of furniture, furnishings and equipment now or hereafter installed in or at any time used in connection with the Property; (h) Proceeds. All proceeds of the conversion, voluntary or involuntary -------- of any of the foregoing into cash or liquidated claims, including, without limitation, -5- proceeds of insurance and condemnation awards (herein collectively referred to as "Proceeds"); and -------- (i) Other Property. All other property and rights of the Grantor of -------------- every kind and character relating to the Property, and all proceeds and products of any of the foregoing. AND, without limiting any of the other provisions of this Deed of Trust, the Grantor expressly grants to the Beneficiary, as secured party, a security interest in all of those portions of the Collateral which are or may be subject to the State Uniform Commercial Code provisions applicable to secured transactions and this Deed of Trust shall also constitute a security agreement from the Grantor to the Beneficiary under the State Uniform Commercial Code and IT IS INTENDED THAT THIS DEED OF TRUST SHALL BE EFFECTIVE AS A FINANCING STATEMENT FILED AS A FIXTURE FILING UNDER THE STATE UNIFORM COMMERCIAL CODE; TO HAVE AND TO HOLD the Collateral unto the Trustee for the benefit of Beneficiary and its successors and assigns, forever. FURTHER to secure the full, timely and proper payment and performance of the Obligations, the Grantor hereby covenants and agrees with and warrants to the Beneficiary as follows: ARTICLE I COVENANTS AND AGREEMENTS OF THE GRANTOR --------------------------------------- SECTION 1.1. Payment of Secured Obligations and Other Obligations. The ---------------------------------------------------- Grantor agrees that it will cause Nasco to duly and punctually pay: (a) the principal of and interest on the Secured Obligations at the time outstanding in accordance with the terms thereof and hereof, and (b) when and as due and payable from time to time in accordance with the terms hereof or of any other applicable Loan Document, all other Obligations. SECTION 1.2. Title to Collateral, etc. The Grantor represents and warrants ------------------------ to and covenants with the Beneficiary that: (a) as of the date hereof and at all times hereafter while this Deed of Trust is outstanding, the Grantor is the -6- absolute owner of the legal and beneficial title to the Property and to all other property included in the Collateral, and has good and marketable title in fee simple absolute to the Property, subject in each case only to this Deed of Trust and the encumbrances set forth in Schedule 2 hereto (the ---------- "Permitted Encumbrances"); ---------------------- (b) the Grantor has good and lawful right, power and authority to execute this Deed of Trust and to convey, transfer, assign, mortgage and grant a security interest in the Collateral, all as provided herein; (c) this Deed of Trust has been duly executed, acknowledged and delivered on behalf of the Grantor, all consents and other actions required to be taken by the officers, directors, shareholders and partners, as the case may be, of the Grantor have been duly and fully given and performed and this Deed of Trust constitutes the legal, valid and binding obligation of the Grantor, enforceable against the Grantor in accordance with its terms; (d) the Grantor, at its expense, will warrant and defend to the Beneficiary and any purchaser under the power of sale herein or at any foreclosure sale such title to the Collateral and the first deed of trust lien and first priority perfected security interest of this Deed of Trust thereon and therein against all claims and demands and will maintain, preserve and protect such lien and security interest and will keep this Deed of Trust a valid, direct first deed of trust lien of record on and a first priority perfected security interest in the Collateral, subject only to the Permitted Encumbrances; and (e) the Grantor will maintain and preserve its corporate existence and good standing under the laws of the State. SECTION 1.3. Title Insurance. --------------- SECTION 1.3.1. SECTION 1.3.1. Concurrently with the execution and delivery of this Deed of Trust, the Grantor, at its expense, has obtained and delivered to the Beneficiary a loan policy in the amount of $567,700, naming the Beneficiary as the insured, insuring the title to and the first deed of trust lien of this Deed of Trust on the Property. The Grantor has duly paid in full all premiums and other charges due in connection with the issuance of such policy of title insurance. -7- SECTION 1.3.2. [INTENTIONALLY OMITTED] SECTION 1.3.3. [INTENTIONALLY OMITTED] SECTION 1.3.4. Title Insurance Proceeds. All proceeds received by and ------------------------ payable to the Beneficiary for any loss under the loan policy or policies of title insurance referenced in Section 1.3.1, or under any policy or policies of ------------- title insurance delivered to the Beneficiary in substitution therefor or replacement thereof, shall be the property of the Beneficiary and shall be applied by the Beneficiary in accordance with the provisions of Section 2.3. ----------- SECTION 1.4. Recordation. The Grantor, at its expense, will at all times ----------- cause this Deed of Trust and any instruments amendatory hereof or supplemental hereto and any instruments of assignment hereof or thereof (and any appropriate financing statements or other instruments and continuations thereof) and each other instrument delivered in connection with any Loan Document and intended thereunder to be recorded, registered and filed and to be kept recorded, registered and filed, in such manner and in such places, and will pay all such recording, registration, filing fees, taxes and other charges, and will comply with all such statutes and regulations as may be required by law in order to establish, preserve, perfect and protect the lien and security interest of this Deed of Trust as a valid, direct first deed of trust lien and first priority perfected security interest in the Collateral, subject only to Permitted Encumbrances. The Grantor will pay or cause to be paid, and will indemnify the Beneficiary in respect of, all taxes (including interest and penalties) at any time payable in connection with the filing and recording of this Deed of Trust and any and all supplements and amendments hereto. SECTION 1.5. Payment of Impositions, etc. Subject to Section 1.8 (relating --------------------------- ----------- to permitted contests), the Grantor will pay or cause to be paid within 30 days after the same become a lien, but in any event before the same would become delinquent and before any fine, penalty, interest or cost may be added for non-payment, all taxes, assessments, water and sewer rates, charges, license fees, inspection fees and other governmental levies or payments, of every kind and nature whatsoever, general and special, ordinary and extraordinary, unforeseen as well as foreseen, which at any time may be assessed, levied, confirmed, imposed or which may become a lien upon the Collateral, or any portion thereof, or which are payable with respect thereto, or upon the rents, issues, income or profits thereof, or on the occupancy, operation, use, possession or activities thereof, -8- whether any or all of the same be levied directly or indirectly or as excise taxes or as income taxes, and all taxes, assessments or charges which may be levied on the Secured Obligations, or the interest thereon (collectively, the "Impositions"). The Grantor will deliver to the Beneficiary, upon request, ----------- copies of official receipts or other satisfactory proof evidencing such payments. Notwithstanding the foregoing provisions of this Section 1.5, the ----------- Beneficiary agrees that if the Grantor (through inadvertence), fails to make payment of any Imposition which is in a de minimis amount (which shall be an -- ------- amount less than or equal to $5,000), then the Beneficiary shall not declare an Event of Default as a result of such failure, provided (i) within five (5) days after the Grantor receives notice of such unpaid Imposition, the Grantor makes payment thereof and (ii) the Collateral is not, in the Beneficiary's judgment, in any danger of being subjected to judicial proceedings, sold, lost, forfeited or interfered with. SECTION 1.6. Insurance and Legal Requirements. Subject to Section 1.8 -------------------------------- ----------- (relating to permitted contests), the Grantor, at its expense, will comply, or cause compliance with (a) all provisions of any insurance policy covering or applicable to the Collateral or any part thereof, all requirements of the issuer of any such policy, and all orders, rules, regulations and other requirements of the National Board of Fire Underwriters (or any other body exercising similar functions) applicable to or affecting the Collateral or any part thereof or any use or condition of the Collateral or any part thereof (collectively, the "Insurance Requirements"); and ---------------------- (b) all laws, including Environmental Laws, statutes, codes, acts, ordinances, orders, judgments, decrees, injunctions, rules, regulations, permits, licenses, authorizations, directions and requirements of all governments, departments, commissions, boards, property owners associations, courts, authorities, agencies, officials and officers, foreseen or unforeseen, ordinary or extraordinary, which now or at any time hereafter may be applicable to the Collateral or any part thereof, or any of the adjoining sidewalks, curbs, vaults and vault space, if any, streets or ways, or any use or condition of the Collateral or any part thereof (collectively, the "Legal Requirements"); ------------------ -9- whether or not compliance therewith shall require structural changes in or interference with the use and enjoyment of the Collateral or any part thereof. SECTION 1.7. Security Interests, etc. The Grantor will not directly or ----------------------- indirectly create or permit or suffer to be created or to remain, and will promptly discharge or cause to be discharged, any deed of trust, mortgage, encumbrance or charge on, pledge of, security interest in or conditional sale or other title retention agreement with respect to or any other lien on or in the Collateral or any part thereof or the interest of the Grantor, the Beneficiary therein or any Proceeds thereof or Rents (as hereinafter defined) or other sums arising therefrom, other than (a) Permitted Encumbrances and (b) liens of mechanics, materialmen, suppliers or vendors or rights thereto incurred in the ordinary course of the business of the Grantor for sums not yet due or any such liens or rights thereto which are at the time being contested as permitted by Section 1.8. The Grantor will not postpone the payment of any sums for which - ----------- liens of mechanics, materialmen, suppliers or vendors or rights thereto have been incurred (unless such liens or rights thereto are at the time being contested as permitted by Section 1.8), or enter into any contract under which ----------- payment of such sums is postponable (unless such contract expressly provides for the legal, binding and effective waiver of any such liens or rights thereto), in either case, for more than 60 days after the completion of the action giving rise to such liens or rights thereto. SECTION 1.8. Permitted Contests. After prior written notice to the ------------------ Beneficiary, the Grantor at its expense may contest, or cause to be contested, by appropriate action conducted in good faith, the amount or validity or application, in whole or in part, of any Imposition, Legal Requirement or Insurance Requirement or lien of a mechanic, materialman, supplier or vendor (including, without limitation, any lien of any mechanic, materialman, supplier or vendor arising from alterations or additions performed by the Grantor pursuant to the provisions of Section 1.12), provided that, (a) in the case of ------------ -------- ---- an unpaid Imposition, lien, encumbrance or charge, such proceedings shall suspend the collection thereof from the Grantor, the Beneficiary, and the Collateral (including any rent or other income therefrom) and shall not interfere with the payment of any such rent or income, (b) neither the Collateral nor any rent or other income therefrom nor any part thereof or interest therein would be in any danger of being sold, forfeited, lost or interfered with, (c) in the case of a Legal -10- Requirement, neither the Grantor nor the Beneficiary would be in danger of any civil or criminal liability for failure to comply therewith, (d) the Grantor shall have furnished such security, if any, as may be required in the proceedings or as may be requested by the Beneficiary, (e) the non-payment of the whole or any part of any Imposition will not result in the delivery of a tax deed to the Collateral or any part thereof because of such non-payment, (f) the payment of any sums required to be paid with respect to the Secured Obligations or under this Deed of Trust (other than any unpaid Imposition, lien, encumbrance or charge at the time being contested in accordance with this Section 1.8) shall ----------- not be interfered with or otherwise affected, and (g) in the case of any Insurance Requirement, the failure of the Grantor to comply therewith shall not affect the validity of any insurance required to be maintained by the Grantor under Section 2.1. ----------- SECTION 1.9. Leases. The Grantor represents and warrants to the Beneficiary ------ that, as of the date hereof, there are no Leases (as hereinafter defined) with respect to all or any portion of the Property. The Grantor covenants and agrees with the Beneficiary that, after the date hereof, the Grantor will not enter into any Lease of all or any portion of the Property without first obtaining the written consent of the Beneficiary. SECTION 1.10. Compliance with Instruments. The Grantor at its expense will --------------------------- promptly comply with all rights of way or use, privileges, franchises, servitudes, licenses, easements, tenements, hereditaments and appurtenances forming a part of the Property and all instruments creating or evidencing the same, in each case, to the extent compliance therewith is required of the Grantor under the terms thereof. The Grantor will not take any action which may result in a forfeiture or termination of the rights afforded to the Grantor under any such instruments and will not, without the prior written consent of the Beneficiary, amend in any material respect any of such instruments. SECTION 1.11. Maintenance and Repair, etc. Subject to the provisions of --------------------------- Section 1.12, the Grantor will keep or cause to be kept all presently and - ------------ subsequently erected or acquired Improvements and the sidewalks, curbs, vaults and vault space, if any, located on or adjoining the same, and the streets and the ways adjoining the same, in good order and repair and in such a fashion that the value and utility of the Collateral will not be diminished, and, at its sole cost and expense, will promptly make or cause to be made all necessary and appropriate repairs, replacements and renewals thereof, whether interior or exterior, structural or nonstructural, ordinary or -11- extraordinary, foreseen or unforeseen. All repairs, replacements and renewals shall be substantially equal in quality to the original Improvements. The Grantor at its expense will do or cause to be done all shoring of foundations and walls of any building or other Improvements on the Property and (to the extent permitted by law) of the ground adjacent thereto, and every other act necessary or appropriate for the preservation and safety of the Property by reason of or in connection with any excavation or other building operation upon the Property and upon any adjoining property, whether or not the Grantor shall, by any Legal Requirement, be required to take such action or be liable for failure to do so. SECTION 1.12. Alterations, Additions, etc. So long as no Event of Default --------------------------- shall have occurred and be continuing, the Grantor shall have the right at any time and from time to time to make or cause to be made reasonable alterations of and additions to the Property or any part thereof, provided that any alteration -------- ---- or addition: (a) shall not change the general character of the Property or reduce the fair market value thereof below its value immediately before such alteration or addition, or impair the usefulness of the Property; (b) is effected with due diligence, in a good and workmanlike manner and in compliance with all Legal Requirements and Insurance Requirements; and (c) is promptly and fully paid for, or caused to be paid for, by the Grantor. SECTION 1.13. Acquired Property Subject to Lien. All property at any time --------------------------------- acquired by the Grantor and provided or required by this Deed of Trust to be or become subject to the lien and security interest hereof, whether such property is acquired by exchange, purchase, construction or otherwise, shall forthwith become subject to the lien and security interest of this Deed of Trust without further action on the part of the Grantor or the Beneficiary. The Grantor, at its expense, will execute and deliver to (and will record and file as provided in Section 1.4) an instrument supplemental to this Deed of Trust satisfactory in ----------- substance and form to the Beneficiary, whenever such an instrument is necessary under applicable law to subject to the lien and security interest of this Deed of Trust all right, title and interest of the Grantor in and to all property provided or required by this Deed of Trust to be subject to the lien and security interest hereof and acquired by the Grantor since the date of this Deed of Trust or the date of the most recent supplemental instrument so subjecting property to the lien and security interest hereof, whichever is later. -12- SECTION 1.14. Assignment of Leases, Rents, Proceeds, etc. ------------------------------------------- (a) As part of the consideration for the Secured Obligations, and not as additional security therefor, Grantor hereby absolutely assigns and transfers to Beneficiary all the right, title and interest of Grantor in and to (i) all leases, licenses, occupancy agreements, concessions and other arrangements, oral or written, now existing or hereafter entered into, whereby any Person agrees to pay money or any other consideration for the use, possession or occupancy of, or any estate in, the Property or any portion thereof or interest therein, and all proceeds thereof (herein collectively referred to as the "Leases"), (ii) all rents, issues, profits, ------ royalties, avails, income and other benefits derived or owned, directly or indirectly, by the Grantor from the Property, including, without limitation, all rents and other consideration payable by tenants, claims against guarantors, and any cash or other securities deposited to secure performance by tenants, under the Leases, and all proceeds thereof (herein collectively referred to as "Rents") and (iii) all Proceeds. In addition, ----- Grantor hereby gives to and confers upon Beneficiary the right, power and authority to exercise all of Grantor's options, rights and remedies under the Leases and collect the Rents and Proceeds. Grantor hereby irrevocably appoints Beneficiary its true and lawful attorney-in-fact, coupled with an interest, at the option of Beneficiary, at any time and from time to time, to demand, receive and enforce payment, to give receipts, releases and satisfactions, to exercise all of Grantor's options, rights and remedies under the Leases and to sue, in the name of Grantor or Beneficiary, for all Rents and Proceeds, and apply the same to the Obligations secured hereby; provided, however, that Grantor shall have a license to collect such Rents and Proceeds as provided in Section 1.14(c) below. The assignment of the --------------- Leases, Rents and Proceeds contained herein is intended to be an absolute assignment from Grantor to Beneficiary and not merely the passing of a security interest and shall be effective immediately upon the recording of this Deed of Trust. Grantor hereby waives any requirement that a receiver be appointed for the Collateral or that Beneficiary take possession of the Collateral in order for such assignment of the Leases, Rents and Proceeds to become effective. Nothing herein shall be construed as obligating Beneficiary to perform any -13- of Grantor's obligations under any of the Leases or other agreements relating to the Collateral. (b) Grantor acknowledges and agrees that the acceptance by Beneficiary of the assignments of the Leases, Rents and Proceeds with all of the rights, powers, privileges and authority so created, shall not, prior to entry upon and taking of possession of the Property by Beneficiary, be deemed or construed to constitute a mortgagee in possession nor thereafter or at any time or in any event obligate Beneficiary to appear in or defend any action or proceeding relating to the Leases or to the Property, or to take any action hereunder, or to expend any money or incur any expenses or perform or discharge any obligation, duty or liability under the Leases or other agreements relating to the Collateral, or to assume any obligation or responsibility for any security deposits or other deposits delivered to Grantor by lessees thereunder and not assigned and delivered to Beneficiary, nor shall Beneficiary be liable in any way for any injury or damage to person or property sustained by any person or persons, firm or corporation, in or about the Property. (c) Notwithstanding the absolute, present and irrevocable assignment, grant and conveyance by Grantor to Beneficiary of the Leases, Rents and Proceeds contained in this Deed of Trust, except as is otherwise provided in this Deed of Trust, a license and permission is hereby given to the Grantor, so long as no Event of Default has occurred and is continuing hereunder, to collect, receive and apply such Rents, Proceeds and other rents, income, proceeds and benefits as they become due and payable, but not in advance thereof, and in accordance with all of the other terms, conditions and provisions hereof and of the Leases, contracts, agreements and other instruments with respect to which such payments are made or such other benefits are conferred. Upon the occurrence of an Event of Default,(i) such license and permission shall terminate immediately and automatically, without notice to the Grantor or any other Person, and shall not be reinstated upon a cure of such Event of Default without the express written consent of the Beneficiary and (ii) Beneficiary shall immediately be entitled to exercise all rights under the Leases and to the possession of all Rents and Proceeds, and to collect, receive and apply all Rents, Proceeds and all other rents, income, proceeds and benefits from the Collateral, including all right, title and interest of the Grantor in -14- any escrowed sums or deposits or any portion thereof or interest therein, whether or not the Beneficiary takes possession of the Collateral or any part thereof. Furthermore, at the Beneficiary's option, upon the occurrence of an Event of Default hereunder, Beneficiary may: (i) enter upon and take possession of the Property for the purpose of collecting Rents, Proceeds and said rents, income, proceeds and other benefits; (ii) dispossess by the customary summary proceedings any tenant, purchaser or other Person defaulting in the payment of any amount when and as due and payable, or in the performance of any other obligation, under the Lease, contract or other instrument to which said Rents, Proceeds or other rents, income, proceeds or benefits relate; (iii) let or convey the Collateral or any portion thereof or any interest therein; and (iv) apply Rents, Proceeds and such rents, income, proceeds and other benefits, after the payment of all necessary fees, charges and expenses, on account of the Obligations in accordance with Section ------- 3.10. ---- (d) Grantor hereby agrees to indemnify and hold Beneficiary harmless of and from any and all liability, loss, damage or expense that it may or might incur under or by reason of the assignments contained herein, or for any action taken by Beneficiary hereunder, or by reason or in defense of any and all claims and demands whatsoever that may be asserted against Beneficiary arising out of the Leases, including without limitation any claim by any lessees of credit for rental paid to and received by Grantor, but not delivered to Beneficiary, for any period under the Leases more than one (1) month in advance of the due date thereof. Should Beneficiary incur any such liability, loss, damage or expense, the amount thereof (including reasonable attorneys' fees) with interest thereon at the Default Rate shall be payable by Grantor immediately without demand, shall be secured by this Deed of Trust, and shall be part of the Obligations. SECTION 1.15. No Claims Against the Beneficiary. Nothing contained in this --------------------------------- Deed of Trust shall constitute any consent or -15- request by the Beneficiary, express or implied, for the performance of any labor or the furnishing of any materials or other property in respect of the Property or any part thereof, or be construed to permit the making of any claim against the Beneficiary in respect of labor or services or the furnishing of any materials or other property or any claim that any lien based on the performance of such labor or the furnishing of any such materials or other property is prior to the lien and security interest of this Deed of Trust. All contractors, ---------------- subcontractors, vendors and other persons dealing with the Property, or with any - -------------------------------------------------------------------------------- persons interested therein, are hereby required to take notice of the provisions - -------------------------------------------------------------------------------- of this Section. If any mechanics' lien is recorded against the Property, - --------------- Grantor shall post bond, as provided by the law of the State, or cause the discharge of such lien within thirty (30) days after such lien is recorded. SECTION 1.16. Indemnification Against Obligations. The Grantor will ----------------------------------- protect, indemnify, save harmless and defend the Beneficiary, each commercial banking institution (a "Participant") which pursuant to a participation ----------- agreement has purchased a participation in any portion of the Loans or the Commitment, or both, and each Lender (collectively, the "Indemnified Parties" ------------------- and individually, an Indemnified Party") from and against any and all ----------------- liabilities, obligations, claims, damages, penalties, causes of action, costs and expenses (including, without limitation, attorneys' fees and expenses) imposed upon or incurred by or asserted against any Indemnified Party by reason of (a) ownership of an interest in this Deed of Trust, the Notes or the Property, (b) any accident, injury to or death of persons or loss of or damage to or loss of the use of property occurring on or about the Property or any part thereof or the adjoining sidewalks, curbs, vaults and vault spaces, if any, streets, alleys or ways, (c) any use, non-use or condition of the Property or any part thereof or the adjoining sidewalks, curbs, vaults and vault spaces, if any, streets, alleys or ways, (d) any failure on the part of the Grantor to perform or comply with any of the terms of this Deed of Trust, (e) performance of any labor or services or the furnishing of any materials or other property in respect of the Collateral or any part thereof made or suffered to be made by or on behalf of the Grantor, (f) any negligence or tortious act on the part of the Grantor or any of its agents, contractors, lessees, licensees or invitees, (g) any work in connection with any alterations, changes, new construction or demolition of or additions to the Property, or (h) (i) any Hazardous Material on, in, under or affecting all or any portion of the Property, the groundwater, or any surrounding -16- areas, (ii) any misrepresentation, inaccuracy or breach of any warranty, covenant or agreement contained or referred to in Section 1.19, (iii) any ------------ violation or claim of violation by the Grantor of any Environmental Laws, or (iv) the imposition of any lien for damages caused by or the recovery of any costs for the cleanup, release or threatened release of Hazardous Material. If any action or proceeding be commenced, to which action or proceeding any Indemnified Party is made a party by reason of the execution of this Deed of Trust or the Notes, or in which it becomes necessary to defend or uphold the lien of this Deed of Trust, all sums paid by the Indemnified Parties, for the expense of any litigation to prosecute or defend the rights and lien created hereby, shall be paid by the Grantor to such Indemnified Parties, as the case may be, as hereinafter provided. The Grantor will pay and save the Indemnified Parties harmless against any and all liability with respect to any intangible personal property tax or similar imposition of the State or any subdivision or authority thereof now or hereafter in effect, to the extent that the same may be payable by the Indemnified Parties in respect of this Deed of Trust or any Secured Obligation. All amounts payable to the Indemnified Parties under this Section 1.16 shall be deemed indebtedness secured by this Deed of Trust and any - ------------ such amounts which are not paid within 10 days after written demand therefor by any Indemnified Party shall bear interest at the Default Rate from the date of such demand. In case any action, suit or proceeding is brought against any Indemnified Party by reason of any such occurrence, the Grantor, upon request of such Indemnified Party, will, at the Grantor's expense, resist and defend such action, suit or proceeding or cause the same to be resisted or defended by counsel designated by the Grantor and approved by such Indemnified Party. The obligations of the Grantor under this Section 1.16 shall survive any discharge ------------ or reconveyance of this Deed of Trust or payment in full of the Secured Obligations. SECTION 1.17. No Credit for Payment of Taxes. The Grantor shall not be ------------------------------ entitled to any credit against the Obligations by reason of the payment of any tax on the Property or any part thereof or by reason of the payment of any other Imposition, and shall not apply for or claim any deduction from the taxable value of the Property or any part thereof by reason of this Deed of Trust. SECTION 1.18. Offering of the Notes. Neither the Grantor nor any Person --------------------- acting on behalf of the Grantor has directly or indirectly offered the Notes or any portion thereof or any similar security to, or solicited any offer to buy any of the -17- same from, any Person other than the Beneficiary. Neither the Grantor nor any Person acting on behalf of the Grantor has taken or will take any action which would subject the issuance of the Notes to the provisions of section 5 of the Securities Act of 1933, as amended. SECTION 1.19. Hazardous Material and Wastes. Neither the Grantor nor, to ----------------------------- the best knowledge of Grantor, any other Person has ever caused or permitted any Hazardous Material to be held or disposed of on or at the Property or at any other property legally or beneficially owned by the Grantor. The Grantor further represents and warrants to the Beneficiary the same representations and warranties made by Nasco as set forth in Section 6.12 of the Credit Agreement and agrees to perform the obligations of Nasco as they relate to the Collateral set forth in Section 7.1.6 of the Credit Agreement. ARTICLE II INSURANCE; DAMAGE, DESTRUCTION OR TAKING, ETC. ---------------------------------------------- SECTION 2.1. Insurance. --------- SECTION 2.1.1. Risks to be Insured. The Grantor will, at its expense, ------------------- maintain or cause to be maintained with insurance carriers approved by the Beneficiary (a) insurance with respect to the Improvements against loss or damage by fire, lightning and such other risks as are included in standard "all-risk" policies, in amounts sufficient to prevent the Grantor and the Beneficiary from becoming a co-insurer of any partial loss under the applicable policies, but in any event in amounts not less than the then full insurable value (actual replacement value) of the Improvements, as determined by the Grantor in accordance with generally accepted insurance practice and approved by the Beneficiary or, upon the request of the Beneficiary as determined at the Grantor's expense by the insurer or insurers or by an expert approved by the Beneficiary, (b) commercial general liability, including bodily injury and property damage, insurance, with personal injury endorsement, applicable to the Property in such amounts as are usually carried by Persons operating similar properties in the same general locality, but in any event with a limit of not less than $3,000,000 per person for bodily injury liability, a limit of not less than $5,000,000 per occurrence for bodily injury liability and $500,000 for all claims for property damage liability with respect to any one occurrence, (c) explosion insurance in respect of any steam and pressure boilers and similar apparatus located in the Property in such amounts as are -18- usually carried by persons operating similar properties in the same general locality, but in any event in an amount not less than $500,000, (d) worker's compensation insurance to the full extent required by applicable law for all employees of the Grantor engaged in any work on or about the Property and employer's liability insurance with a limit of not less than $3,000,000 for each occurrence, (e) all-risk, builders' risk insurance with respect to the Property during any period during which there is any construction work being performed, against loss or damage by fire or other risks, including vandalism, malicious mischief and sprinkler leakage, as are included in so-called "extended coverage" clauses at the time available, (f) business interruption insurance in an amount reasonably satisfactory to the Beneficiary, and (g) such other insurance with respect to the Property in such amounts and against such insurable hazards as the Beneficiary from time to time may reasonably require by written notice to the Grantor. SECTION 2.1.2. Policy Provisions. All insurance maintained by the Grantor ----------------- pursuant to Section 2.1.1 shall (a) (except for worker's compensation insurance) ------------- name the Grantor as the named insured and the Beneficiary as an additional insured and loss payee, (b) (except for worker's compensation and commercial general liability insurance) provide that the proceeds for any losses shall be adjusted by the Grantor subject to the approval of the Beneficiary in the event the proceeds shall exceed $100,000, and shall be payable to the Beneficiary, to be held and applied as provided in Section 2.3, (c) include effective waivers by ----------- the insurer of all rights of subrogation against the Beneficiary, the indebtedness secured by this Deed of Trust and the Property and all claims for insurance premiums against the Beneficiary, (d) provide that any losses shall be payable notwithstanding (i) any act, failure to act or negligence of or violation of warranties, declarations or conditions contained in such policy by any named insured, (ii) the occupation or use of the Property for purposes more hazardous than permitted by the terms thereof, (iii) any foreclosure or other action or proceeding taken by the Beneficiary pursuant to any provision of this Deed of Trust, or (iv) any change in title or ownership of the Property, (e) provide that no cancellation, reduction in amount or material change in coverage thereof or any portion thereof shall be effective until at least 30 days after receipt by the Beneficiary of written notice thereof, and (f) be satisfactory in all other respects to the Beneficiary. Any insurance maintained pursuant to this Section 2.1 may be evidenced by blanket insurance policies covering the Property - ----------- and other -19- properties or assets of the Grantor, provided that any such policy shall specify -------- ---- the portion, if less than all, of the total coverage of such policy that is allocated to the Property and shall in all other respects comply with the requirements of this Section 2.1. ----------- SECTION 2.1.3. Delivery of Policies, etc. The Grantor will deliver to the ------------------------- Beneficiary, promptly upon request, (a) the originals (or, at the Beneficiary's option, certificates) of all policies evidencing all insurance required to be maintained under Section 2.1.1 (or, in the case of blanket policies, ------------- certificates thereof by the insurers together with a counterpart of each blanket policy), and (b) evidence as to the payment of all premiums due thereon (with respect to commercial general liability insurance policies, all installments for the current year due thereon to such date), provided that the Beneficiary shall -------- ---- not be deemed by reason of its custody of such policies to have knowledge of the contents thereof. The Grantor will also deliver to the Beneficiary not later than 30 days prior to the expiration of any policy a binder or certificate of the insurer evidencing the replacement thereof and not later than 15 days prior to the expiration of such policy an original copy of the new policy (or, in the case of a replacement blanket policy, a certificate thereof of the insurer together with a counterpart of the blanket policy). In the event the Grantor shall fail to effect or maintain any insurance required to be effected or maintained pursuant to the provisions of this Section 2.1, the Grantor will ----------- indemnify the Beneficiary against damage, loss or liability resulting from all risks for which such insurance should have been effected or maintained. SECTION 2.1.4. Separate Insurance. The Grantor will not take out ------------------ separate insurance concurrent in form or contributing in the event of loss with that required to be maintained pursuant to this Section 2.1. ----------- SECTION 2.2. Damage, Destruction or Taking; Grantor to Give Notice; ------------------------------------------------------ Assignment of Awards. In case of - -------------------- (a) any damage to or destruction of the Collateral or any part thereof, or (b) any taking, whether for permanent or temporary use, of all or any part of the Collateral or any interest therein or right accruing thereto, as the result of or in anticipation of the exercise of the right of condemnation or eminent domain, or a change of grade affecting the Collateral or any portion thereof (a "Taking"), or the ------ -20- commencement of any proceedings or negotiations which may result in a Taking, the Grantor will promptly give written notice thereof to the Beneficiary, generally describing the nature and extent of such damage or destruction and the Grantor's best estimate of the cost of restoring the Collateral, or the nature of such proceedings or negotiations and the nature and extent of the Taking which might result therefrom, as the case may be. The Beneficiary shall be entitled to all insurance proceeds payable on account of such damage or destruction and to all awards or payments allocable to the Collateral on account of such Taking, and the Grantor hereby irrevocably assigns, transfers and sets over to the Beneficiary all rights of the Grantor to any such proceeds, awards or payments and irrevocably authorizes and empowers the Beneficiary, at its option, in the name of the Grantor or otherwise, to file and prosecute what would otherwise be the Grantor's claim for any such proceeds, award or payment and to collect, receipt for and retain the same for disposition in accordance with Section 2.3. The Grantor will pay all reasonable costs and expenses ----------- incurred by the Beneficiary in connection with any such damage, destruction or Taking and seeking and obtaining any insurance proceeds, awards or payments in respect thereof. SECTION 2.3. Application of Proceeds and Awards. The Beneficiary may, at ---------------------------------- its option, apply all amounts recovered under any insurance policy required to be maintained by the Grantor hereunder and all awards received by it on account of any Taking in any one or more of the following ways: (a) to the payment of the reasonable costs and expenses incurred by the Beneficiary in obtaining any such insurance proceeds or awards, including the fees and expenses of attorneys and insurance and other experts and consultants, the costs of litigation, arbitration, mediation, investigations and other judicial, administrative or other proceedings and all other out-of-pocket expenses; (b) Ratably, to the payment of any Obligation secured by this Deed of Trust other than indebtedness with respect to the Secured Obligations; (c) Ratably, to the payment of the principal of the Secured Obligations and any interest (including post-petition interest payable in any proceedings for bankruptcy under applicable law ("Post-Petition ------------- Interest") to the -------- -21- extent such interest is an Obligation) accrued and unpaid thereon, without regard to whether any portion or all of such amounts shall be matured or unmatured, together with interest at the Default Rate on any overdue principal and (to the extent permitted by applicable law) interest; and, in case such amount shall be insufficient to pay in full all such amounts, then such amount shall be applied, first, to the payment of all amounts of ----- interest (including Post-Petition Interest to the extent such interest is an Obligation) accrued on the Secured Obligations and unpaid, second, to ------ the payment of all amounts of principal at the time outstanding; (d) to fulfill any of the other covenants contained herein as the Beneficiary may determine; (e) to the Grantor for application to the cost of restoring the Collateral and the replacement of Goods destroyed, damaged or taken; or (f) to the Grantor. Notwithstanding the foregoing provisions of this Section 2.3 to the ----------- contrary, and if each of the following conditions is satisfied, the Beneficiary, upon request of the Grantor, shall apply insurance proceeds or condemnation awards received by it to the restoration or replacement of the Collateral, to the extent necessary for the restoration or replacement thereof: (i) there shall then exist no uncured material Default; (ii) the Grantor shall furnish to the Beneficiary a certificate of an architect or engineer reasonably acceptable to the Beneficiary stating (x) that the Collateral is capable of being restored, prior to the maturity of the Loans, to substantially the same condition as existed prior to the casualty or Taking, (y) the aggregate estimated direct and indirect costs of such restoration and (z) as to any Taking, that the property taken in such Taking, or sold under threat thereof, is not necessary to the Grantor's customary use or occupancy of the Property; and (iii) in the event that the estimated cost of restoration set forth in the certificate of such architect or engineer (and such revisions to such estimate as are from time to time made) exceeds the -22- net insurance proceeds or condemnation awards actually received from time to time, the Grantor shall deposit the amount of such excess with the Beneficiary. In the event that such insurance proceeds or condemnation awards are to be utilized in the restoration of the Collateral, the Beneficiary shall disburse such Proceeds and the additional amounts deposited by the Grantor for such restoration after receipt of a written request for disbursement, on not less than five nor more than twelve Business Days' notice and, to the extent applicable, in accordance with customary construction loan procedures and conditions. In the event that such insurance or condemnation awards are to be utilized to replace the Collateral so destroyed or taken, the Beneficiary shall disburse such Proceeds after receipt of a written request for disbursement, on not less than five nor more than twelve Business Days' notice simultaneously with the acquisition of such replacement property by the Grantor. In the event that, after the restoration or replacement of the Collateral, any insurance or condemnation awards shall remain, such amount shall be paid to the Grantor. Insurance proceeds and condemnation awards shall be invested in the manner reasonably requested by the Grantor and approved by the Beneficiary, and all interest earned thereon shall be applied as provided in this Section 2.3. If, ----------- prior to the receipt by the Beneficiary of such insurance proceeds or condemnation awards, the Collateral shall have been sold on foreclosure, the Beneficiary shall have the right to receive said insurance proceeds or condemnation awards to the extent of any deficiency found to be due upon such sale, with legal interest thereon, whether or not a deficiency judgment shall have been sought or recovered or denied, and the reasonable attorneys' fees, costs and disbursements incurred by the Beneficiary in connection with the collection of such award or payment. SECTION 2.4. Total Taking and Total Destruction. In the event of a Total ---------------------------------- Destruction or a Total Taking, the Beneficiary shall apply all amounts recovered under any insurance policy referred to in Section 2.1.1 and all awards received ------------- by it on account of any such Taking as follows: (a) first, to the payment of the reasonable costs and expenses incurred by the Beneficiary in obtaining any such insurance proceeds or awards, including the fees and expenses of attorneys and insurance and other experts and consultants, the costs of litigation, arbitration, mediation, investigations and other judicial, -23- administrative or other proceedings and all other out-of-pocket expenses; (b) second, Ratably, to the payment of any Obligation secured by this Deed of Trust other than indebtedness with respect to the Secured Obligations; (c) third, Ratably, to the payment of the principal of the Secured Obligations and any interest (including Post-Petition Interest to the extent such interest is an Obligation) accrued and unpaid thereon, without regard to whether any portion or all of such amounts shall be matured or unmatured, together with interest at the Default Rate on any overdue principal and (to the extent permitted by applicable law) interest; and, in case such amount shall be insufficient to pay in full all such amounts, then such amount shall be applied, first, to the payment of all amounts of ----- interest (including Post-Petition Interest to the extent such interest is an Obligation) accrued on the Secured Obligations and unpaid, and second, ------ to the payment of all amounts of principal at the time outstanding; (d) fourth, to fulfill any of the other covenants contained herein as the Beneficiary may determine; and (e) fifth, the balance, if any, to the Grantor. ARTICLE III EVENTS OF DEFAULT; REMEDIES, ETC. --------------------------------- SECTION 3.1. Events of Default; Acceleration. If any one or more of the ------------------------------- following events (herein called "Events of Default") shall occur: ----------------- (a) if an "Event of Default" under and as defined in any of the Credit Agreement shall have occurred; or (b) if the Grantor shall default in the due and punctual performance or observance of any of its obligations under Section 1.4, 1.5, 1.7, 1.9, ----------- --- --- --- or 2.1; or --- (c) if the Grantor shall fail to duly and punctually perform or comply with any provision of this Deed of Trust other than the provisions referred to in clause (a) or (b) of this Section 3.1 and such default shall continue ---------- --- ----------- unremedied for a period of 30 days after the date that -24- notice of such nonperformance or noncompliance is delivered to the Grantor; or (d) if the Grantor shall, directly or indirectly, voluntarily or involuntarily, by operation of law or otherwise, sell, convey, transfer, assign, grant a security interest in or otherwise dispose of the Collateral or any portion thereof or estate or interest therein; or (e) if subsequent to the date of this Deed of Trust the law of the State shall be changed by statutory enactment, judicial decision, regulation or otherwise, so as (i) to deduct from the value of land for the purpose of taxation (for state, county, municipal or other purpose) any lien or charge thereon, or (ii) to change the taxation of deeds of trust, mortgages or debts secured by land or the manner of collecting any such taxation, so as to affect this Deed of Trust, and thereafter, within 30 days following receipt of a written request from the Beneficiary, the Grantor shall have failed to enter into a lawful and binding agreement with the Beneficiary, satisfactory in substance and form to the Beneficiary, obligating the Grantor to reimburse the Beneficiary for any increase in taxation imposed on the Beneficiary by reason of any of the foregoing; then and in any such event the Beneficiary may at any time thereafter exercise any right or remedy granted to the Beneficiary under the Credit Agreement or the other Loan Documents or available to the Beneficiary at law or in equity including, without limitation, declare, by written notice to the Grantor, the Secured Obligations and all other Obligations to be due and payable immediately or on a date specified in such notice, and on such date the same shall be and become due and payable, together with interest accrued thereon, without presentment, demand, protest or notice, all of which the Grantor hereby waives. The Grantor will pay on demand all costs and expenses, including, without limitation, attorneys' fees and expenses, incurred by or on behalf of the Beneficiary in enforcing this Deed of Trust or the Secured Obligations or any other Loan Document, or occasioned by any default hereunder or thereunder. SECTION 3.2. Legal Proceedings; Foreclosure. If an Event of Default shall ------------------------------ have occurred and be continuing, the Beneficiary at any time may, at its election, proceed at law or in equity or otherwise to enforce the payment of the Secured Obligations in accordance with the terms hereof and thereof and -25- to foreclose the lien of this Deed of Trust as against all or any part of the Collateral and to have the same sold under the judgment or decree of a court of competent jurisdiction. The Beneficiary shall be entitled to recover in such proceedings all costs incident thereto, including attorneys' fees and expenses in such amounts as may be fixed by the court. SECTION 3.3. Power of Sale. If an Event of Default shall have occurred and ------------- be continuing, the Beneficiary is authorized and empowered, without further notice, to file with the Trustee, a notice of election and demand for sale, in writing, as provided by the law of the State. After such filing, the Trustee may lawfully foreclose and shall foreclose the lien of this Deed of Trust, and sell and dispose of the Property en masse or in separate parcels (as the Beneficiary may elect) and all the right, title, and interest of the Grantor therein, at a public auction at any place then authorized by the law of the State as may be specified in the notice of such sale, for the highest and best price (the "Trustee's Sale"), four (4) weeks' public notice having previously been given of the time and place of such sale by advertisement, weekly, in a newspaper of general circulation at the time published in the County where the Property is located, or upon such other notice as may then be required by the law of the State. The Trustee shall issue, execute, and deliver a certificate of purchase, a trustee's deed (which may be in the ordinary form of conveyance), or a certificate of redemption in the manner provided by the law of the State to the party entitled thereto. The Trustee shall apply the proceeds or avails of the Trustee's Sale as required by the law of the State. The Beneficiary may purchase all or any part of the Property at the Trustee's Sale. Any purchaser at the Trustee's Sale shall not be responsible for the application of the purchase money. In the event of any express conflict between the provisions of this Deed of Trust and the provisions of Colorado Revised Statutes, the provisions of Colorado Revised Statutes shall apply. If this Deed of Trust is foreclosed by Trustee, Trustee shall allow a reasonable amount of attorneys; fees for services rendered in the supervision of such foreclosure proceedings as a part of the cost of the foreclosure. SECTION 3.4. Uniform Commercial Code Remedies. If an Event of Default shall -------------------------------- have occurred and be continuing, the Beneficiary may exercise from time to time and at any time any rights and remedies available to it under applicable law upon default in the payment of indebtedness, including, without limitation, any right or remedy available to it as a secured -26- party under the Uniform Commercial Code of the State. The Grantor shall, promptly upon request by the Beneficiary, assemble the Collateral, or any portion thereof generally described in such request, and make them available to the Beneficiary at such place or places designated by the Beneficiary and reasonably convenient to the Beneficiary and the Grantor. If the Beneficiary elects to proceed under the Uniform Commercial Code of the State to dispose of portions of the Collateral, the Beneficiary, at its option, may give the Grantor notice of the time and place of any public sale of any such property, or of the date after which any private sale or other disposition thereof is to be made, by sending notice by registered or certified first class mail, postage prepaid, to the Grantor at least ten days before the time of the sale or other disposition. If any notice of any proposed sale, assignment or transfer by the Beneficiary of any portion of the Collateral or any interest therein is required by law, the Grantor conclusively agrees that ten days' notice to the Grantor of the date, time and place (and, in the case of a private sale, the terms) thereof is reasonable. SECTION 3.5. Beneficiary Authorized to Execute Deeds, etc. The Grantor -------------------------------------------- irrevocably appoints the Beneficiary the true and lawful attorney of the Grantor, in its name and stead and on its behalf, for the purpose of effectuating, after the occurrence and during the continuation of an Event of Default, any sale, assignment, transfer or delivery for the enforcement hereof, whether pursuant to power of sale, foreclosure or otherwise, to execute and deliver all such deeds, bills of sale, assignments, releases and other instruments as may be designated in any such request. SECTION 3.6. Purchase of Collateral by Beneficiary. The Beneficiary may be ------------------------------------- a purchaser of the Collateral or of any part thereof or of any interest therein at any sale thereof, whether pursuant to power of sale, foreclosure or otherwise, and the Beneficiary may apply upon the purchase price thereof the indebtedness secured hereby. Such purchaser shall, upon any such purchase, acquire good title to the properties so purchased, free of the security interest and lien of this Deed of Trust and free of all rights of redemption in the Grantor. SECTION 3.7. Receipt a Sufficient Discharge to Purchaser. Upon any sale of ------------------------------------------- the Collateral or any part thereof or any interest therein, whether pursuant to power of sale, foreclosure or otherwise, the receipt of the Beneficiary or the officer making the sale under judicial proceedings shall be a sufficient discharge to the purchaser for the purchase money, and such -27- purchaser shall not be obliged to see to the application thereof. SECTION 3.8. Waiver of Appraisement, Valuation, etc. The Grantor hereby -------------------------------------- waives, to the fullest extent it may lawfully do so, the benefit of all appraisement, valuation, stay, extension and redemption laws now or hereafter in force and all rights of marshaling in the event of any sale of the Collateral or any part thereof or any interest therein. SECTION 3.9. Sale a Bar Against Grantor. Any sale of the Collateral or any -------------------------- part thereof or any interest therein under or by virtue of this Deed of Trust, whether pursuant to power of sale, foreclosure or otherwise, shall forever be a bar against the Grantor. SECTION 3.10. Application of Proceeds of Sale and Other Moneys. The ------------------------------------------------ proceeds of any sale of the Collateral or any part thereof or any interest therein under or by virtue of this Deed of Trust, whether pursuant to power of sale, foreclosure or otherwise, and all other moneys at any time held by the Beneficiary as part of the Collateral, unless otherwise required by the law of the State, shall be applied as follows: First: to the payment of the reasonable costs and expenses of such ----- sale (including, without limitation, the cost of evidence of title and the costs and expenses, if any, of taking possession of, retaining custody over, repairing, managing, operating, maintaining and preserving the Collateral or any part thereof prior to such sale), all reasonable costs and expenses incurred by the Beneficiary or any other Person in obtaining or collecting any insurance proceeds, condemnation awards or other amounts received by the Beneficiary, all reasonable costs and expenses of any receiver of the Collateral or any part thereof, and any Impositions or other charges or expenses prior to the security interest or lien of this Deed of Trust, which the Beneficiary may consider it necessary or desirable to pay; Second: Ratably, to the payment of any indebtedness secured by this ------ Deed of Trust, other than indebtedness with respect to the Secured Obligations at the time outstanding, which the Beneficiary may consider it necessary or desirable to pay; Third: Ratably, to the payment of all amounts of principal of and ----- interest (including Post-Petition Interest -28- to the extent such interest is an Obligation) at the time due and payable on the Secured Obligations at the time outstanding (whether due by reason of maturity or by reason of any prepayment requirement or by declaration or acceleration or otherwise), including interest at the Default Rate on any overdue principal and (to the extent permitted under applicable law) on any overdue interest; and, in case such moneys shall be insufficient to pay in full the amounts so due and unpaid with respect to the Secured Obligations at the time outstanding, then, first, to the payment of all amounts of ----- interest (including Post-Petition Interest to the extent such interest is an Obligation) at the time due and payable on the Secured Obligations and, second, to the payment of all amounts of principal at the time due and ------ payable on the Secured Obligations; and Fourth: the balance, if any, held by the Beneficiary after payment in ------ full of all amounts referred to in subdivisions First, Second and Third, ------ ----- above, shall, unless a court of competent jurisdiction may otherwise direct by final order not subject to appeal, be paid to or upon the direction of the Grantor. SECTION 3.11. Appointment of Receiver. If an Event of Default shall have ----------------------- occurred and be continuing, the Beneficiary shall, as a matter of right and without regard to the adequacy of any security for the indebtedness secured hereby or the solvency of the Grantor and without notice to Grantor, be entitled to the appointment of a receiver for all or any part of the Collateral, whether such receivership be incidental to a proposed sale of the Collateral or otherwise, and the Grantor hereby consents to the appointment of such a receiver and will not oppose any such appointment and agrees that all expenses of such receivership shall be borne by the Grantor and shall be an Obligation secured by this Deed of Trust. SECTION 3.12. Possession, Management and Income. If an Event of Default --------------------------------- shall have occurred and be continuing, in addition to, not in limitation of, the rights and remedies provided in Section 1.14, the Beneficiary, upon five days' ------------ notice to the Grantor, may enter upon and take possession of the Collateral or any part thereof by force, summary proceeding, ejectment or otherwise and may remove the Grantor and all other Persons and any and all property therefrom and may hold, operate, maintain, repair, preserve and manage the same and receive all earnings, income, Rents, issues and Proceeds accruing with respect thereto or any part thereof. The -29- Beneficiary shall be under no liability for or by reason of any such taking of possession, entry, removal or holding, operation or management, except that any amounts so received by the Beneficiary shall be applied to pay all costs and expenses of so entering upon, taking possession of, holding, operating, maintaining, repairing, preserving and managing the Collateral or any part thereof, and any Impositions or other charges prior to the lien and security interest of this Deed of Trust which the Beneficiary may consider it necessary or desirable to pay, and any balance of such amounts shall be applied as provided in Section 3.10. ------------ SECTION 3.13. Right of Beneficiary to Perform Grantor's Covenants, etc. If -------------------------------------------------------- the Grantor shall fail to make any payment or perform any act required to be made or performed hereunder or under the Credit Agreement or the other Loan Documents, the Beneficiary, without notice to or demand upon the Grantor and without waiving or releasing any obligation or Default, may (but shall be under no obligation to) at any time thereafter make such payment or perform such act for the account and at the expense of the Grantor, and may enter upon the Collateral for such purpose and take all such action thereon as, in the Beneficiary's opinion, may be necessary or appropriate therefor, provided that -------- ---- the Beneficiary shall have no right to perform any covenant of the Grantor under Section 1.19 (or Section 1.4 to the extent that it includes any of the matters - ------------ ----------- more specifically described in Section 1.19) until the entire outstanding ------------ principal amount of the Secured Obligations shall have become due and payable by reason of the declaration of the Beneficiary or the Lenders or the maturity of the Notes. No such entry and no such action shall be deemed an eviction of any lessee of the Property or any part thereof. All sums so paid by the Beneficiary and all costs and expenses (including, without limitation, attorneys' fees and expenses) so incurred, together with interest thereon at the Default Rate from the date of payment or incurring, shall constitute additional indebtedness secured by this Deed of Trust and shall be paid by the Grantor to the Beneficiary on demand. SECTION 3.14. Subrogation. To the extent that the Beneficiary, on or after ----------- the date hereof, pays any sum due under any provision of any Legal Requirement or any instrument creating any lien prior or superior to the lien of this Deed of Trust, or the Grantor or any other Person pays any such sum with the proceeds of the Loans evidenced by the Notes, the Beneficiary shall have and be entitled to a lien on the Collateral equal in priority to the lien discharged, and the -30- Beneficiary shall be subrogated to, and receive and enjoy all rights and liens possessed, held or enjoyed by, the holder of such lien, which shall remain in existence and benefit the Beneficiary in securing the Obligations. SECTION 3.15. Remedies, etc., Cumulative. Each right, power and remedy of -------------------------- the Beneficiary provided for in this Deed of Trust or now or hereafter existing at law or in equity or by statute or otherwise shall be cumulative and concurrent and shall be in addition to every other right, power or remedy provided for in this Deed of Trust or the other Loan Documents, or now or hereafter existing at law or in equity or by statute or otherwise, and the exercise or beginning of the exercise by the Beneficiary of any one or more of the rights, powers or remedies provided for in this Deed of Trust, or now or hereafter existing at law or in equity or by statute or otherwise shall not preclude the simultaneous or later exercise by the Beneficiary of any or all such rights, powers or remedies. SECTION 3.16. Provisions Subject to Applicable Law. All rights, powers and ------------------------------------ remedies provided in this Deed of Trust may be exercised only to the extent that the exercise thereof does not violate any applicable provisions of law and are intended to be limited to the extent necessary so that they will not render this Deed of Trust invalid, unenforceable or not entitled to be recorded, registered or filed under the provisions of any applicable law. If any term of this Deed of Trust or any application thereof shall be invalid or unenforceable, the remainder of this Deed of Trust and any other application of such term shall not be affected thereby. SECTION 3.17. No Waiver, etc. No failure by the Beneficiary to insist upon -------------- the strict performance of any term hereof or of any other Loan Document, or to exercise any right, power or remedy consequent upon a breach hereof or thereof, shall constitute a waiver of any such term or of any such breach. No waiver of any breach shall affect or alter this Deed of Trust, which shall continue in full force and effect with respect to any other then existing or subsequent breach. By accepting payment or performance of any of the Obligations before or after its due date, the Beneficiary shall not be deemed to have waived its right either to require prompt payment or performance when due of all other Obligations payable hereunder or to declare a default for failure to effect such prompt payment or performance. SECTION 3.18. Compromise of Actions, etc. Any action, suit or proceeding -------------------------- brought by the Beneficiary pursuant to any of -31- the terms of this Deed of Trust, the Credit Agreement, any other Loan Document, or otherwise, and any claim made by the Beneficiary hereunder or thereunder, may be compromised, withdrawn or otherwise dealt with by the Beneficiary without any notice to or approval of the Grantor. ARTICLE IV DEFINITIONS ----------- SECTION 4.1. Terms Defined in this Deed of Trust. When used herein the ----------------------------------- following terms have the following meanings: "Beneficiary": see the preamble. ----------- "Collateral": see the granting clause. ---------- "Credit Agreement": see the second recital. ---------------- ------ ------- "Deed of Trust": see the preamble. ------------- "Default" means any Event of Default or any condition or event which, after ------- notice or lapse of time, or both, would constitute an Event of Default. "Default Rate" means the per annum rate of interest specified in Section ------------ 3.2.2 of the Credit Agreement. "Event of Default": see Section 3.1. ---------------- "Goods": see clause (c) of the granting clause. ----- ---------- -------- ------ "Grantor": see the preamble. ------- -------- "herein", "hereof", "hereto", and "hereunder" and similar terms refer to ------ ------ ------ --------- this Deed of Trust and not to any particular Section, paragraph or provision of this Deed of Trust. "Impositions": see Section 1.5. ----------- ----------- "Improvements": see clause (b) of the granting clause. ------------ ---------- -------- ------ "Indemnified Parties": see Section 1.16. ------------------- ------------ "Insurance Requirements": see paragraph (a) of Section 1.6. ---------------------- ------------- ----------- "Intangibles": see clause (d) of the granting clause. ----------- ---------- -------- ------ -32- "Land": see the first recital. ---- ----- ------- "Leases": see paragraph (a) of Section 1.14. ------ ------------- ------------ "Legal Requirements": see paragraph (b) of Section 1.6. ------------------ ------------- ----------- "Lenders": see the preamble. ------- -------- "Loans": see the second recital. ---- ------ ------- "Loan Document": see clause (b) of the sixth recital. ------------- ---------- ----- ------- "Notes": means the following Notes delivered to Beneficiary: (1) the ----- Note dated May 29, 2001, in the original principal amount of $27,168,210.00 executed by Nasco International, Inc., a Wisconsin corporation and made to the order of Bank of America, N.A., and (2) the Note dated May 29, 2001 in the original principal amount of $23,831,790.00 executed by Nasco International, Inc., a Wisconsin corporation and made to the order of Bank One, Wisconsin. "Obligations": see the sixth recital. ----------- ----- ------- "Other Obligations": See Section 5.12. ----------------- ------------ "Other Parties": See Section 5.12. ------------- ------------ "Permits": see clause (f) of the granting clause. ------- ---------- -------- ------ "Permitted Encumbrances": see Section 1.2. ---------------------- ----------- "Person" means a corporation, an association, a partnership, an ------ organization, a business, an individual, a government or political subdivision thereof or a governmental agency or officer. "Plans": see clause (e) of the granting clause. ----- ---------- -------- ------ "Post-Petition Interest": see Section 2.3. ---------------------- ----------- "Proceeds": see clause (h) of the granting clause. -------- ---------- -------- ------ "Property": see clause (b) of the granting clause. -------- ---------- -------- ------ "Ratable" or "Ratably" means, in the context of a distribution of ------- ------- Collateral or Proceeds, an allocation of such Collateral or Proceeds among the Lenders pro rata in accordance with their respective portion of the aggregate --- ---- dollar amount of the Obligations to which the distribution is being applied. -33- "Real Estate": see clause (a) of the granting clause. ----------- ---------- -------- ------ "Rents": see paragraph (a) of Section 1.14. ----- ------------- ------------ "Secured Obligations": see the second recital. ------------------- ------ ------- "State": means the State of Colorado. ----- "Taking": see clause (b) of Section 2.2. ------ ---------- ------------ "Total Destruction" means any damage to or destruction of the ----------------- Improvements or any part thereof which, in the reasonable estimation of the Beneficiary shall require the expenditure of an amount in excess of $200,000 to restore the Improvements to substantially the same condition of the Improvements immediately prior to such damage or destruction. "Total Taking" means a Taking, whether permanent or for temporary use, ------------ which, in the reasonable judgment of the Beneficiary, shall substantially interfere with the normal operation of the Property by the Grantor. "Trustee": see the preamble. ------- -------- "Trustee's Sale": see Section 3.3. -------------- SECTION 4.2. Use of Defined Terms. Terms for which meanings are -------------------- provided in this Deed of Trust shall, unless otherwise defined or the context otherwise requires, have such meanings when used in any certificate and any opinion, notice or other communication delivered from time to time in connection with this Deed of Trust or pursuant hereto. SECTION 4.3. Credit Agreement Definitions. Unless otherwise defined ---------------------------- herein or the context otherwise requires, capitalized terms used in this Deed of Trust, including its preamble and recitals, have the meanings provided in the Credit Agreement. ARTICLE V MISCELLANEOUS ------------- SECTION 5.1. Further Assurances; Financing Statements. ---------------------------------------- SECTION 5.1.1. Further Assurances. The Grantor, at its expense, will ------------------ execute, acknowledge and deliver all such instruments and take all such other action as the Beneficiary from time to time may reasonably request: -34- (a) better to subject to the lien and security interest of this Deed of Trust all or any portion of the Collateral, (b) to perfect, publish notice or protect the validity of the lien and security interest of this Deed of Trust, (c) to preserve and defend the title to the Collateral and the rights of the Beneficiary therein against the claims of all Persons as long as this Deed of Trust shall remain undischarged, (d) better to subject to the lien and security interest of this Deed of Trust or to maintain or preserve the lien and security interest of this Deed of Trust with respect to any replacement or substitution for any Improvements or any other after-acquired property, or (e) in order further to effectuate the purposes of this Deed of Trust and to carry out the terms hereof and to better assure and confirm to the Beneficiary its rights, powers and remedies hereunder. SECTION 5.1.2. Financing Statements. Notwithstanding any other -------------------- provision of this Deed of Trust, the Grantor hereby agrees that, without notice to or the consent or signature of the Grantor, the Beneficiary may file with the appropriate public officials such financing statements, continuation statements, amendments and similar documents as are or may become necessary to perfect, preserve or protect the security interest granted by this Deed of Trust. SECTION 5.2. Additional Security. Without notice to or consent of the ------------------- Grantor, and without impairment of the security interest and lien and rights created by this Deed of Trust, the Beneficiary may accept from the Grantor or any other Person additional security for the Secured Obligations. Neither the giving of this Deed of Trust nor the acceptance of any such additional security shall prevent the Beneficiary from resorting, first, to such additional security, or, first, to the security created by this Deed of Trust, or concurrently to both, in any case without affecting the Beneficiary's lien and rights under this Deed of Trust. -35- SECTION 5.3. Defeasance; Partial Release, etc. -------------------------------- SECTION 5.3.1. Defeasance. If the Grantor or Nasco shall pay, in full, ---------- the principal of and premium, if any, and interest on the Secured Obligations in accordance with the terms thereof and hereof and all other sums payable hereunder by the Grantor and shall comply with all the terms, conditions and requirements hereof and of the Secured Obligations, then on such date, this Deed of Trust shall be (except as provided herein) null and void and of no further force and effect and the Collateral shall thereupon be, and be deemed to have been, reconveyed, released and discharged from this Deed of Trust without further notice on the part of either the Grantor or the Beneficiary. SECTION 5.3.2. Partial Release etc. The Beneficiary may, at any time ------------------- and from time to time, without liability therefor, and without prior notice to the Grantor, release, reconvey any part of the Collateral, consent to the making of any map or plat of the Property, join in granting any easement thereon or join in any extension agreement or agreement subordinating the lien of this Deed of Trust or enter into any other agreement in connection with the Collateral. SECTION 5.4. Notices, etc. All notices and other communications ------------ provided to the Grantor or the Beneficiary under this Deed of Trust shall be given in the manner and with the effect specified in the Credit Agreement. The foregoing incorporation by reference of the Grantor's mailing address shall be deemed to be a request by the Grantor that a copy of any notice of default and of any notice of sale hereunder be mailed to the Grantor at such address as provided by law. SECTION 5.5. Waivers, Amendments, etc. The provisions of this Deed of ------------------------ Trust may be amended, discharged or terminated and the observance or performance of any provision of this Deed of Trust may be waived, either generally or in a particular instance and either retroactively or prospectively, only by an instrument in writing executed by the Grantor and the Beneficiary. SECTION 5.6. Cross-References. References in this Deed of Trust and ---------------- in each instrument executed pursuant hereto to any Section or Article are, unless otherwise specified, to such Section or Article of this Deed of Trust or such instrument, as the case may be, and references in any Section, Article or definition to any clause are, unless otherwise specified, to such clause of such Section, Article or definition. -36- SECTION 5.7. Headings. The various headings of this Deed of Trust and of -------- each instrument executed pursuant hereto are inserted for convenience only and shall not affect the meaning or interpretation of this Deed of Trust or such instrument or any provisions hereof or thereof. SECTION 5.8. Governing Law. This Deed of Trust shall be deemed to be a ------------- contract made under and governed by the laws of the State. SECTION 5.9. Successors and Assigns, etc. This Deed of Trust shall be --------------------------- binding upon and shall inure to the benefit of the parties hereto and their respective successors and assigns. SECTION 5.10. Loan Document. This Deed of Trust is a Loan Document executed ------------- pursuant to the Credit Agreement and shall (unless otherwise expressly indicated herein) be construed, administered and applied in accordance with the terms and provisions thereof, including Article X thereof. --------- SECTION 5.11. Severability. Any provision of this Deed of Trust or any ------------ other Loan Document which is prohibited or unenforceable in any jurisdiction shall as to such provision and such jurisdiction, be ineffective to the extent of such prohibition or unenforceability without invalidating the remaining provisions of this Deed of Trust or such Loan Document or affecting the validity or unenforceability of such provision in any other jurisdiction. SECTION 5.12. Accommodation Provisions. Insofar as this Deed of Trust ------------------------ secures obligations (the "Other Obligations") of other obligors other than ----------------- Grantor (the "Other Parties") in favor of Beneficiary, Grantor has executed and ------------- delivered this Deed of Trust as an accommodation instrument with the intent of subjecting its interests in the Collateral to the lien of this Deed of Trust as security for the Other Obligations and in order to induce Beneficiary to enter into the Loan Documents. Grantor hereby agrees, to the fullest extent permitted by law, not to assert or take advantage of: (a) Any right to require Beneficiary to proceed against the Other Parties or any other person or to proceed against or exhaust any other security held by Beneficiary at any time or to pursue any other remedy in Beneficiary's power before exercising any right or remedy under this Deed of Trust. (b) Any defense that may arise by reason of: -37- (i) Beneficiary's failure to proceed against the Other Parties' property, or any other party against whom Beneficiary might assert a claim, before proceeding against Grantor under this Deed of Trust; or (ii) The release, suspension, discharge or impairment of any of Beneficiary's rights against the Other Parties or any other party against whom Beneficiary might assert a claim, whether such release, suspension, discharge or impairment is explicit, tacit or inadvertent; or (iii) Beneficiary's failure to pursue any other remedies available to Beneficiary that would reduce the burden of the indebtedness secured hereby on Grantor's interests in the Collateral; or (iv) Any extension of the time for the payment or performance of any of the Other Obligations or this Deed of Trust; or (v) Any amendment of this Deed of Trust or the Other Obligations, whether or not such amendment materially affects the risk that Grantor has assumed by executing this Deed of Trust; or (vi) The incapacity, lack of authority, death or disability of the Other Parties or any other person or persons; or (vii) The failure of Beneficiary to file or enforce a claim against the estate (in either administration, bankruptcy or any other proceedings) of the Other Parties or any other person or persons. (c) Demand, protest and notice of any kind, including, without limitation, the following notices: (i) Notice of the evidence, creation or incurring of any new or additional indebtedness or obligation (provided that such indebtedness or obligation is not secured by this Deed of Trust); or (ii) Notice of any action or non-action on the part of the Other Parties or Beneficiary in connection with any obligation or evidence of indebtedness held by Beneficiary as collateral; or -38- (iii) Notice of payment or non-payment by the Other Parties of the indebtedness secured by this Deed of Trust. (d) Any right to assert against the Beneficiary any defense arising by reason of any claim or defense based upon an election of remedies by the Beneficiary to foreclose, either by judicial foreclosure or by exercise of the power of sale, under any other deed of trust securing the Other Obligations, which in any manner impairs, reduces, releases, destroys or extinguishes Grantor's subrogation rights, rights to proceed against the Other Parties for reimbursement, or any other rights of Grantor to proceed against any other person or security. Grantor waives all rights and defenses to enforcement of all or any part of the indebtedness secured hereby which defenses are based on an election of remedies by Beneficiary, even though the election of remedies, such as nonjudicial foreclosure with respect to any such other deed of trust, may destroy Grantor's rights of subrogation and reimbursement against the Other Parties. This means, among other things: (i) The Beneficiary may collect from the Grantor without first foreclosing on any real or personal property collateral pledged by the Other Parties. (ii) If the Beneficiary forecloses on any real property collateral pledged by the Other Parties: (1) The amount of the debt may be reduced only by the price for which that collateral is sold at the foreclosure sale, even if the collateral is worth more than the sale price. (2) The Beneficiary may collect from the Grantor even if the Beneficiary, by foreclosing on the other real property collateral, has destroyed any right the Grantor may have to collect from the Other Parties. This is an unconditional and irrevocable waiver of any rights and defenses the Grantor may have because the debtor's debt is secured by real property. (e) Any rights arising because of Grantor's payment or satisfaction of the indebtedness secured hereby (i) against the Other Parties, by way of subrogation to the rights of Beneficiary or otherwise, or (ii) against any -39- other guarantor or any Other Party obligated to pay any of the indebtedness secured hereby, by way of contribution or reimbursement or otherwise. (f) Any duty on the part of Beneficiary to disclose to Grantor any default under the Other Obligations. (g) Any duty on the part of Beneficiary to disclose to Grantor any facts Beneficiary may now know or may hereafter know about the Other Parties or any successors in interest (if any) regardless of whether Beneficiary (i) has reason to believe that any such facts materially increase the risk beyond the risk which Grantor intends to assume by executing this Deed of Trust, (ii) has reason to believe that these facts are unknown to Grantor, or (iii) has a reasonable opportunity to communicate such facts to Grantor, it being understood and agreed that Grantor is fully responsible for being and keeping informed of the financial condition of the Other Parties or any successor in interest of the Other Parties and of all circumstances bearing on the risk of nonpayment of any indebtedness of the Other Parties to Beneficiary that is secured hereby. (h) Any right to object to the release of any portions of the Collateral from the lien of this Deed of Trust notwithstanding the fact that such releases may be made without Beneficiary's having received any or adequate consideration therefor. Grantor further agrees that with respect to any Secured Obligation secured hereby Beneficiary may, in such manner and upon such terms and at such times as Beneficiary deems best and without demand or notice to or consent of Grantor (i) release any party now or hereafter liable for the performance of any such Secured Obligation, (ii) extend the time for the performance of any such Secured Obligation, (iii) accept additional security therefor, and (iv) alter, substitute or release any property securing such performance. Before executing this Deed of Trust, Grantor has made such independent legal and factual inquiries and investigations as Grantor deemed necessary or desirable with respect to the ability of the Other Parties to honor all of the Other Parties' covenants and agreements with Beneficiary, and Grantor has relied solely on said independent inquiries and investigations preparatory to entering into this Deed of Trust. -40- IN WITNESS WHEREOF, the Grantor has caused this Deed of Trust to be duly executed as of the day and year first above written. Grantor: AMERICAN EDUCATIONAL PRODUCTS, INC., a Colorado corporation By:__________________________________ Name: Title: ACKNOWLEDGMENT STATE OF COLORADO ) ) SS.: COUNTY OF _________________ ) The foregoing Deed of Trust was acknowledged before me this _____ day of ____________, 2001, by _______________________, as _____________ of American Educational Products, Inc., a Colorado corporation. Witness my hand and official seal. My commission expires ___________. [SEAL] _____________________________ Notary Public SCHEDULE 1 DESCRIPTION OF THE LAND ----------------------- A portion of Block 22 and the West 1/2 of the vacated street abutting Block 22 on the East of Riverside Park, a Subdivision in the City of Fort Collins, Colorado, more particularly described as being contained within boundary lines which considering the East line of the Southeast 1/4 of Section 2, Township 7 North, Range 69 West of the 6th P.M., as bearing due South and with all bearings contained herein relative thereto; begin at a point which bears South 89 degrees 57' West 1950.00 feet and again South 38.42 feet from the East 1/4 corner of said Section 2 and run thence West 193.60 feet, thence South 450.00 feet, thence East 193.60 feet, thence North 450.00 feet to the Point of Beginning; and a portion of Block 22, Riverside Park, a Subdivision in The City of Fort Collins, Colorado, more particularly described as being contained in boundary lines which considering the East line of the Southeast 1/4 of Section 2, Township 7 North, Range 69 West of the 6th P.M., as bearing due South and with all bearings contained herein relative thereto; begin at a point which bears South 89 degrees 57' West 1950.00 feet and again South 38.42 feet and again West 193.60 feet from the East 1/4 corner of said Section 2, and run thence West 96.80 feet, thence South 450.00 feet, thence East 96.80 feet, thence North 450.00 feet to The Point of Beginning. County of Larimer, State of Colorado. Address: 401 Hickory, Fort Collins, Colorado SCHEDULE 2 Permitted Encumbrances 1. Right of way for the Greeley Salt Lake and Pacific Railroad Company as stated in Deed recorded September 15, 1882 in Book T at Page 362. 2. Right of way for Town Ditch as stated in instrument recorded September 1, 1901 in Book 137 at Page 168. 3. Terms, conditions, provisions and obligations of Easement Dedication recorded April 21, 1993 as Reception No. 93024709. EX-23.3 10 dex233.txt CONSENT OF ARTHUR ANDERSEN LLP [ANDERSEN LOGO] Exhibit 23.3 Consent of Independent Public Accountants To the Board of Directors and Stockholders of The Aristotle Corporation: As independent public accountants, we hereby consent to the use of our report included in this registration statement and to the incorporation by reference in this registration statement of our report dated August 31, 2001, except for the item noted in footnote 2 for which the date is April 9, 2002, included in The Aristotle Corporation's Form 10-K for the year ended June 30, 2001 and to all references to our Firm included in this registration statement. /s/ Arthur Andersen Hartford, Connecticut April 10, 2002 EX-23.3.1 11 dex2331.txt LETTER REGARDING ARTHUR ANDERSEN REPRESENTATIONS EXHIBIT 23.3.1 The Aristotle Corporation 27 Elm Street New Haven, CT 06510 Letter to Commission Pursuant To Temporary Note 3T April 10, 2002 Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549-0408 Ladies and Gentlemen: Pursuant to Temporary Note 3T to Article 3 of Regulation S-X, The Aristotle Corporation has obtained a letter of representation from Arthur Andersen LLP ("Andersen") stating that the June 30, 2001 audit was subject to their quality control system for the U.S. accounting and auditing practice to provide reasonable assurance that the engagement was conducted in compliance with professional standards, and that there was appropriate continuity of Andersen personnel working on the audit and availability of national office consultation. Availability of personnel at foreign affiliates of Andersen is not relevant to this audit. Very truly yours, The Aristotle Corporation /s/ Paul M. McDonald Paul M. McDonald Chief Financial Officer EX-23.4 12 dex234.txt CONSENT OF KPMG LLP Exhibit 23.4 Consent of KPMG LLP The Board of Directors Nasco International Inc.: We consent to the use of our report dated February 8, 2002, on the consolidated financial statements of Nasco International Inc. and Subsidiaries (a wholly-owned subsidiary of Nasco Holdings, Inc.) included herein and to the reference to our firm under the heading "Experts" in the prospectus. /s/ KPMG LLP Milwaukee, Wisconsin April 10, 2002 EX-23.5 13 dex235.txt CONSENT OF HEIN & ASSOCIATES LLP Exhibit 23.5 INDEPENDENT AUDITOR'S CONSENT We consent to the use in the Registration Statement and Prospectus of The Aristotle Corporation of our report dated March 9, 2001, accompanying the consolidated financial statements of American Educational Products, Inc. contained in such Registration Statement, and to the use of our name and the statements with respect to us, as appearing under the heading "Experts" in the Prospectus. /s/ Hein + Associates LLP Hein + Associates LLP Denver, Colorado April 9, 2002 -----END PRIVACY-ENHANCED MESSAGE-----