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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 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED: DECEMBER 31, 1993
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 1-6981
NATIONAL EDUCATION CORPORATION
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF
INCORPORATION OR ORGANIZATION)
95-2774428
(I.R.S. EMPLOYER
IDENTIFICATION NO.)
18400 VON KARMAN AVENUE, IRVINE, CALIFORNIA 92715
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 474-9400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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<S> <C>
Common Stock, New York Stock Exchange
$.01 par value Pacific Stock Exchange
6 1/2% Convertible Subordinated New York Stock Exchange
Debentures Due 2011 Pacific Stock Exchange
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SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: NONE
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The aggregate market value of voting stock held by nonaffiliates of the
registrant as of March 11, 1994 was $176,880,719.
The number of shares of registrant's common stock outstanding as of March
11, 1994 was 29,485,004.
DOCUMENTS INCORPORATED BY REFERENCE
Parts I, II and IV incorporate information by reference from the Annual
Report to Stockholders for the fiscal year ended December 31, 1993. Part III
incorporates information by reference from the Proxy Statement for the Annual
Meeting of Stockholders to be held May 13, 1994.
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PART I
ITEM 1. BUSINESS.
GENERAL DEVELOPMENT OF THE COMPANY'S BUSINESS
National Education Corporation (the "Company") provides training and
education to individuals, businesses and governments. The Company was
originally incorporated in California in 1954 and reincorporated in Delaware in
1972. Its business is conducted through four operating entities: ICS Learning
Systems, Inc. ("ICS"), Steck-Vaughn Publishing Corporation ("Steck-Vaughn"),
National Education Centers, Inc. ("Education Centers") and National Education
Training Group, Inc. ("NETG").
During 1993, the Company took substantive measures to turn around the
operations at NETG and Education Centers. As a result, the Company's operating
performance improved in the fourth quarter of 1993 as compared to the fourth
quarter of 1992. This improvement reflects the substantial investments the
Company made in product development and marketing at NETG. Overall for 1993,
the Company reported a net loss of $9.6 million, compared to net income of
$515,000 in 1992. The 1993 loss includes a third quarter $32.9 million pretax
write-off for the closure of 14 schools at Education Centers, as well as a
write-down of certain intangible assets at NETG. The loss was partially offset
by a one-time gain of $21.3 million on the initial public offering of
Steck-Vaughn shares.
In 1993, ICS achieved a 12.2% increase in revenues and a 13.8%
increase in operating income. These results are directly related to a 28,692,
or 10.1%, increase in enrollments resulting partially from an expanded
telesales operation that improved the conversion of prospective students into
enrollments, additional advertising spending and new product introductions.
ICS' computer and related training is the company's fastest growing product
line and has achieved compound annual growth since 1988 of over 30% in revenue
and enrollments. ICS has a total of 14 courses that include an IBM compatible
computer as part of a total training package. Also during 1993, ICS introduced
the following five new courses: Home Inspector, Real Estate Appraiser, Medical
Transcriptionist, Child Psychology and DeskTop Publishing and Design.
Based on statistics compiled by the National Home Study Council
("NHSC"), the United States Department of Education recognized accrediting body
for independent study schools, ICS continues as the industry leader in
generating new enrollments. During 1993, more than 35,000 students enrolled in
ICS' high school diploma program and more than 27,000 students enrolled in ICS'
eleven two-year associate degree programs in business and technology. An
additional 250,000 students worldwide pursued courses in other ICS career and
hobby-related areas.
ICS acquired the Industrial Print business unit from sister subsidiary
NETG in 1993. This unit was combined with the English Language Institute,
which was acquired in 1992 and renamed ICS Learning Systems, Business and
Industrial Training Division. Through renewed marketing efforts, including an
expanded sales force and a streamlined course catalog and database marketing
system, this unit
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markets over 1,000 individual courses and 10,000 hours of education and
training. More than 2,000 businesses in America use ICS products to train
their workforce.
ICS Online, which ICS established in 1993, is an electronic campus
which is featured on the fastest growing online service in the United States,
America Online ("AOL"). ICS was one of the first home study schools to
establish this service and currently offers the following online services
through links between personal computers: ICS Library, ICS Bookstore,
Electronic Bulletin Board, Online Classroom, Online Enrollment, plus the
hundreds of features available on the AOL service.
Steck-Vaughn completed an initial public offering of 2,668,000 shares
of its common stock at $12.00 per share in July 1993, generating approximately
$29,775,000 of net proceeds. This initial public offering represents
approximately 18% of the stock of the Company's Steck-Vaughn subsidiary. The
net proceeds were reduced by expenses of $1,074,000 that were incurred in
connection with the initial public offering. On April 1, 1993, Steck-Vaughn
declared a $19,999,000 dividend payable to the Company. The dividend and
certain intercompany balances were later paid from proceeds from the offering.
During 1993, Steck-Vaughn continued its growth with increases in
revenues and operating income of 17.8% and 8.0% respectively, with revenue
increases outpacing industry averages. The fastest growing segment of
Steck-Vaughn was its library division, which continued to introduce a
significant number of new titles in 1993. Overall growth was attributable to
continued new product introductions, an expanded selling organization and
intense marketing efforts.
Steck-Vaughn maintained its aggressive product development effort and
produced many new titles in all of the market areas it serves. More than 230
new products were released in 1993.
In April 1993, Steck-Vaughn paid approximately $5.4 million to acquire
THE MAGNETIC WAY(TM) product line from Creative Edge, Inc. THE MAGNETIC
WAY(TM) product line, consisting of magnetic boards and overlays, can be
integrated with Steck-Vaughn's print products or marketed as a stand-alone
teaching tool. This innovative product line increases Steck-Vaughn's presence
in the English as a Second Language market.
Due to the rapidly expanding number of products offered, Steck-Vaughn
reorganized its sales force effective January 2, 1994. During 1993, each
salesperson was responsible for the whole product range, which included
elementary, high school, library and adult education markets. Beginning in
1994, the sales force will be segmented into two groups. One group will focus
on the elementary, junior high school and library markets, while the other
group will focus on the high school and adult education markets. This
reorganization will allow the two groups to focus their expertise, time and
energy in a more productive way.
Education Centers is one of the largest operators of private
postsecondary schools in the United States. In 1993, it became more difficult
for students at a number of locations, especially in urban areas, to obtain
access to federally
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guaranteed student loans. Certain provisions of the Higher Education Act of
1992, as well as the recent Omnibus Budget Reconciliation Act, caused some
lenders to terminate participation in federally guaranteed student loan
programs. These difficulties prompted Education Centers to restructure its
operations. Anticipating that decreased access to funding would result in
further operating losses in some of its schools for the year ending December
31, 1993 and future years, Education Centers elected to cease new student
enrollments at 15 of its 48 schools.
Education Centers' revenues of $133.2 million decreased $23.9 million
or 15.2% from revenues of $157.0 million in 1992. Operating losses before
unusual items of $5.5 million compared to operating income before unusual items
of $10.8 million in 1992. During the third quarter of 1993, Education Centers
restructured its operations and ceased new student enrollments at 14 of its
schools, while allowing existing students to complete their educational
programs at the schools. As a result, Education Centers recorded an unusual
charge of $23.6 million, which included a write-down of assets and estimated
costs of closing 14 schools.
In February 1993, NETG reorganized its structure to stabilize and
reposition the operations for turnaround. NEC named Robert Soto as its new
president and it strengthened its management team by adding new vice presidents
in product development, marketing and sales. The company directed much of its
effort toward developing training courses in areas that are significantly
growing in demand, such as client/server computer, business process
reengineering, desktop computing, and management and professional development.
NETG also restructured its United States sales operations, expanded its
marketing activities, and made significant expansions of product development
capabilities. Additionally, the company completed the sale of its Canadian
operations to a subsidiary of SHL Systemhouse Inc., who will become the
distributor of NETG products in Canada.
NETG's 1993 revenues of $68.3 million decreased $14.3 million, or
17.3% from revenues of $82.6 million in 1992. In 1993, operating losses of
$26.0 million before unusual items increased $4.1 million from losses of $21.9
million in 1992. During the third quarter of 1993, NETG recorded an unusual
charge of $9.2 million that resulted from the write-down of certain acquired
intangible assets. The decrease in revenues and the increase in operating
losses at NETG primarily resulted from a lower contract backlog at the
beginning of the year and the transfer of the Industrial Print operation to ICS
effective January 1, 1993. Additionally, operating losses increased due to an
increase of $3.0 million in product development expenditures, or 29% over the
prior year.
DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENT
Revenues and operating income (loss) by industry segment for the past
three years are as follows:
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(dollars in thousands) 1993 1992 1991
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NET REVENUES:
ICS $101,319 $ 90,292 $ 82,071
Steck-Vaughn 53,156 45,124 38,044
Education Centers 133,151 157,043 152,540
NETG 68,259 82,582 112,769
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TOTAL NET REVENUES $355,885 $375,041 $385,424
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OPERATING INCOME (LOSS):
ICS $ 21,368 $ 18,780 $ 16,048
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Steck-Vaughn 13,566 12,556 8,650
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Education Centers operating
income (loss) before
unusual items (5,511) 10,835 9,424
Unusual items (23,626) (1,184) --
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Education Centers (29,137) 9,651 9,424
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NETG operating loss before
unusual items (29,950) (21,854) (1,760)
Unusual items (9,232) (2,506) --
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NETG (35,182) (24,360) (1,760)
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TOTAL SEGMENT OPERATING
INCOME (LOSS) $(29,385) $ 16,627 $ 32,362
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ICS Learning Systems, Inc.
General. The company provides training and education to consumers and
companies under the following names: ICS Learning Systems, English Language
Institute, International Correspondence Schools, North American Correspondence
Schools, and the ICS Center for Degree Studies (collectively referred to as
"ICS"). ICS offers more than 50 independent study courses in the United States
and more than 100 courses abroad in disciplines ranging from high school
completion requirements through occupational training and associate technology
degree programs in business and engineering.
Curricula and Product Development. Curricula are carefully designed
to reflect the most important trends in employment opportunities and consumer
interest. New courses introduced during 1993 include Home Inspector, Real
Estate Appraiser, Medical Transcriptionist, Child Psychology and DeskTop
Publishing and Design. In addition, a major project to convert all existing
print-based products to an electronic format continued in 1993 and was
complemented by the installation of a digital data network to facilitate online
editing, filing and retrieval, and transfer of products. This format also
facilitates the transfer of documents directly to high technology printers in
digital format, which will eventually allow ICS to reduce inventory
requirements, virtually eliminate any material obsolescence, and position the
company to move product electronically via any digital transfer mechanism.
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Traditionally, all independent study courses have been structured
around "graded lessons" in which the student receives one section of
instructional material at a time, which must be completed before proceeding to
the next section. Courses are designed to be completed by the typical student
in periods ranging from 12 to 24 months, depending on the course selected. A
computerized student information/testing system permits students, through
touch-tone telephones or voice response, to obtain immediate testing and
feedback on test results. Over 90% of the 1.5 million exams graded by ICS
during 1993 were graded electronically by either the information/testing system
via telephone or by electronic scanner. With improved technology, the cost of
grading an exam is at an all-time low while the speed of correcting an exam and
turnaround to the student have never been faster. ICS utilizes a voice
activated computer record access system that allows students to obtain key
information from their records, 24 hours a day, without operator assistance.
These services are a direct result of a published commitment to 100% customer
satisfaction.
Tuition for ICS' independent study courses ranges from approximately
$400 to $2,300. Students generally pay a portion of the tuition upon
enrollment and the balance on a monthly basis. ICS estimates that students
complete an average of approximately 40% to 65% of lessons, depending on the
course. The company's accounting treatment recognizes independent study
contract revenues when cash is received, but only to the extent that such cash
can be retained under existing refund policies of the National Home Study
Council ("NHSC") and applicable state law. ICS is not dependent on financial
aid from the federal government.
ICS has recently established a domestic telesales department by which
in-bound telephone inquiries are answered by its in-house telesales staff.
These telesales professionals seek to enroll students over the telephone
without needing to send the customer ICS' traditional sales literature. During
the past two years, new telesales departments have been established in Canada,
the United Kingdom and Australia. Telesales improved the number of prospective
students converted into enrollments and, accordingly, contributed to the 10.1%
increase in enrollments at ICS.
During 1993, ICS created ICS Online, which is an electronic campus now
available on America Online. Through this electronic campus, ICS offers
real-time instruction, and ICS students can query their instructors, learn from
other students, and discuss their lessons with each other.
To accommodate future growth, ICS acquired a warehouse during
September 1993. The warehouse consists of 82,000 square feet and is located on
approximately 31 acres of land in Ransom, Pennsylvania.
Advertising and Marketing. ICS markets its independent study courses
throughout its United States and international operations utilizing direct
response advertising through print, television media and direct mail marketing.
Telemarketing is also used in the United States, Canada, United Kingdom, and
Australia. During 1993, ICS began using its computer driven predictive dialing
system in its United States-based operation to dial back automatically
individuals who have previously requested information from ICS. Live operators
then speak directly to the consumer about enrolling in the program. This
process has improved telemarketing productivity. Also during 1993, ICS
increased its
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handling of inbound marketing calls by establishing more inbound lines directly
to the ICS Marketing Call Center.
All of ICS' independent study courses in the United States are
accredited by the NHSC. ICS also offers courses in many other English-
speaking countries throughout the world. During 1993, ICS enrolled students
from more than 150 different countries.
With the 1993 transfer of NETG's Industrial Print operation to ICS,
which ICS combined with the English Language Institute acquired in 1992 and
renamed ICS Learning Systems, Business and Industrial Training Division, ICS
intends to pursue independent study training opportunities with business and
government agencies. ICS has renewed its marketing and sales efforts by
expanding its sales force, streamlining its catalog and offering more courses
in an effort to expand this division's customer base.
Competition. The independent study industry is highly competitive.
The company faces direct competition from United States and foreign independent
study providers and indirect competition from community colleges, vocational
and technical schools, two-year colleges and universities, and, to a lesser
extent, governmental entities and other "distance learning" companies and
schools, including electronic universities. In recent years, technological
changes have increased the variety of choices available to students in
selecting the type of education and the manner in which it is delivered,
thereby increasing the entities with which ICS competes for student enrollment.
Overall, the Company believes that ICS' competitive position is good.
Steck-Vaughn Publishing Corporation
General. Steck-Vaughn is one of the country's largest publishers of
supplemental educational materials and offers educators a broad range of
quality products that address educational needs from early childhood through
adulthood. The term "supplemental materials" generally refers to softcover,
curriculum-based books, workbooks and other support materials that are used in
conjunction with or instead of traditional hardcover "basal" textbooks.
Steck-Vaughn also publishes reference and nonfiction products for school and
public libraries, as well as bookstores.
Sales and Marketing. Steck-Vaughn markets all of its products through
multiple distribution channels, including a national sales and telesales
organization and has an established reputation for meeting the needs of its
broad-based markets. Additionally, Steck-Vaughn has a distributor organization
which services public libraries, trade outlets, and other nontraditional school
markets. Steck-Vaughn has begun to establish a presence in foreign markets
where English language curriculum and library products are in demand.
Steck-Vaughn's customer service group emphasizes prompt and accurate delivery
of published materials.
Steck-Vaughn expanded and realigned its sales force, effective January
2, 1994, into two segments. One group will concentrate on the elementary and
junior high schools and school and public libraries, and the other group will
focus on the high school and adult education markets. This reorganization of
what was
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previously a smaller group calling on all Steck-Vaughn markets will allow the
two groups to focus their expertise, time and energy in a more productive way.
Product Development. During the past three years, Steck-Vaughn has
increased significantly the number of new educational materials created
primarily for use in elementary and secondary schools. In 1991, Steck-Vaughn
augmented its development of library titles with the addition of the Raintree
product line, a highly respected library publisher in the children's library
market. Steck-Vaughn has also responded to growing areas of adult education
with the introduction of new publications for adult basic education and adult
literacy. In 1990 and again in 1993, Steck-Vaughn was awarded the exclusive
distribution rights of the Official Practice Test of the GED Testing Service of
the American Council for Education.
In April 1993, Steck-Vaughn acquired THE MAGNETIC WAY(TM) product line
from Creative Edge, Inc. The product line consists of magnetized boards with
metallic coated visual overlays. These products are used by teachers and
students to build hands-on displays paralleling curriculum topics for social
studies, language arts, reading and science. Twelve comprehensive learning
packages, which sell for $200-$450 each, are currently available for use with
the magnetized board which sells for approximately $85. Steck-Vaughn also
introduced a lower-priced, smaller set of similar products in the fall of 1993.
Competition. There are many companies that compete with Steck-Vaughn
in the educational publishing field. No single company is dominant in the
industry segments for which Steck-Vaughn publishes. Overall, the Company
believes that Steck-Vaughn's competitive position is good and that growth has
occurred due to new products and increased sales and market penetration.
National Education Centers, Inc.
General. Education Centers operates 33 postsecondary career schools in
urban and suburban locations in 16 states. In addition, Education Centers is
in the process of closing 15 schools, which are in various stages of teaching
existing students until the schools close.
The schools provide training for entry-level occupations in five major
disciplines: Medical, Electronics, Business, Automotive, and Aviation. Most
schools offer multiple curricula, but no school offers every discipline.
Hands-on training using labs and some media-based delivery methodologies form
the basic curriculum philosophy. Programs ranging in length from 8 to 36
months are offered to individual students as well as government agencies with a
training mandate and organizations having employee training needs that are met
by Education Centers' curricula.
Curricula. The occupations for which Education Centers offers
training programs include medical and dental assistants, electronics
technicians, computer-aided drafters, computer programmers, commercial artists,
aviation mechanics, broadcast technicians, secretaries, personal computer
specialists, ophthalmic technicians, automotive mechanics and pilots, among
others. Certain schools offer Bachelor degrees in Interior Design and
Electronics Engineering
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Technology. Tuition for the programs ranges from $4,000 to $25,000 depending
on length of course and subject matter. Tuition for government and industry
training engagements varies from contract to contract as a function of contract
training hours.
All courses offered by Education Centers were developed internally or
with the assistance of consultants. The development process begins with the
establishment of criterion-referenced learning objectives based on achieving
skills-based competencies demanded by employers. These objectives drive the
development of lesson plans for instructors to follow. Specific test-bank
items are then prepared to ensure students master the subject matter.
Education Centers has emphasized a modular, nonsequential curriculum design
structure for newer programs. The modular design enables Education Centers to
start students more frequently and reduce costs due to increased efficiencies.
National focus group meetings and surveys conducted in 1993 have
provided input from employers that will result in a number of initiatives,
including major modifications to the electronics and allied health curricula.
Also, program opportunities were identified in computerized accounting and
secretarial areas. While these two curricula are not new to Education Centers'
program directory, they will be considered for new development with a
high-technology focus in 1994. An approach emphasizing individual product
lines has been incorporated into the curriculum development and maintenance
process which will better integrate the various facets of the business.
Job Placement. Over the past three years Education Centers has placed
almost 32,500 graduates in jobs. Education Centers maintains placement
personnel in each school, has fully computerized its job placement tracking
system, and has initiated communication and training programs to achieve its
placement goals.
To ensure fair value to its student clients, Education Centers has
increased its focus from simply graduating students to placing and verifying
that graduates are experiencing initial success in their positions for at least
three months. Education Centers continues to monitor the overall placement
rate as an indicator of progress.
Completion. Completion is recognized as one of the critical measures
of Education Centers' success. The completion rate for 1993 was 59.5%, with
significantly better rates in short-term programs. Higher entrance standards,
greater focus on each student's commitment at enrollment, enhanced curricula,
greater focus on career development skills, better placement information, and
increased involvement with placement staff are several initiatives being
implemented to increase completion, as well as placement rates.
Financial Aid. Education Centers assists its students in assessing
their eligibility for financial aid and in procuring available financial aid.
Federal and state financial aid represented approximately 85 percent of
Education Centers' revenues and approximately 32 percent of consolidated
revenues in 1993. Grant programs, principally the Pell grant, entitle certain
students to receive funds for tuition and other educational expenses, based on
financial need. These grants may be available to students with family incomes
of less than $25,000 per
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year, and historically many students of Education Centers qualified for these
grants.
There is no assurance that future governmental programs providing
financial assistance to Education Centers' students will remain available at
levels which have existed in prior fiscal years. Certain provisions of the
Higher Education Act of 1992, as well as the recent Omnibus Budget
Reconciliation Act, caused some lenders to terminate participation in federally
guaranteed loan programs. Students' access to government financial aid
programs has become more restricted due to an increasing number of lenders and
guarantors declining to serve vocational schools with shorter-term programs or
higher default rates. To alleviate the problem, during the third quarter of
1993, Education Centers ceased enrollments at 14 schools and initiated a
program to provide internal financing to Education Centers' students. (For
more detailed information regarding discussion of financial aid, see the
"Liquidity and Capital Resources" section starting on page 21 of the Company's
1993 Annual Report to Stockholders.)
Education Centers has instituted a student loan default reduction
program which includes information from the Default Management Manual prepared
and distributed by the Career College Association. Education Centers has also
incorporated information from the Department of Education Default Reduction
Initiative federal regulations issued June 5, 1989, into its default program,
plus additional default reduction strategies of its own. Additionally, most of
Education Centers' schools use an outside consulting group to contact former
students who are reported as delinquent in federal loan repayments to provide
information and assistance in avoiding a default on their loans. Education
Centers anticipates that its current default programs will reduce the number of
future student loan defaults.
Accreditation. All schools operated by Education Centers are
accredited. Of the 33 schools currently enrolling students, 28 are accredited
by the Accrediting Commission of Career Schools and Colleges of Technology
(formerly known as the Accrediting Commission for Trade and Technical Schools),
and five are accredited by the Accrediting Council for Independent Colleges
and Schools, formerly known as the Accrediting Commission for Independent
Colleges and Schools. Each school voluntarily undergoes periodic accrediting
evaluations by teams of qualified examiners.
Advertising and Marketing. Education Centers markets its courses to
individual students, organizations, and governmental agencies. It utilizes
various direct response advertising media including television, direct mail,
and newspapers. In addition, Education Centers offers 90 partial-tuition
scholarships to high school students in markets where its schools are located
and utilizes Education Centers' employees to give public service presentations
at these high schools. For organizations and government entities, Education
Centers maintains a staff to make sales calls and prepare proposals based on
training needs analyses and/or the existing government request for proposal
process.
Competition. Education Centers encounters active competition in the
marketing of vocational and technical training programs from junior colleges
and other public institutions, military training programs, and other
proprietary schools. The nature and degree of competition largely depend on
the courses
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being offered by Education Centers' locations and the geographical proximity of
competing schools. Competitors may vary substantially in the treatment of
course subject matter, the amount of tuition or other fees charged, the
duration of the course, and the job placement success rate. Overall, the
Company believes Education Centers' competitive position is satisfactory.
National Education Training Group, Inc.
General. Established in the late 1960s, NETG specializes in providing
multimedia products to educate, train and transfer skills to corporate and
government employees, with specific emphasis on information systems training.
Headquartered in Naperville, Illinois, NETG course offerings range from
hands-on, skill-based training to courses that build awareness or provide a
theoretical understanding of current business developments.
Markets, Products and Delivery Media. NETG offers education and
training in the areas of information technologies, enterprise systems, desktop
computing, management and professional development, and manufacturing and
industrial skills. Because each training audience has its own specific needs,
NETG has subdivided its curricula into five primary product lines:
Desktop Computing. Today's business environment has generated an
overwhelming demand for end-user business applications and desktop system
training. In response to this demand, NETG has harnessed the enormous
potential of current technologies, such as compact disc-read only memory
("CD-ROM"), the 486-based workstation, and sophisticated training and work
support system. The end-user courses are built around specific business case
scenarios that allow participants to learn relevant skills quickly and
immediately apply those skills to their jobs.
Information Technologies (Client/Server Computing and Enterprise
Systems Product Lines). NETG has a long history of supporting information
systems training. Today the course offerings reflect the varied and changing
nature of information systems and include topics on a wide range of
technologies such as client/server, object-oriented technologies, networking,
and open systems technologies.
Management and Professional Development. NETG offers effective,
relevant management and professional development training that can help
organizations meet their business needs and objectives. The courses emphasize
productivity and performance issues. They provide the means for improving
personal, management and business skills that are essential to developing
highly productive and professional employees.
Manufacturing and Industrial Skills. Today's manufacturing and
industrial organizations are concerned with reducing costs, reducing risks of
accidents, complying with regulations and creating an overall healthy work
environment. NETG is committed to providing workers with the most accurate,
comprehensive and up-to-date training solutions available.
The NETG course library features approximately 1,000 courses on a
variety of media including:
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1) Videotape: Each video course is a training package comprised
of one or more videotaped instructional sessions, audio
sessions, and associated textual materials, including
comprehensive student and coordinator guides. Groups of
related video courses in a specified curriculum are taken as
needed by the student to develop various job-related skills
either at a task level or at a complete topical level.
2) Local Area Network ("LAN"): Organizations are interconnecting
more and more personal computers and workstations via LANs to
enable individuals to share information and communicate
effectively. Training applications conveniently residing on
LANs enable individuals to select from a variety of courses
for use on their desktop systems. A number of NETG's
computer-based products are available for use on LANs,
including the SKILL BUILDER(R) courses.
3) Interactive Video Instruction ("IVI"): Many of NETG's courses
are available through interactive delivery media, interactive
videodiscs and computer diskettes in conjunction with related
textual materials and guides. IVI combines the interactivity
and control of the personal computer with video, sound and
graphics.
4) Computer-Based Training ("CBT"): CBT products use a computer
to deliver interactive instruction, drill and practice,
simulation and remedial training. Training programs in NETG's
mainframe CBT library include information processing skills
training, end-user computing and fourth generation languages,
and other subjects related to the application of information
technologies. Customers can distribute CBT through worldwide
networks because the CBT is stored on a mainframe computer and
the training may be accessed simultaneously by students in
multiple locations.
5) Compact Disc-Read Only Memory ("CD-ROM"): CD-ROM formatted
products are interactive and targeted to meet the growing
demands of desktop training. NETG's SKILL BUILDER(R) Series
offers a unique architecture which provides a method of
learning an application program in which different learning
paths may be utilized. The digital mass storage capability
inherent in CD-ROM creates lower delivery costs and
facilitates updating or customizing the content.
6) Instructor-Led Training ("ILT"): NETG's ILT Group provides a
network of skilled instructors to conduct courses in data
processing, end user computing, human resource development and
manufacturing. NETG's instructor-led programs offer tested
course materials developed by training experts within each
field. Course content is regularly updated to incorporate the
latest technological advances.
This selection of delivery options allows greater flexibility in
designing training programs that are customized to specific resources. Each of
these media
12
<PAGE> 13
offer particular strengths that are brought into play by the requirements of
individual training programs.
Course Production and Acquisition. NETG has significantly increased
its investment in product development to expand course offerings in the
emerging technology areas of client/server computing, networking,
object-oriented technologies, business reengineering, desktop computing,
management and professional development, and manufacturing and industrial
skills.
NETG is providing high quality learning solutions that effectively and
efficiently deliver a direct learning payoff to the participant. All NETG
courses are designed to introduce the topic, state the purpose, present the
subject matter, and provide examples and practice exercises.
NETG's new educational instruction system allows an individual to
select from three types of content: informational, conceptual and skills-based
training:
Informational Courses - build awareness about the particular course
topic. The student will acquire a high-level understanding of the subjects
covered. These courses are primarily descriptive, and their technical content
is lower than the other two course types.
Conceptual Courses - provide the student with a theoretical
understanding of the topic. After completing the course, the student will have
an analytical perspective of the subjects covered.
Skills-Based Courses - teach proficiency in a topic. After completing
these courses, the student will have a practical knowledge of the subject.
Acquisitions/Corporate Partners. NETG is actively acquiring products
and technology through strategic alliances and co-development agreements with
leading software vendors and training organizations that offer expertise on
advanced technologies, desktop computing and management and professional
development skills. These choices are driven by customer requests and current
market trends. As part of a commitment to quality standards, topics are
selected and produced with leading subject matter experts, industry authorities
and top educators in each subject area.
By aligning itself with leading training developers and industry
experts on the most sought after topics in today's business environment, NETG
can provide its customers with timely and relevant training and education
solutions that provide the proficiency and competency organizations are
seeking. NETG corporate business partners include:
Andersen Consulting
Hands On Learning
Individual Software
Intelecom Intelligent Communications
MicroVideo Learning Systems
Novell, Inc.
Open Systems Training
13
<PAGE> 14
Video Publishing House
Wave Technologies
Wilson Learning
Xebec Multi-Media Solutions
Customized Services. NETG-Spectrum in Bedford, Massachusetts, is the
consulting and custom development division of NETG. Spectrum specializes in
helping companies use the power of multimedia technology to improve the
knowledge, skills and performance of people.
Spectrum's high quality, practical solutions have supported strategic
change and achieved significant business results such as reduced costs,
increased sales, enhanced customer satisfaction, decreased turnover, increased
span of control and improved timeliness of information.
For over a decade, Spectrum has provided a full scope of services in
the design of multimedia performance systems, including consulting,
instructional systems design, media production and implementation services.
Spectrum uses a full range of delivery media and systems encompassing
interactive video, desktop multimedia, workshops, print and video. After
determining the optimal choice of media and methods to solve the problem and
reach the audience, Spectrum serves as the learning system's integrator to
ensure improved performance and results.
Distribution, Service, Marketing and Sales. NETG is an international
organization with 74 offices and production and distribution centers worldwide.
The corporate headquarters are in suburban Chicago, Illinois, and international
headquarters are in London, England. The company has approximately 600
employees. Wholly owned subsidiaries are located in the United Kingdom,
Netherlands, Germany and Austria.
NETG Service System. NETG's Product Support Center, located in
Naperville, Illinois, provides customers with toll-free technical assistance,
answers to software and hardware questions, and assistance in the installation
and ongoing use of courseware products. Support analysts are available to
address inquiries 24 hours a day, seven days a week. Customers may also log
and track inquiries through a bulletin board.
In addition to toll-free product support, NETG also provides toll-free
customer service for order placement and product descriptions, including course
profiles, prerequisites, target audience descriptions, and details on specific
components of courses.
NETG also conducts progress reviews which measure and evaluate the
success of a training program, as well as an inventory tracking system that
details which courses were received, installed and returned.
Additional services available to customers include: consultative
training needs analysis to help customers identify all performance improvement
opportunities; training management workshops that provide training
administration techniques; and custom training product design and development
services to modify existing courses or develop new fully customized courses.
14
<PAGE> 15
NETG Sales Organization and Distribution Channels. NETG's revenues
are primarily generated from customer contracts. Customers typically sign
annual agreements based on the amount of training they would expect to require
in a twelve-month period. Contracts range from approximately $2,000 to over
$1,000,000.
NETG has a staff of telemarketing and telesales representatives in the
United States, and a separate telesales staff in Europe. The telesales groups
offer the same products as the direct sales force, but focus their efforts
toward companies with revenues between $100 - 200 million. The sales cycles
average two to four months and the average contract is $3,000.
NETG's products are also available through local distributors or
agents in Argentina, Australia, Bolivia, Brazil, Canada, Denmark, Ecuador,
Egypt, Finland, France, Ghana, Hong Kong, India, Iran, Israel, Korea, Malaysia,
New Zealand, Nigeria, Norway, Peru, Russia, Saudi Arabia, Singapore, Spain,
Sweden, Taiwan, Turkey, the United Arab Emirates, and Venezuela.
Competition. The Company believes the total training market in North
America is in excess of $45 billion annually for industry and government, and
that NETG is one of the largest multimedia training companies in this very
large, highly fragmented and competitive market. Most training needs are
satisfied by instructor-led training. NETG faces active competition from
existing or potential client internal training operations, vendor-supplied
training operations, other independent training companies offering
instructor-led or multimedia training, universities and community college
systems.
NETG competes in the training market on the basis of: quality and
instructional effectiveness of its training programs; quantity, thoroughness
and timeliness of its training programs; price; ability to deliver course
material in a timely manner; and client services. Overall, the Company
believes that its competitive position is good. Major competitors include CBT
Systems, SRA and COMSELL, among others.
Foreign Operations
The following table shows consolidated net revenues of the Company in
foreign countries for 1993, 1992 and 1991:
<TABLE>
<CAPTION>
(Dollars in thousands) 1993 1992 1991
------- ------- --------
<S> <C> <C> <C>
Net revenues outside the
United States $58,642 $63,966 $69,590
Percent of consolidated
net revenues 16.5% 17.1% 18.1%
</TABLE>
Consolidated operating results are reported in United States dollars.
Because the foreign subsidiaries of the Company conduct operations in the
currencies of the countries in which they are based, all financial statements
of the foreign subsidiaries must be translated into United States dollars. As
the value of the United States dollar increases or decreases relative to these
15
<PAGE> 16
foreign currencies, the United States dollar value of items on the financial
statements of the foreign subsidiaries is reduced or increased, respectively.
Therefore, changes in dollar sales of the foreign subsidiaries from year to
year are not necessarily indicative of changes in actual revenues recorded in
local currency. Financial information about foreign and domestic operations is
described in Note 13, page 33 of the Company's 1993 Annual Report to
Stockholders, which Note is hereby incorporated by reference in this Annual
Report on Form 10-K.
The Company's ability to continue operations outside of the Unites
States or maintain the profitability of such operations is to some extent
subject to control and regulation by the United States government and foreign
governments. The Company's foreign operations are primarily located in the
United Kingdom, Canada, Australia and Germany, which historically have
controlled and regulated businesses in the same manner as the United States.
Research and Development
The amount spent during 1993, 1992 and 1991 on Company-sponsored
research and development activities was approximately $24 million, $20 million,
and $18 million, respectively. In 1993, the Company continued to invest in
research and development to ensure new product availability for future revenue
generation. The Company spends substantial sums primarily in the development
of new products at NETG and Steck-Vaughn, and curricula for ICS and Education
Centers.
Seasonality of the Business
Most of Steck-Vaughn's sales are made in the third quarter of the year
because most of its customers purchase products in anticipation of classes
commencing in the fall. ICS' business is moderately seasonal with more
students studying during the latter part of the year. The Education Centers'
business is moderately seasonal due to the inclination of its students to
commence classes in the fall. NETG's business is seasonal due to the sales
cycle from contracts expiring in the latter half of the year. There is no
customer to whom sales are made in an amount that exceeds two percent or more
of the Company's consolidated annual net revenues.
Additional Information
Unearned future tuition income for Education Centers and ICS, which
represents amounts estimated to be recognized as revenue in subsequent years as
services and courseware are provided, is described in Note 10, page 32 of the
Company's 1993 Annual Report to Stockholders, which Note is hereby incorporated
by reference in this Annual Report on Form 10-K.
Financial information about industry segments is described in Note 13,
page 33 of the Company's 1993 Annual Report to Stockholders, which Note is
hereby incorporated by reference in this Annual Report on Form 10-K.
Compliance with federal, state or local provisions concerning the
discharge of materials into the environment or otherwise relating to the
protection of the
16
<PAGE> 17
environment have no material effect on the Company's capital expenditures,
earnings or competitive position.
The Company employed approximately 4,200 persons as of January 31,
1994.
Executive Officers of the Company
The following table provides information regarding executive officers of
the Company, including their ages as of March 1, 1994:
<TABLE>
<CAPTION>
Name, Age and Title: Five-Year Business Experience:
-------------------- ------------------------------
<S> <C>
David C. Jones (72) Chairman of the Board since July 1989.
Chairman of the Board Acting Chief Executive Officer from
July 1989 to April 1990. Chairman of
the Joint Chiefs of Staff from June
1978 through June 1982. Director of
General Electric.
Jerome W. Cwiertnia (52) President and Chief Executive Officer since
President and Chief April 1990. President and Chief Operating
Executive Officer Officer from August 1989 to April 1990.
President from February 1988 to March 1989.
Mr. Cwiertnia has been a Director of the
Company since 1984, and has served as
Chairman of the Board of Steck-Vaughn since
March 1993.
Christine A. Gattenio (38) Vice President and Corporate Controller
Vice President and since April 1989. Corporate Controller
Corporate Controller since January 19877.
Philip C. Maynard (39) Vice President, Secretary and General
Vice President, Secretary Counsel since February 1994. General
and General Counsel Counsel of Orchids Paper Products Company
from May 1993 through January 1994. Chief
Executive Officer and Director of McClellan
Development from May 1989 to May 1992.
General Partner of Urland, Morello, Dunn &
Maynard law practice from February 1985
to May 1989. Mr. Maynard succeeds Mr.
Jeffrey A. Brill, who resigned as Vice
President, Secretary and General Counsel of
the Company in October 1993.
Keith K. Ogata (39) Vice President, Chief Financial Officer and
Vice President, Chief Treasurer since April 1991. Vice President
Financial officer and and Treasurer from April 1989 to April 1991.
Treasurer Treasurer since January 1987.
</TABLE>
17
<PAGE> 18
ITEM 2. PROPERTIES.
(a) The Company's corporate headquarters are located in leased
facilities aggregating 40,000 square feet in Irvine, California.
(b) The Company owns real property consisting of approximately 2.2
acres of land with a 22,000 square foot building in Nutley, New Jersey, for a
National Education Center.
(c) The Company owns an 180,000 square foot building on 15 acres of
land and 80,000 square feet of buildings on leased land in Tulsa, Oklahoma, for
a National Education Center.
(d) The Company owns real property in Scranton, Pennsylvania, for the
principal offices of ICS. This building consists of 120,000 square feet of
space on 14.3 acres of land.
(e) The Company owns an 82,000 square foot building on approximately
31 acres of land in Ransom, Pennsylvania for an ICS warehouse.
(f) The Company owns the land and building serving as the warehouse
for Steck-Vaughn Company. The building, located in Austin, Texas on
approximately 13 acres of land, contains 101,000 square feet of space.
(g) The Company owns 28,200 square feet of buildings on approximately
4.7 acres of land in Little Rock, Arkansas, for a National Education Center.
(h) The Company owns 22,000 square feet of buildings on approximately
4.8 acres of land in West Des Moines, Iowa, for a National Education Center.
(i) The Company owns 60,000 square feet of buildings on approximately
3.1 acres of land in Blairsville, Pennsylvania, for a National Education
Center.
(j) The Company owns 10,000 square feet of buildings on approximately
.5 acres of land in Minneapolis, Minnesota, for a National Education Center.
(k) The Company has approximately 130 leases for its operating units
and offices, including the following: National Education Centers, Inc.'s
headquarters in Irvine, California - approximately 24,000 square feet; National
Education Training Group, Inc.'s headquarters in Naperville, Illinois -
approximately 30,000 square feet; Steck-Vaughn Company's headquarters in
Austin, Texas - approximately 31,000 square feet; and Spectrum's headquarters
in Bedford, Massachusetts - approximately 52,500 square feet.
Overall, the Company's properties are suitable and adequate for the
Company's needs.
ITEM 3. LEGAL PROCEEDINGS.
The Company is a party to litigation matters and claims which are routine
in the course of its operations and, while the results of litigation and claims
18
<PAGE> 19
cannot be predicted with certainty, the Company believes that the final outcome
of such matters will not have a materially adverse effect on the Company's
consolidated financial position or results of operations.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's stockholders during
the fourth quarter of 1993.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
The markets on which the Company's Common Stock is traded and the high
and low sales prices of the Company's Common Stock during each quarter for the
last two years, appears on page 37 of the Company's 1993 Annual Report to
Stockholders, which information is hereby incorporated by reference in this
Annual Report on Form 10-K.
No cash dividends have been declared or paid on the Company's Common
Stock during 1993 or 1992. The Company has no present intent to pay cash
dividends. The Company's Credit Agreement with its lending institutions
restricts the payment of cash dividends.
Approximate Number of Equity Security Holders:
<TABLE>
<CAPTION>
Number of Record Holders
Title of Class as of March 11, 1994
-------------- ------------------------
<S> <C>
Common Stock, $.01 par value 3,007
</TABLE>
The number of record holders is based upon the actual number of holders
registered on the stock transfer books for the Company at such date and does
not include holders of shares in "street names" or persons, partnerships,
associations, corporations or other entities identified in security position
listings maintained by depository trust companies.
ITEM 6. SELECTED FINANCIAL DATA.
The following financial information for the years 1989 through 1993
included in the Company's 1993 Annual Report to Stockholders is incorporated by
reference in this Annual Report on Form 10-K:
Five-Year Financial Highlights, page 18.
19
<PAGE> 20
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
The following information included in the Company's 1993 Annual Report to
Stockholders is incorporated by reference in this Annual Report on Form 10-K:
Management's Discussion and Analysis, pages 19 through 23.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The following financial statements and the supplementary financial
information included in the Company's 1993 Annual Report to Stockholders are
incorporated by reference in this Annual Report on Form 10-K:
The consolidated financial statements of the Company, pages 24 through 27
together with the report of Price Waterhouse, dated February 4, 1994
pertaining to the consolidated financial statements as of December 31,
1993 and 1992, and for the three years ended December 31, 1993, page 35.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE.
The Company has no information to report in response to this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
(a) The information required by Item 10 with respect to the directors
of the Company is incorporated herein by reference from the Company's Proxy
Statement for the 1994 Annual Meeting of Stockholders which will be mailed to
stockholders and filed with the Securities and Exchange Commission on or about
March 28, 1994.
(b) The information required by Item 10 with respect to executive
officers of the Company is furnished in a separate item captioned "Executive
Officers of the Company" and included in Part I of this Annual Report on
Form 10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated herein by reference
from the Company's Proxy Statement for the 1994 Annual Meeting of Stockholders
which will be mailed to stockholders and filed with the Securities and Exchange
Commission on or about March 28, 1994.
20
<PAGE> 21
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT.
The information required by Item 12 is incorporated herein by reference
from the Company's Proxy Statement for the 1994 Annual Meeting of Stockholders
which will be mailed to stockholders and filed with the Securities and Exchange
Commission on or about March 28, 1994.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated herein by reference
from the Company's Proxy Statement for the 1994 Annual Meeting of Stockholders
which will be mailed to stockholders and filed with the Securities and Exchange
Commission on or about March 28, 1994.
21
<PAGE> 22
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND
REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
Pages in
Annual Report*
<S> <C> <C>
(a) The following documents are filed as
part of this report:
(1) Financial Statements:
Report of Independent Accountants . . . . . . . . . . . . 35
Consolidated Statements of Operations for
each of the three years in the period
ended December 31, 1993 . . . . . . . . . . . . . . . . . 24
Consolidated Balance Sheets at December 31,
1993 and 1992 . . . . . . . . . . . . . . . . . . . . . . 25
Consolidated Statements of Cash Flows for
each of the three years in the period
ended December 31, 1993 . . . . . . . . . . . . . . . . . 26
Consolidated Statements of Stockholders'
Equity for each of the three years in the
period ended December 31, 1993 . . . . . . . . . . . . . . 27
Notes to Consolidated Financial
Statements . . . . . . . . . . . . . . . . . . . . . . . . 28-34
</TABLE>
* Incorporated by reference from the indicated pages of the Company's 1993
Annual Report to Stockholders.
<TABLE>
<CAPTION>
Pages in
This Report
<S> <C> <C>
(2) Financial Statement Schedules:**
Report of Independent Accountants
on Financial Statement Schedules . . . . . . . . . . . . . 24
Schedules numbered in accordance with Rule
5.04 of Regulation S-X:
I Marketable Securities. . . . . . . . . . . . . . . . . . . 25
V Property, Plant and Equipment . . . . . . .. . . . . . . . 26
</TABLE>
22
<PAGE> 23
<TABLE>
<S> <C> <C>
VI Accumulated Depreciation and
Amortization of Property, Plant
and Equipment . . . . . . . . . . . . . . . . 27
VIII Valuation and Qualifying
Accounts . . . . . . . . . . . . . . . . . . . 28
IX Short-Term and Bank Borrowings . . . . . . . . 29
X Supplementary Consolidated Income
Statement Information . . . . . . . . . . . . 30
</TABLE>
**All other financial statement schedules are omitted because they are not
applicable or the required information is shown in the financial statements or
notes thereto.
(3) Exhibits: See Exhibit Index.
(b) No reports on Form 8-K were filed during the fourth quarter of 1993.
23
<PAGE> 24
NATIONAL EDUCATION CORPORATION
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULES
To the Board of Directors of
National Education Corporation
Our audits of the consolidated financial statements referred to in our report
dated February 4, 1994 appearing on page 35 of the 1993 Annual Report to
Stockholders of National Education Corporation (which report and consolidated
financial statements are incorporated by reference in this Annual Report on
Form 10-K) also included an audit of the Financial Statement Schedules listed
in Item 14(a) of this Form 10-K. In our opinion, these Financial Statement
Schedules present fairly, in all material respects, the information set forth
therein when read in conjunction with the related consolidated financial
statements.
/s/ PRICE WATERHOUSE
- -------------------------------
PRICE WATERHOUSE
Costa Mesa, California
February 4, 1994
24
<PAGE> 25
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
SCHEDULE I - MARKETABLE SECURITIES
At December 31, 1993
(dollars in thousands)
<TABLE>
<CAPTION> Market Value Amount at Which
of Each Issue Each Issue is
Name of Issuer and Number of Cost of at Balance Carried on the
Title of Each Issue Shares or Units Each Issue Sheet Date Balance Sheet
- ------------------- --------------- ---------- ------------- ---------------
<S> <C> <C> <C> <C>
EQUITY SECURITIES:
Corporate Income Funds 24,016 $ 6,678 $ 7,058 $ 6,678
Preferred Stocks 181,300 3,797 4,324 3,797
Tax Exempt Municipal Funds 89 5,500 5,500 5,500
Other N/A 325 1,082 325
------- ------- -------
$16,300 $17,964 $16,300
======= ======= =======
</TABLE>
25
<PAGE> 26
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
SCHEDULE V - PROPERTY, PLANT AND EQUIPMENT
(dollars in thousands)
<TABLE>
<Caption
Balance at Transfers, Balance
beginning Additions retirements at end
Classification of period at cost or sales of period
- -------------- ----------- --------- ----------- ---------
<S> <C> <C> <C> <C>
YEAR ENDED 1993:
Land $ 2,544 $ -- $ -- $ 2,544
Buildings and improvements 13,246 2,951 (545) 15,652
Leasehold improvements 22,794 1,655 (507) 23,942
Machinery and equipment 88,404 10,967 (7,782) 91,589
Furniture and fixtures 32,210 312 (1,196) 31,326
-------- ------- -------- --------
$159,198 $15,885 $(10,030) $165,053
======== ======= ======== ========
YEAR ENDED 1992:
Land $ 2,340 $ 1,029 $ (825) $ 2,544
Buildings and improvements 13,746 1,415 (1,915) 13,246
Leasehold improvements 22,327 1,121 (654) 22,794
Machinery and equipment 88,427 5,358 (5,381) 88,404
Furniture and fixtures 29,890 2,954 (634) 32,210
-------- ------- -------- --------
$156,730 $11,877 $ (9,409) $159,198
======== ======= ======== ========
YEAR ENDED 1991:
Land $ 2,840 $ -- $ (500) $ 2,340
Buildings and improvements 17,564 65 (3,883) 13,746
Leasehold improvements 21,453 1,108 (234) 22,327
Machinery and equipment 86,280 4 (2,052) 88,427
Furniture and fixtures 28,873 1,155 (138) 29,890
-------- ------- -------- --------
$157,010 $ 6,527 $ (6,807) $156,730
======== ======= ======== ========
</TABLE>
26
<PAGE> 27
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
SCHEDULE VI - ACCUMULATED DEPRECIATION AND
AMORTIZATION OF PROPERTY, PLANT AND EQUIPMENT
(dollars in thousands)
<TABLE> Additions
<CAPTION> Balance at charged to Transfers, Balance
beginning costs and retirements at end
Classification of period expenses or sales of period
- ---------------- ----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
YEAR ENDED 1993:
Buildings and improvements $ 6,624 $ 614 $ (220) $ 7,018
Leasehold improvements 18,015 1,537 (517) 19,035
Machinery and equipment 67,942 9,634 (7,072) 70,504
Furniture and fixtures 22,387 1,113 (1,060) 22,440
-------- ------- ------- --------
$114,968 $12,898 $(8,869) $118,997
======== ======= ======= ========
YEAR ENDED 1992:
Buildings and improvements $ 6,876 $ 606 $ (858) $ 6,624
Leasehold improvements 16,375 1,825 (185) 18,015
Machinery and equipment 62,892 9,638 (4,588) 67,942
Furniture and fixtures 20,571 2,368 (552) 22,387
-------- ------- ------- --------
$106,714 $14,437 $(6,183) $114,968
======== ======= ======= ========
YEAR ENDED 1991:
Buildings and improvements $ 7,427 $ 582 $(1,133) $ 6,876
Leasehold improvements 14,646 1,873 (144) 16,375
Machinery and equipment 54,542 9,284 (934) 62,892
Furniture and fixtures 18,707 2,221 (357) 20,571
-------- ------- ------- --------
$ 95,322 $13,960 $(2,568) $106,714
======== ======= ======= ========
</TABLE>
27
<PAGE> 28
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
SCHEDULE VIII - VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)
<TABLE>
<CAPTION> Balance at Charged to Balance
beginning costs and Deductions/ at end
Classification of period expenses Other of period
- --------------- ---------- ---------- ----------- ---------
<S> <C> <C> <C> <C>
YEAR ENDED 1993:
Allowance for doubtful
receivables $10,119 $4,664 $(4,346) $10,437
======= ====== ======= =======
Accumulated amortization of
acquired intangible assets $78,865 $4,775 $11,995 (A) $95,635
======= ====== ======= =======
YEAR ENDED 1992:
Allowance for doubtful
receivables $11,505 $5,887 $(7,273) $10,119
======= ====== ======= =======
Accumulated amortization of
acquired intangible assets $72,685 $6,206 $ (26) $78,865
======= ====== ======= =======
YEAR ENDED 1991:
Allowance for doubtful
receivables $12,819 $6,540 $(7,854) $11,505
======= ====== ======= =======
Accumulated amortization of
acquired intangible assets $66,117 $6,570 $ (2) $72,685
======= ====== ======= =======
</TABLE>
(A) This amount primarily represents the write-off of intangible assets in
connection with previous acquisitions for the Company's National Education
Training Group of $9,232,000 and National Education Centers of $2,766,000.
28
<PAGE> 29
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
SCHEDULE IX - SHORT-TERM AND BANK BORROWINGS
(dollars in thousands)
<TABLE>
<CAPTION>
Average Weighted
Weighted Maximum Amount Average
Average Amount Outstanding Interest
Balance Interest Outstanding During Rate During
Category of at End Rate at End During the Period the Period
Adequate Borrowings of Period of Period the Period (A) (B)
- --------------------- ---------- ----------- ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
YEAR ENDED 1991:
Notes payable to banks $ -- -- % $ 46,066 (C) $31,988 10.92%
</TABLE>
No short-term or bank borrowings were outstanding during the twelve month
period ended December 31, 1992 and 1993.
(A) - The average amount outstanding during the period was computed by dividing
the total of the daily principal balances by 365.
(B) - The weighted average interest rate during the period was computed by
dividing the total interest expense by the weighted average principal
amounts of borrowings.
(C) - These amounts exclude the portion of domestic bank debt which was
refinanced by the issuance of the $20,000,000 senior subordinated
convertible debentures in February 1991.
29
<PAGE> 30
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
SCHEDULE X - SUPPLEMENTARY CONSOLIDATED INCOME STATEMENT INFORMATION
(dollars in thousands)
<TABLE>
<CAPTION>
Charged to Costs and Expenses
---------------------------------------------
1993 1992 1991
------- ------- -------
<S> <C> <C> <C>
Maintenance and repairs $ 3,951 $ 4,064 $ 3,959
Royalties $10,494 $10,745 $ 9,162
Advertising expenses $49,751 $48,254 $46,351
</TABLE>
Taxes other than income and payroll taxes are not presented as the amounts are
less than one percent of total revenues.
30
<PAGE> 31
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Company has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
NATIONAL EDUCATION CORPORATION Date
By /s/ JEROME W. CWIERTNIA March 16, 1994
- --------------------------------------
Jerome W. Cwiertnia
President and Chief
Executive Officer
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 Company and in the capacities and on the dates indicated.
Date
By /s/ JEROME W. CWIERTNIA March 16, 1994
- --------------------------------------
Jerome W. Cwiertnia,
Director, President and Chief
Executive Officer
(Principal Executive Officer)
By /s/ KEITH K. OGATA March 16, 1994
- --------------------------------------
Keith K. Ogata, Vice President,
Chief Financial Officer and
Treasurer (Principal Financial
Officer)
By /s/ CHRISTINE A. GATTENIO March 16, 1994
- --------------------------------------
Christine A. Gattenio, Vice
President and Corporate
Controller (Principal
Accounting Officer)
31
<PAGE> 32
Date
By: /s/ RICHARD C. BLUM March 10, 1994
- ---------------------------------------------
Richard C. Blum, Director
By: /s/ DAVID BONDERMAN March 14, 1994
- ---------------------------------------------
David Bonderman, Director
By: /s/ LEONARD W. JAFFE March 11, 1994
- ---------------------------------------------
Leonard W. Jaffe, Director
By: /s/ DAVID C. JONES March 10, 1994
- ---------------------------------------------
David C. Jones, Director
By: /s/ MICHAEL R. KLEIN March 10, 1994
- ---------------------------------------------
Michael R. Klein, Director
By: /s/ PAUL B. MACCREADY March 11, 1994
- ---------------------------------------------
Paul B. MacCready, Director
By: /s/ FREDERIC V. MALEK March 10, 1994
- ---------------------------------------------
Frederic V. Malek, Director
By: /s/ JOHN J. MCNAUGHTON March 9, 1994
- ---------------------------------------------
John J. McNaughton, Director
By: /s/ HAROLD SEGAL March 10, 1994
- ---------------------------------------------
Harold Segal, Director
By: /s/ WILLIAM D. WALSH March 10, 1994
- ---------------------------------------------
William D. Walsh, Director
32
<PAGE> 33
INDEX TO EXHIBITS
(Item 14(a))
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------- ------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the
Company (1) . . . . . . . . . . . . . . . . . . . . . . . . . . *
3.2 By-Laws of the Company, as amended (2) . . . . . . . . . . . . . *
10.1 National Education Corporation Retirement Plan
(Restated as of January 1, 1989)(As Amended
through January 1, 1992) (3) . . . . . . . . . . . . . . . . . . *
10.2 National Education Corporation Retirement Plan
Trust (4) . . . . . . . . . . . . . . . . . . . . . . . . . . . *
10.3 1981 Long-Term Incentive Plan (5) . . . . . . . . . . . . . . . *
10.4 1983 Stock Option Plan (6) . . . . . . . . . . . . . . . . . . . *
10.5 Advanced Systems, Incorporated 1984 Stock
Option and Stock Appreciation Rights Plan (7) . . . . . . . . . *
10.6 1986 Stock Option and Incentive Plan, as
amended (8) . . . . . . . . . . . . . . . . . . . . . . . . . . *
10.7 1990 Stock Option and Incentive Plan (9) . . . . . . . . . . . . *
10.8 1991 Directors' Stock Option Plan (10) . . . . . . . . . . . . . *
10.9 Rights Agreement, dated October 29, 1986,
between National Education Corporation and
Bank of America National Trust and Savings
Association, Rights Agent (including exhibits
thereto) (11) . . . . . . . . . . . . . . . . . . . . . . . . . *
10.10 Addendum No. 1 to Rights Agreement dated
October 29, 1986 (12) . . . . . . . . . . . . . . . . . . . . . *
10.11 Indenture, dated as of May 15, 1986, between
National Education Corporation and Continental
Illinois National Bank and Trust Company of
Chicago, as Trustee (13) . . . . . . . . . . . . . . . . . . . . *
10.12 Tripartite Agreement Dated as of May 31, 1990,
among National Education Corporation, Conti-
nental Bank as Resigning Trustee, and IBJ
Schroder Bank & Trust Company as Successor
Trustee (14) . . . . . . . . . . . . . . . . . . . . . . . . . . *
</TABLE>
33
<PAGE> 34
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------- ------------
<S> <C> <C>
10.13 National Education Corporation Purchase Agree-
ment, Senior Subordinated Convertible Deben-
tures, dated as of February 15, 1991 (15) . . . . . . . . . . . *
10.14 National Education Corporation Supplemental
Executive Retirement Plan, as amended (16) . . . . . . . . . . . *
10.15 Supplemental Benefit Plan for Non-Employee
Directors (17) . . . . . . . . . . . . . . . . . . . . . . . . *
10.16 Retirement Agreement with J.J. McNaughton (18) . . . . . . . . . *
10.17 Intercompany Agreement Between National
Education Corporation and Steck-Vaughn
Publishing Corporation dated June 30, 1993 (19) . . . . . . . *
10.18 Tax Sharing Agreement Between National
Education Corporation and Its Direct and
Indirect Corporate Subsidiaries dated
January 1, 1993 (20) . . . . . . . . . . . . . . . . . . . . . . *
10.19 Asset Purchase Agreement Between Steck-Vaughn
Company and Creative Edge Inc. dated as of
April 26, 1993 (21) . . . . . . . . . . . . . . . . . . . . . . *
10.20 $10,000,000 Credit Agreement Between National
Education Corporation and Bankers Trust
Company as Agent, dated as of December 22,
1993 (the "Credit Agreement") (Confidential
treatment under Rule 24b-2 has been requested
for portions of this exhibit.)(22) . . . . . . . . . . . . . .
10.21 National Education Corporation First Amendment
to Credit Agreement (22) . . . . . . . . . . . . . . . . . . . .
11.1 Calculation of Primary Earnings Per Share (22) . . . . . . . . .
11.2 Calculation of Fully Diluted Earnings Per
Share (22) . . . . . . . . . . . . . . . . . . . . . . . . . . .
13 1993 Annual Report to Stockholders (22) . . . . . . . . . . . .
21 Subsidiaries of National Education Corporation
(22) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
23 Consent of Price Waterhouse (22) . . . . . . . . . . . . . . . .
__________________
</TABLE>
34
<PAGE> 35
* incorporated by reference from a previously filed document
(1) Incorporated by reference to Exhibit (19)-2 filed with the Quarterly
Report on Form 10-Q for the fiscal quarter ended June 30, 1987.
(2) Incorporated by reference to Exhibit 10 filed with the Form 10-Q
Quarterly Report for the quarterly period ended June 30, 1990.
(3) Incorporated by reference to Exhibit 10.1 filed with the Annual Report
on Form 10-K for the year ended December 31, 1992, filed March 22,
1993.
(4) Incorporated by reference to Exhibit 10(b) filed with Registration
Statement on Form S-8 (No. 2-86904), filed October 3, 1983.
(5) Incorporated by reference to Exhibit 15 filed with Registration
Statement on Form S-8 (No. 2-71650), filed April 7, 1981.
(6) Incorporated by reference to Exhibit D filed with the 1983 Proxy
Statement dated April 25, 1983, for the annual meeting dated May 19,
1983.
(7) Incorporated by reference to Exhibit 10.15 filed with the Annual
Report on Form 10-K for the year ended December 31, 1987, filed
March 30, 1988.
(8) Incorporated by reference to Exhibit 10.17 filed with the Annual
Report on Form 10-K for the year ended December 31, 1990, filed
April 1, 1991.
(9) Incorporated by reference to Exhibit "A" filed with the 1990 Proxy
Statement, filed April 2, 1990.
(10) Incorporated by reference to Exhibit "A" filed with the 1991 Proxy
Statement, filed April 1, 1991.
(11) Incorporated by reference to Exhibit 4.1 filed with Form 8-K Current
Report, dated October 29, 1986, filed October 30, 1986.
(12) Incorporated by reference to Exhibit 4 filed with the Annual Report on
Form 10-K for the year ended December 31, 1987, filed March 30, 1988.
(13) Incorporated by reference to Exhibit 4.2 filed with Amendment No. 1 to
Registration Statement on Form S-3 (No. 33-5552), filed May 16, 1986.
(14) Incorporated by reference to Exhibit 4 filed with the Form 10-Q
Quarterly Report for the quarterly period ended June 30, 1990.
(15) Incorporated by reference to Exhibit 4 filed with Form 8-K Current
Report, dated February 20, 1991, filed February 27, 1991.
(16) Incorporated by reference to Exhibit 10.17 filed with the Annual
Report on Form 10-K for the year ended December 31, 1991, filed
April 1, 1992.
(17) Incorporated by reference to Exhibit 10.18 filed with the Annual
Report on Form 10-K for the year ended December 31, 1991, filed
April 1, 1992.
35
<PAGE> 36
(18) Incorporated by reference to Exhibit 10.19 filed with the Annual
Report on Form 10-K for the year ended December 31, 1991, filed
April 1, 1992.
(19) Incorporated by reference to Exhibit 10.8 filed with Amendment No. 1
to the Steck-Vaughn Publishing Corporation Registration Statement on
Form S-1, File No. 33-62334, filed June 17, 1993.
(20) Incorporated by reference to Exhibit 10.9 filed with Amendment No. 1
to the Steck-Vaughn Publishing Corporation Registration Statement on
Form S-1, File No. 33-62334, filed June 17, 1993.
(21) Incorporated by reference to Exhibit 10.13 filed with the Steck-Vaughn
Publishing Corporation Registration Statement on Form S-1, File No.
33-62334, filed May 7, 1993.
(22) Filed herewith.
36
<PAGE> 1
* NOTE: CONFIDENTIAL PORTIONS OMITTED IN ACCORDANCE WITH RULE 24b-2 UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
EXHIBIT 10.20
$10,000,000
CREDIT AGREEMENT
AMONG
NATIONAL EDUCATION CORPORATION
THE BANKS NAMED HEREIN
AND
BANKERS TRUST COMPANY,
AS AGENT
__________________________________
Dated as of December 22, 1993
__________________________________
<PAGE> 2
TABLE OF CONTENTS *
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
Section 1. Definitions and Principles of Construction . . . . . . . . . 1
1.01 Defined Terms . . . . . . . . . . . . . . . . . . . . 1
1.02 Principles of Construction . . . . . . . . . . . . . . 13
Section 2. Amount and Terms of Credit . . . . . . . . . . . . . . . . . 13
2.01 The Loans . . . . . . . . . . . . . . . . . . . . . . 13
2.02 Notes . . . . . . . . . . . . . . . . . . . . . . . . 17
2.03 Interest on the Loans . . . . . . . . . . . . . . . . 17
2.04 Increased Costs . . . . . . . . . . . . . . . . . . . 21
2.05 Use of Proceeds . . . . . . . . . . . . . . . . . . . 21
2.06 Special Provisions Governing Eurodollar Rate
Loans . . . . . . . . . . . . . . . . . . . . . . . . . 22
2.07 Letters of Credit . . . . . . . . . . . . . . . . . . 29
Section 3. Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
3.01 Fees . . . . . . . . . . . . . . . . . . . . . . . . . 38
Section 4. Prepayments; Payments . . . . . . . . . . . . . . . . . . . . 38
4.01 Prepayments . . . . . . . . . . . . . . . . . . . . . 38
4.02 Method and Place of Payment . . . . . . . . . . . . . 39
4.03 Net Payments . . . . . . . . . . . . . . . . . . . . . 39
4.04 Application of Prepayments . . . . . . . . . . . . . . 39
4.05 Apportionment of Payments . . . . . . . . . . . . . . 39
4.06 Voluntary Reduction of Revolving Loan
Commitments . . . . . . . . . . . . . . . . . . . . . . 40
Section 5. Conditions Precedent . . . . . . . . . . . . . . . . . . . . 40
5.01 Conditions to Effectiveness . . . . . . . . . . . . . 40
5.02 Termination of Advised Line . . . . . . . . . . . . . 42
5.03 Conditions to all Loans and Letters of Credit . . . . 43
5.04 Conditions to Certain Revolving Loans and
Letters of Credit . . . . . . . . . . . . . . . . . . . 44
Section 6. Representations, Warranties and Agreements . . . . . . . . . 44
6.01 Corporate Status . . . . . . . . . . . . . . . . . . . 44
6.02 Corporate Power and Authority . . . . . . . . . . . . 45
6.03 No Violation . . . . . . . . . . . . . . . . . . . . . 45
6.04 Governmental Approvals . . . . . . . . . . . . . . . . 46
</TABLE>
*This Table of Contents is provided for convenience only and is not a
part of the attached Credit Agreement.
<PAGE> 3
<TABLE>
<S> <C> <C>
6.05 Financial Statements; Financial Condition;
Undisclosed Liabilities; etc. . . . . . . . . . . . . . 46
6.06 Litigation . . . . . . . . . . . . . . . . . . . . . . 47
6.07 True and Complete Disclosure . . . . . . . . . . . . . 47
6.08 Use of Proceeds; Margin Regulations . . . . . . . . . 48
6.09 Tax Returns and Payments . . . . . . . . . . . . . . . 48
6.10 Compliance with ERISA . . . . . . . . . . . . . . . . 48
6.11 Capitalization . . . . . . . . . . . . . . . . . . . . 49
6.12 Subsidiaries . . . . . . . . . . . . . . . . . . . . . 49
6.13 Compliance with Statutes, etc. . . . . . . . . . . . . 49
6.14 Investment Company Act . . . . . . . . . . . . . . . . 50
6.15 Public Utility Holding Company Act . . . . . . . . . . 50
6.16 Labor Relations . . . . . . . . . . . . . . . . . . . 50
6.17 Patents, Licenses, Franchises and Formulas . . . . . . 51
6.18 No Material Adverse Change . . . . . . . . . . . . . . 51
Section 7. Affirmative Covenants . . . . . . . . . . . . . . . . . . . . 51
7.01 Information Covenants . . . . . . . . . . . . . . . . 51
7.02 Books, Records and Inspections . . . . . . . . . . . . 55
7.03 Maintenance of Property, Insurance . . . . . . . . . . 55
7.04 Corporate Franchises . . . . . . . . . . . . . . . . . 56
7.05 Compliance with Statutes, etc. . . . . . . . . . . . . 56
7.06 ERISA . . . . . . . . . . . . . . . . . . . . . . . . 56
7.07 End of Fiscal Years; Fiscal Quarters . . . . . . . . . 57
7.08 Performance of Obligations . . . . . . . . . . . . . . 57
7.09 Payment of Taxes and Claims . . . . . . . . . . . . . 58
7.10 Further Assurances; New Subsidiaries . . . . . . . . . 58
Section 8. Negative Covenants . . . . . . . . . . . . . . . . . . . . . 58
8.01 Liens . . . . . . . . . . . . . . . . . . . . . . . . 59
8.02 Consolidation, Merger, Sale of Assets, etc. . . . . . 60
8.03 Dividends . . . . . . . . . . . . . . . . . . . . . . 61
8.04 Leases . . . . . . . . . . . . . . . . . . . . . . . . 62
8.05 Indebtedness . . . . . . . . . . . . . . . . . . . . . 63
8.06 Advances, Investments and Loans . . . . . . . . . . . 64
8.07 Transactions with Affiliates . . . . . . . . . . . . . 66
8.08 Capital Expenditures . . . . . . . . . . . . . . . . . 66
8.09 Ratio of Liabilities to Net Worth . . . . . . . . . . 67
8.10 Minimum Consolidated EBITDA . . . . . . . . . . . . . 67
8.11 Minimum Consolidated Net Worth . . . . . . . . . . . . 67
8.12 Fixed Charge Coverage Ratio . . . . . . . . . . . . . 67
8.13 Limitation on Voluntary Payments and
Modifications of Indebtedness; Modifications of
Certificate of Incorporation, By-Laws and
Certain Other Agreements; etc. . . . . . . . . . . . . 68
8.14 Limitation on Restrictions on Subsidiary
Dividends and Other Distributions . . . . . . . . . . . 68
8.15 Business . . . . . . . . . . . . . . . . . . . . . . . 69
8.16 Transfer of Copyrights, Patents and Trademarks . . . . 69
</TABLE>
ii
<PAGE> 4
<TABLE>
<S> <C> <C>
Section 9. Events of Default . . . . . . . . . . . . . . . . . . . . . . 69
9.01 Payments . . . . . . . . . . . . . . . . . . . . . . . 69
9.02 Representations, etc. . . . . . . . . . . . . . . . . 69
9.03 Covenants . . . . . . . . . . . . . . . . . . . . . . 70
9.04 Default Under Other Agreements . . . . . . . . . . . . 70
9.05 Bankruptcy, etc. . . . . . . . . . . . . . . . . . . . 70
9.06 ERISA . . . . . . . . . . . . . . . . . . . . . . . . 71
9.07 Subsidiary Guaranty . . . . . . . . . . . . . . . . . 71
9.08 Changes of Control . . . . . . . . . . . . . . . . . . 72
9.09 Judgments . . . . . . . . . . . . . . . . . . . . . . 72
9.10 Governmental Policies . . . . . . . . . . . . . . . . 72
Section 10. The Agent . . . . . . . . . . . . . . . . . . . . . . . . . 73
10.01 Appointment . . . . . . . . . . . . . . . . . . . . . 73
10.02 Nature of Duties . . . . . . . . . . . . . . . . . . 74
10.03 Lack of Reliance on the Agent . . . . . . . . . . . . 74
10.04 Certain Rights of the Agent . . . . . . . . . . . . . 75
10.05 Reliance . . . . . . . . . . . . . . . . . . . . . . 75
10.06 Indemnification . . . . . . . . . . . . . . . . . . . 75
10.07 The Agent in its Individual Capacity . . . . . . . . 75
10.08 Holders . . . . . . . . . . . . . . . . . . . . . . . 76
10.09 Resignation by the Agent . . . . . . . . . . . . . . 76
Section 11. Miscellaneous . . . . . . . . . . . . . . . . . . . . . . . 76
11.01 Payment of Expenses, etc. . . . . . . . . . . . . . . 76
11.02 Right of Setoff . . . . . . . . . . . . . . . . . . . 77
11.03 Notices . . . . . . . . . . . . . . . . . . . . . . . 78
11.04 Benefit of Agreement . . . . . . . . . . . . . . . . 78
11.05 No Waiver; Remedies Cumulative . . . . . . . . . . . 79
11.06 Payments Pro Rata . . . . . . . . . . . . . . . . . . 80
11.07 Calculations; Computations . . . . . . . . . . . . . 80
11.08 Governing Law; Waiver of Jury Trial . . . . . . . . . 81
11.09 Counterparts . . . . . . . . . . . . . . . . . . . . 81
11.10 Headings Descriptive . . . . . . . . . . . . . . . . 81
11.11 Amendment or Waiver . . . . . . . . . . . . . . . . . 81
11.12 Survival . . . . . . . . . . . . . . . . . . . . . . 82
11.13 Domicile of Loans . . . . . . . . . . . . . . . . . . 82
</TABLE>
iii
<PAGE> 5
<TABLE>
<S> <C>
SCHEDULE I Banks, Loan Amounts and Pro Rata Shares
SCHEDULE II Material Adverse Changes
SCHEDULE III Undisclosed Liabilities
SCHEDULE IV Litigation
SCHEDULE V Subsidiaries
SCHEDULE VI Statutory Noncompliance
SCHEDULE VII Insurance
SCHEDULE VIII Permitted Liens
SCHEDULE IX Existing Indebtedness
SCHEDULE X Permitted Asset Sales
EXHIBIT A Notice of Borrowing
EXHIBIT B Notice of Conversion/Continuation
EXHIBIT C Notice of Issuance of Letter of Credit
EXHIBIT D Investment Policy and Guidelines
EXHIBIT E Revolving Note
EXHIBIT F Subsidiary Guaranty
EXHIBIT G Subordination Agreement
</TABLE>
iv
<PAGE> 6
CREDIT AGREEMENT
CREDIT AGREEMENT, dated as of December 22, 1993, among
NATIONAL EDUCATION CORPORATION (the "Borrower"), a corporation organized and
existing under the laws of Delaware, BANKERS TRUST COMPANY and any other
financial institution which may become a lender hereunder (each a "Bank" and,
collectively, the "Banks") and BANKERS TRUST COMPANY, acting in the manner and
to the extent described in Section 10 (in such capacity, the "Agent").
R E C I T A L S
WHEREAS, the Borrower has requested that Bankers Trust Company
provide revolving credit facilities in the amount of $10,000,000 and Bankers
Trust Company has agreed to provide such credit facilities only upon the terms
and conditions set forth herein.
A G R E E M E N T
NOW, THEREFORE, in consideration of the premises and
agreements, provisions and covenants herein contained, the Borrower, the Banks
and the Agent agree as follows:
Section 1. Definitions and Principles of Construction.
1.01 Defined Terms. As used in this Agreement, the following
terms shall have the following meanings (such meanings to be equally applicable
to both the singular and plural forms of the terms defined):
"Acquisition" shall mean the New Horizons Acquisition, the
Micromash Acquisition and/or any other acquisition of the capital stock of, or
all (or substantially all) of the assets of, any Person permitted pursuant to
subsection 8.02(vi).
"Adjusted Consolidated Net Worth" shall mean, as to the
Borrower, the Consolidated Net Worth of the Borrower adjusted by excluding the
cumulative foreign exchange translation adjustment.
"Adjusted Eurodollar Rate" shall mean, for any Interest Rate
Determination Date, the rate (rounded upward to the next highest one hundredth
of one percent) obtained by dividing (i) the Eurodollar Rate for that date by
(ii) a percentage equal to 100% minus the stated maximum rate of
1
<PAGE> 7
all reserves required to be maintained against "Eurocurrency Liabilities" as
specified in Regulation D of the Board of Governors of the Federal Reserve
System (or against any other category of liabilities that includes deposits by
reference to which the interest rate on Eurodollar Rate Loans is determined or
any category of extensions of credit or other assets that includes loans by a
non- United States office of a bank to United States residents).
"Affected Bank" shall mean any Bank affected by any of the
events described in subsection 2.06(b) or 2.06(c).
"Affiliate" shall mean, with respect to any Person, any other
Person (other than an individual) directly or indirectly controlling,
controlled by, or under direct or indirect common control with, such Person;
provided, however, that for purposes of Section 8.07, an Affiliate of the
Borrower shall include any Person (including an individual) that directly or
indirectly owns more than 5% of the Borrower and any officer or director of the
Borrower or any such Person. A Person shall be deemed to control another
Person if such Person possesses, directly or indirectly, the power to direct or
cause the direction of the management and policies of such other Person,
whether through the ownership of voting securities, by contract or otherwise.
"Agent" shall have the meaning provided in the first paragraph
of this Agreement and shall include any successor to the Agent appointed
pursuant to Section 10.09.
"Agreement" shall mean this Credit Agreement, as modified,
supplemented or amended from time to time.
"Bank" shall mean Bankers Trust Company and each successor and
assignee pursuant to Section 11.04.
"Bankruptcy Code" shall have the meaning provided in Section
9.05.
"Borrower" shall have the meaning provided in the first
paragraph of this Agreement.
"Business Day" shall mean any day except Saturday, Sunday and
any day which shall be in New York City or California a legal holiday or a day
on which banking institutions are authorized or required by law or other
government action to close.
"Certificate of Exemption" shall have the meaning assigned to
that term in subsection 2.06(g)(iii).
2
<PAGE> 8
"Closing Date" shall mean the date on or before December 31,
1993 on which all of the conditions to the effectiveness of this Agreement set
forth in Section 5.01 are satisfied or waived.
"Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
"Consolidated EBIT" shall mean, as to any Person and for any
period, the consolidated net income of such Person and its Subsidiaries for
such period, before interest expense and provision for taxes and without giving
effect to (i) any extraordinary gains (or extraordinary losses) and (ii) gains
(or losses) from sales of assets (other than sales of inventory in the ordinary
course of business) to the extent that the net gain or loss from all such sales
is, in the aggregate, less than $500,000 per annum; it being agreed and
understood that such excluded gains and losses shall include, among other
things, (A) gains realized in July 1993 as the result of the public offering of
the common stock of SV and (B) any losses arising from the restructuring
charges taken in September 1993 in relation to Ed Centers, various school
closures, and the write-down of certain assets, including intangible assets of
NETG.
"Consolidated EBITDA" shall mean, as to any Person and for any
period, the Consolidated EBIT of such Person and its Subsidiaries for such
period, adjusted by (i) adding thereto the amount of all amortization of
intangibles and depreciation that were deducted in arriving at such
Consolidated EBIT for such period, (ii) subtracting therefrom the amount of all
non-cash gains that were added in arriving at such Consolidated EBIT for such
period, (iii) to the extent not otherwise subtracted pursuant the preceding
clause (ii), subtracting gains (or adding losses) on foreign exchange
adjustments on intercompany balances reflected on the books of the Borrower,
and (iv) excluding minority interests.
"Consolidated Fixed Charges" shall mean, as to any Person and
for any period, the sum of (i) the total consolidated interest expense of such
Person and its Subsidiaries for such period (calculated without regard to any
limitations on the payment thereof) (ii) all scheduled principal payments
required to be made by such Person and its Subsidiaries, on a consolidated
basis for such period and (iii) lease payments made or accrued by such Person
and its Subsidiaries, on a consolidated basis, for such period.
3
<PAGE> 9
"Consolidated Liabilities" shall mean, as to any Person, the
total liabilities of such Person and its Subsidiaries determined on a
consolidated basis in accordance with generally accepted accounting principles
in the United States.
"Consolidated Net Worth" shall mean, as to any Person, the Net
Worth of such Person and its Subsidiaries determined on a consolidated basis
after appropriate deduction for any minority interests in Subsidiaries.
"Consolidated Subsidiaries" shall mean, as to any Person, all
Subsidiaries of such Person which are consolidated with such Person for
financial reporting purposes in accordance with generally accepted accounting
principles in the United States.
"Contingent Obligation" shall mean, as to any Person, (A) any
obligation of such Person guaranteeing or intended to guarantee any
Indebtedness, leases, dividends or other obligations ("primary obligations") of
any other Person (the "primary obligor") in any manner, whether directly or
indirectly, including, without limitation, any obligation of such Person,
whether or not contingent, (i) to purchase any such primary obligation or any
property constituting direct or indirect security therefor, (ii) to advance or
supply funds (x) for the purchase or payment of any such primary obligation or
(y) to maintain working capital or equity capital of the primary obligor or
otherwise to maintain the net worth or solvency of the primary obligor, (iii)
to purchase property, securities or services primarily for the purpose of
assuring the owner of any such primary obligation of the ability of the primary
obligor to make payment of such primary obligation or (iv) otherwise to assure
or hold harmless the holder of such primary obligation against loss in respect
thereof; provided, however, that the term Contingent Obligation shall not
include endorsements of instruments for deposit or collection in the ordinary
course of business; and (B) any obligations of such Person under any Interest
Rate/Currency Agreement. The amount of any Contingent Obligation shall be
deemed to be an amount equal to the stated or determinable amount of the
primary obligation in respect of which such Contingent Obligation is made or,
if not stated or determinable, the maximum reasonably anticipated liability in
respect thereof (assuming such Person is required to perform thereunder) as
determined by such Person in good faith.
"Credit Documents" shall mean this Agreement, each Note, the
Letters of Credit and the Subsidiary Guaranty.
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"Default" shall mean any event, act or condition which with
notice or lapse of time, or both, would constitute an Event of Default.
"Dollars" and "$" shall mean the lawful money of the United
States of America.
"Ed Centers" shall mean National Education Centers, Inc., a
California corporation and a direct Wholly-Owned Subsidiary of the Borrower.
"ERISA" shall mean the Employee Retirement Income Security Act
of 1974, as amended from time to time. Section references to ERISA are to
ERISA, as in effect at the date of this Agreement, and to any subsequent
provisions of ERISA, amendatory thereof, supplemental thereto or substituted
therefor.
"ERISA Affiliate" shall mean any person (as defined in Section
3(9) of ERISA) which together with the Borrower or any of its Subsidiaries
would be a member of the same "controlled group" within the meaning of Section
414(b), (m), (c) and (o) of the Code.
"Eurodollar Rate" shall mean, for any Interest Rate
Determination Date, the arithmetic average (rounded upwards, if necessary, to
the nearest 1/16 of 1%) of the offered quotation, if any, to first class banks
in the Eurodollar market by Bankers Trust Company for Dollar deposits of
amounts in immediately available funds comparable to the principal amount of
the Eurodollar Rate Loan of Bankers Trust Company for which the Eurodollar Rate
is being determined with maturities comparable to the Interest Period for which
such Eurodollar Rate will apply as of approximately 10:00 A.M. (New York time)
two Business Days prior to the commencement of such Interest Period.
"Eurodollar Rate Loans" shall mean Loans bearing interest at
rates determined by reference to the Eurodollar Rate as provided in Section
2.03.
"Eurodollar Rate Taxes" shall have the meaning assigned to
that term in subsection 2.06(g)(i).
"Event of Default" shall have the meaning provided in Section
9.
"Existing Indebtedness" shall have the meaning provided in
Section 8.05.
"Fees" shall mean all amounts payable pursuant to or referred
to in Section 3.01.
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"Foreign Bank" shall have the meaning assigned to that term in
subsection 2.06(g)(iii).
"Funding Date" shall mean the date of the funding of a Loan or
the date of the issuance of a Letter of Credit, as applicable.
"Government Acts" shall have the meaning assigned to such term
in subsection 2.07(h).
"Guarantor Subsidiary" shall mean NETG, Ed Centers, ICS,
National Education Training Group, Inc., a Nevada corporation and a
Wholly-Owned Subsidiary of NETG, Spectrum Interactive, Inc., a Delaware
corporation and a Wholly-Owned Subsidiary of NETG, and International
Correspondence Schools, Inc., a Pennsylvania corporation and a Wholly-Owned
Subsidiary of ICS, each of which shall be party to the Subsidiary Guaranty.
"ICS" shall mean ICS Learning Systems, Inc., a Delaware
corporation and a direct Wholly-Owned Subsidiary of the Borrower.
"Increased Taxes" shall mean, with respect to any Bank, taxes
imposed on or measured by the overall income of that Bank (whether gross or net
income) by the United States of America or any political subdivision or taxing
authority thereof or therein or taxes on or measured by the overall income of
any foreign branch or subsidiary of that Bank (whether gross or net income) by
any foreign country or subdivision thereof in which that branch or subsidiary
is doing business or any withholding taxes imposed by the United States of
America with respect to the payment of interest or any other amount hereunder.
"Indebtedness" shall mean, as to any Person, without
duplication, (i) all indebtedness (including principal, fees and charges) of
such Person for borrowed money or for the deferred purchase price of property
or services, (ii) the undrawn amount of or unreimbursed amount under all
letters of credit issued for the account of such Person and all drafts drawn
thereunder, (iii) all liabilities secured by any Lien on any property owned by
such Person, whether or not such liabilities have been assumed by such Person,
(iv) the aggregate amount required to be capitalized under generally accepted
accounting principles under leases under which such Person is the lessee and
(v) all Contingent Obligations of such Person.
"Interest Payment Date" shall mean, (i) with respect to any
Eurodollar Rate Loan having an Interest Period of one, two or three months, the
last day of the Interest Period applicable to such Loan or, (ii) in the case of
any Eurodollar Rate Loan having an Interest Period of six months, (a) the date
that is three months after the initial
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<PAGE> 12
date of the Interest Period applicable to such Loan and (b) the last day of the
Interest Period applicable to such Loan.
"Interest Period" shall mean any period applicable to a Loan
as determined pursuant to subsection 2.03(b).
"Interest Rate/Currency Agreement" shall mean (i) any interest
rate swap agreement, interest rate cap agreement or other similar agreement or
arrangement designed to protect the Borrower against fluctuations in interest
rates or (ii) any foreign exchange contract, currency swap agreement or other
similar agreement or arrangement designed to protect the Borrower against
fluctuations in currency values.
"Interest Rate Determination Date" shall mean each date for
calculating the Eurodollar Rate for purposes of determining the interest rate
in respect of an Interest Period. The Interest Rate Determination Date shall
be the second Business Day prior to the first day of the related Interest
Period for a Eurodollar Rate Loan.
"Issuing Bank" shall mean Bankers Trust Company in its
capacity as the issuer of Letters of Credit pursuant to Section 2.07.
"JMI" shall mean the joint venture company formed by Training
Group and James Martin pursuant to the JMI Joint Venture Agreement.
"JMI Administrative Services Contract" shall mean the
Administrative Services Contract dated as of April 5, 1991, between JMI and
Training Group, as amended, modified or supplemented from time to time.
"JMI Joint Venture Agreement" shall mean the Joint Venture
Agreement dated as of April 5, 1991, between James Martin, an individual, and
Training Group, as amended, modified or supplemented from time to time.
"JMI License Agreement" shall mean the License Agreement dated
as of April 5, 1991, between JMI and Training Group, as amended, modified or
supplemented from time to time.
"Lending Office" shall mean, with respect to each Bank, the
office of such Bank specified opposite its signature below as its lending
office or such other office, Subsidiary or Affiliate of such Bank as such Bank
may from time to time specify as such to the Borrower and the Agent.
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"Letter of Credit" shall mean any of the standby letters of
credit issued or to be issued by the Issuing Bank for the account of the
Borrower pursuant to Section 2.07 and for the purposes described in subsection
2.05(b); provided that, notwithstanding anything to the contrary contained
herein, any such Letter of Credit may be issued by an Affiliate of the Issuing
Bank; provided, further, that to the extent that a Letter of Credit is issued
by an Affiliate of the Issuing Bank, such Affiliate shall, for all purposes
under this Agreement, the Credit Documents and all other instruments and
documents referred to herein and therein be deemed to be the "Issuing Bank"
with respect to such Letter of Credit.
"Letter of Credit Usage" shall mean, as at any date of
determination, the sum of (i) the maximum aggregate amount which is or at any
time thereafter may become available for drawing under all Letters of Credit
then outstanding plus (ii) the aggregate amount of all drawings under Letters
of Credit honored by the Issuing Bank and not theretofore reimbursed by the
Borrower.
"Letter of Intent" shall mean that certain letter dated
October 21, 1993, from the Borrower to Mr. Michael Brinda, New Horizons
Computer Learning Center, Inc. and New Horizons Franchising, Inc. relating to
the acquisition of the assets of, and the assumption of certain liabilities of,
New Horizons by the Borrower or its Wholly-Owned Subsidiary.
"Letter of Non-Exemption" shall have the meaning assigned to
that term in subsection 2.06(g)(iii).
"Lien" shall mean any mortgage, pledge, hypothecation,
assignment, deposit arrangement, encumbrance, lien (statutory or other),
preference, priority or other security agreement of any kind or nature
whatsoever (including, without limitation, any conditional sale or other title
retention agreement, any financing or similar statement or notice filed under
the UCC or any other similar recording or notice statute, any agreement to give
any security interest and any lease having substantially the same effect as any
of the foregoing).
"Loan" or "Loans" shall mean one or more of the Revolving
Loans.
"Margin Stock" shall have the meaning provided in Regulation U
of the Board of Governors of the Federal Reserve System.
"Micromash" shall mean M-Mash, Inc., a Colorado corporation.
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<PAGE> 14
"Micromash Acquisition" shall mean the acquisition of
Micromash by the Borrower or any Wholly-Owned Subsidiary of the Borrower.
"NETG" shall mean NETG Holding, Inc., a Delaware corporation
and a direct Wholly-Owned Subsidiary of the Borrower.
"Net Worth" shall mean, as to any Person, the sum of its
capital stock, capital in excess of par or stated value of shares of its
capital stock, retained earnings and any other account which, in accordance
with generally accepted accounting principles in the United States, constitutes
stockholders' equity, excluding any treasury stock.
"New Horizons" shall mean New Horizons Computer Learning
Center, Inc. and New Horizons Franchising, Inc., collectively.
"New Horizons Acquisition" shall mean the acquisition of the
assets of, and the assumption of certain liabilities of, New Horizons by the
Borrower or any Wholly-Owned Subsidiary of the Borrower in accordance with the
terms set forth in the Letter of Intent.
"New Subordinated Debt" shall mean the Senior Subordinated
Convertible Debentures due 2006 in an aggregate principal amount of $20,000,000
issued by Borrower pursuant to the New Subordinated Debt Agreement.
"New Subordinated Debt Agreement" shall mean the Purchase
Agreement dated as of February 15, 1991 by and among the Borrower, the persons
identified in Exhibit A thereto and Richard C. Blum Associates, Inc., pursuant
to which the Borrower issued and sold and the buyers thereunder purchased the
New Subordinated Debt.
"Notes" shall mean one or more of the Revolving Notes.
"Notice of Borrowing" shall mean a notice substantially in the
form of Exhibit A with respect to a proposed borrowing.
"Notice of Conversion/Continuation" shall mean a notice
substantially in the form of Exhibit B with respect to a proposed conversion or
continuation of a Loan.
"Notice of Issuance of Letter of Credit" shall mean a notice
substantially in the form of Exhibit C with respect to a proposed issuance of a
Letter of Credit.
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<PAGE> 15
"Notice Office" shall mean the office of the Agent located at
One Bankers Trust Plaza, 14th Floor, New York, New York 10006, or such other
office as the Agent may hereafter designate in writing as such to the other
parties hereto.
"Obligations" shall mean all amounts owing to the Agent or any
Bank pursuant to the terms of this Agreement or any other Credit Document.
"Payment Office" shall mean the office of the Agent located at
One Bankers Trust Plaza, New York, New York 10006, Attention: Commercial Loan
Division Ref: NEC, or such other office as the Agent may hereafter designate
in writing as such to the other parties hereto.
"PBGC" shall mean the Pension Benefit Guaranty Corporation
established pursuant to Section 4002 of ERISA or any successor thereto.
"Permitted Liens" shall have the meaning provided in Section
8.01.
"Person" shall mean any individual, partnership, joint
venture, firm, corporation, association, trust or other enterprise or any
government or political subdivision or any agency, department or
instrumentality thereof.
"Performance Plan" shall have the meaning provided in
subsection 7.01(d).
"Plan" shall mean any multiemployer plan or single-employer
plan as defined in Section 4001 of ERISA, which is maintained or contributed
to, or at any time during the five calendar years preceding the date of this
Agreement was maintained or contributed to, by the Borrower or by a Subsidiary
of the Borrower or an ERISA Affiliate.
"Prime Lending Rate" shall mean the rate which Bankers Trust
Company announces from time to time as its prime lending rate, and the Prime
Lending Rate shall change when and as such prime lending rate changes. The
Prime Lending Rate is a reference rate and does not necessarily represent the
lowest or best rate actually charged to any customer. Bankers Trust Company
may make commercial loans or other loans at rates of interest at, above or
below the Prime Lending Rate.
"Prime Rate Loans" shall mean Loans maintained or made by the
Banks bearing interest at rates determined by reference to the Prime Lending
Rate as provided in Section 2.03.
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"Pro Rata Share" shall mean, with respect to each Bank, the
percentage designated as such Bank's Pro Rata Share set forth opposite the name
of such Bank on Schedule I; provided that Schedule I shall be amended and the
Banks' Pro Rata Shares shall be adjusted from time to time to give effect to
the addition of any new Banks and any reallocations among existing Banks
necessary to reflect assignments pursuant to subsection 11.04. The sum of the
Pro Rata Shares of all Banks at any date of determination shall equal 100%.
"Public Subordinated Debt" shall mean Indebtedness outstanding
under the Borrower's 6-1/2% Convertible Subordinated Debentures due 2011.
"Reportable Event" shall mean an event described in Section
4043(b) of ERISA with respect to a Plan as to which the 30-day notice
requirement has not been waived by the PBGC.
"Reporting Subsidiary" means each of SV, NETG, ICS, and Ed
Centers.
"Required Banks" shall mean, at any time, the Banks holding
51% or more of the aggregate Revolving Loan Commitments (or, if the Revolving
Loan Commitments have been terminated, the aggregate unpaid principal amount of
the Revolving Loans and the aggregate face amount of all outstanding Letters of
Credit).
"Revolving Loan Commitment" or "Revolving Loan Commitments"
shall mean the commitment or commitments of a Bank or the Banks to make
Revolving Loans as set forth in subsection 2.01(a).
"Revolving Loans" shall mean the Revolving Loans made by the
Banks on or after the Closing Date pursuant to subsection 2.01(a).
"Revolving Notes" shall mean the promissory notes of the
Borrower issued in favor of the Banks pursuant to Section 2.02 to evidence the
Revolving Loans, substantially in the form of Exhibit E.
"SEC" shall have the meaning provided in Section 7.01(h).
"Signing Date" shall mean the initial date upon which this
Agreement is fully executed and delivered by the Borrower, the Agent and the
Banks.
"SV" shall mean Steck-Vaughn Publishing Corporation, a
Delaware corporation.
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"Subordination Agreement" shall mean the Subordination
Agreement, dated as of December 22, 1993, among the Borrower and certain of its
Subsidiaries, an executed copy of which is attached hereto as Exhibit G, as
amended, modified or supplemented from time to time.
"Subsidiary" shall mean, as to any Person, (i) any corporation
more than 50% of whose stock of any class or classes having by the terms
thereof ordinary voting power to elect a majority of the directors of such
corporation (irrespective of whether or not at the time stock of any class or
classes of such corporation shall have or might have voting power by reason of
the happening of any contingency) is at the time owned by such Person and/or
one or more Subsidiaries of such Person and (ii) any partnership, association,
joint venture or other entity in which such Person and/or one or more
Subsidiaries of such Person has more than a 50% equity interest at the time.
"Subsidiary Guaranty" shall mean the Guaranty Agreement dated
as of the date hereof, executed by each Guarantor Subsidiary, substantially in
the form annexed hereto as Exhibit F, as modified, supplemented or amended from
time to time.
"Target" shall mean the Person to be acquired, or the Person
whose assets are to be acquired, in any Acquisition.
"Termination Date" shall mean the earlier of (a) the day that
is 364 days after Signing Date and (b) the date upon which the Revolving Loan
Commitments are terminated pursuant to subsection 4.06 or Section 9.
"Total Utilization of Revolving Loan Commitments" shall mean,
as at any date of determination, the sum of (i) the aggregate principal amount
of all outstanding Revolving Loans plus (ii) the Letter of Credit Usage.
"Training Group" shall mean National Education Training Group,
Inc., a Nevada corporation and a direct Wholly-Owned Subsidiary of NETG.
"UCC" shall mean the Uniform Commercial Code as from time to
time in effect in the relevant jurisdiction.
"Unfunded Current Liability" shall mean, as to any Plan, the
amount, if any, by which the present value of the accrued benefits under such
Plan as of the close of its most recent plan year determined in accordance with
Section 412 of the Code exceeds the fair market value of the assets allocable
thereto.
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"Wholly-Owned Subsidiary" shall mean, as to any Person, (i)
any corporation 100% of whose capital stock is at the time owned by such Person
and/or one or more Wholly-Owned Subsidiaries of such Person and (ii) any
partnership, association, joint venture or other entity in which such Person
and/or one or more Wholly-Owned Subsidiaries of such Person has a 100% equity
interest at such time.
"XAP" shall mean XAP Company L.P., a California limited
partnership.
"XAP Agreement" shall mean that certain Agreement of Limited
Partnership dated November 1, 1992, between Nec Sub, Inc., a California
corporation and Wholly-Owned Subsidiary of the Borrower, Allen Firstenberg and
Maurice Salter, as amended, modified or supplemented from time to time.
1.02 Principles of Construction.
(a) All references to sections, schedules and exhibits are to
sections, schedules and exhibits in or to this Agreement unless otherwise
specified. The words "hereof," "herein" and "hereunder" and words of similar
import when used in this Agreement shall refer to this Agreement as a whole and
not to any particular provision of this Agreement.
(b) All accounting terms not specifically defined herein
shall be construed in accordance with generally accepted accounting principles
in conformity with those used in the preparation of the financial statements
referred to in subsections 6.05(a) and (b).
Section 2. Amount and Terms of Credit.
2.01 The Loans.
(A) REVOLVING LOANS. Subject to the terms and conditions
of this Agreement and in reliance upon the representations and warranties of
the Borrower set forth herein, each Bank hereby severally agrees, subject to
the limitations set forth below with respect to the maximum amount of Revolving
Loans permitted to be outstanding from time to time, to make Revolving Loans to
the Borrower from time to time during the period from the Closing Date through
but excluding the Termination Date in an amount not exceeding its Pro Rata
Share of the aggregate Revolving Loan Commitments (as defined below) for the
purposes identified in Section 2.05. Each Bank's commitment to maintain and
make Revolving Loans to the Borrower pursuant to this subsection 2.01(a) is
hereby called its "Revolving Loan Commitment" and such commitments of all Banks
in the aggregate are herein called the "Revolving Loan
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Commitments". The initial amount of each Bank's Revolving Loan
Commitment is set forth in Schedule I and the aggregate initial amount of all
Revolving Loan Commitments is $10,000,000. The amount of the Revolving Loan
Commitments shall be reduced by the amount of all reductions thereof made
pursuant to Section 4.06 through the date of determination. In no event shall
the aggregate principal amount of the Revolving Loans from any Bank outstanding
at any time exceed the amount of its Revolving Loan Commitment then in effect.
Each Bank's Revolving Loan Commitment shall expire on the Termination Date and
all Revolving Loans and all other amounts owed hereunder with respect to the
Revolving Loans, the Revolving Commitments, or otherwise (including, without
limitation, any cash deposit required under subsection 2.07(a) with respect to
any Letter of Credit having an expiration date subsequent to the Termination
Date) shall be paid in full no later than that date.
Notwithstanding the foregoing provisions of this subsection
2.01(a) and subsection 2.01(b), the extensions of credit under the Revolving
Loan Commitments shall be subject to the following limitations in the amounts
and during the periods indicated:
(i) The amount otherwise available for borrowing under
the Revolving Loan Commitments as of any time of determination (other
than to reimburse the Issuing Bank for the amount of any drawings
under any Letter of Credit honored by the Issuing Bank and not
theretofore reimbursed by the Borrower) shall be reduced by the Letter
of Credit Usage as of such time of determination;
(ii) At no time shall the Total Utilization of Revolving
Loan Commitments exceed the aggregate amount of the Revolving Loan
Commitments then in effect; and
(iii) In no event shall any Bank's Pro Rata Share of the
Total Utilization of Revolving Loan Commitments as of any date of
determination exceed its Revolving Loan Commitment then in effect.
Subject to subsection 2.06(d), all Revolving Loans under this
Agreement shall be made by the Banks simultaneously and proportionately to
their respective Pro Rata Shares, it being understood that no Bank shall be
responsible for any default by any other Bank in that other Bank's obligation
to make Revolving Loans hereunder nor shall the Revolving Loan Commitment of
any Bank be increased or decreased as a result of the default by any other Bank
in that other Bank's obligation to make Revolving Loans hereunder. Amounts
borrowed by the Borrower under this
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subsection 2.01(a) may be repaid and, through but excluding the Termination
Date, reborrowed.
(B) NOTICE OF BORROWING. Subject to subsection 2.01(a),
whenever the Borrower desires to borrow Revolving Loans under this subsection
2.01, it shall deliver to the Agent a Notice of Borrowing no later than 1:00
P.M. (New York time) one Business Day in advance of the proposed Funding Date
(in the case of a requested Prime Rate Loan) and three Business Days in advance
of the proposed Funding Date (in the case of a requested Eurodollar Rate Loan).
The Notice of Borrowing shall specify (a) the proposed Funding Date (which
shall be a Business Day), (b) the amount of the proposed borrowing and that the
proposed borrowing shall be a Revolving Loan, (c) in the case of any Revolving
Loans requested to be made on the Closing Date, that such Revolving Loans shall
initially be Prime Rate Loans, (d) in the case of Revolving Loans requested to
be made after the Closing Date, whether such Revolving Loans are initially to
consist of Prime Rate Loans or Eurodollar Rate Loans or a combination thereof,
(e) if such Revolving Loans, or any portion thereof, are initially to be
Eurodollar Rate Loans, the amounts thereof and the initial Interest Periods
therefor and (f) that the Total Utilization of Revolving Loan Commitments
(after giving effect to the Revolving Loans then requested) will not exceed the
Revolving Loan Commitments then in effect. Revolving Loans shall be made in an
aggregate minimum amount of $1,000,000 and integral multiples of $100,000 in
excess of that amount. Revolving Loans may be continued as or converted into
Prime Rate Loans and Eurodollar Rate Loans in the manner provided in subsection
2.03(d); provided that unless the Agent otherwise consents in writing, the
Revolving Loans made during the period from and including the Closing Date
until the date 3 Business Days after the Closing Date may not be converted
until 3 Business Days after the Closing Date. In lieu of delivering the
above-described Notice of Borrowing, the Borrower may give the Agent telephonic
notice by the required time of any proposed borrowing of Revolving Loans under
this subsection 2.01; provided that such notice shall be promptly confirmed in
writing by delivery of a Notice of Borrowing to the Agent on or prior to the
Funding Date of the requested Revolving Loans.
Neither the Agent nor any Bank shall incur any liability to
the Borrower in acting upon any telephonic notice referred to above that Agent
believes in good faith to have been given by a duly authorized officer or other
person authorized to borrow on behalf of the Borrower or for otherwise acting
in good faith under this subsection 2.01 and upon funding of Revolving Loans by
the Banks in accordance with this Agreement pursuant to any such
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telephonic notice, the Borrower shall have effected Revolving Loans hereunder.
Except as provided in subsection 2.06(d), a Notice of
Borrowing for a Eurodollar Rate Loan (or telephonic notice in lieu thereof)
shall be irrevocable on and after the related Interest Rate Determination Date,
and the Borrower shall be bound to make a borrowing in accordance therewith.
(C) DISBURSEMENT OF FUNDS. Promptly after receipt of a
Notice of Borrowing related to a Revolving Loan pursuant to subsection 2.01(b)
(or telephonic notice thereof), the Agent shall notify each Bank of the
proposed borrowing. Each Bank shall make the amount of its Revolving Loan
available to the Agent, in same day funds, at its Payment Office not later than
12:00 Noon (New York time) on the Funding Date. Upon satisfaction or waiver of
the conditions precedent specified in Section 5, as applicable, the Agent shall
make the proceeds of such Loans available to the Borrower on such Funding Date
by causing an amount of same day funds equal to the proceeds of all such Loans
received by the Agent to be credited to the account of the Borrower at such
office of the Agent.
Unless the Agent shall have been notified by any Bank in
writing prior to any Funding Date in respect of any Revolving Loans that such
Bank does not intend to make available to the Agent such Bank's Revolving Loan
on such Funding Date (which such notice, if so received by the Agent, shall
promptly be communicated to the Borrower), the Agent may assume that such Bank
has made such amount available to the Agent on such Funding Date and the Agent
in its sole discretion may, but shall not be obligated to, make available to
the Borrower a corresponding amount on such Funding Date. If such
corresponding amount is not in fact made available to the Agent by such Bank,
the Agent shall be entitled to recover such corresponding amount on demand from
such Bank together with interest thereon, for each day from such Funding Date
until the date such amount is paid to the Agent, at the customary rate set by
the Agent for the correction of errors among banks for three Business Days and
thereafter at the Prime Lending Rate. If such Bank does not pay such
corresponding amount forthwith upon the Agent's demand therefor, the Agent
shall promptly notify the Borrower, and the Borrower shall immediately pay such
corresponding amount to the Agent. Nothing in this subsection 2.01(c) shall be
deemed to relieve any Bank from its obligation to fulfill its Revolving Loan
Commitment hereunder or to prejudice any rights that the Borrower may have
against any Bank as a result of any default by such Bank hereunder.
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2.02 Notes. The Borrower shall execute and deliver to each
Bank (or to the Agent for that Bank) on the Closing Date a Revolving Note
substantially in the form of Exhibit E to evidence that Bank's Revolving Loans,
in the principal amount of that Bank's Revolving Loan Commitment and with other
appropriate insertions. Each Bank will note on its internal records the amount
of each Loan made by it and each payment in respect thereof and will prior to
any transfer of any of its Notes endorse on the reverse side thereof the
outstanding principal amount of the Loans evidenced thereby. Failure to make
any such notation shall not affect the Borrower's obligations in respect of
such Loans.
2.03 Interest on the Loans.
(A) RATE OF INTEREST. Subject to the provisions of
subsections 2.03(e) and 2.06(g), each Revolving Loan shall bear interest on the
unpaid principal amount thereof from the date made through maturity (whether by
acceleration or otherwise) at a rate determined by reference to the Prime
Lending Rate or the Adjusted Eurodollar Rate. The applicable basis for
determining the rate of interest shall be selected by the Borrower initially at
the time a Notice of Borrowing is given pursuant to subsection 2.01(b). The
basis for determining the interest rate with respect to any Loan may be changed
from time to time pursuant to subsection 2.03(d). If on any day a Revolving
Loan is outstanding with respect to which notice has not been delivered to the
Agent in accordance with the terms of this Agreement specifying the basis for
determining the rate of interest, then for that day that Loan shall bear
interest determined by reference to the Prime Lending Rate.
The Loans shall bear interest through maturity as follows:
(i) if a Prime Rate Loan, then at the sum of the Prime
Lending Rate plus 0.50% per annum; and
(ii) if a Eurodollar Rate Loan, then at the sum of the
Adjusted Eurodollar Rate plus 1.50% per annum;
(B) INTEREST PERIODS. In connection with each Eurodollar
Rate Loan, the Borrower shall elect an interest period (each an "Interest
Period") to be applicable to such Loan, which Interest Period shall be either a
one, two, three or six- month period; provided that:
(i) the initial Interest Period for any Loan shall
commence on the Funding Date of such Loan;
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w (ii) in the case of immediately successive Interest
Periods, each successive Interest Period shall commence on the day on
which the next preceding Interest Period expires;
(iii) if an Interest Period would otherwise expire on a day
that is not a Business Day, such Interest Period shall expire on the
next succeeding Business Day; provided that if any Interest Period
would otherwise expire on a day that is not a Business Day but is a
day of the month after which no further Business Day occurs in such
month, such Interest Period shall expire on the next preceding
Business Day;
(iv) any Interest Period that begins on the last Business
Day of a calendar month (or on a day for which there is no numerically
corresponding day in the calendar month at the end of such Interest
Period) shall, subject to part (v) below, end on the last Business Day
of a calendar month;
(v) no Interest Period with respect to any Loan shall
extend beyond the Termination Date;
(vi) no Interest Period may extend beyond a date on which
the Borrower is required to make a scheduled payment of principal of
the Loans unless the aggregate principal amount of Loans that are
Prime Rate Loans or that have Interest Periods expiring on or before
such date equals or exceeds the principal amount required to be paid
on the Loans on such date; and
(vii) there shall be no more than ten (10) Eurodollar Rate
Loans with different maturities outstanding at any time.
(C) INTEREST PAYMENTS. Subject to subsection 2.03(e),
interest shall be payable on the Loans as follows:
(i) interest on each Prime Rate Loan shall be payable
quarterly in arrears on and to the last Business Day of each February,
May, August and November, commencing on February 28, 1994, on any
prepayment of any such Loan (to the extent accrued on the amount being
prepaid) and at maturity; and
(ii) interest on each Eurodollar Rate Loan shall be
payable in arrears on and to (but not including) each Interest Payment
Date applicable to that Loan, on any prepayment of that Loan (to the
extent accrued on the amount being prepaid) and at maturity.
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(D) CONVERSION OR CONTINUATION. Subject to the
provisions of Section 2.06, the Borrower shall have the option (i) to convert
at any time all or any part of the outstanding Loans from Loans bearing
interest at a rate determined by reference to one basis to Loans bearing
interest at a rate determined by reference to an alternative basis, or (ii)
upon the expiration of any Interest Period applicable to a Eurodollar Rate
Loan, to continue all or any portion of such Loan equal to $1,000,000 and
integral multiples of $100,000 in excess of that amount as a Eurodollar Rate
Loan and the succeeding Interest Period(s) of such continued Loan shall
commence on the last day of the Interest Period of the Loan to be continued;
provided, however, Eurodollar Rate Loans may only be converted into Prime Rate
Loans on the expiration date of an Interest Period applicable thereto; provided
further that no outstanding Loan may be continued as, or be converted into, a
Eurodollar Rate Loan when any Default or Event of Default has occurred and is
continuing; and provided further that the Loans made on the Closing Date may
not be converted prior to three Business Days after the Closing Date, unless
Agent otherwise consents in writing.
The Borrower shall deliver a Notice of Conversion/Continuation
to the Agent no later than 1:00 P.M. (New York time) at least two Business Days
in advance of the proposed conversion/continuation date (in the case of a
conversion to a Prime Rate Loan), and at least three Business Days in advance
of the proposed conversion/continuation date (in the case of a conversion to,
or a continuation of, a Eurodollar Rate Loan). A Notice of
Conversion/Continuation shall certify (i) the proposed conversion/ continuation
date (which shall be a Business Day), (ii) the amount of the Loan to be
converted/continued, (iii) the nature of the proposed conversion/continuation,
(iv) in the case of a conversion to, or a continuation of, a Eurodollar Rate
Loan, the requested Interest Period, and (v) that no Default or Event of
Default has occurred and is continuing. In lieu of delivering the above-
described Notice of Conversion/Continuation, the Borrower may give the Agent
telephonic notice by the required time of any proposed conversion/continuation
under this subsection 2.03(d); provided that such notice shall be promptly
confirmed in writing by delivery of a Notice of Conversion/Continuation to the
Agent on or before the proposed conversion/continuation date.
Neither the Agent nor any Bank shall incur any liability to
the Borrower in acting upon any telephonic notice referred to above that the
Agent believes in good faith to have been given by a duly authorized officer or
other person authorized to act on behalf of the Borrower or for otherwise
acting in good faith under this subsection 2.03(d) and upon conversion/
continuation by the Agent in
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accordance with this Agreement, pursuant to any telephonic notice the Borrower
shall have effected such conversion or continuation, as the case may be,
hereunder.
Except as provided in subsection 2.06(d), a Notice of
Conversion/Continuation for conversion to, or continuation of, a Eurodollar
Rate Loan (or telephonic notice in lieu thereof) shall be irrevocable on and
after the related Interest Rate Determination Date, and the Borrower shall be
bound to convert or continue in accordance therewith.
(E) POST MATURITY INTEREST. Any principal payments on
the Loans not paid when due and, to the extent permitted by applicable law, any
interest payments on the Loans not paid when due and any fees and other amounts
payable hereunder not paid when due (the "due date"), in each case whether at
stated maturity, by notice of prepayment, by acceleration or otherwise, shall
upon delivery of written notice to the Borrower from the Agent bear interest
from and after the due date payable upon demand at a rate that is two percent
(2%) per annum in excess of the rate of interest otherwise payable under this
Agreement (or, in the case of any such fees and other amounts due hereunder, at
the Prime Lending Rate plus 2.50%); provided that, in the case of Eurodollar
Rate Loans, upon the expiration of the Interest Period in effect at the time
any such increase in interest rate is effective, such Eurodollar Rate Loans
shall thereupon become Prime Rate Loans and thereafter bear interest payable
upon demand at a rate which is two percent (2%) per annum in excess of the
interest rate otherwise payable under this Agreement for Prime Rate Loans. The
payment or acceptance of the increased rate provided by this subsection 2.03(e)
shall not constitute a waiver of any Event of Default or an amendment to this
Agreement or otherwise prejudice or limit any rights or remedies of the Agent
or any Bank.
(F) COMPUTATION OF INTEREST. Interest on the Loans shall
be computed on the basis of a 360-day year and the actual number of days
elapsed in the period during which it accrues. In computing interest on any
Loan, the date of the making of such Loan or the first day of an Interest
Period applicable to such Loan or, with respect to a Prime Rate Loan being
converted from a Eurodollar Rate Loan, the date of conversion of such
Eurodollar Rate Loan to such Prime Rate Loan, shall be included; and the date
of payment of such Loan or the expiration date of an Interest Period applicable
to such Loan, or with respect to a Prime Rate Loan being converted to a
Eurodollar Rate Loan, the date of conversion of such Prime Rate Loan to such
Eurodollar Rate Loan, shall be excluded; provided that if a Loan is repaid
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on the same day on which it is made, one day's interest shall be paid on that
Loan.
2.04 Increased Costs. If any Bank shall determine that the
adoption of any applicable law, rule or regulation concerning capital adequacy
or any applicable change therein, or any change in interpretation or
administration thereof by any governmental authority, central bank or
comparable agency charged with the interpretation or administration thereof, or
compliance by such Bank (or its Lending Office) with any request or directive
regarding capital adequacy (whether or not having the force of law) of any such
authority, central bank or comparable agency, in each case occurring after the
Closing Date, has or will have the effect of reducing the rate of return on
such Bank's capital as a consequence of its obligation to make a Loan hereunder
to a level below that which such Bank could have achieved but for such
adoption, change or compliance (taking into consideration such Bank's policies
with respect to capital adequacy) by any amount deemed by such Bank to be
material, then from time to time, within fifteen (15) days after demand by such
Bank, the Borrower shall pay to such Bank such additional amounts as shall
compensate such Bank for such reduction. Each Bank shall promptly notify the
Borrower of any of the matters set forth in the preceding sentence. A
certificate as to additional amounts owed any such Bank, showing in reasonable
detail the basis for the calculation thereof, submitted in good faith to the
Borrower and the Agent by such Bank shall, absent manifest error, be final and
conclusive and binding upon all of the parties hereto.
2.05 Use of Proceeds.
(A) REVOLVING LOANS. The proceeds of the Revolving Loans
shall be applied by the Borrower for the general corporate purposes of the
Borrower and its Subsidiaries, which may include, without limitation, (i) the
reimbursement of the Issuing Bank of any amounts drawn under any Letter of
Credit as provided in subsection 2.07(c) and (ii) the payment of amounts to be
expended by the Borrower in connection with any Acquisition.
(B) LETTER OF CREDIT. The Letters of Credit shall be
used for the purpose of supporting (x) workers' compensation liabilities of the
Borrower or its Subsidiaries, (y) the obligations of the Borrower or its
Subsidiaries to third party insurers arising (1) by virtue of the laws of any
jurisdiction requiring third party insurers and (2) in lieu of payments in cash
of insurance obligations, or (z) performance, payment, deposit or surety
obligations of the Borrower or its Subsidiaries, in any case if required by law
or governmental rule or regulation, by
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any landlord under any real estate lease, or by custom and practice in the
business of the Borrower and its Subsidiaries.
(C) MARGIN REGULATIONS. No portion of the proceeds of
any borrowing under this Agreement shall be used by the Borrower to purchase or
carry any Margin Stock in any manner that might cause the borrowing or the
application of such proceeds to violate Regulation G, Regulation U, Regulation
T or Regulation X of the Board of Governors of the Federal Reserve System or
any other regulation of the Board or to violate the Securities Exchange Act of
1934, in each case as in effect on the date or dates of such borrowing and such
use of proceeds.
2.06 Special Provisions Governing Eurodollar Rate Loans.
Notwithstanding any other provision of this Agreement, the
following provisions shall govern with respect to Eurodollar Rate Loans as to
the matters covered:
(A) DETERMINATION OF INTEREST RATE. As soon as
practicable after 10:00 A.M. (New York time) on each Interest Rate
Determination Date, the Agent shall determine (which determination shall,
absent manifest error, be final, conclusive and binding upon all parties) the
interest rate that shall apply to the Eurodollar Rate Loans for which an
interest rate is then being determined for the applicable Interest Period and
shall promptly give notice thereof (in writing or by telephone confirmed in
writing) to the Borrower and each Bank.
(B) SUBSTITUTED RATE OF BORROWING. If on any Interest
Rate Determination Date any Bank (including the Agent) shall have determined
(which determination shall be final and conclusive and binding upon all parties
but, with respect to the following clauses (i) and (ii)(B), shall be made only
after consultation with the Borrower and the Agent) that:
(i) by reason of any changes arising after the date of
this Agreement affecting the Eurodollar market or affecting the
position of that Bank in such market, adequate and fair means do not
exist for ascertaining the applicable interest rate by reference to
the Eurodollar Rate with respect to the Eurodollar Rate Loans as to
which an interest rate determination is then being made; or
(ii) by reason of (A) any change after the date hereof in
any applicable law or governmental rule, regulation or order (or any
interpretation thereof and
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including the introduction of any new law or governmental rule,
regulation or order) or (B) other circumstances affecting that Bank or
the Eurodollar market or the position of that Bank in such market
(such as for example, but not limited to, official reserve
requirements required by Regulation D of the Board of Governors of the
Federal Reserve System to the extent not given effect in the
Eurodollar Rate), the Eurodollar Rate shall not represent the
effective pricing to that Bank for Dollar deposits of comparable
amounts for the relevant period;
then, and in any such event, that Bank shall be an Affected Bank and it shall
promptly (and in any event as soon as possible after being notified of a
borrowing, conversion or continuation) give notice (by telephone promptly
confirmed in writing) to the Borrower and the Agent (which notice the Agent
shall promptly transmit to each other Bank) of such determination. Thereafter,
the Borrower shall pay to the Affected Bank, upon written demand therefor, such
additional amounts (in the form of an increased rate of, or a different method
of calculating, interest or otherwise as the Affected Bank in its sole
discretion shall reasonably determine) as shall be required to cause the
Affected Bank to receive interest with respect to its Eurodollar Rate Loans for
the Interest Period following that Interest Rate Determination Date at a rate
per annum equal to 1.00% per annum in excess of the effective pricing to the
Affected Bank for Dollar deposits to make or maintain its Eurodollar Rate
Loans. A certificate as to additional amounts owed the Affected Bank, showing
in reasonable detail the basis for the calculation thereof, submitted in good
faith to the Borrower and the Agent by the Affected Bank shall, absent manifest
error, be final and conclusive and binding upon all of the parties hereto.
(C) REQUIRED TERMINATION AND PREPAYMENT. If on any date
any Bank shall have reasonably determined (which determination shall be final
and conclusive and binding upon all parties) that the making or continuation of
its Eurodollar Rate Loans has become unlawful or impossible by reason of
compliance by that Bank in good faith with any law, governmental rule,
regulation or order (whether or not having the force of law and whether or not
failure to comply therewith would be unlawful), then, and in any such event,
that Bank shall be an Affected Bank and it shall promptly give notice (by
telephone promptly confirmed in writing) to the Borrower and the Agent (which
notice the Agent shall promptly transmit to each other Bank) of that
determination. Subject to the prior withdrawal of a Notice of Borrowing or a
Notice of Conversion/Continuation or prepayment of the Eurodollar Rate Loans of
the Affected Bank as contemplated by the following subsection 2.06(d), the
obligation of the
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Affected Bank to make or maintain its Eurodollar Rate Loans during any such
period shall be terminated at the earlier of the termination of the Interest
Period then in effect or when required by law and the Borrower shall no later
than the termination of the Interest Period in effect at the time any such
determination pursuant to this subsection 2.06(c) is made or, earlier, when
required by law, repay or prepay the Eurodollar Rate Loans of the Affected
Bank, together with all interest accrued thereon.
(D) OPTIONS OF THE BORROWER. In lieu of paying an
Affected Bank such additional moneys as are required by subsection 2.06(b) or
the prepayment of an Affected Bank required by subsection 2.06(c), the Borrower
may exercise any one of the following options:
(i) If the determination by an Affected Bank relates only
to Eurodollar Rate Loans then being requested by the Borrower pursuant
to a Notice of Borrowing or a Notice of Conversion/Continuation, the
Borrower may by giving notice (by telephone promptly confirmed in
writing) to the Agent (who shall promptly give similar notice to each
other Bank) no later than the date immediately prior to the date on
which such Eurodollar Rate Loans are to be made, withdraw that Notice
of Borrowing or Notice of Conversion/Continuation and the Eurodollar
Rate Loans then being requested shall be made by the Banks as Prime
Rate Loans; or
(ii) Upon written notice to the Agent and each Bank, the
Borrower may terminate the obligations of the Banks to make or
maintain Loans as, and to convert Loans into, Eurodollar Rate Loans
and in such event, the Borrower shall, prior to the time any payment
pursuant to subsection 2.06(c) is required to be made or, if the
provisions of subsection 2.06(b) are applicable, at the end of the
then current Interest Period, convert all of the Eurodollar Rate Loans
into Prime Rate Loans in the manner contemplated by subsection 2.03(d)
but without satisfying the advance notice requirements therein.
(E) COMPENSATION. The Borrower shall compensate each
Bank, upon written request by that Bank (which request shall set forth in
reasonable detail the basis for requesting such amounts), for all reasonable
losses, expenses and liabilities (including, without limitation, any loss
(including interest paid) sustained by that Bank in connection with the
re-employment of such funds), that such Bank may sustain: (i) if for any
reason (other than a default by that Bank) a borrowing of any Eurodollar Rate
Loan does not occur on a date specified therefor in a Notice
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of Borrowing, a Notice of Conversion/Continuation or a telephonic request for
borrowing or conversion/continuation or a successive Interest Period does not
commence after notice therefor is given pursuant to subsection 2.03(d), (ii) if
any prepayment of any of its Eurodollar Rate Loans occurs on a date that is not
the last day of an Interest Period applicable to that Loan, (iii) if any
prepayment of any of its Eurodollar Rate Loans is not made on any date
specified in a notice of prepayment given by the Borrower, or (iv) as a
consequence of any other default by the Borrower to repay its Eurodollar Rate
Loans when required by the terms of this Agreement.
(F) QUOTATION OF EURODOLLAR RATE. Anything herein to the
contrary notwithstanding, if on any Interest Rate Determination Date Bankers
Trust Company is as a matter of general practice not quoting rates to first
class banks in the Eurodollar market for the offering of Dollars for deposit
with maturities comparable to the Interest Period and in amounts comparable to
the Eurodollar Rate Loans requested, the Agent shall contact the other Banks,
if any, for their quotes for rates to first class banks in the Eurodollar
market with respect to the requested Eurodollar Rate Loan, such other Banks to
be contacted in decreasing order of their respective Pro Rata Shares (and in
alphabetical order in the case of two or more Banks having the same Pro Rata
Shares). In the event that none of the Banks are making Eurodollar quotes in
the applicable amount and with the applicable maturity, the Agent shall give
the Borrower and each Bank prompt notice thereof and the Loans requested shall
be made as Prime Rate Loans.
(G) EURODOLLAR RATE TAXES. The Borrower agrees that:
(i) Promptly upon notice from any Bank to the Borrower,
the Borrower will pay, prior to the date on which penalties attach
thereto, all present and future income, stamp and other taxes, levies,
or costs and charges whatsoever imposed, assessed, levied or collected
on or in respect of a Loan solely as a result of the interest rate
being determined by reference to the Eurodollar Rate and/or the
provisions of this Agreement relating to the Eurodollar Rate and/or
the recording, registration, notarization or other formalization of
any thereof and/or any payments of principal, interest or other
amounts made on or in respect of a Loan when the interest rate is
determined by reference to the Eurodollar Rate (all such taxes,
levies, costs and charges being herein collectively called "Eurodollar
Rate Taxes"); provided, however, that Eurodollar Rate Taxes shall not
include Increased Taxes. The Borrower shall also pay such additional
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amounts equal to increases in Increased Taxes payable by that Bank
which increases are attributable to payments made by the Borrower
described in the immediately preceding sentence or this sentence. A
certificate as to additional amounts owed by the Borrower pursuant to
this clause (i), showing in reasonable detail the basis for the
calculation thereof, submitted in good faith to the Borrower and the
Agent by any Bank shall, absent manifest error, be final and
conclusive and binding upon all of the parties hereto. Promptly after
the date on which payment of any such Eurodollar Rate Tax is due
pursuant to applicable law, the Borrower will, at the request of that
Bank, furnish to that Bank evidence, in form and substance
satisfactory to that Bank, that the Borrower has met its obligations
under this subsection 2.06(g).
(ii) The Borrower will indemnify each Bank against, and
reimburse each Bank on demand for, any Eurodollar Rate Taxes, as
determined by that Bank in its good faith discretion; provided that
such Bank shall provide the Borrower with appropriate receipts for any
payments or reimbursements made by the Borrower pursuant to this
clause (ii) of subsection 2.06(g).
(iii) Each Bank organized under the laws of a jurisdiction
outside of the United States (referred to in this subsection 2.06(g)
as a "Foreign Bank") as to which payments to be made hereunder or
under the Notes are exempt from United States withholding tax or are
subject to such tax at a reduced rate under an applicable statute or
tax treaty shall provide to the Borrower and the Agent (x) a properly
completed and executed Internal Revenue Service Form 4224 or Form 1001
or other applicable form, certificate or document prescribed by the
Internal Revenue Service of the United States certifying as to such
Foreign Bank's entitlement to such exemption or reduced rate with
respect to payments to be made to such Foreign Bank hereunder and
under the Notes (referred to in this subsection 2.06(g) as a
"Certificate of Exemption") or (y) a letter from such Foreign Bank
stating that it is not entitled to any such exemption or reduced rate
(referred to in this subsection 2.06(g) as a "Letter of
Non-Exemption"). Each Foreign Bank shall provide such a Certificate
of Exemption or a Letter of Non-Exemption on or before the Closing
Date. Each Foreign Bank that becomes a Bank pursuant to the proviso
in the definition of "Bank" shall provide a Certificate of Exemption
or a Letter of Non-Exemption on the date such Foreign Bank becomes a
Bank. Until the Borrower and the Agent have received from such
Foreign Bank a Certificate of Exemption, the accuracy of which shall
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be reasonably satisfactory to the Borrower, the Borrower shall,
subject to its obligations under subsections 2.06(g)(i), 2.06(g)(ii)
and 2.06(i), be entitled to withhold taxes from such payments to such
Foreign Bank at the statutory rate applicable to amounts to be paid
hereunder to such Foreign Bank.
(iv) Notwithstanding anything to the contrary contained in
this subsection 2.06(g), the Borrower shall not be required to pay any
amounts pursuant to this subsection 2.06(g) to any Foreign Bank unless
such Foreign Bank has provided to the Borrower, within 60 days after
the receipt by such Foreign Bank of a written request therefor, either
a Certificate of Exemption or a Letter of Non-Exemption.
(H) BOOKING OF EURODOLLAR RATE LOANS. Any Bank may make,
carry or transfer Eurodollar Rate Loans at, to, or for the account of, any of
its branch offices or the office of an Affiliate of that Bank.
(I) INCREASED COSTS. Except as provided in subsection
2.06(b) with respect to certain determinations on Interest Rate Determination
Dates, if, after the date hereof by reason of, (x) the introduction of or any
change (including, without limitation, any change by way of imposition or
increase of reserve requirements) in, or in the interpretation of, any law or
regulation, or (y) the compliance with any guideline or request from any
central bank or other governmental authority or quasi- governmental authority
exercising control over banks or financial institutions generally (whether or
not having the force of law):
(i) any Bank (or its applicable lending office) shall be
subject to any tax, duty or other charge with respect to its
Eurodollar Rate Loans or its obligation to make Eurodollar Rate Loans,
or shall change the basis of taxation of payments to any Bank of the
principal of or interest on its Eurodollar Rate Loans or its
obligation to make Eurodollar Rate Loans (except for changes in the
rate of tax on the overall net income of such Bank or its applicable
lending office imposed by the jurisdiction in which such Bank's
principal executive office or applicable lending office is located);
or
(ii) any reserve (including, without limitation, any
imposed by the Board of Governors of the Federal Reserve System),
special deposit or similar requirement against assets of, deposits
with or for the account of, or credit extended by, any Bank's
applicable lending office shall be imposed or deemed applicable or any
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other condition affecting its Eurodollar Rate Loans or its obligation
to make Eurodollar Rate Loans shall be imposed on any Bank or its
applicable lending office or the interbank Eurodollar market,
and as a result thereof there shall be any increase in the cost to such Bank of
agreeing to make or making, funding or maintaining Eurodollar Rate Loans, or
there shall be a reduction in the amount received or receivable by that Bank or
its applicable lending office, then the Borrower shall from time to time, upon
written notice from and demand by that Bank (with a copy of such notice and
demand to the Agent), pay to the Agent for the account of that Bank, within
five Business Days after receipt of such notice and demand, additional amounts
sufficient to indemnify that Bank against such increased cost or reduced
amount. A certificate as to the amount of such increased cost or reduced
amount, submitted to the Borrower and the Agent by that Bank, shall, except for
manifest error, be final, conclusive and binding for all purposes. Any
payments to be made by the Borrower under subsections 2.06(b), 2.06(g) or
2.06(i) are to be without duplication.
(J) ASSUMPTIONS CONCERNING FUNDING OF EURODOLLAR RATE
LOANS. Calculation of all amounts payable to a Bank under this Section 2.06
shall be made as though that Bank had actually funded its relevant Eurodollar
Rate Loan through the purchase of a Eurodollar deposit bearing interest at the
Eurodollar Rate in an amount equal to the amount of that Eurodollar Rate Loan
and having a maturity comparable to the relevant Interest Period and through
the transfer of such Eurodollar deposit from an offshore office of that Bank to
a domestic office of that Bank in the United States of America; provided,
however, that each Bank may fund each of its Eurodollar Rate Loans in any
manner it sees fit and the foregoing assumption shall be utilized only for the
calculation of amounts payable under this Section 2.06.
(K) EURODOLLAR RATE LOANS AFTER DEFAULT. Unless the
Agent and Required Banks shall otherwise agree, after the occurrence of and
during the continuance of a Default or an Event of Default, the Borrower may
not elect to have a Loan be made or maintained as, or converted to, a
Eurodollar Rate Loan after the expiration of any Interest Period then in effect
for that Loan.
(L) AFFECTED BANKS' OBLIGATION TO MITIGATE. Each Bank
agrees that, as promptly as practicable after it becomes aware of the
occurrence of an event or the existence of a condition that would cause it to
be an Affected Bank under subsection 2.06(b) or 2.06(c) or that would entitle
such Bank to receive payments under subsection 2.06(g) or 2.06(i), it will, to
the extent not inconsistent with such
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Bank's internal policies, use reasonable efforts to make, fund or maintain the
affected Eurodollar Rate Loans of such Bank through another lending office of
such Bank if as a result thereof the additional moneys which would otherwise be
required to be paid to such Bank pursuant to subsection 2.06(b), 2.06(g) or
2.06(i) would be materially reduced or the illegality or other adverse
circumstances which would otherwise require prepayment of such Loans pursuant
to subsection 2.06(c) would cease to exist, and if, as determined by such Bank
in its sole discretion, the making, funding or maintaining of such Loans
through such other lending office would not otherwise materially adversely
affect such Loans or such Bank. The Borrower hereby agrees to pay all
reasonable expenses incurred by any Bank in utilizing another lending office of
such Bank pursuant to this subsection 2.06(l).
2.07 Letters of Credit.
(A) LETTERS OF CREDIT. In addition to the Borrower
requesting that the Banks make Revolving Loans pursuant to subsection 2.01(a),
the Borrower may request, in accordance with the provisions of this subsection
2.07, on and after the Closing Date to and excluding the Termination Date, that
the Issuing Bank issue Letters of Credit for the account of the Borrower;
provided that (i) the Borrower shall not request that the Issuing Bank issue
(and the Issuing Bank shall not issue) any Letter of Credit if, after giving
effect to such issuance, the Total Utilization of Revolving Loan Commitments
would exceed the aggregate of all Revolving Loan Commitments and (ii) the
Borrower shall not request that the Issuing Bank issue any Letter of Credit if,
after giving effect to such issuance, the Letter of Credit Usage would exceed
$3,000,000. In no event shall the Issuing Bank issue any Letter of Credit
having an expiration date later than one year after the issuance thereof. If
the issuing Bank, in its sole discretion, determines to issue a Letter of
Credit expiring after the scheduled Termination Date, the Borrower shall be
required on the third Business Day immediately preceding the Termination Date
to deposit with the Issuing Bank cash collateral for the repayment of any
drawings under the Letter of Credit, such deposit to be in an amount equal to
the maximum amount that may be drawn under such Letter of Credit and to be upon
such terms and conditions as the Issuing Bank may require. The issuance of any
Letter of Credit in accordance with the provisions of this Section 2.07 shall
require the satisfaction of each condition set forth in Sections 5.02, 5.03 and
5.04, as applicable; provided, however, that the obligation of the Issuing Bank
to issue any Letter of Credit is subject to the condition that (i) the Issuing
Bank believed in good faith that all conditions under subsection 2.07(a) and
Sections 5.02, 5.03 and 5.04, as applicable, to the issuing of such
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Letter of Credit were satisfied at the time such Letter of Credit was issued or
(ii) the satisfaction of any such condition not satisfied had been waived by
Required Banks prior to or at the time such Letter of Credit was issued;
provided further that the Issuing Bank shall be entitled to rely, and shall be
fully protected in relying, upon any communication, instrument or document
believed by it to be genuine and correct and to have been signed or sent by the
proper person or persons, including, without limitation, an Officer's
Certificate from the Borrower as to the satisfaction of the conditions under
Sections 5.03 and 5.04, as applicable, in determining the satisfaction of any
conditions to the issuance of any Letter of Credit or the Total Utilization of
Revolving Loan Commitments or Letter of Credit Usage then in effect.
Immediately upon the issuance of each Letter of Credit, each
Bank shall be deemed to, and hereby agrees to, have irrevocably purchased from
the Issuing Bank a participation in such Letter of Credit and drawings
thereunder in an amount equal to such Bank's Pro Rata Share of the maximum
amount which is or at any time may become available to be drawn thereunder. If
the Issuing Bank issues a Letter of Credit having an expiration date after the
scheduled Termination Date, such participations shall expire without further
action by any Bank on the scheduled Termination Date.
Each Letter of Credit supporting the payment of Indebtedness
may provide that the Issuing Bank may (but shall not be required to) pay the
beneficiary thereof upon the occurrence of a Default or an Event of Default and
the acceleration of the maturity of the Loans or, if payment is not then due to
the beneficiary, provide for the deposit of funds in an account to secure
payment to the beneficiary and that any funds so deposited shall be paid to the
beneficiary of the Letter of Credit if conditions to such payment are satisfied
or returned to the Issuing Bank for distribution to the Banks (or, if all
Obligations shall have been indefeasibly paid in full, to the Borrower) if no
payment to the beneficiary has been made and the final date available for
drawings under the Letter of Credit has passed. Each payment or deposit of
funds by the Issuing Bank as provided in this paragraph shall be treated for
all purposes of this Agreement as a drawing duly honored by the Issuing Bank
under the related Letter of Credit.
(B) NOTICE OF ISSUANCE. Whenever the Borrower desires to
cause the Issuing Bank to issue a Letter of Credit, it shall deliver to the
Issuing Bank and the Agent a Notice of Issuance of Letter of Credit
substantially in the form of Exhibit C no later than 1:00 P.M. (New York time)
at least four Business Days in advance of the proposed date of
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issuance or such shorter time as may be acceptable to the Issuing Bank (and the
Agent shall promptly notify each Bank of the proposed issuance of a Letter of
Credit). The Notice of Issuance of Letter of Credit shall specify (i) the
proposed date of issuance (which shall be a Business Day), (ii) the face amount
of the Letter of Credit, (iii) the expiration date of the Letter of Credit,
(iv) the name and address of the beneficiary, (v) such other documents or
materials as the Issuing Bank may reasonably request, and (vi) a precise
description of the documents and the verbatim text of any certificate to be
presented by the beneficiary which, if presented by the beneficiary prior to
the expiration date of the Letter of Credit, would require the Issuing Bank to
make payment under the Letter of Credit; provided that the Issuing Bank, in its
sole judgment, may require changes in any such documents and certificates;
provided further that the Issuing Bank shall not be required to issue any
Letter of Credit that requires payment thereunder prior to the third Business
Day following receipt by the Issuing Bank of such documents and certificates.
In determining whether to pay any Letter of Credit, the Issuing Bank shall be
responsible only to use reasonable care to determine that the documents and
certificates required to be delivered under that Letter of Credit have been
delivered and that they comply on their face with the requirements of that
Letter of Credit. Promptly upon the issuance of a Letter of Credit, the
Issuing Bank shall notify each Bank of the issuance and the amount of each such
other Bank's respective participation therein determined in accordance with
subsection 2.07(d).
(C) PAYMENT OF AMOUNTS DRAWN UNDER OR NECESSARY TO
COLLATERALIZE LETTERS OF CREDIT. In the event (i) the beneficiary of any
Letter of Credit makes a drawing thereunder or (ii) the Borrower is required
under subsection 2.07(a) to cash collateralize any Letter of Credit, the
Issuing Bank shall immediately notify the Borrower and the Agent, and the
Borrower shall reimburse the Issuing Bank or make a deposit with the Issuing
Bank, as appropriate, on the day on which such drawing is honored or such cash
collateral deposit is required in an amount in same day funds equal to the
amount of such drawing or, in the case of such a deposit, the maximum amount
that may be drawn under the applicable Letter of Credit; provided that,
anything contained in this Agreement to the contrary notwithstanding, (i)
unless prior to 1:00 P.M. (New York time) on the date of such drawing or the
date the Borrower is required make such required deposit of cash collateral, as
applicable, (A) the Borrower shall have notified the Issuing Bank and the Agent
that the Borrower intends to reimburse the Issuing Bank for the amount of such
drawing or to make such deposit with funds other than the proceeds of Revolving
Loans or (B) the Borrower shall have delivered a Notice of Borrowing
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requesting Revolving Loans which are Prime Rate Loans in an amount equal to the
amount of such drawing or deposit, the Borrower shall be deemed to have given a
Notice of Borrowing to the Agent requesting the Banks to make Revolving Loans
which are Prime Rate Loans on the date on which such drawing is honored or on
which such deposit is required in an amount equal to the amount of such drawing
or deposit, and (ii) if so requested by the Agent, the Banks shall, on the date
of such drawing or required deposit, make Revolving Loans which are Prime Rate
Loans in the amount of such drawing or required deposit, the proceeds of which
shall be applied directly by the Agent to reimburse the Issuing Bank for the
amount of such drawing or to make a deposit with the Issuing Bank in the amount
of such required deposit; and provided further that, if for any reason proceeds
of Revolving Loans are not received by the Issuing Bank on such date in an
amount equal to the amount of such drawing or deposit, the Borrower shall
reimburse or make a deposit with the Issuing Bank, on the Business Day
immediately following the date of such drawing or such deposit, in an amount in
same day funds equal to the excess of the amount of such drawing or deposit
over the amount of such Revolving Loans, if any, which are so received, plus
accrued interest on such amount at the rate set forth in subsection
2.07(e)(iii).
(D) PAYMENT BY THE BANKS. If the Borrower shall fail to
reimburse the Issuing Bank, for any reason, as provided in subsection 2.07(c)
(including, without limitation, the making of Revolving Loans by the Banks
pursuant to the terms of subsection 2.07(c)) in an amount equal to the amount
of any drawing honored by the Issuing Bank under a Letter of Credit issued by
it, the Issuing Bank shall promptly notify each Bank of the unreimbursed amount
of such drawing and of such Bank's respective participation therein based on
such Bank's Pro Rata Share. Each Bank shall make available to the Issuing Bank
an amount equal to its respective participation, in same day funds, at the
office of the Issuing Bank specified in such notice, not later than 1:00 P.M.
(New York time) on the Business Day after the date notified by the Issuing
Bank. If any Bank fails to make available to the Issuing Bank the amount of
such Bank's participation in such Letter of Credit as provided in this
subsection 2.07(d), the Issuing Bank shall be entitled to recover such amount
on demand from such Bank together with interest at the customary rate set by
the Issuing Bank for the correction of errors among banks for one Business Day
and thereafter at the Prime Lending Rate. Nothing in this Section 2.07 shall
be deemed to prejudice the right of any Bank to recover from the Issuing Bank
any amounts made available by such Bank to the Issuing Bank pursuant to this
subsection 2.07(d) if it is determined in a final judgment by a court of
competent jurisdiction that the payment with respect to a Letter of Credit by
the Issuing
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Bank in respect of which payment was made by such Bank constituted gross
negligence or willful misconduct on the part of the Issuing Bank. The Issuing
Bank shall distribute to each other Bank which has paid all amounts payable by
it under this subsection 2.07(d) with respect to any Letter of Credit issued by
the Issuing Bank such other Bank's Pro Rata Share of all payments received by
the Issuing Bank from the Borrower or pursuant to the last paragraph of
subsection 2.07(a) in reimbursement of drawings honored by the Issuing Bank
under such Letter of Credit when such payments are received.
(E) COMPENSATION. The Borrower agrees to pay the
following amounts to the Issuing Bank with respect to each Letter of Credit
issued by it:
(i) a commission equal to 1.50% per annum of the maximum
amount available from time to time to be drawn under such Letter of
Credit payable in advance on or prior to the date of issuance of such
Letter of Credit;
(ii) with respect to drawings made under any Letter of
Credit, interest, payable on demand, on the amount paid by the Issuing
Bank in respect of each such drawing from the date of the drawing
through the date such amount is reimbursed by the Borrower (including
any such reimbursement out of the proceeds of Revolving Loans pursuant
to subsection 2.07(c)) at a rate which is equal to the Prime Lending
Rate; provided that if such amount is not paid on demand, such amount
shall bear interest thereafter at a rate which is equal to 2.50% per
annum in excess of the Prime Lending Rate which such rate shall not
thereafter be increased pursuant to subsection 2.03(e); and
(iii) with respect to the issuance, amendment or transfer
of each Letter of Credit and each drawing made thereunder, documentary
and processing charges in accordance with the Issuing Bank's standard
schedule for such charges in effect at the time of such issuance,
amendment, transfer or drawing, as the case may be, or as otherwise
agreed to by the Issuing Bank.
Promptly upon receipt by the Issuing Bank of any amount
described in clauses (i) or (ii) of this subsection 2.07(e) with respect to a
Letter of Credit, the Issuing Bank shall distribute to each Bank its Pro Rata
Share of such amount.
(F) OBLIGATIONS ABSOLUTE. The obligation of the Borrower
to reimburse the Issuing Bank for drawings made under the Letters of Credit
issued by it and to repay any Revolving Loans made by the Banks pursuant to
subsection
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2.07(c) and the obligations by the Banks under subsection 2.07(d) shall be
unconditional and irrevocable and shall be paid strictly in accordance with the
terms of this Agreement under all circumstances including, without limitation,
the following circumstances:
(i) any lack of validity or enforceability of any Letter
of Credit;
(ii) the existence of any claim, set-off, defense or other
right which the Borrower may have at any time against a beneficiary or
any transferee of any Letter of Credit (or any persons or entities for
whom any such transferee may be acting), the Agent, any Bank or any
other Person, whether in connection with this Agreement, the
transactions contemplated herein or any unrelated transaction
(including any underlying transaction between the Borrower and the
beneficiary for which the Letter of Credit was procured);
(iii) any draft, demand, certificate or any other document
presented under any Letter of Credit proving to be forged, fraudulent,
invalid or insufficient in any respect or any statement therein being
untrue or inaccurate in any respect; provided that the Issuing Bank
shall use reasonable care to determine that the documents and
certificates required to be delivered under any Letter of Credit have
been delivered and that they comply on their face with the
requirements of that Letter of Credit;
(iv) payment by the Issuing Bank under any Letter of
Credit against presentation of a demand, draft or certificate or other
document which does not comply with the terms of such Letter of
Credit; provided that the Issuing Bank shall use reasonable care to
determine that the documents and certificates required to be delivered
under any Letter of Credit have been delivered and that they comply on
their face with the requirements of that Letter of Credit;
(v) any adverse change in the business, operations,
property, assets, condition (financial or otherwise) or prospects of
the Borrower or any of its Subsidiaries;
(vi) any breach of this Agreement or any other Credit
Document by the Borrower or any of its Subsidiaries, the Agent or any
Bank (other than the Issuing Bank);
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(vii) any other circumstance or happening whatsoever, which
is similar to any of the foregoing; or
(viii) the fact that a Default or an Event of Default shall
have occurred and be continuing;
provided that the Borrower shall not be required to pay any such amounts to the
extent they arise from the gross negligence or willful misconduct of the
Issuing Bank (as determined by a court of competent jurisdiction).
(G) ADDITIONAL PAYMENTS. If by reason of (i) any change
in any applicable law, regulation, rule, decree or regulatory requirement or
any change in the interpretation or application by any judicial or regulatory
authority of any law, regulation, rule, decree or regulatory requirement, in
each case occurring after the Closing Date, or (ii) compliance by the Issuing
Bank or any Bank with any direction, request or requirement (whether or not
having the force of law) announced or issued after Closing Date by any
governmental or monetary authority, including, without limitation, any
announcements or issuances under Regulation D of the Board of Governors of the
Federal Reserve System:
(A) the Issuing Bank or any Bank shall be subject to any
tax, levy, charge or withholding of any nature or to any variation
thereof or to any penalty with respect to the maintenance or
fulfillment of its obligations under this Section 2.07, whether
directly or by such being imposed on or suffered by the Issuing Bank
or any Bank;
(B) any reserve, special deposit, premium, FDIC
assessment, capital adequacy or similar requirement is or shall be
applicable, imposed or modified in respect of any Letters of Credit
issued by the Issuing Bank or participations therein purchased by any
Bank; or
(C) there shall be imposed on the Issuing Bank or any
Bank any other condition regarding this Section 2.07, any Letter of
Credit or any participation therein;
and the result of the foregoing is to directly or indirectly increase the cost
to the Issuing Bank or any Bank of issuing, making or maintaining any Letter of
Credit or of purchasing or maintaining any participation therein, or to reduce
the amount receivable in respect thereof by the Issuing Bank or any Bank, then
and in any such case the Issuing Bank or such Bank may, at any time within a
reasonable period after the additional cost is incurred or
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the amount received is reduced, notify the Borrower and the Agent, and the
Borrower shall pay within five Business Days of the date of such notice such
amounts as the Issuing Bank or such Bank may specify to be necessary to
compensate the Issuing Bank or such Bank for such additional cost or reduced
receipt, together with interest on such amount from the date demanded until
payment in full thereof at a rate equal at all times to the Prime Lending Rate
plus 2.50% per annum. The determination by the Issuing Bank or any Bank, as
the case may be, of any amount due pursuant to this subsection 2.07(g) as set
forth in a certificate setting forth the calculation thereof in reasonable
detail, shall, in the absence of error, be final and conclusive and binding on
all of the parties hereto.
(H) INDEMNIFICATION; NATURE OF THE ISSUING BANK'S DUTIES.
In addition to amounts payable as elsewhere provided in this Section 2.07, the
Borrower hereby agrees to protect, indemnify, pay and save harmless the Issuing
Bank from and against any and all claims, demands, liabilities, damages,
losses, costs, charges and expenses (including reasonable attorneys' fees and
allocated costs of internal counsel) which the Issuing Bank may incur or be
subject to as a consequence, direct or indirect, of (i) the issuance of any
Letter of Credit, other than as a result of gross negligence or willful
misconduct of the Issuing Bank or the Issuing Bank failing to use reasonable
care to determine that the documents and certificates required to be delivered
under such Letter of Credit had been delivered and that they complied on their
face with the requirements of that Letter of Credit as determined by a court of
competent jurisdiction or (ii) the failure of the Issuing Bank to honor a
drawing under any Letter of Credit as a result of any act or omission, whether
rightful or wrongful, of any present or future de jure or de facto government
or governmental authority (all such acts or omissions herein called "Government
Acts"). Each Bank, proportionately to its Pro Rata Share, severally agrees to
indemnify the Issuing Bank to the extent the Issuing Bank shall not have been
reimbursed by the Borrower or its Subsidiaries, for and against any of the
foregoing claims, demands, liabilities, damages, losses, costs, charges and
expenses to which the Issuing Bank is entitled to reimbursement from the
Borrower.
As between the Borrower and the Issuing Bank, the Borrower
assumes all risks of the acts and omissions of, or misuse of the Letters of
Credit issued by the Issuing Bank by, the respective beneficiaries of such
Letters of Credit. In furtherance and not in limitation of the foregoing, the
Issuing Bank shall not be responsible (absent gross negligence or willful
misconduct (as determined by a court of competent jurisdiction)): (i) for the
form, validity, sufficiency, accuracy, genuineness or legal effect of any
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document submitted by any party in connection with the application for and
issuance of such Letters of Credit, even if it should in fact prove to be in
any or all respects invalid, insufficient, inaccurate, fraudulent or forged;
(ii) for the validity or sufficiency of any instrument transferring or
assigning or purporting to transfer or assign any such Letter of Credit or the
rights or benefits thereunder or proceeds thereof, in whole or in part, which
may prove to be invalid or ineffective for any reason; (iii) for failure of the
beneficiary of any such Letter of Credit to comply fully with conditions
required in order to draw upon such Letter of Credit; (iv) for errors,
omissions, interruptions or delays in transmission or delivery of any messages,
by mail, cable, telegraph, telex or otherwise, whether or not they be in
cipher; (v) for errors in interpretation of technical terms; (vi) for any loss
or delay in the transmission or otherwise of any document required in order to
make a drawing under any such Letter of Credit or of the proceeds thereof;
(vii) for the misapplication by the beneficiary of any such Letter of Credit of
the proceeds of any drawing under such Letter of Credit; and (viii) for any
consequences arising from causes beyond the control of the Issuing Bank,
including, without limitation, any Government Acts. None of the above shall
affect, impair, or prevent the vesting of any of the Issuing Bank's rights or
powers hereunder; provided that, notwithstanding the foregoing, the Issuing
Bank shall use reasonable care to determine that the documents and certificates
required to be delivered under such Letter of Credit have been delivered and
that they comply on their face with the requirements of that Letter of Credit.
In furtherance and extension and not in limitation of the
specific provisions hereinabove set forth, any action taken or omitted by the
Issuing Bank under or in connection with the Letters of Credit issued by it or
the related certificates, if taken or omitted in good faith and absent gross
negligence or willful misconduct of the Issuing Bank (as determined by a court
of competent jurisdiction), shall not put the Issuing Bank under any resulting
liability to the Borrower.
Notwithstanding anything to the contrary contained in this
subsection 2.07(h), the Borrower shall have no obligation to indemnify the
Issuing Bank in respect of any liability incurred by the Issuing Bank arising
solely out of the gross negligence or willful misconduct of the Issuing Bank as
determined by a court of competent jurisdiction, or out of the wrongful
dishonor by the Issuing Bank of a proper demand for payment made under the
Letters of Credit; provided that the Issuing Bank shall use reasonable care to
determine that the documents and certificates required to be delivered under
any Letter of Credit have been delivered and
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that they comply on their face with the requirements of that Letter of Credit.
For purposes of this subsection 2.07(h), the term "Issuing
Bank" means the Issuing Bank and any Bank purchasing a participation in any
Letter of Credit pursuant to subsection 2.07(d).
(I) COMPUTATION OF INTEREST. Interest payable pursuant
to this Section 2.07 shall be computed on the basis of a 360-day year and the
actual number of days elapsed in the period during which it accrues.
Section 3. Fees.
3.01 Fees.
(A) LOAN FEES. On the Signing Date, the Borrower agrees to
pay to Bankers Trust Company a mutually agreed upon amount.
(B) COMMITMENT FEES. The Borrower agrees to pay to the
Agent, for distribution to each Bank in proportion to its Pro Rata Share,
commitment fees for the period from and including the Signing Date to but
excluding the Termination Date equal to the average of the daily unused portion
of the Revolving Loan Commitments multiplied by 3/8 of 1% per annum, such
commitment fees to be calculated on the basis of a 360-day year and the actual
number of days elapsed and to be payable quarterly in arrears on and to the
last day of February, May, August and November commencing on February 28, 1994
and upon the termination of the Revolving Loan Commitments. Anything contained
in this Agreement to the contrary notwithstanding, for the purposes of
calculating the commitment fees payable by the Borrower pursuant to this
subsection 3.01(c), the "unused portion of the Revolving Loan Commitments", as
of any date of determination, shall be an amount equal to the aggregate amount
of Revolving Loan Commitments as of such date minus the aggregate principal
amount of all outstanding Revolving Loans and the Letter of Credit Usage on
such date, and the unused portion of the Revolving Loan Commitments shall not
be reduced by reason of Borrower's inability to satisfy the conditions
precedent set forth in Section 5 and consequent inability to borrow Loans
hereunder.
Section 4. Prepayments; Payments.
4.01 Prepayments.
(A) OPTIONAL PREPAYMENTS. The Borrower shall have the right
to prepay the Loans, without premium or penalty, in whole or in part from time
to time on the
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following terms and conditions: (i) the Borrower shall give the Agent at its
Notice Office at least three Business Days' prior notice of its intent to
prepay the Loans and the amount of such prepayment, which notice the Agent
shall promptly transmit to each of the Banks and (ii) Eurodollar Rate Loans may
be prepaid only on the expiration of the Interest Period applicable thereto.
(B) MANDATORY PREPAYMENTS. The Borrower shall make
prepayments on the Revolving Loans necessary to give effect to the limitations
set forth in subsection 2.01(a).
4.02 Method and Place of Payment. Except as otherwise
specifically provided herein, all payments under this Agreement or any Note
shall be made to the Agent for the account of the Bank or Banks entitled
thereto not later than 2:00 P.M. (New York time) on the date when due and shall
be made in Dollars in immediately available funds at the Payment Office of the
Agent. Whenever any payment to be made hereunder or under any Note shall be
stated to be due on a day which is not a Business Day, the due date thereof
shall be extended to the next succeeding Business Day and such extension of
time shall be included in the computation of the payment of interest hereunder
or under any Note or of the commitment or other fees hereunder, as the case may
be; provided, however, that if the day on which payment relating to a
Eurodollar Rate Loan is due is not a Business Day but is a day of the month
after which no further Business Day occurs in that month, then the due date
thereof shall be the next preceding Business Day.
4.03 Net Payments. All payments made by the Borrower
hereunder or under any Note will be made without setoff, counterclaim or other
defense.
4.04 Application of Prepayments. All prepayments shall
include payment of accrued interest on the principal amount so prepaid and
shall be applied to the payment of interest before application to principal.
With respect to different Loans being prepaid separately, any prepayment shall
be applied first to Prime Rate Loans to the full extent thereof before
application to Eurodollar Rate Loans, in the order determined by the Agent
unless the Borrower indicates otherwise in its notice of prepayment pursuant to
subsection 4.01(a).
4.05 Apportionment of Payments. Aggregate principal and
interest payments shall be apportioned among all outstanding Loans to which
such payments relate, and such payments shall be apportioned ratably to the
Banks, proportionately to the Banks' respective Pro Rata Shares. The Agent
shall promptly distribute to each Bank at its primary address set forth below
its name on the appropriate
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signature page hereof or such other address as any Bank may request its share
of all such payments received by the Agent and the commitment and loan fees of
such Bank when received by the Agent pursuant to subsections 3.01(a), 3.01(c)
or 3.01(d).
4.06 Voluntary Reduction of Revolving Loan Commitments. The
Borrower shall have the right, at any time and from time to time, to terminate
in whole or permanently reduce in part, without premium or penalty, the
Revolving Loan Commitments in an amount up to the amount by which the Revolving
Loan Commitments exceed the Total Utilization of Revolving Loan Commitments.
The Borrower shall give not less than three Business Days' prior written notice
to the Agent designating the date (which shall be a Business Day) of such
termination or reduction and the amount of any partial reduction. Promptly
after receipt of a notice of such termination or partial reduction, the Agent
shall notify each Bank of the proposed termination or reduction. Such
termination or partial reduction of the Revolving Loan Commitments shall be
effective on the date specified in the Borrower's notice and shall reduce the
Revolving Loan Commitment of each Bank proportionately to its Pro Rata Share.
Any such partial reduction of the Revolving Loan Commitments shall be in an
aggregate minimum amount of $1,000,000 and integral multiples of $100,000 in
excess of that amount unless the remaining amount of the Revolving Loan
Commitments is less than $100,000 in which case such reduction shall be in the
amount of the then remaining Revolving Loan Commitments.
Section 5. Conditions Precedent. The effectiveness of this
Agreement and the obligations of the Banks to maintain and make Loans hereunder
are subject to the satisfaction of the following conditions.
5.01 Conditions to Effectiveness. This Agreement shall
become effective only upon satisfaction of all of the following conditions:
(A) EXECUTION OF AGREEMENT; NOTES. The Agent shall have
received at its Notice Office: (i) a signed copy of this Agreement
(whether the same or different copies) duly executed by the Borrower,
each Bank and the Agent and (ii) an original Revolving Note made to
the order of each Bank executed by the Borrower in the amount,
maturity and as otherwise provided herein.
(B) NO DEFAULT; REPRESENTATION AND WARRANTIES. All
representations and warranties of the Borrower and its Subsidiaries
set forth in this Agreement and in each of the other Credit Documents
shall be true, correct and complete in all material respects on and as
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of the Closing Date and after giving effect to the transactions
contemplated to occur on such date, and the Borrower shall have
delivered to the Agent an officer's certificate, dated as of the
Closing Date, signed by the President or Vice President of the
Borrower, and attested to by the Secretary or any Assistant Secretary
of the Borrower, in form and substance satisfactory to the Agent, to
the effect that on and as of the Closing Date and after giving effect
to the transactions contemplated to occur on such date, (i) no Default
or Event of Default shall have occurred and be continuing and (ii) all
representations and warranties contained herein and in the other
Credit Documents are true, correct and complete in all material
respects.
(C) CORPORATE DOCUMENTS; PROCEEDINGS.
(i) On the Closing Date, the Agent shall have
received a certificate, dated the Closing Date, signed by the
President or Vice President of the Borrower, and attested to by the
Secretary or any Assistant Secretary of the Borrower, in form and
substance satisfactory to the Agent, certifying resolutions of the
Board of Directors of the Borrower authorizing and approving this
Agreement and the transactions contemplated hereby and thereby and the
Certificate of Incorporation and By-Laws of the Borrower together with
copies of the Certificate of Incorporation and By-Laws of the Borrower
and the resolutions of the Borrower referred to in such certificate.
(ii) On the Closing Date, the Agent shall have
received a certificate, dated the Closing Date, signed by the
President or Vice President of each Guarantor Subsidiary, and attested
to by the Secretary or any Assistant Secretary of such Guarantor
Subsidiary, in form and substance satisfactory to Agent, certifying
the resolutions adopted by the Board of Directors of such Guarantor
Subsidiary approving and authorizing the Subsidiary Guaranty and the
transactions contemplated thereby and the Certificate of Incorporation
and By-Laws of such Guarantor Subsidiary, together with copies of the
Certificate of Incorporation and By-Laws of such Guarantor Subsidiary
and the resolutions of such Guarantor Subsidiary referred to in such
certificate.
(iii) On the Closing Date, the Agent shall have
received copies of the certificates of incorporation of the Borrower
and each Guarantor Subsidiary, certified as of a recent date prior to
delivery by the Secretary of State of its jurisdiction
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of incorporation, together with a good standing certificate from its
jurisdiction of incorporation dated a recent date prior to delivery.
(iv) All corporate and legal proceedings and all
instruments and agreements in connection with the transactions
contemplated by this Agreement and the other Credit Documents shall be
satisfactory in form and substance to the Banks, and the Agent shall
have received all information and copies of all documents and papers,
including records of corporate proceedings and governmental approvals,
if any, which any Bank reasonably may have requested in connection
therewith, such documents and papers where appropriate to be certified
by proper corporate or governmental authorities.
(D) SUBSIDIARY GUARANTY. Each Guarantor Subsidiary shall
have duly executed and delivered the Subsidiary Guaranty.
(E) PAYMENT OF FEES. The Borrower shall have paid the
Fees required by Section 3.01 to be paid on the Closing Date and the
reasonable fees and expenses of O'Melveny & Myers, counsel to the
Agent, as of the Closing Date.
(F) OPINIONS OF COUNSEL. On the Closing Date, the Agent
shall have received from Irell & Manella, counsel to the Borrower, an
opinion in form and substance satisfactory to the Agent, addressed to
each of the Banks and dated the date of delivery, covering such
matters incident to the transactions contemplated herein as the Agent
may reasonably request.
All the Notes, certificates, legal opinions and other
documents and papers referred to in this Section 5, unless otherwise specified,
shall be delivered to the Agent at the Agent's Notice Office for the account of
each of the Banks and, except for the Notes, in sufficient counterparts for
each of the Banks and shall be satisfactory in form and substance to the Banks.
5.02 Termination of Advised Line. The obligations of the
Banks to make the initial Revolving Loan and the obligation of the Issuing Bank
to issue the initial Letter of Credit hereunder are subject to the condition
precedent, in addition to the conditions precedent set forth in Sections 5.03
and 5.04 below, that the Borrower shall have paid all amounts payable under the
advised line of credit established by Bankers Trust Company in the Borrower's
favor pursuant to the letter dated May 1, 1993, from Bankers Trust Company to
the Borrower. The Borrower
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and Bankers Trust Company, by their execution of this Agreement, agree that
such advised line shall, as of the date hereof, be cancelled.
5.03 Conditions to all Loans and Letters of Credit. The
obligations of the Banks to make Revolving Loans and the obligation of the
Issuing Bank to issue a Letter of Credit on each Funding Date are subject to
the following further conditions precedent:
(a) The Agent shall have received, in accordance with the
provisions of subsections 2.01(b) or 2.07(b), as the case may be,
before that Funding Date, an originally executed Notice of Borrowing
or Notice of Issuance of Letter of Credit, as the case may be, in each
case signed by the chief executive officer, the chief financial
officer or the treasurer of the Borrower or by any officer of the
Borrower designated by the Board of Directors of the Borrower or any
of the above-described officers on behalf of the Borrower in writing
delivered to the Agent. The obligation of the Issuing Bank to issue
any Letter of Credit is subject to the further condition precedent
that on or before the date of issuance of such Letter of Credit, the
Issuing Bank shall have received, in accordance with the provisions of
subsection 2.07(b), all other information specified in subsection
2.07(b) and such other documents as the Issuing Bank may reasonably
require in connection with the issuance of such Letter of Credit.
(b) As of the Funding Date:
(i) The representations and warranties (other
than the representations and warranties set forth in Section
6.18) contained herein shall be true, correct and complete in
all material respects on and as of that Funding Date to the
same extent as though made on and as of that date;
(ii) No event shall have occurred and be
continuing or would result from the consummation of the
borrowing contemplated by such Notice of Borrowing or the
issuance of such Letter of Credit that would constitute a
Default or an Event of Default;
(iii) The Borrower shall have performed in all
material respects all agreements and satisfied all conditions
which this Agreement provides shall be performed by it on or
before that Funding Date;
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(iv) No order, judgment or decree of any court,
arbitrator or governmental authority shall purport to enjoin
or restrain any Bank from making the Revolving Loans or the
Issuing Bank from issuing the Letter of Credit; and
(v) The making of the Revolving Loans or the
issuing of the Letter of Credit requested on such Funding Date
shall not violate any law, including, without limitation,
Regulation G, Regulation T, Regulation U or Regulation X of
the Board of Governors of the Federal Reserve System.
5.04 Conditions to Certain Revolving Loans and Letters of
Credit. The obligations of each Bank to make a Revolving Loan and the
obligation of the Issuing Bank to issue a Letter of Credit on each Funding Date
when the making of such Revolving Loan or the issuance of such Letter of
Credit, as applicable, would (i) increase the aggregate outstanding amount of
Revolving Loans over the aggregate amount of Revolving Loans outstanding
immediately prior to the making of such Loan or (ii) increase the aggregate
Letter of Credit Usage over the aggregate Letter of Credit Usage immediately
prior to the issuance of such Letter of Credit are subject to the further
condition precedent that the representations and warranties set forth in
Section 6.18 are true, correct and complete in all material respects on and as
of that Funding Date to the same extent as though made on and as of that date.
Section 6. Representations, Warranties and Agreements. In
order to induce the Banks to enter into this Agreement and to maintain and make
the Loans, the Borrower makes the following representations, warranties and
agreements, which shall survive the execution and delivery of this Agreement
and the Notes and the making of the Loans.
6.01 Corporate Status. Each of the Borrower and its
Subsidiaries (i) is a duly organized and validly existing corporation in good
standing under the laws of the jurisdiction of its incorporation, (ii) has the
power and authority to own its property and assets and to transact the business
in which it is engaged and (iii) is duly qualified as a foreign corporation and
in good standing in each jurisdiction where the ownership, leasing or operation
of property or the conduct of its business requires such qualification, except
where the failure to be so qualified could not reasonably be expected to have a
material adverse effect on the business, operations, property, assets,
condition (financial or otherwise) or prospects of the Borrower and its
Subsidiaries taken as a whole or any Reporting Subsidiary and its Subsidiaries
taken as a whole.
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6.02 Corporate Power and Authority. The Borrower and each of
its Subsidiaries has the corporate power to execute, deliver and perform the
terms and provisions of each of the Credit Documents to which it is a party and
has taken all necessary corporate action to authorize the execution, delivery
and performance by it of each of such Credit Documents. The Borrower and each
of its Subsidiaries has duly executed and delivered each of the Credit
Documents to which it is party, and each of such Credit Documents constitutes
the legal, valid and binding obligation of the Borrower or such Subsidiary, as
the case may be, enforceable against the Borrower or such Subsidiary, as the
case may be, in accordance with its terms except as the enforceability thereof
may be limited by applicable bankruptcy, insolvency, reorganization or other
similar laws affecting creditors' rights generally and by general equitable
principles (regardless of whether the issue of enforceability is considered in
a proceeding in equity or at law). The Borrower shall have the corporate power
to consummate any Acquisition upon the consummation thereof, on the terms set
forth in any applicable purchase agreement, agreement of merger or other
operative agreement. Upon the consummation of any Acquisition, such
Acquisition shall have been duly authorized by all necessary action of the
Borrower and any of its Subsidiaries participating therein.
6.03 No Violation. Neither the execution, delivery or
performance by the Borrower or a Subsidiary of the Borrower of the Credit
Documents to which it is a party, nor the execution, delivery and performance
of the Letter of Intent by the Borrower, nor compliance by it with the terms
and provisions of any such Credit Documents or Letter of Intent, nor the
consummation of any Acquisition, upon the consummation thereof, (i) will
contravene any provision of any law, statute, rule or regulation or any order,
writ, injunction or decree of any court or governmental instrumentality, (ii)
will conflict or be inconsistent with or result in any breach of any of the
terms, covenants, conditions or provisions of, or constitute a default under,
or result in the creation or imposition of (or the obligation to create or
impose) any Lien (other than Liens permitted under Section 8.01) upon any of
the property or assets of the Borrower or any of its Subsidiaries pursuant to
the terms of any indenture, mortgage, deed of trust, credit agreement, loan
agreement or any other agreement, contract or instrument to which the Borrower
or any of its Subsidiaries is a party or by which it or any of its property or
assets is bound or to which it may be subject or (iii) will violate any
provision of the Certificate of Incorporation or By-Laws of the Borrower or any
of its Subsidiaries.
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6.04 Governmental Approvals. No order, consent, approval,
license, authorization or validation of, or filing, recording or registration
with (except as have been obtained or made prior to the Closing Date), or
exemption by, any governmental or public body or authority, or any subdivision
thereof, is required to authorize, or is required in connection with, (i) the
execution, delivery and performance by the Borrower or any of its Subsidiaries
of any Credit Document to which the Borrower or any of such Subsidiaries is a
party, (ii) the legality, validity, binding effect or enforceability of any
such Credit Document or (iii) any Acquisition, except filings, approvals and
authorizations which shall have been made or obtained prior to the consummation
of such Acquisition.
6.05 Financial Statements; Financial Condition; Undisclosed
Liabilities; etc.
(a) The consolidated balance sheets of the Borrower and its
Consolidated Subsidiaries at December 31, 1992 and September 30, 1993, and the
related consolidated statements of operations and statements of cash flows of
the Borrower and its Consolidated Subsidiaries for the fiscal year or 9-month
period, as the case may be, ended on such date and heretofore furnished to the
Banks present fairly the consolidated financial condition of the Borrower and
its Consolidated Subsidiaries at the date of such balance sheets and statements
of operations of the Borrower and its Consolidated Subsidiaries for such fiscal
year or 9-month period, as the case may be. All such consolidated financial
statements have been prepared in accordance with generally accepted accounting
principles and practices consistently applied except for, with respect to the
financial statements for the 9-month period ended on September 30, 1993,
year-end audit adjustments.
(b) The consolidated balance sheet of each Reporting
Subsidiary and its Consolidated Subsidiaries at December 31, 1992 and September
30, 1993, and the related consolidated statements of operations and the
consolidated statement of cash flows of each Reporting Subsidiary and its
Consolidated Subsidiaries for the fiscal year or 9-month period, as the case
may be, ended on such date and heretofore furnished to the Banks have been
prepared in accordance with generally accepted accounting principles and
practices consistently applied except for, with respect to the financial
statements for the 9-month period ended on September 30, 1993, year-end audit
adjustments, and except that the Borrower in preparing the financial statements
of each Reporting Subsidiary does not allocate corporate overhead, interest and
taxes in accordance with generally accepted accounting principles and prepares
all of its financial statements by considering materiality based on the
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consolidated financial statements of the Borrower and its Subsidiaries taken as
a whole. Subject to the foregoing exceptions from generally accepted
accounting principles and year-end audit adjustments in the case of the
financial statements for the 9-month period ended on September 30, 1993, such
financial statements of each Reporting Subsidiary and its Consolidated
Subsidiaries present fairly the financial condition of such Reporting
Subsidiary and its Consolidated Subsidiaries at the date of such balance sheets
and statements of operations of such Reporting Subsidiary and its Consolidated
Subsidiaries for such fiscal year or 9-month period, as the case may be.
(c) Except as fully reflected in the financial statements
described in subsections 6.05(a) and (b) or in Schedule III, there were as of
the Closing Date no liabilities or obligations with respect to the Borrower or
any of its Subsidiaries of any nature whatsoever (whether absolute, accrued,
contingent or otherwise and whether or not due) which, either individually or
in aggregate, would be material to the Borrower and its Subsidiaries taken as a
whole or to any Reporting Subsidiary and its Subsidiaries taken as a whole.
Except as set forth in Schedule III, as of the Closing Date the Borrower does
not know of any basis for the assertion against the Borrower or any of its
Subsidiaries of any liability or obligation of any nature whatsoever that is
not fully reflected in the financial statements described in subsections
6.05(a) and (b) which, either individually or in the aggregate, would be
material to the Borrower and its Subsidiaries taken as a whole or to any
Reporting Subsidiary and its Subsidiaries taken as a whole.
6.06 Litigation. Except as set forth on Schedule IV, there
is no action, suit or arbitration or other proceeding pending or, to the best
knowledge of the Borrower, threatened with respect to (i) any Credit Document,
(ii) any tax return, (iii) any Acquisition which has been consummated, if any,
or (iv) any other matter that, if adversely determined, is reasonably likely to
materially and adversely affect the business, operations, property, assets,
condition (financial or otherwise) or prospects of the Borrower and its
Subsidiaries taken as a whole or of any Reporting Subsidiary and its
Subsidiaries taken as a whole.
6.07 True and Complete Disclosure. All factual information
(taken as a whole) heretofore or contemporaneously furnished by or on behalf of
the Borrower in writing to any Bank (including, without limitation, all
information contained in the Credit Documents) for purposes of or in connection
with this Agreement or any transaction contemplated herein (including, without
limitation, any Acquisition) is, and all other such factual information
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(taken as a whole) hereafter furnished by or on behalf of the Borrower in
writing to any Bank will be, true and accurate in all material respects on the
date as of which such information is dated or certified and not incomplete by
omitting to state any fact necessary to make such information (taken as a
whole) not misleading at such time in light of the circumstances under which
such information was provided.
6.08 Use of Proceeds; Margin Regulations. All proceeds of
the Loans and any Letters of Credit have been and will be used by the Borrower
for the purposes set forth in Section 2.05; provided that no part of the
proceeds of any Loan or any Letter of Credit was or will be used by the
Borrower to purchase or carry any Margin Stock or to extend credit to others
for the purpose of purchasing or carrying any Margin Stock. Neither the making
of any Loan or the issuance of any Letter of Credit nor the use of the proceeds
thereof will violate or be inconsistent with the provisions of Regulations G,
T, U or X of the Board of Governors of the Federal Reserve System.
6.09 Tax Returns and Payments. Each of the Borrower and its
Subsidiaries has filed all tax returns required to be filed by it and has paid
all income taxes payable by it which have become due pursuant to such tax
returns and all other taxes and assessments payable by it which have become
due, other than those not yet delinquent, those being contested in good faith
and those listed on Schedule IV.
6.10 Compliance with ERISA. Each Plan is in substantial
compliance with ERISA; no Plan is insolvent or in reorganization; no Plan has
an Unfunded Current Liability, no Plan has an accumulated or waived funding
deficiency or permitted decreases in its funding standard account within the
meaning of Section 412 of the Code; neither the Borrower nor any Subsidiary of
the Borrower nor ERISA Affiliate has incurred any material liability to or on
account of a Plan pursuant to Sections 502(c), (i) or (l), 515, 4062, 4063,
4064, 4071, 4201 or 4204 of ERISA or Chapter 43 of the Code or expects to incur
any liability under any of the foregoing sections; no proceedings have been
instituted to terminate any Plan; no condition exists which presents a material
risk to the Borrower or any of its Subsidiaries of incurring a liability to or
on account of a Plan pursuant to the foregoing provisions of ERISA and the
Code; no Lien imposed under the Code or ERISA on the assets of the Borrower or
any of its Subsidiaries exists or is likely to arise on account of any Plan;
the Borrower and its Subsidiaries may terminate contributions to any other
employee benefit plans maintained by them without incurring any material
liability to any Person interested therein; and
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no Plan has received notice from the Internal Revenue Service of the failure of
such Plan to qualify under Section 401(a) of the Code.
6.11 Capitalization. The authorized capital stock of the
Borrower consists of 50,000,000 shares of common stock, $.01 par value per
share, of which 29,391,392 shares were issued and outstanding as of November
30, 1993. All such outstanding shares have been duly and validly issued, are
fully paid and non-assessable. The Borrower does not have outstanding any
securities convertible into or exchangeable for its capital stock or
outstanding any rights to subscribe for or to purchase, or any options for the
purchase of, or any agreements providing for the issuance (contingent or
otherwise) of, or any calls, commitments or claims of any character relating
to, its capital stock except:
(i) The Public Subordinated Debt;
(ii) Options held by present and former officers,
directors and employees of the Borrower and its Subsidiaries for the
purchase of not more than 1,319,980 shares of the Borrower's common
stock plus any additional stock options issued for the Borrower's
common stock during 1994 in the normal course of business;
(iii) The stockholders' rights plan adopted by the Board of
Directors of the Borrower on October 29, 1986 as described in the plan
summary heretofore delivered to the Banks; and
(iv) The New Subordinated Debt.
6.12 Subsidiaries. On the Closing Date, the corporations
listed on Schedule V are the only Subsidiaries of the Borrower. Schedule V
correctly sets forth, as of the Closing Date, the percentage ownership (direct
and indirect) of the Borrower in each class of capital stock of each of its
Subsidiaries and also identifies the direct owner thereof.
6.13 Compliance with Statutes, etc. Except as disclosed on
Schedule VI, each of the Borrower and its Subsidiaries is in compliance with
all applicable statutes, regulations and orders of, and all applicable
restrictions imposed by, all governmental bodies, domestic or foreign, in
respect of the conduct of its business and the ownership of its property
(including applicable statutes, regulations, orders and restrictions relating
to environmental standards and controls), except such noncompliances as would
not, in the aggregate, have a material adverse effect on the
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business, operations, property, assets, condition (financial or otherwise) or
prospects of the Borrower and its Subsidiaries taken as a whole or of any
Reporting Subsidiary and its Subsidiaries taken as a whole.
6.14 Investment Company Act. Neither the Borrower nor any of
its Subsidiaries is an "investment company" within the meaning of the
Investment Company Act of 1940, as amended.
6.15 Public Utility Holding Company Act. Neither the
Borrower nor any of its Subsidiaries is a "holding company," or a "subsidiary
company" of a "holding company," or an "affiliate" of a "holding company" or of
a "subsidiary company" of a "holding company" within the meaning of the Public
Utility Holding Company Act of 1935, as amended.
6.16 Labor Relations. Neither the Borrower nor any of its
Subsidiaries nor, to the best of the Borrower's knowledge at the time of any
Acquisition, the Target of such Acquisition, is engaged in any unfair labor
practice that would (upon giving effect to such Acquisition) have a material
adverse effect on the Borrower and its Subsidiaries taken as a whole. There is
(i) no significant unfair labor practice complaint pending or, to the best
knowledge of the Borrower, threatened against the Borrower or any of its
Subsidiaries or, to the best knowledge of the Borrower at the time of any
Acquisition, the Target of such Acquisition, before the National Labor
Relations Board, and no significant grievance or significant arbitration
proceeding arising out of or under any collective bargaining agreement is so
pending or, to the best knowledge of the Borrower, threatened against the
Borrower or any of its Subsidiaries or, to the best of knowledge of the
Borrower at the time of any Acquisition, the Target of such Acquisition, (ii)
no significant strike, labor dispute, slowdown or stoppage pending or, to the
best knowledge of the Borrower, threatened against the Borrower or any of its
Subsidiaries or, to the best knowledge of the Borrower at the time of any
Acquisition, the Target of such Acquisition, and (iii) to the best knowledge of
the Borrower, no union representation question existing with respect to the
employees of the Borrower or any of its Subsidiaries and, to the best knowledge
of the Borrower, no union organizing activities are taking place, except (with
respect to any matter specified in clause (i), (ii) or (iii) above, either
individually or in the aggregate) such as would not (upon giving effect to such
Acquisition) have a material adverse effect on the business, operations,
property, assets, condition (financial or otherwise) or prospects of the
Borrower and its Subsidiaries taken as a whole.
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6.17 Patents, Licenses, Franchises and Formulas.
Each of the Borrower and its Subsidiaries owns all the
patents, trademarks, permits, service marks, trade names, copyrights, licenses,
franchises and formulas, or rights with respect to the foregoing, and has
obtained assignments of all leases and other rights of whatever nature,
necessary for the present conduct of its business, without any known conflict
with the rights of others which, or the failure to obtain which, as the case
may be, would result in a material adverse effect on the business, operations,
property, assets, condition (financial or otherwise) or prospects of the
Borrower and its Subsidiaries taken as a whole or of any Reporting Subsidiary
and its Subsidiaries taken as a whole.
6.18 No Material Adverse Change. Except as set forth on
Schedule II, since December 31, 1992, there has been no material adverse change
in the business, operations, properties, assets, condition (financial or
otherwise) or prospects of the Borrower and its Subsidiaries taken as a whole
or of any Reporting Subsidiary and its Subsidiaries taken as a whole.
6.19 Obligations Constitute "Senior Indebtedness". All
Obligations of the Borrower under this Agreement and the Letters of Credit are
within the definition of "Designated Senior Indebtedness" contained in the New
Subordinated Debt Agreement and the definition of "Senior Indebtedness"
contained in the indenture pursuant to which the Public Subordinated Debt has
been issued.
Section 7. Affirmative Covenants. The Borrower covenants and
agrees that on and after the Closing Date and until the Loans and the Notes,
together with interest, Fees and all other obligations incurred hereunder and
thereunder, are paid in full:
7.01 Information Covenants. The Borrower will furnish to
each Bank:
(a) Quarterly Financial Statements. (i) Borrower.
Within 45 days (or 90 days in the case of the fourth fiscal quarter)
after the close of each quarterly accounting period in each fiscal
year of the Borrower, the consolidated and consolidating balance
sheets of the Borrower and its Consolidated Subsidiaries as at the end
of such quarterly period and the related consolidated and
consolidating statements of operations and statements of cash flows
for the elapsed portion of the fiscal year ended with the last day of
such quarterly period and for such quarterly period and setting forth
comparative figures for the
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related periods in the prior fiscal year for the statements of
operations and cash flows, all of which shall be certified by the
chief executive officer or the chief financial officer of the
Borrower, subject to normal year-end audit adjustments.
(ii) Reporting Subsidiaries. Within 45 days (or 90 days
in the case of the fourth fiscal quarter) after the close of each
quarterly accounting period in each fiscal year of the Borrower, the
consolidated balance sheet of each Reporting Subsidiary and its
Consolidated Subsidiaries as at the end of such quarterly period and
the related consolidated statement of operations and the consolidated
statement of cash flows and for the elapsed portion of the fiscal year
ended with the last day of such quarterly period and for such
quarterly period and setting forth comparative figures for the related
periods in the prior fiscal year for the statements of operations and
cash flows, all of which shall be certified by the chief executive
officer or chief financial officer of the Borrower, subject to normal
year-end audit adjustments.
(b) Annual Financial Statements. (i) Borrower. Within
90 days after the close of each fiscal year of the Borrower, the
consolidated and consolidating balance sheets of the Borrower and its
Consolidated Subsidiaries as at the end of such fiscal year and the
related consolidated and consolidating statements of operations and
statements of cash flows for such fiscal year, in each case setting
forth comparative figures for the preceding fiscal year and certified,
in the case of the consolidated financial statements, without
qualification by independent certified public accountants of
recognized national standing reasonably acceptable to Required Banks,
together with a report of such accounting firm stating that in the
course of its regular audit of the financial statements of the
Borrower, which audit was conducted in accordance with generally
accepted auditing standards, such accounting firm obtained no
knowledge of any Default or Event of Default as a result of a breach
of Sections 8.04, 8.08, 8.09, 8.10, 8.11 and 8.12 which has occurred
and is continuing or, if in the opinion of such accounting firm such a
Default or Event of Default has occurred and is continuing, a
statement as to the nature thereof.
(ii) Reporting Subsidiaries. Within 90 days after the
close of each fiscal year of the Borrower, the consolidated balance
sheet of each Reporting Subsidiary and its Consolidated Subsidiaries
as at the end of such fiscal year and the related consolidated
statement of
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operations and consolidated statement of cash flows for such fiscal
year, all of which shall be certified by the chief executive officer
or the chief financial officer of the Borrower.
(c) Management Letters. Promptly after the Borrower's
receipt thereof, a copy of any "management letter" received by the
Borrower from its certified public accountants.
(d) Performance Plan. On or before December 31st of each
year, a preliminary performance plan for the immediately following
year, and on or before February 28th of each year, a final performance
plan (the "Performance Plan") for such year, each in a form reasonably
satisfactory to the Banks for the Borrower and its Subsidiaries as a
whole and each Reporting Subsidiary and its Subsidiaries as a whole
(in each case including forecast consolidated statements of income and
sources and uses of cash and balance sheets and forecast capital
expenditures, as available) prepared by the Borrower for each month of
the fiscal year beginning January 1, 1994 and for the elapsed portion
of such fiscal year ended with the last day of each month accompanied
by the statement of the chief executive officer or the chief financial
officer of the Borrower to the effect that, to the best of his
knowledge, the Performance Plan is a reasonable estimate and forecast
for the period covered thereby.
(e) Performance Reports. Within 20 Business Days after
the end of each month and within 45 days after the end of each fiscal
quarter, a performance report, in a form reasonably satisfactory to
the Banks, containing consolidated balance sheets for the Borrower and
its Subsidiaries as a whole and each Reporting Subsidiary and its
Subsidiaries as a whole as at the end of that month or quarter, as the
case may be, and the related consolidated statements of operations and
cash flows for the month or quarter, as the case may be, and the
elapsed portion of the fiscal year then ended, and comparing actual
results of operations and financial position to that forecast in the
Performance Plan for the month or quarter, as the case may be, and for
the elapsed portion of the fiscal year ended with the last day of that
month or quarter, as the case may be, setting forth comparative
figures for the related periods in the prior fiscal year and stating
the reasons for any variance between the actual results of operations,
financial position and cash flows and forecasted results of
operations, financial position and cash flows and explanations of the
variances which are adverse to the Borrower or any of its
Subsidiaries.
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Such performance report shall also contain a statement of cash
balances, investments held by the Borrower and its Subsidiaries that
are permitted under subsection 8.06(ix) and receivables (including an
aging report) held by the Borrower and its Subsidiaries as a whole and
each Reporting Subsidiary and its Subsidiaries as a whole.
(f) Officer's Certificates. At the time of the delivery
of the financial statements provided for in subsections 7.01(a) and
(b) and the monthly performance reports provided for in subsection
7.01(e), a certificate of the chief executive officer or the chief
financial officer of the Borrower to the effect that, to the best of
his knowledge, no Default or Event of Default has occurred and is
continuing or, if any Default or Event of Default has occurred and is
continuing, specifying the nature and extent thereof, which
certificate shall set forth the calculations required to establish
whether the Borrower was in compliance with the provisions of Sections
8.08 through 8.12, inclusive, at the end of such month, fiscal quarter
or year, as the case may be.
(g) Notice of Default or Litigation. Promptly, and in
any event within three Business Days after any officer of the Borrower
obtains knowledge thereof, notice of (i) the occurrence of any event
which constitutes a Default or an Event of Default, (ii) any
litigation or governmental or arbitration proceeding pending (x)
against the Borrower or any of its Subsidiaries which could materially
and adversely affect the business, operations, property, assets,
condition (financial or otherwise) or prospects of the Borrower and
its Subsidiaries, taken as a whole, or any Reporting Subsidiary and
its Subsidiaries, taken as a whole, or (y) with respect to any Credit
Document or any Acquisition then contemplated or already consummated
by the Borrower or its Subsidiaries, (iii) any material changes in the
status of any litigation or other proceeding reported by Borrower
pursuant to Section 6.06 or subsection 7.01(g)(ii), and (iv) any other
event which could materially and adversely affect the business,
operations, property, assets, condition (financial or otherwise) or
prospects of the Borrower and its Subsidiaries, taken as a whole, or
any Reporting Subsidiary and its Subsidiaries, taken as a whole.
(h) Other Reports and Filings. Promptly, copies of all
financial information, proxy materials and other information and
reports, if any, which the Borrower or any of its Subsidiaries shall
file with the Securities
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and Exchange Commission or any governmental agencies substituted
therefor (the "SEC").
(i) Financial Review. Promptly, commencing with the
quarter ended December 31, 1993, the financial review provided
quarterly to the Board of Directors of the Borrower.
(j) Reports of Asset Transfers to Subsidiaries. At least
5 Business Days prior to any transfer to any other Subsidiary that is
not a Subsidiary Guarantor of (i) any assets of the Borrower or any of
its Subsidiaries having a fair market value exceeding $250,000 or (ii)
any intangible assets, the Borrower shall notify the Agent of such
proposed transfer and the business purpose therefor.
(k) Other Information. From time to time, such other
information or documents (financial or otherwise) as any Bank may
reasonably request.
7.02 Books, Records and Inspections. The Borrower will, and
will cause each of its Subsidiaries to, keep proper books of record and account
in which full, true and correct entries in conformity with generally accepted
accounting principles and all requirements of law shall be made of all dealings
and transactions in relation to its business and activities. The Borrower
will, and will cause each of its Subsidiaries to, permit officers and
designated representatives of the Agent or any Bank to visit and inspect, under
guidance of officers of the Borrower or such Subsidiary, any of the properties
of the Borrower or such Subsidiary, and to examine the books of record and
account of the Borrower or such Subsidiary and discuss the affairs, finances
and accounts of the Borrower or such Subsidiary with, and be advised as to the
same by, its and their officers and independent accountants, all at such
reasonable times and intervals and to such reasonable extent as the Agent or
such Bank may request.
7.03 Maintenance of Property, Insurance. Schedule VII sets
forth a true and complete listing of all insurance maintained by the Borrower
and its Subsidiaries as of the Closing Date and the amounts of such insurance.
The Borrower will, and will cause each of its Subsidiaries to, (i) keep all
property useful and necessary in its business in good working order and
condition, (ii) maintain with financially sound and reputable insurance
companies insurance on all its property and its directors and officers in at
least such amounts and against at least such risks as are described in Schedule
VII; provided that the Borrower and its Subsidiaries may self-insure against
risks consistent with standard industry practices for companies in
55
<PAGE> 61
the same or similar businesses, and (iii) furnish to each Bank, within 45 days
after the end of each fiscal quarter and otherwise, upon written request, full
information as to the insurance carried.
7.04 Corporate Franchises. Except as permitted by Section
8.02, the Borrower will, and will cause each of its Subsidiaries to, do or
cause to be done, all things necessary to preserve and keep in full force and
effect its existence and its material rights, franchises, licenses and patents;
provided, however, that nothing in this Section 7.04 shall prevent the
withdrawal by the Borrower or any of its Subsidiaries of its qualification as a
foreign corporation in any jurisdiction where such withdrawal would not have a
material adverse effect on the business, operations, property, assets,
condition (financial or otherwise) or prospects of the Borrower and its
Subsidiaries taken as a whole.
7.05 Compliance with Statutes, etc. The Borrower will, and
will cause each of its Subsidiaries to, comply with all applicable statutes,
regulations and orders of, and all applicable restrictions imposed by, all
governmental bodies, domestic or foreign, in respect of the conduct of its
business and the ownership of its property (including applicable statutes,
regulations, orders and restrictions relating to environmental standards and
controls), except such noncompliances as could not, in the aggregate,
reasonably be expected to have a material adverse effect on the business,
operations, property, assets, condition (financial or otherwise) or prospects
of the Borrower and its Subsidiaries taken as a whole.
7.06 ERISA. As soon as possible and, in any event, within 10
days after the Borrower or any of its Subsidiaries or ERISA Affiliates knows or
has reason to know any of the following, the Borrower will deliver to each of
the Banks a certificate of the chief executive officer or the chief financial
officer of the Borrower setting forth details as to such occurrence and such
action, if any, which the Borrower, such Subsidiary or such ERISA Affiliate is
required or proposes to take, together with any notices required or proposed to
be given to or filed with or by the Borrower, the Subsidiary, the ERISA
Affiliate, the PBGC, a Plan participant or the Plan administrator with respect
thereto: that a Reportable Event has occurred; that an accumulated funding
deficiency has been incurred or an application may be or has been made to the
Secretary of the Treasury for a waiver or modification of the minimum funding
standard (including any required installment payments) or an extension of any
amortization period under Section 412 of the Code with respect to a Plan; that
a Plan has been or may be terminated, reorganized, partitioned or declared
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<PAGE> 62
insolvent under Title IV of ERISA; that a Plan has an Unfunded Current
Liability giving rise to a Lien under ERISA or the Code; that proceedings may
be or have been instituted to terminate a Plan; that a proceeding has been
instituted pursuant to Section 515 of ERISA to collect a delinquent
contribution to a Plan; that the Borrower, any of its Subsidiaries or ERISA
Affiliates will or may incur any liability (including any contingent or
secondary liability) to or on account of the termination of or withdrawal from
a Plan under Sections 4062, 4063, 4064, 4201 or 4204 of ERISA; that the
Borrower, any of its Subsidiaries or ERISA Affiliates will or may incur any
liability under Chapter 43 of the Code or under Sections 502(c), (i) or (1) or
4071 of ERISA; that there exists a condition which presents a material risk to
the Borrower, any of its Subsidiaries or ERISA Affiliates of incurring a
liability to or on account of a Plan pursuant to the assertion of a material
claim (other than a routine claim for benefits) against any such Plan; or that
any Plan has been determined by the Internal Revenue Service to fail to qualify
under Section 401(a) of the Code. The Borrower will deliver to each of the
Banks a complete copy of the annual report (Form 5500) of each Plan required to
be filed with the Internal Revenue Service. In addition to any certificates or
notices delivered to the Banks pursuant to the first sentence hereof, copies of
annual reports and any other notices received by the Borrower or any of its
Subsidiaries required to be delivered to the Banks hereunder shall be delivered
to the Banks no later than 10 days after the later of the date such report or
notice has been filed with the Internal Revenue Service or the PBGC, given to
Plan participants or received by the Borrower or such Subsidiary.
7.07 End of Fiscal Years; Fiscal Quarters. The Borrower
shall cause (i) each of its, and each of its Subsidiaries', fiscal years to end
on December 31 and (ii) each of its, and each of its Subsidiaries', fiscal
quarters to end on March 31, June 30, September 30 and December 31.
7.08 Performance of Obligations. The Borrower will, and will
cause each of its Subsidiaries to, perform all of its obligations under the
terms of each mortgage, indenture, security agreement and other debt instrument
by which it is bound, except such non-performances as could not in the
aggregate, reasonably be expected to have a material adverse effect on the
business, operations, property, assets, condition (financial or otherwise) or
prospects of the Borrower and its Subsidiaries taken as a whole, or of any
Reporting Subsidiary and its Subsidiaries taken as a whole.
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<PAGE> 63
7.09 Payment of Taxes and Claims. The Borrower will, and
will cause each of its Subsidiaries to, pay or cause to be paid all taxes,
assessments and other governmental charges imposed upon it or any of its
properties or assets or in respect of any of its franchises, business, income
or property before any material penalty accrues thereon, and all claims
(including, without limitation, claims for labor, services, materials and
supplies) for sums that have become due and payable and that by law have or may
become a material Lien upon any of its properties or assets, prior to the time
when any material penalty or fine shall be incurred with respect thereto;
provided that so long as no property or assets (other than money for such
charge or claim and the interest or penalty accruing thereof) of the Borrower
or any of its Subsidiaries is in danger of being lost or forfeited as a result
thereof, no such charge or claim need be paid if it is being contested in good
faith by appropriate proceedings promptly instituted and diligently conducted
and if such reserve or other appropriate provision, if any, as shall be
required in conformity with generally accepted accounting principles shall have
been made therefor.
7.10 Further Assurances; New Subsidiaries.
(a) At any time and from time to time upon the request of
the Agent, the Borrower shall and shall cause each of its Wholly-Owned
Subsidiaries to execute and deliver such further documents and do such other
acts and things as the Agent may reasonably request in order to effect fully
the purposes of this Agreement and the other Credit Documents and to provide
for payment of the Obligations in accordance with the terms of this Agreement
and the other Credit Documents.
(b) In the event a Person becomes a domestic Subsidiary
of the Borrower after the Closing Date, the Borrower, upon the request of the
Agent, shall and shall cause its Subsidiaries to execute and deliver such
guaranties, collateral documents and such other agreements, pledges,
assignments, documents and certificates (including, without limitation, any
amendments to the Credit Documents) as may be necessary or desirable or as the
Agent may request and do such other acts and things as the Agent may reasonably
request in order to have such domestic Subsidiary guaranty and/or secure the
Obligations and effect fully the purposes of this Agreement and the other
Credit Documents and to provide for payment of the Obligations in accordance
with the terms of this Agreement and the other Credit Documents.
Section 8. Negative Covenants. The Borrower covenants and
agrees that on and after the Closing Date and
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<PAGE> 64
until the Loans and the Notes, together with interest, Fees and all other
obligations incurred hereunder and thereunder, are paid in full:
8.01 Liens. The Borrower will not, and will not permit any
of its Subsidiaries to, create, incur, assume or permit to exist any Lien upon
or with respect to any property or assets (real or personal, tangible or
intangible) of the Borrower or any of its Subsidiaries, whether now owned or
hereafter acquired; provided that the provisions of this Section 8.01 shall not
prevent the creation, incurrence, assumption or existence of:
(i) Liens for taxes not yet due, or Liens for taxes being
contested in good faith and by appropriate proceedings for which
adequate reserves have been established;
(ii) Liens in respect of property or assets of the
Borrower or any of its Subsidiaries imposed by law, which were
incurred in the ordinary course of business, such as carriers',
warehousemen's and mechanics' liens and other similar Liens arising in
the ordinary course of business and (x) which do not in the aggregate
materially detract from the value of such property or assets or
materially impair the use thereof in the operation of the business of
the Borrower or any of its Subsidiaries or (y) which are being
contested in good faith by appropriate proceedings, which proceedings
have the effect of preventing the forfeiture or sale of the property
or assets subject to any such Lien;
(iii) Liens in existence on the Closing Date which are
listed, and the property subject thereto described, in Schedule VIII
(Liens described in this clause (iii), "Permitted Liens");
(iv) Liens in favor of the Agent;
(v) Liens relating to leases and subleases granted to
others not interfering in any material respect with the business of
the Borrower or any of its Subsidiaries;
(vi) Easements, rights-of-way, restrictions, minor defects
or irregularities of title and other similar charges or encumbrances
not interfering in any material respect with the ordinary conduct of
the business of the Borrower or any of its Subsidiaries;
(vii) Liens relating to any interest or title of a lessor
under any lease permitted under Section 8.04;
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<PAGE> 65
(viii) Liens relating to Interest Rate/Currency Agreements
permitted under Section 8.05;
(ix) Liens relating to bankers' liens and other rights of
setoff;
(x) Pledges or deposits in connection with worker's
compensation, unemployment insurance and other social security
legislation;
(xi) Liens on real property assets of ICS or any
Wholly-Owned Subsidiary of ICS securing Indebtedness permitted under
clause (xii) of Section 8.05 incurred solely to finance or refinance
the acquisition or improvement of such real property assets by ICS or
such Subsidiary provided such Liens do not extend to any other assets
of ICS or such Subsidiary; and
(xii) Liens on assets purchased using the proceeds of
non-recourse purchase money Indebtedness permitted by clause (ix) of
Section 8.05.
8.02 Consolidation, Merger, Sale of Assets, etc. The Borrower
will not, and will not permit any of its Subsidiaries to, wind up, liquidate or
dissolve its affairs or enter into any transaction of merger or consolidation,
or convey, sell, lease or otherwise dispose of (or agree to do any of the
foregoing at any future time) all or any part of its property or assets, or
purchase or otherwise acquire (in one or a series of related transactions) any
part of the property or assets (other than purchases or other acquisitions of
inventory, materials and equipment in the ordinary course of business) of any
Person, or permit any of its Subsidiaries so to do any of the foregoing, except
that:
(i) the Borrower and its Subsidiaries may make sales of
inventory in the ordinary course of business;
(ii) the Borrower and its Subsidiaries may, in the
ordinary course of business, sell for cash, equipment and capital
assets which are uneconomic, obsolete or in need of replacement;
(iii) the Borrower and its Subsidiaries may sell or
otherwise dispose of the assets listed on Schedule X;
(iv) the Borrower and its Subsidiaries may, in addition
to any sales permitted in clauses (i), (ii) and (iii) above, sell
(by way of merger or otherwise) for cash, the stock, property or
assets of any ofits Subsidiaries (excluding the stock of ICS or any
of its Subsidiaries) having an aggregate fair market value
(as reasonably determined by the board of directors of the
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<PAGE> 66
Person making the sale) not to exceed $5,000,000 in any calendar year;
(v) any Subsidiary of the Borrower may merge or
consolidate with any other domestic Wholly-Owned Subsidiary of
the Borrower, so long as such Wholly-Owed Subsidiary is the
surviving corporation, and in the case of any merger or
consolidation involving a Guarantor Subsidiary, the Guarantor
Subsidiary is the surviving corporation;
(vi) the Borrower and its Wholly-Owned Subsidiaries may
(subject to the limitations set forth in Section 8.08) acquire
property and assets of other Persons (including any assets or
property acquired in any Acquisition) provided that the aggregate
consideration paid by the Borrower or such Subsidiaries consisting
of cash or any assets of the Borrower or such Subsidiaries (excluding
any common stock of the Borrower but including the principal amount
of any Indebtedness described in subsection 8.05(xiv) incurred in
connection with such acquisition) shall not exceed (if valued at fair
market value, as reasonably determined by the board of directors of
the Person making such acquisition) $12,000,000 when added to the
aggregate amount of all investments made pursuant to subsection
8.06(vii);
(vii) the Borrower and its Subsidiaries may make capital
expenditures to the extent not in violation of Section 8.08; and
(viii) SV and its Wholly-Owned Subsidiaries may acquire
property and assets of other Persons for cash or the issuance of
Indebtedness in an aggregate amount (for all such cash or
Indebtedness) not exceeding $10,000,000 provided that such
acquisition is funded with (a) cash of SV and its Subsidiaries,
but only to the extent that the aggregate under 8.06(ix) exceeds
$9,000,000, (b) borrowings under credit lines permitted pursuant
to clause (xiii) of Section 8.05 and/or (c) promissory notes
issued by SV and its Wholly-Owned Subsidiaries evidencing
Indebtedness permitted under subsection 8.05(xiii).
8.03 Dividends.
(a) The Borrower will not declare or pay any dividends, or
return any capital, to its stockholders or authorize or make any other
distribution, payment or delivery of property or cash to its stockholders as
such, or redeem, retire, purchase or otherwise acquire, directly or
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<PAGE> 67
indirectly, for a consideration, any shares of any class of its capital stock
now or hereafter outstanding (or any options or warrants issued by the Borrower
with respect to its capital stock), or set aside any funds for any of the
foregoing purposes, or permit any of its Subsidiaries to purchase or otherwise
acquire for a consideration any shares of any class of the capital stock of the
Borrower now or hereafter outstanding (or any options or warrants issued by the
Borrower with respect to its capital stock), except that:
(i) the Borrower may make payments in cash in lieu of
fractional shares in respect of conversions of the New Subordinated
Debt and the Public Subordinated Debt;
(ii) the Borrower may reacquire stock options or
restricted stock in an aggregate amount not to exceed $250,000
in any calendar year; and
(iii) the Borrower may, after the date hereof, repurchase
its common stock, in open market transactions, for cash in an amount
not exceeding the amount by which $1,000,000 exceeds the aggregate
amount of cash paid by the Borrower after the date hereof to repurchase
subordinated debt or to prepay other Indebtedness pursuant to
subsection 8.13(i).
(b) The Borrower will not permit any of its Subsidiaries
to declare or pay any dividends, or return any capital, to its stockholders or
authorize or make any other distribution, payment or delivery of property or
cash to its stockholders as such, or redeem, retire, purchase or otherwise
acquire, directly or indirectly, for a consideration, any shares of any class
of its capital stock now or hereafter outstanding (or any options or warrants
issued by such Subsidiary with respect to its capital stock), or set aside any
funds for any of the foregoing purposes, or permit any of its Subsidiaries to
purchase or otherwise acquire for a consideration any shares of any class of
the capital stock of such Subsidiary now or hereafter outstanding (or any
options or warrants issued by such Subsidiary with respect to its capital
stock), except that any Subsidiary of the Borrower may pay dividends to the
Borrower or any Wholly-Owned Subsidiary of the Borrower.
8.04 Leases. The Borrower will not permit the aggregate
payments (including, without limitation, any property taxes paid as additional
rent or lease payments) by the Borrower and its Subsidiaries on a consolidated
basis under agreements to rent or lease any real or personal property
(including capitalized lease obligations) to exceed $7,500,000 during any
fiscal quarter.
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8.05 Indebtedness. The Borrower will not, and will not
permit any of its Subsidiaries to, contract, create, incur, assume or suffer to
exist any Indebtedness, except:
(i) Indebtedness of the Borrower and its Subsidiaries incurred
under the Credit Documents;
(ii) Indebtedness listed on Schedule IX ("Existing
Indebtedness") and Indebtedness incurred by the Borrower or any of
its Subsidiaries to renew or refinance the Existing Indebtedness of
the Borrower or such Subsidiary provided that the new Indebtedness
shall not exceed the principal amount of the Existing Indebtedness so
renewed or refinanced and shall not contain any terms or conditions,
taken as a whole, less favorable to the Borrower and the Banks than
the Existing Indebtedness being renewed or refinanced;
(iii) accrued expenses and current trade accounts payable
incurred in the ordinary course of business and to the extent
consistent with past practice, and obligations under trade letters of
credit incurred by the Borrower or any of its Subsidiaries in the
ordinary course of business and to the extent consistent with past
practice, which are to be repaid in full not more than one year after
the date on which such Indebtedness is originally incurred to finance
the purchase of goods by the Borrower or such Subsidiary;
(iv) obligations under letters of credit incurred by the
Borrower or any of its Subsidiaries in the ordinary course of business
and to the extent consistent with past practice in support of
obligations incurred in connection with worker's compensation,
unemployment insurance and other social security legislation;
(v) Indebtedness incurred as a result of loans and advances
permitted under Section 8.06(ii)-(v);
(vi) obligations under letters of credit incurred by the
Borrower or any of its Subsidiaries in the ordinary course of business
and to the extent consistent with past practice in support of
obligations under leases permitted under Section 8.04, bonds posted
for judgments being appealed or as a condition to bringing any action,
suit or other proceeding not to exceed $2,000,000 and advances under
foreign contracts in an aggregate amount not to exceed, when added to
the amount of obligations incurred for bonds posted for judgments,
$5,000,000;
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<PAGE> 69
(vii) nonrecourse Indebtedness payable solely from and secured
solely by life insurance policies and annuities maintained by the
Borrower and its Subsidiaries for their respective officers, employees
and directors;
(viii) surety bonds, performance bonds and other completion bonds
in the ordinary course of business and consistent with past practice
or as required by law;
(ix) non-recourse purchase money Indebtedness not exceeding the
purchase price of the asset so purchased and secured solely by such
asset;
(x) capitalized leases to the extent permitted under Section
8.04;
(xi) the Borrower and its Subsidiaries may enter into Interest
Rate/Currency Agreements (and guaranties thereof) with the prior
approval of Required Banks;
(xii) ICS or any Wholly-Owned Subsidiary of ICS may become and
remain liable with respect to secured Indebtedness in a principal
amount not exceeding $3,000,000 incurred solely to acquire (or
refinance amounts paid in the acquisition of) or improve real property
assets used or to be used in the business of ICS and its Subsidiaries;
(xiii) SV or any of its Wholly-Owned Subsidiaries may become and
remain liable with respect to Indebtedness owed to (a) a commercial
bank or institutional lender or (b) any Person selling property or
assets to SV and its Wholly-Owned Subsidiaries in a transaction
permitted under subsection 8.01(viii) in an aggregate principal
amount, that when added to the outstanding principal amount of
Indebtedness owed by SV to the Borrower, at no time exceeds
$10,000,000, provided such Indebtedness is not guarantied by or
secured by the assets of the Borrower or any of its Subsidiaries other
than SV and its Wholly-Owned Subsidiaries and otherwise has terms and
conditions that have been approved by Required Banks; and
(xiv) the Borrower and its Subsidiaries (other than SV and its
Subsidiaries) may become and remain liable with respect to
Indebtedness owed to the Person selling the capital stock or assets of
any Target in any Acquisition permitted under subsection 8.02(vi).
8.06 Advances, Investments and Loans. The Borrower will not,
and will not permit any of its Subsidiaries to, lend money or credit or make
advances to
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<PAGE> 70
any Person, or purchase or acquire any stock, obligations or securities of, or
any other interest in, or make any capital contribution to, any other Person,
except that the following shall be permitted:
(i) the Borrower and its Subsidiaries may each acquire
and hold receivables owing to it, if created or acquired in the
ordinary course of business and payable or dischargeable in accordance
with customary trade terms to the extent consistent with past
practice;
(ii) Training Group may make loans and capital
contributions to JMI pursuant to the terms of the JMI Joint Venture
Agreement in an aggregate amount not exceeding $1,000,000;
(iii) loans and advances by any direct Subsidiary of the
Borrower to the Borrower; provided such loans or advances are at all
times subordinated to the Obligations of the Borrower pursuant to the
Subordination Agreement;
(iv) loans and advances by the Borrower to any of its
Subsidiaries in the ordinary course of business and consistent with
past practice so long as after giving effect to such loan or advance
there shall not have occurred a Default or an Event of Default and
provided that the aggregate amount of all such loans and advances to
SV and its Subsidiaries, when added to the outstanding principal
amount of any Indebtedness of SV and its Subsidiaries permitted under
subsection 8.05(xiii), shall at no time exceed $10,000,000;
(v) loans and advances by any of Borrower's Wholly-Owned
Subsidiaries to any other Wholly-Owned Subsidiary of the Borrower in
the ordinary course of business and consistent with past practice and
loans and advances by SV to any of its Subsidiaries or by any such
Subsidiary to SV or any Subsidiary of SV;
(vi) the Borrower and its Subsidiaries may make new loans
and advances to officers, employees and agents in the ordinary course
of business (for purposes other than purchasing stock or stock options
or exercising stock options) equal, in the aggregate for the Borrower
and its Subsidiaries, to no more than $1,000,000 at any one time
outstanding and may make loans to officers, directors and employees in
connection with the purchase or exercise of options for the Borrower's
common stock, provided that no cash is advanced;
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(vii) the Borrower and its Subsidiaries may make equity
investments in other Persons engaged in the businesses that Borrower
and its Subsidiaries are engaged in as of the date hereof, in an
aggregate amount which, when added to the aggregate consideration paid
to acquire assets and property pursuant to subsection 8.02(vi), does
not exceed the amount specified in subsection 8.02(vi);
(viii) the Borrower and its Subsidiaries may make and
investments in XAP in an aggregate amount not exceeding $3,000,000
pursuant to the XAP Agreement provided that all of the general and at
least 51% of the limited partnership interests of XAP are at all times
owned directly or indirectly by the Borrower; and
(ix) the Borrower and its Subsidiaries may make
investments in accordance with its Investment Policy and Guidelines, a
copy of which is annexed hereto as Exhibit D; provided, that any such
investment, to the extent also described in clauses (i) through (vii)
of this subsection 8.06, is permitted pursuant to any other applicable
clause of this subsection 8.06.
8.07 Transactions with Affiliates. The Borrower will not,
and will not permit any of its Subsidiaries to, enter into any transaction or
series of related transactions, whether or not in the ordinary course of
business, with any Affiliate of the Borrower, other than on terms and
conditions substantially as favorable to the Borrower or such Subsidiary as
would be obtainable by the Borrower or such Subsidiary at the time in a
comparable arm's-length transaction with a Person other than an Affiliate;
provided that the foregoing restriction shall not apply to any transactions
pursuant to the terms of the JMI Joint Venture Agreement, the JMI
Administrative Services Contract, the JMI License Agreement or the XAP
Agreement.
8.08 Capital Expenditures. Except for expenditures made by
the Borrower and its Subsidiaries to acquire assets in the Acquisitions in an
aggregate amount not exceeding $ *, the Borrower will not, and will not
permit any of its Subsidiaries to, make any expenditure for fixed or capital
assets (including, without limitation, expenditures for product development and
maintenance and repairs which should be capitalized in accordance with
generally accepted accounting principles and including capitalized lease
obligations) during the 1994 fiscal year which would cause the aggregate amount
of all such expenditures (excluding any such expenditures made to acquire
assets in the Acquisition) for the Borrower and its Subsidiaries made during
such fiscal year to exceed $ *.
* NOTE: CONFIDENTIAL PORTIONS OMITTED IN ACCORDANCE WITH RULE 24b-2 UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED
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8.09 Ratio of Liabilities to Net Worth.
The Borrower will not permit the ratio of its Consolidated
Liabilities to its Adjusted Consolidated Net Worth at any time during the
fiscal quarters set forth below to be more than the ratio set forth opposite
such quarters:
<TABLE>
<CAPTION>
Quarter Ended Ratio
------------- -----
<S> <C>
December 31, 1993 1.60:1.00
March 31, 1994 *
June 30, 1994 *
September 30, 1994 *
December 31, 1994 *
</TABLE>
8.10 Minimum Consolidated EBITDA.
The Borrower will not permit its Consolidated EBITDA for the
cumulative prior four fiscal quarters ending on each date set forth below to be
less than the amount set forth opposite such date:
<TABLE>
<CAPTION>
Prior Four Fiscal
Quarters Ending Amount
----------------- ------
<S> <C>
December 31, 1993 $11,800,000
March 31, 1994 *
June 30, 1994 *
September 30, 1994 *
December 31, 1994 *
</TABLE>
8.11 Minimum Consolidated Net Worth. The Borrower will not
permit its Adjusted Consolidated Net Worth at any time during the fiscal
quarter ending on the date set forth below to be less than the amount set
forth opposite such date:
<TABLE>
<CAPTION>
Quarters Ending Amount
--------------- ------
<S> <C>
December 31, 1993 $128,000,000
March 31, 1994 *
June 30, 1994 *
September 30, 1994 *
December 31, 1994 *
</TABLE>
8.12 Fixed Charge Coverage Ratio.
The Borrower will not permit the ratio of (i) the sum of
(A) Consolidated EBITDA of the Borrower and its Subsidiaries plus (B) the
lease payments made or accrued by the Borrower and its Subsidiaries on a
consolidated basis to (ii) the Consolidated Fixed Charges of the Borrower
and
* NOTE: CONFIDENTIAL PORTIONS OMITTED IN ACCORDANCE WITH RULE 24b-2 UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
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its Subsidiaries (the "Fixed Charge Coverage Ratio") for the cumulative prior
four fiscal quarters ending on the date set forth below to be less than the
ratio set forth opposite such date:
<TABLE>
<CAPTION>
Prior Four Fiscal
Quarters Ending Ratio
----------------- -----
<S> <C>
December 31, 1993 1.10:1.00
March 31, 1994 *
June 30, 1994 *
September 30, 1994 *
December 31, 1994 *
</TABLE>
8.13 Limitation on Voluntary Payments and Modifications of
Indebtedness; Modifications of Certificate of Incorporation, By-Laws and
Certain Other Agreements; etc. The Borrower will not, and will not permit
any of its Subsidiaries to, (i) make any voluntary or optional payment or
prepayment on or redemption or acquisition for value of (including, without
limitation, by way of depositing with the trustee with respect thereto money
or securities before due for the purpose of paying when due) any Indebtedness;
provided, however, that the Borrower may after the date hereof (a) repurchase
in open market transactions, Indebtedness constituting Public Subordinated Debt
and/or (b) prepay any other Indebtedness (excluding New Subordinated Debt) of
the Borrower and its Subsidiaries with cash in an aggregate amount, for all
such repurchases or prepayments pursuant to clauses (a) or (b), not exceeding
the amount by which $1,000,000 exceeds the aggregate fair market value of all
consideration paid by the Borrower after the date hereof to repurchase its
common stock pursuant to subsection 8.03(a)(iii), or (ii) amend or modify, or
permit the amendment or modification of, any provision of any Indebtedness or
of any agreement (including, without limitation, any purchase agreement,
indenture, loan agreement or security agreement) relating to any of the
foregoing other than amendments which only extend the maturity of or lower the
interest rate on Indebtedness or (iii) amend, modify, change, cancel or
terminate the Subordination Agreement, the JMI Joint Venture Agreement, the JMI
Administrative Services Contract, the JMI License Agreement or the XAP
Agreement, or (iv) amend, modify or change the Certificate of Incorporation
(including, without limitation, by the filing or modification of any
certificate of designation) or the By-Laws of the Borrower or any Guarantor
Subsidiary or any Subsidiary of a Guarantor Subsidiary (except to reflect a
name change previously noticed to the Agent).
8.14 Limitation on Restrictions on Subsidiary Dividends and
Other Distributions. The Borrower will not,
* NOTE: CONFIDENTIAL PORTIONS OMITTED IN ACCORDANCE WITH RULE 24b-2 UNDER THE
SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
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and will not permit any of its Subsidiaries to, directly or indirectly, create
or otherwise cause or suffer to exist or become effective any encumbrance or
restriction, other than as set forth in this Agreement, on the ability of any
such Subsidiary to (a) pay dividends or make any other distributions on its
capital stock or any other interest or participation in its profits owned by
the Borrower or any Subsidiary of the Borrower, or pay any Indebtedness owed to
the Borrower or a Subsidiary of the Borrower, (b) make loans or advances to the
Borrower or (c) transfer any of its properties or assets to the Borrower,
except for such encumbrances or restrictions existing under or by reasons of
(i) applicable law, (ii) this Agreement, (iii) customary provisions restricting
subletting or assignment of any lease governing a leasehold interest of the
Borrower or a Subsidiary of the Borrower, (iv) the JMI Joint Venture Agreement,
(v) restrictions, existing as of the date hereof, which limit the principal
amount that SV may lend to the Borrower to not more than $10,000,000
outstanding at any time, and (vi) the XAP Agreement.
8.15 Business. The Borrower will not, and will
not permit any of its Subsidiaries to, engage (directly or indirectly) in any
business other than the business in which it is engaged on the Closing Date.
8.16 Transfer of Copyrights, Patents and
Trademarks. The Borrower will not, and will not permit any of its Subsidiaries
to, transfer any of their respective copyrights, licenses, patents, trademarks,
permits, service marks, trade names, franchises and formulas, or rights with
respect to the foregoing, except transfers pursuant to licenses granted in the
ordinary course of business consistent with past practice that would not have a
material adverse effect on the business, operations, property, assets,
condition (financial or otherwise) or prospects of the Borrower and its
Subsidiaries taken as a whole or of any Reporting Subsidiary and its
Subsidiaries taken as a whole.
Section 9. Events of Default. Upon the
occurrence of any of the following specified events (each an "Event of
Default");
9.01 Payments. The Borrower shall (i) default
in the payment when due of any principal of any Loan or any Note or (ii)
default, and such default shall continue unremedied for one Business Day, in
the payment when due of interest on any Loan, any Fees or any other amounts
owing hereunder or under any Note; or
9.02 Representations, etc. Any representation,
warranty or statement made by the Borrower herein or in any other Credit
Document or in any certificate delivered
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pursuant hereto or thereto shall prove to be untrue in any material respect on
the date as of which made or deemed made; or
9.03 Covenants. The Borrower shall (i) default
in the due performance or observance by it of any term, covenant or agreement
contained in subsections 7.01(g) or Section 8 or (ii) default in the due
performance or observance by it of any term, covenant or agreement (other than
those referred to in Sections 9.01 and 9.02 and clause (i) of this Section
9.03) contained in this Agreement and such default shall continue unremedied
for a period of 15 days after written notice to the Borrower by the Agent; or
9.04 Default Under Other Agreements. The
Borrower or any of its Subsidiaries shall (i) default in any payment of
Indebtedness in an aggregate principal amount equal to or exceeding $1,000,000
(other than the Notes) beyond the period of grace (not to exceed 30 days), if
any, provided in the instrument or agreement under which such Indebtedness was
created or (ii) default in the observance or performance of any agreement or
condition relating to Indebtedness in an aggregate principal amount equal to or
exceeding $1,000,000 (other than the Notes) or contained in any instrument or
agreement evidencing, securing or relating thereto, or any other event shall
occur or condition exist, the effect of which default or other event or
condition is to cause, or to permit the holder or holders of such Indebtedness
(or a trustee or agent on behalf of such holder or holders) to cause
(determined without regard to whether any notice is required), any such
Indebtedness to become due prior to its stated maturity; or Indebtedness of the
Borrower or any of its Subsidiaries, in an aggregate principal amount equal to
or exceeding $1,000,000, shall be declared to be due and payable, or required
to be prepaid other than by a regularly scheduled required prepayment, prior to
the stated maturity thereof; or
9.05 Bankruptcy, etc. The Borrower or any of
its Subsidiaries shall commence a voluntary case concerning itself under Title
11 of the United States Code entitled "Bankruptcy," as now or hereafter in
effect, or any successor thereto (the "Bankruptcy Code"); or an involuntary
case is commenced against the Borrower or any of its Subsidiaries, and the
petition is not controverted within 10 days, or is not dismissed within 60
days, after commencement of the case (provided that the Borrower expressly
authorizes the Agent and each Bank to appear in any court conducting any such
proceeding during such 60 day period to preserve, protect and defend their
rights under this Agreement and the other Credit Documents); or a custodian (as
defined in the Bankruptcy Code) is appointed for, or takes charge of, all or
substantially all of the property of the Borrower or any
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of its Subsidiaries; or the Borrower or any of its Subsidiaries commences any
other proceeding under any reorganization, arrangement, adjustment of debt,
relief of debtors, dissolution, insolvency or liquidation or similar law of any
jurisdiction whether now or hereafter in effect relating to the Borrower or any
of its Subsidiaries; or there is commenced against the Borrower or any of its
Subsidiaries any such proceeding which remains undismissed for a period of 60
days; or the Borrower or any of its Subsidiaries is adjudicated insolvent or
bankrupt, or any order of relief or other order approving any such case or
proceeding is entered; or the Borrower or any of its Subsidiaries suffers any
appointment of any custodian or the like for it or any substantial part of its
property to continue undischarged or unstayed for a period of 60 days; or the
Borrower or any of its Subsidiaries makes a general assignment for the benefit
of creditors; or any corporate action is taken by the Borrower or any of its
Subsidiaries for the purpose of effecting any of the foregoing; or
9.06 ERISA. Any Plan shall fail to maintain
the minimum funding standard required for any plan year or part thereof or a
waiver of such standard or extension of any amortization period is sought or
granted under Section 412 of the Code; any Plan is, shall have been or is
likely to be terminated or the subject of a termination proceeding under ERISA;
any Plan shall have an Unfunded Current Liability, or the Borrower or any of
its Subsidiaries or ERISA Affiliates has incurred or is likely to incur a
liability to or on account of a Plan under Sections 502(c), (i) or (l), 515,
4062, 4063, 4064, 4071, 4201 or 4204 of ERISA or Chapter 43 of the Code; and
there shall result from any such event or events the imposition of a Lien upon
or the granting of a security interest in the assets of the Borrower or any of
its Subsidiaries, or a liability or a material risk of incurring a liability to
the PBGC or a Plan or a trustee appointed under ERISA, which will have a
material adverse effect upon the business, operations, property, assets,
condition (financial or otherwise) or prospects of the Borrower and its
Subsidiaries taken as a whole; or
9.07 Subsidiary Guaranty. The Subsidiary
Guaranty or any provision thereof shall cease to be in full force and effect
for any reason, other than the satisfaction in full of all Obligations and the
termination of this Agreement, or is declared to be null and void, or any
Guarantor Subsidiary shall default in the due performance or observance of any
term, covenant or agreement on its part to be performed or observed pursuant to
the Subsidiary Guaranty, or any Guarantor Subsidiary denies that it has any
further liability under the Subsidiary Guaranty or gives notice to such effect;
or
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9.08 Changes of Control. (i) Any Person or two
or more Persons acting in concert shall have acquired beneficial ownership
(within the meaning of the Rule 13d-3 under the Securities Exchange Act of
1934), directly or indirectly, of securities of the Borrower representing 20%
or more of the combined voting power of all securities of the Borrower entitled
to vote in the election of directors, other than securities having such power
only by reason of the happening of a contingency (other than Richard C. Blum
Associates, Inc. and its Affiliates, all of which together may acquire up to
30% of the securities described herein); or (ii) during any period of up to 12
consecutive months, commencing before or after the date of this Agreement,
individuals who at the beginning of such 12-month period were directors of the
Borrower shall cease for any reason to constitute a majority of the Board of
Directors of the Borrower; or (iii) any Person or two or more Persons acting in
concert shall have acquired by contract or otherwise, or shall have entered
into a contract or arrangement which upon consummation shall result in its or
their acquisition of or control over, securities of the Borrower representing
20% or more of the combined voting power of all securities of the Borrower
entitled to vote in the election of directors, other than securities having
such power only by reason of the happening of a contingency; or (iv) the
Borrower shall for any reason cease directly to own and control all of the
issued and outstanding shares of capital stock of ICS or ICS shall for any
reason cease to directly or indirectly own and control all of the issued and
outstanding capital stock of its Subsidiaries; or
9.09 Judgments. One or more judgments, decrees
or arbitration awards shall be entered against the Borrower or any of its
Subsidiaries involving in the aggregate for the Borrower and its Subsidiaries a
liability (not paid or fully covered by insurance) of $1,000,000 or more, and
all such judgments, decrees or awards shall not have been vacated, discharged
or stayed or bonded pending appeal within 60 days after the entry thereof; or
9.10 Governmental Policies. Any change shall
occur in state or federal laws, rules or governmental regulations or budgetary
allocations or educational loan policies which could reasonably be expected to
have a material adverse effect on the business, operations, properties, assets,
condition (financial or otherwise) or prospects of the Borrower and its
Subsidiaries taken as a whole;
then, and in any such event, and at any time thereafter, if any Event of
Default shall then be continuing, the Agent, upon the written request of
Required Banks, shall by written notice to the Borrower, (provided, that, if an
Event of
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Default specified in Section 9.05 shall occur with respect to the Borrower, the
result which would occur upon the giving of written notice by the Agent to the
Borrower as hereafter shall occur automatically without the giving of any such
notice) declare the principal of and any accrued interest in respect of all
Loans and the Notes and all obligations owing hereunder and thereunder to be,
whereupon the same shall become, forthwith due and payable without presentment,
demand, protest or other notice of any kind, all of which are hereby waived by
the Borrower, and the obligation of each Bank to make any Loan and the
obligation of the Issuing Bank to issue any Letter of Credit shall thereupon
terminate; provided, that the foregoing shall not affect in any way the
obligations of the Banks to make Revolving Loans to reimburse drawings under
Letters of Credit as provided in subsection 2.07(c) or to purchase
participations from the Issuing Bank in the unreimbursed amount of any drawings
under any Letters of Credit as provided in subsection 2.07(d). So long as any
Letter of Credit shall remain outstanding, any amounts received by the Agent
shall be held by the Agent, pursuant to such documentation as the Agent shall
request, as cash collateral for the obligation of the Borrower to reimburse the
Issuing Bank in the event of any drawing under any outstanding Letters of
Credit, and so much of such funds shall at all times remain on deposit as cash
collateral as aforesaid as shall equal the maximum amount available at any time
for drawing under all Letters of Credit (the "Maximum Available Amount");
provided that in the event of cancellation or expiration of any Letter of
Credit or any reduction in the Maximum Available Amount, the Agent shall apply
the difference between the cash collateral held by the Agent immediately prior
to such cancellation, expiration or reduction and the Maximum Available Amount
immediately after such cancellation, expiration or reduction first to the
payment of any outstanding Obligations, and second to the payment to whomsoever
shall be lawfully entitled to receive such funds.
Section 10. The Agent.
10.01 Appointment. The Banks hereby designate
Bankers Trust Company as Agent (for purposes of this Section 10, the term
"Agent" shall include Bankers Trust Company in its capacity as Agent pursuant
to the Subsidiary Guaranty) to act as specified herein and in the other Credit
Documents. Each Bank hereby irrevocably authorizes, and each holder of any
Note by the acceptance of such Note shall be deemed irrevocably to authorize,
the Agent to take such action on its behalf under the provisions of this
Agreement, the other Credit Documents and any other instruments and agreements
referred to herein or therein and to exercise such powers and to perform such
duties hereunder and
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thereunder as are specifically delegated to or required of the Agent by the
terms hereof and thereof and such other powers as are reasonably incidental
thereto. The Agent may perform any of its duties hereunder by or through its
officers, directors, agents or employees.
10.02 Nature of Duties. The Agent shall have
no duties or responsibilities except those expressly set forth in this
Agreement and the Subsidiary Guaranty. Neither the Agent nor any of its
officers, directors, agents or employees shall be liable for any action taken
or omitted by it or them hereunder or under any other Credit Document or in
connection herewith or therewith, unless caused by its or their gross
negligence or willful misconduct. The duties of the Agent shall be mechanical
and administrative in nature; the Agent shall not have by reason of this
Agreement or any other Credit Document a fiduciary relationship in respect of
any Bank or the holder of any Note; and nothing in this Agreement or any other
Credit Document, expressed or implied, is intended to or shall be so construed
as to impose upon the Agent any obligations in respect of this Agreement or any
other Credit Document except as expressly set forth herein.
10.03 Lack of Reliance on the Agent.
Independently and without reliance upon the Agent, each Bank and the holder of
each Note, to the extent it deems appropriate, has made and shall continue to
make (i) its own independent investigation of the financial condition and
affairs of the Borrower in connection with the making and the continuance of
the Loans and the taking or not taking of any action in connection herewith and
(ii) its own appraisal of the creditworthiness of the Borrower and, except as
expressly provided in this Agreement, the Agent shall have no duty or
responsibility, either initially or on a continuing basis, to provide any Bank
or the holder of any Note with any credit or other information with respect
thereto, whether coming into its possession before the making of the Loans or
at any time or times thereafter. The Agent shall not be responsible to any
Bank or the holder of any Note for any recitals, statements, information,
representations or warranties herein or in any document, certificate or other
writing delivered in connection herewith or for the execution, effectiveness,
genuineness, validity, enforceability, perfection, collectibility, priority or
sufficiency of this Agreement or any other Credit Document or the financial
condition of the Borrower or be required to make any inquiry concerning either
the performance or observance of any of the terms, provisions or conditions of
this Agreement or any other Credit Document, or the financial condition of the
Borrower or the existence or possible existence of any Default or Event of
Default.
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10.04 Certain Rights of the Agent. If the
Agent shall request instructions from Required Banks with respect to any act or
action (including failure to act) in connection with this Agreement or any
other Credit Document, the Agent shall be entitled to refrain from such act or
taking such action unless and until the Agent shall have received instructions
from Required Banks; and the Agent shall not incur liability to any Person by
reason of so refraining. Without limiting the foregoing, no Bank or the holder
of any Note shall have any right of action whatsoever against the Agent as a
result of the Agent acting or refraining from acting hereunder or under any
other Credit Document in accordance with the instructions of Required Banks.
10.05 Reliance. The Agent shall be entitled to
rely, and shall be fully protected in relying, upon any note, writing,
resolution, notice, statement, certificate, telex, teletype or telecopier
message, cablegram, radiogram, order or other document or telephone message
signed, sent or made by any Person that the Agent believed to be the proper
Person, and, with respect to all legal matters pertaining to this Agreement and
any other Credit Document and its duties hereunder and thereunder, upon advice
of counsel selected by it.
10.06 Indemnification. To the extent the Agent
is not reimbursed and indemnified by the Borrower, the Banks will reimburse and
indemnify the Agent, in proportion to their respective proportionate shares of
the aggregate amount of the Revolving Loan Commitments as of the date of
determination, for and against any and all liabilities, obligations, losses,
damages, penalties, claims, actions, judgments, suits, costs, expenses or
disbursements of whatsoever kind or nature which may be imposed on, asserted
against or incurred by the Agent in performing its duties hereunder or under
any other Credit Document, or in any way relating to or arising out of this
Agreement or any other Credit Document; provided that no Bank shall be liable
for any portion of such liabilities, obligations, losses, damages, penalties,
actions, judgment, suits, costs, expenses or disbursements resulting from the
Agent's gross negligence or willful misconduct.
10.07 The Agent in its Individual Capacity.
With respect to its obligation to maintain and make Loans under this Agreement,
the Agent shall have the rights and powers specified herein for a "Bank" and
may exercise the same rights and powers as though it were not performing the
duties specified herein; and the term "Banks," "Required Banks," "holders of
Notes" or any similar terms shall, unless the context clearly otherwise
indicates, include the Agent in its individual capacity. The Agent may accept
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deposits from, lend money to, and generally engage in any kind of banking,
trust or other business with the Borrower or any Affiliate of the Borrower as
if it were not performing the duties specified herein, and may accept fees and
other consideration from the Borrower for services in connection with this
Agreement and otherwise without having to account for the same to the Banks.
10.08 Holders. The Agent may deem and treat
the payee of any Note as the owner thereof for all purposes hereof unless and
until a written notice of the assignment, transfer or endorsement thereof, as
the case may be, shall have been filed with the Agent. Any request, authority
or consent of any Person who, at the time of making such request or giving such
authority or consent, is the holder of any Note shall be conclusive and binding
on any subsequent holder, transferee, assignee or indorsee, as the case may be,
of such Note or of any Note or Notes issued in exchange therefor.
10.09 Resignation by the Agent.
(a) The Agent may resign from the
performance of all its functions and duties hereunder and/or under the other
Credit Documents at any time by giving 15 Business Days prior written notice to
the Borrower and the Banks. Such resignation shall take effect upon the
appointment of a successor Agent pursuant to clauses (b) and (c) below or as
otherwise provided below.
(b) Upon any such notice of resignation, the
Banks shall appoint a successor Agent hereunder or thereunder who shall be a
commercial bank or trust company reasonably acceptable to the Borrower.
(c) If no successor Agent has been appointed
pursuant to clause (b) above by the 20th Business Day after the date such
notice of resignation was given by the Agent, the Agent's resignation shall
become effective and the Banks shall thereafter perform all the duties of the
Agent hereunder and/or under any other Credit Document until such time, if any,
as the Banks appoint a successor Agent as provided above.
Section 11. Miscellaneous.
11.01 Payment of Expenses, etc. The Borrower
shall: (i) whether or not the transactions herein contemplated are
consummated, pay all reasonable out-of-pocket costs and expenses (x) of the
Agent (including, without limitation, the reasonable fees and disbursements of
O'Melveny & Myers, special counsel to the Banks) in connection with the
preparation, execution and delivery of
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this Agreement and the other Credit Documents and the documents and instruments
referred to herein and therein and any amendment, waiver or consent relating
hereto or thereto and (y) of the Agent and each of the Banks in connection with
the enforcement of this Agreement and the other Credit Documents and the
documents and instruments referred to herein and therein (including, without
limitation, the reasonable fees and disbursements of O'Melveny & Myers, special
counsel to the Banks, and for each of the Banks) and (z) of any consultants or
accountants chosen by Required Banks, to investigate, test or review such
matters relating to the Borrower and its Subsidiaries as the Agent shall
designate; provided that the fees of such consultants or accountants shall be
subject to the prior approval of the Borrower, which approval shall not be
unreasonably withheld; (ii) pay and hold each of the Banks harmless from and
against any and all present and future stamp and other similar taxes with
respect to the foregoing matters and save each of the Banks harmless from and
against any and all liabilities with respect to or resulting from any delay or
omission (other than to the extent attributable to such Bank) to pay such
taxes; and (iii) indemnify the Agent and each Bank, its officers, directors,
employees, representatives and agents from and hold each of them harmless
against any and all liabilities, obligations, losses, damages, penalties,
claims, actions, judgments, suits, costs, expenses and disbursements incurred
by any of them as a result of, or arising out of, or in any way related to, or
by reason of, any investigation, litigation or other proceeding (whether or not
the Agent or any Bank is a party thereto) related to the entering into and/or
performance of this Agreement or any other Credit Document or the use of the
proceeds of any Loans or Letters of Credit hereunder or the consummation of any
transactions contemplated herein or in any other Credit Document, including,
without limitation, the reasonable fees and disbursements of counsel incurred
in connection with any such investigation, litigation or other proceeding (but
excluding any such liabilities, obligations, losses, etc., to the extent
incurred by reason of the gross negligence or willful misconduct of the Person
to be indemnified).
11.02 Right of Setoff. In addition to any
rights now or hereafter granted under applicable law or otherwise, and not by
way of limitation of any such rights, upon the occurrence of an Event of
Default, each Bank is hereby authorized at any time or from time to time,
without presentment, demand, protest or other notice of any kind to the
Borrower or to any other Person, any such notice being hereby expressly waived,
to set off and to appropriate and apply any and all deposits (general or
special) and any other Indebtedness at any time held or owing by such Bank
(including without limitation, by branches and agencies of
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such Bank wherever located) to or for the credit or the account of the Borrower
against and on account of the Obligations and liabilities of the Borrower to
such Bank under this Agreement or under any of the other Credit Documents,
including, without limitation, all interests in Obligations purchased by such
Bank pursuant to Section 11.06(b), and all other claims of any nature or
description arising out of or connected with this Agreement or any other Credit
Document, irrespective of whether or not such Bank shall have made any demand
hereunder and although said Obligations, liabilities or claims, or any of
them, shall be contingent or unmatured.
11.03 Notices. Except as otherwise expressly
provided herein, all notices and other communications provided for hereunder
shall be in writing (including telegraphic, telex, telecopier or cable
communication) and mailed, telegraphed, telexed, telecopied, cabled or
delivered: if to the Borrower, at its address specified opposite its signature
below; if to any Bank, at its office specified opposite its signature below;
and if to the Agent, at its Notice Office; or, as to the Borrower or the Agent,
at such other address as shall be designated by such party in a written notice
to the other parties hereto and, as to each other party, at such other address
as shall be designated by such party in a written notice to the Borrower and
the Agent. All such notices and communications shall, when mailed,
telegraphed, telexed, telecopied, or cabled or sent by overnight courier, be
effective when deposited in the mails, delivered to the telegraph company,
cable company or overnight courier, as the case may be, or sent by telex or
telecopier, except that notices and communications to the Agent shall not be
effective until received by the Agent.
11.04 Benefit of Agreement.
(a) This Agreement shall be binding upon and
inure to the benefit of and be enforceable by the respective successors and
assigns of the parties hereto; provided, however, that the Borrower may not
assign or transfer any of its rights or obligations hereunder without the prior
written consent of each Bank.
(b) Bankers Trust Company may with the prior
written consent of the Borrower (which consent shall not be unreasonably
withheld) assign its rights and delegate its obligations under this Agreement,
and each of such assignees shall be deemed to be a "Bank" and may further
assign its rights and delegate its obligations under this Agreement upon the
prior written consent of the Agent and the Borrower (which consents shall not
be unreasonably withheld). Each Bank further may sell participations in all or
any part of any Loan made by it or any other interest herein or in its
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Note to another bank or other entity. Thereupon (i) in the case of an
assignment, upon notice thereof by such Bank to the Borrower and the Agent, the
assignee shall have, to the extent of such assignment (unless otherwise
provided thereby), the same rights and benefits as it would have if it were a
Bank hereunder and the holder of a Note and, if the assignee has expressly
assumed, for the benefit of the Borrower, the assignor Bank's obligations
hereunder, such assignor Bank shall be relieved of its obligations hereunder to
the extent of such assignment and assumption, and (ii) in the case of a
participation, (A) the participant shall not have any rights under this
Agreement or any Note or any other document delivered in connection herewith
and all amounts payable by the Borrower under Sections 2.04, 2.06, 2.07(g) and
4.03 hereof shall be determined as if the Bank had not sold such participation
and (B) the participant, other than an Affiliate of such Bank, shall not be
entitled to require such Bank to take or omit to take any action hereunder
except action directly affecting the extension of the final maturity of the
principal amount of a Loan or the Revolving Loan Commitments or a reduction of
the principal amount of or the decrease in the rate of interest payable on the
Loans or any fees related thereto. At the time any Bank makes an assignment of
any of its rights hereunder, such assignor Bank shall pay to the Agent for its
own account an administrative transfer fee of $2,500. Any Bank may furnish any
information concerning the Borrower in the possession of such Bank from time to
time to Affiliates of such Bank and to assignees and participants (including
prospective assignees and participants); provided, however, that the furnishing
of such information (and the nature, manner and extent thereof) by any Bank to
its Affiliates and such assignees and participants shall be governed by the
relevant agreement, assignment or participation agreement relating to such
arrangement, assignment or participation, as the case may be. Notwithstanding
the foregoing provisions of this Section 11.04 to the contrary, each Bank may
at any time pledge or assign any portion of its rights under this Agreement and
its Note to any Federal Reserve Bank without notice to or consent of the
Borrower or the Agent and without the payment of any fee to the Agent; provided
that no such pledge or assignment shall otherwise release such Bank from its
obligations hereunder.
11.05 No Waiver; Remedies Cumulative. No
failure or delay on the part of the Agent or any Bank or the holder of any Note
in exercising any right, power or privilege hereunder or under any other Credit
Document and no course of dealing between the Borrower and the Agent or any
Bank or the holder of any Note shall operate as a waiver thereof; nor shall any
single or partial exercise of any right, power or privilege hereunder or under
any other Credit Document preclude any other or further exercise thereof or the
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exercise of any other right, power or privilege hereunder or thereunder. The
rights, powers and remedies herein or in any other Credit Document expressly
provided are cumulative and not exclusive of any rights, powers or remedies
which the Agent or any Bank or the holder of any Note would otherwise have. No
notice to or demand on the Borrower in any case shall entitle the Borrower to
any other or further notice or demand in similar or other circumstances or
constitute a waiver of the rights of the Agent or any Bank or the holder of any
Note to any other or further action in any circumstances without notice or
demand.
11.06 Payments Pro Rata.
(a) The Agent agrees that promptly after its
receipt of each payment from or on behalf of the Borrower in respect of any
Obligations of the Borrower hereunder, it shall distribute such payment to the
Banks pro rata based upon their respective shares, if any, of the Obligations
with respect to which such payment was received.
(b) Each of the Banks agrees that, if it
should receive any amount hereunder (whether by voluntary payment, by
realization upon security, by the exercise of the right of setoff or banker's
lien, by counterclaim or cross action, by the enforcement of any right under
the Credit Documents, or otherwise), which is applicable to the payment of the
principal of, or interest on, the Loans, or under any Letter of Credit of a sum
which with respect to the related sum or sums received by other Banks is in a
greater proportion than the total amount of such Obligation then owed and due
to such Bank bears to the total amount of such Obligation then owed and due to
all of the Banks immediately prior to such receipt, then such Bank receiving
such excess payment shall purchase for cash without recourse or warranty from
the other Banks an interest in the Obligations of the Borrower to such Banks in
such amount as shall result in a proportional participation by all the Banks in
such amount; provided, however, that if all or any portion of such excess
amount is thereafter recovered from such Bank, such purchase shall be rescinded
and the purchase price restored to the extent of such recovery, but without
interest.
11.07 Calculations; Computations. The
financial statements to be furnished to the Banks pursuant hereto shall be made
and prepared in accordance with generally accepted accounting principles in the
United States consistently applied throughout the periods involved (except as
set forth in the notes thereto or as otherwise disclosed in writing by the
Borrower to the Banks); provided that, except as otherwise specifically
provided herein, all computations determining compliance with Section 8 shall
utilize accounting principles and policies in conformity
80
<PAGE> 86
with those used to prepare the historical financial statements delivered to the
Banks pursuant to subsections 6.05(a) and (b).
11.08 Governing Law; Waiver of Jury Trial;
Service of Process. THIS AGREEMENT AND THE OTHER CREDIT DOCUMENTS AND THE
RIGHTS AND OBLIGATIONS OF THE PARTIES HEREUNDER AND THEREUNDER SHALL BE
CONSTRUED IN ACCORDANCE WITH AND BE GOVERNED BY THE LAW OF THE STATE OF NEW
YORK. THE AGENT, THE BANKS AND THE BORROWER HEREBY IRREVOCABLY WAIVE ALL RIGHT
TO A TRIAL BY JURY IN ANY ACTION, PROCEEDING OR COUNTERCLAIM ARISING OUT OF OR
RELATING TO THIS AGREEMENT OR ANY OTHER CREDIT DOCUMENT. The Borrower
designates and appoints CT Corporation with offices at 818 West Seventh Street,
Suite 1004, Los Angeles, California 90017, and such other Persons as may
hereafter be selected by the Borrower irrevocably agreeing in writing to so
serve, as its agent to receive on its behalf service of all process in any such
proceedings in any such court, such service being hereby acknowledged by the
Borrower to be effective and binding service in every respect. A copy of any
such process so served shall be mailed by registered mail to the Borrower at
its address provided in the applicable signature page hereto, except that
unless otherwise provided by applicable law, any failure to mail such copy
shall not affect the validity of service of process. If any agent appointed by
the Borrower refuses to accept service, the Borrower hereby agrees that service
upon it by mail shall constitute sufficient notice. Nothing herein shall
affect the right to serve process in any other manner permitted by law or shall
limit the right of the Agent or any Bank to bring proceedings against the
Borrower in the courts of any other jurisdiction.
11.09 Counterparts. This Agreement may be
executed in any number of counterparts and by the different parties hereto on
separate counterparts by facsimile or otherwise, each of which when so executed
and delivered shall be an original, but all of which shall together constitute
one and the same instrument. A set of counterparts executed by all the parties
hereto shall be lodged with the Borrower and the Agent.
11.10 Headings Descriptive. The headings of
the several sections and subsections of this Agreement are inserted for
convenience only and shall not in any way affect the meaning or construction of
any provision of this Agreement.
11.11 Amendment or Waiver. No approval,
consent, amendment or waiver of this Agreement or any of the Credit Documents
shall be effective unless it is in writing signed by the Agent and Required
Banks; provided, however, that any
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<PAGE> 87
such approval, consent, amendment or waiver, which (a) reduces the amount of
any interest, principal or fees owing to any Bank hereunder, including, without
limitation, amounts payable under Section 4.01; (b) extends the date on which
any sum is due hereunder; (c) releases any person from all or any portion of
its liabilities under the Subsidiary Guaranty; (d) amends any provisions of
this Section 11.11; (e) changes the definition of the term "Required Banks"; or
(f) by the terms of any provision of this Agreement requires the approval of
all the Banks shall be effective only if it is in writing signed by all the
Banks.
11.12 Survival. All indemnities set forth
herein including, without limitation, in Sections 2.04, 10.06 and 11.01 shall
survive the execution and delivery of this Agreement and the Notes and the
making and repayment of the Loans and the Letters of Credit.
11.13 Domicile of Loans. Each Bank may
transfer and carry its Loans at, to or for the account of any office,
Subsidiary or Affiliate of such Bank.
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<PAGE> 88
IN WITNESS WHEREOF, the parties hereto have
caused their duly authorized officers to execute and deliver this Agreement as
of the date first above written.
NATIONAL EDUCATION CORPORATION
By____________________________
Title Keith Ogata,
Vice President,
Chief Financial
Officer and
Treasurer
Address:
18400 Von Karman Avenue
Irvine, California 92715
Attn: Keith Ogata
BANKERS TRUST COMPANY,
Individually and as Agent
By____________________________
Title
Notice Address:
One Bankers Trust Plaza
14th Floor
New York, New York 10006
With a copy to:
300 S. Grand Ave., 41st Floor
Los Angeles, California 90071
Attn: Ms. Kate Cook
Lending Office:
Bankers Trust Co.
One Bankers Trust Plaza
14th Floor
New York, New York 10006
S-1
<PAGE> 89
EXHIBIT A
[FORM OF NOTICE OF BORROWING]
Pursuant to that certain Credit Agreement dated
as of December 22, 1993 (such agreement as it may be amended, restated,
supplemented or otherwise modified from time to time, the "Credit Agreement";
capitalized terms used herein without definition having the meanings assigned
to those terms in the Credit Agreement) among NATIONAL EDUCATION CORPORATION, a
Delaware corporation (the "Borrower"), the financial institutions party thereto
and BANKERS TRUST COMPANY, as Agent, this represents the Borrower's request to
borrow on __________, 19__ from the Banks $__________ as a Loan. The proceeds
of such Loan are to be transferred to the Borrower.
The undersigned officer, to the best of his or
her knowledge, and the Borrower certify that:
(i) The representations and warranties
contained in the Credit Agreement [other than those
contained in Section 6.18 of the Credit Agreement]** are
true, correct and complete in all material respects on
and as of the date hereof to the same extent as though
made on and as of such date;
(ii) No event has occurred and is continuing
or would result from the proposed borrowing that would
constitute a Default or an Event of Default;
(iii) The Borrower has performed in all
material respects all agreements and satisfied all
conditions which the Credit Agreement provides shall be
performed by it on or before the date hereof;
(iv) No order, judgment or decree of any
court, arbitrator or governmental authority has or has
purported to enjoin or restrain any Bank from making the
Loan contemplated hereby;
(v) The making of the Loan contemplated
hereby will not violate Regulation G, Regulation T,
Regulation U or Regulation X of the Board of Governors of
the Federal Reserve System;
** To be included in borrowings in which the provisions of Section
5.03 of the Credit Agreement do not apply.
A-1
<PAGE> 90
(vi) The amount of the proposed borrowing
will not cause the Total Utilization of Revolving Loan
Commitments (after giving effect to the proposed
borrowing) to exceed the Revolving Loan Commitments
currently in effect.
DATED: ____________ NATIONAL EDUCATION CORPORATION
By ___________________________
Title ________________________
A-2
<PAGE> 91
EXHIBIT B
[FORM OF NOTICE OF CONVERSION/CONTINUATION]
Pursuant to that certain Credit Agreement dated
as of December 22, 1993 (the "Credit Agreement"; capitalized terms used herein
without definition having the meanings assigned to those terms in the Credit
Agreement) among NATIONAL EDUCATION CORPORATION, a Delaware corporation (the
"Borrower"), the financial institutions party thereto, and BANKERS TRUST
COMPANY, as Agent, the undersigned Borrower hereby requests*** [A: to convert
$__________ in principal amount of presently outstanding [Prime Rate/Eurodollar
Rate] Loans [with an Interest Period expiration date of __________, 19__] to
[Prime Rate/Eurodollar Rate] Loans on __________, 19__. [The Interest Period
for such [Eurodollar Rate] Loans commencing on such Interest Period expiration
date is requested to be a __________ period.] [B: to continue as [Eurodollar
Rate] Loans $__________ in principal amount of presently outstanding
[Eurodollar Rate] Loans with an Interest Period expiration date of __________,
19__. The Interest Period for such [Eurodollar Rate] Loans commencing on such
Interest Period expiration date is requested to be a __________ period.]
The undersigned officer, to the best of his
knowledge, and the Borrower certify that no Default or Event of Default has
occurred and is continuing under the Credit Agreement.
DATED: ____________ NATIONAL EDUCATION CORPORATION
By ___________________________
Title ________________________
***Insert A or B with appropriate insertions and deletions.
B-1
<PAGE> 92
EXHIBIT C
[FORM OF NOTICE OF ISSUANCE OF LETTER OF CREDIT]
Pursuant to that certain Credit Agreement dated
as of December 22, 1993 (such agreement as it may be amended, restated,
supplemented or otherwise modified from time to time, the "Credit Agreement";
capitalized terms used herein without definition having the meanings assigned
to those terms in the Credit Agreement) among NATIONAL EDUCATION CORPORATION, a
Delaware corporation (the "Borrower"), the financial institutions party thereto
and BANKERS TRUST COMPANY, as Agent, this represents the Borrower's request to
have the Issuing Bank issue a Letter of Credit on [date of issuance] in the
face amount of [__________], effective [effective date], with an expiration
date of [expiration date] for the benefit of [name and address of beneficiary]
for the purpose of ____________________.
The undersigned officer, to the best of his or
her knowledge, and the Borrower certify that:
(i) The representations and warranties
contained in the Credit Agreement [other than those set
forth in Section 6.18 of the Credit Agreement]* are true,
correct and complete in all material respects on and as
of the date hereof to the same extent as though made on
and as of such date;
(ii) No event has occurred and is continuing
or would result from the issuance of the proposed Letter
of Credit that would constitute a Default or an Event of
Default;
(iii) The Borrower has performed in all
material respects all agreements and satisfied all
conditions which the Credit Agreement provides shall be
performed by it on or before the date hereof;
(iv) No order, judgment or decree of any
court, arbitrator or governmental authority has or has
purported to enjoin or restrain the Issuing Bank from
issuing the Letter of Credit;
(v) The issuing of the requested Letter of
Credit will not violate Regulation G, Regulation T,
Regulation
* To be included in issuances of Letters of Credit in which the
provisions of Section 5.03 of the Credit Agreement do not apply.
C-1
<PAGE> 93
U or Regulation X of the Board of Governors of the
Federal Reserve System;
(vi) The issuance of the Letter of Credit
will not cause, after giving effect to such issuance, the
Total Utilization of Revolving Loan Commitments to exceed
(a) the Revolving Loan Commitments currently in effect or
(b) the Letter of Credit Usage to exceed the limits in
subsection 2.07 of the Credit Agreement.
Attached hereto as Annex A is the proposed terms
and conditions of the proposed Letter of Credit, the verbatim text of any
drawing certificate thereunder and a precise description of any other
documentation required to be submitted by the beneficiary which, if submitted
by the beneficiary, would require the Issuing Bank to make payment under the
Letter of Credit.
DATED: ____________ NATIONAL EDUCATION CORPORATION
By ___________________________
Title ________________________
C-2
<PAGE> 94
ANNEX A
[Terms and Conditions of the Proposed Letter of Credit]
and
Text of Drawing Certificate
C-3
<PAGE> 95
REVISED MAY 1992
EXHIBIT D
NATIONAL EDUCATION CORPORATION
INVESTMENT POLICY AND GUIDELINES
The purpose of this policy is to establish the guidelines and objectives of
National Education Corporation Domestic and International Cash and Investment
Management. Within this framework, the following is set forth:
I. Investment objectives and guidelines.
II. Approved investment instruments, including
minimum credit quality standards, maturity
limits and dollar limits per type of
investment.
III. Operational and audit procedures.
- -------------------------------------------------------------------------------
I. Investment Objectives and Guidelines
NEC's investment objectives in their order of
priority are as follows:
A. Safety of Principal - The preservation
of principal from financial loss as a
result of excessive risk.
B. Yield - Take sensible risks to
maximize aftertax returns relative to
risk free investments.
C. Liquidity - The ability to convert
from the investment medium to cash
when needed without material loss of
principal. Maintain sufficient
liquidity to finance the Company's
planned internal growth, debt service
and capital expenditures.
In order for the Company to achieve the above
objectives, it is important to consider
various investment strategies and
alternatives. Moreover, tax ramifications
must be included as an integral part of the
investment decision.
II. Approved Investment Instruments, Maturity
Limits and Dollar Limits per Type of
Investment
A. Domestic Guidelines
The Company will pursue the stated objectives
in (I) above by limiting investments to the
following instruments:
D-1
<PAGE> 96
<TABLE>
<CAPTION>
Maximum
Type Limitations Maturity Ratings/Restrictions
---- ----------- -------- --------------------
<S> <C> <C> <C> <C>
1. U.S. Government Securities None 3 years N/A
2. Government Agency Issues-FHLB, None 3 years N/A
FNMA, GNMA, etc.
3. Corporate Income Funds None 1 year AAA/AAA
4. Repurchase agreements secured None 3 years Security collateral must represent
by U.S. Gov't Securities or not less than 100% of the
Gov't Agency Issue repurchase obligation at the time
of such repurchase agreement is entered into.
5. Banker's Acceptance $5 million per 1 year - minimum assets of
Bank $3 billion
- Insured by FDIC or
FSlIC
- rating of A
Standard & Poor's
(S&P) or better on
notes issued by the
institution, or
A-2, A-1, or A
(Commercial Paper)
6. Certificates of Deposits $5 million per 1 year See (5) above.
including Eurodollar CD's Bank
7. Time Deposits incl. Eurodollar $5 million per 1 year See (5) above
TD's Bank
8. Money Market Account $5 million per N/A See (5) above and brokerage firms
instit. registered with the New York Stock
Exchange.
9. Commercial Paper $5 million per 6 months P-1 Moody; A-1 (S&P)
issuer
10. Municipal Bonds $5 million per 3 years Rated A or better by Moody or
issuer Standard & Poor's. At least 50%
total investment in municipal carry
a rating of AA or better.
</TABLE>
D-2
<PAGE> 97
11. Corporate Bonds, Preferred Stock, Common Stock
[and shares of any mutual fund comprised of the
foregoing, except Corporate Income Funds
as specified in (3)], stock or commodity option
contracts and other securities, provided that:
a) Such securities are rated BBB or better by Standard
and Poor's or BAA or better by Moody's (or issued
by an issuer having outstanding publicly traded debt
securities so rated) and that the principal amount
of each individual security shall not exceed
$3,000,000 or 15% of all cash, cash equivalents and
marketable securities investments, or
b) The principal amount of such securities is adequately
hedged (except for periods of not longer than two
business days to permit hedging of such securities)
or are for purposes to specifically hedge principal
or interest rate risk and
c) Any other marketable security of the nature described
in (11)(a) or (11)(b) above, provided
that the principal amount of each individual security
shall not exceed the greater of $2,000,000 or 10% and
the aggregate principal amount of such securities
shall not exceed the greater of $3,000,000 or 15% of
the aggregate principal amount of all cash, cash
equivalents and marketable security investments.
D-3
<PAGE> 98
B. International Guidelines
The Company will pursue the stated objectives
in (I) above by limiting investments to the
following instruments:
<TABLE>
<CAPTION>
Type Limitations Maturity Ratings/Restrictions
---- ----------- -------- --------------------
<S> <C> <C> <C> <C>
1. Gov't backed securities of $5 million 1 year Must be considered a high grade
respective country investment by U.S. rating services
(e.g., AA by Standard & Poor's, or
equivalent)
2. Banker's Acceptance $3 million 1 year - minimum assets of $3 billion U.S.
per bank
- insured by gov't agency
- high investment rating by local
and US (if available) rating
services (e.g. A rating by
Standard & Poor's or
equivalent)
3. Eurodollar Certificates of $3 million 1 year See (2) above
Deposit and other CD's per bank
4. Eurodollar Time Deposits and $3 million 1 year See (2) above
other TD's
5. Money Market Account $3 million N/A See (2) above
per insti-
tution
6. Commercial Paper $3 million 6 months See (2) above
per issuer
</TABLE>
D-4
<PAGE> 99
III. Operational and Audit Procedures
The overall management and authority of the
cash and marketable securities portfolio is
vested in the Chief Financial Officer. The
Chief Financial Officer has the authority to
interpret and establish investing parameters
within the bounds of the Investment Policy.
In addition, the Chief Financial Officer is
authorized to delegate such activities as
necessary to conduct the day to day
activities of cash and investment management.
An investment report should be prepared by
the individual responsible whenever
significant changes to the portfolio occur,
but not less frequently than quarterly.
On a quarterly basis, an audit of the
marketable securities account should be
performed by a responsible individual not
involved in the overall daily functions of
investing, monitoring and reporting of the
investment securities portfolio.
Revised May 1992
D-5
<PAGE> 100
EXHIBIT E
[FORM OF REVOLVING NOTE]
NATIONAL EDUCATION CORPORATION
PROMISSORY NOTE
Los Angeles, California
[1]
$[2]
FOR VALUE RECEIVED, NATIONAL EDUCATION CORPORATION (the
"Borrower"), being liable hereunder, promises to pay to the order of [3] (the
"Payee"), on or before December [4], 1994, the lesser of (x) [5] ($[2]) and (y)
the unpaid principal amount of all advances made by the Payee to the Borrower
as Revolving Loans under the Credit Agreement referred to below.
The Borrower also promises to pay interest on the unpaid
principal amount hereof from the date hereof until paid in full at the rates
and at the times which shall be determined, and to make principal prepayments
on this Note at the times which shall be determined, in accordance with the
provisions of the Credit Agreement dated as of December 22, 1993 among National
Education Corporation, the financial institutions party thereto and Bankers
Trust Company, as Agent (as it may be amended, amended and restated or
otherwise modified from time to time, the "Credit Agreement").
This Note is one of the Borrower's "Revolving Notes" in the
aggregate principal amount of $10,000,000 and is issued pursuant to and
entitled to the benefits of the Credit Agreement to which reference is hereby
made for a more complete statement of the terms and conditions under which the
Revolving Loans evidenced hereby were made and are to be repaid. Capitalized
terms used herein without
____________________
1 Insert the Closing Date.
2 Insert amount of Bank's Revolving Loan Commitment in numbers.
3 Insert name of Bank in capital letters.
4 Insert the date that is 364 days after the Signing Date.
5 Insert amount of Bank's Revolving Loan Commitment in words.
E-1
<PAGE> 101
definition shall have the meanings set forth in the Credit Agreement.
All payments of principal and interest in respect of this Note
shall be made in lawful money of the United States of America in same day funds
at the office of the Agent located at One Bankers Trust Plaza, New York, New
York, or at such other place as shall be designated in writing for such purpose
in accordance with the terms of the Credit Agreement. Until notified in
writing of the transfer of this Note, the Borrower and the Agent shall be
entitled to deem the Payee or such person who has been so identified by the
transferor in writing to the Borrower and the Agent as the holder of this Note,
as the owner and holder of this Note. Each of the Payee and any subsequent
holder of this Note agrees, by its acceptance hereof, that before disposing of
this Note or any part hereof it will make a notation hereon of all principal
payments previously made hereunder and of the date to which interest hereon has
been paid; provided, however, that the failure to make a notation of any
payment made on this Note shall not limit or otherwise affect the obligation of
the Borrower hereunder with respect to payments of principal or interest on
this Note.
Whenever any payment on this Note shall be stated to be due on
a day that is not a Business Day, such payment shall be made on the next
succeeding Business Day and such extension of time shall be included in the
computation of the payment of interest on this Note; provided, however, that if
the day on which any payment relating to a Eurodollar Rate Loan is due is not a
Business Day but is a day of the month after which no further Business Day
occurs in such month, then the due date thereof shall be the next preceding
Business Day; provided further that if the date of any mandatory prepayment
required to be made under the Credit Agreement is not a Business Day such
payment shall be made on the immediately preceding Business Day.
This Note is subject to mandatory prepayment as provided in
subsections 2.06(c) and 4.01(b) and prepayment at the option of the Borrower as
provided in subsection 4.01(a) of the Credit Agreement.
THIS NOTE SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND
ENFORCED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
Upon the occurrence of an Event of Default, the unpaid balance
of the principal amount of this Note, together with all accrued but unpaid
interest thereon, may become, or may be declared to be, due and payable in the
manner, upon the conditions and with the effect provided in the Credit
Agreement.
E-2
<PAGE> 102
The terms of this Note are subject to amendment only in the
manner provided in the Credit Agreement.
No reference herein to the Credit Agreement and no provision
of this Note or the Credit Agreement shall alter or impair the obligation of
the Borrower, which is absolute and unconditional, to pay the principal of and
interest on this Note at the place, at the respective times, and in the
currency herein prescribed.
The Borrower promises to pay all costs and expenses, including
reasonable attorneys' fees, all as provided in subsection 11.01 of the Credit
Agreement, incurred in the collection and enforcement of this Note. The
Borrower and endorsers of this Note hereby consent to renewal and extensions of
time at or after the maturity hereof, without notice, and hereby waive
diligence, presentment, protest, demand and notice of every kind and, to the
full extent permitted by law, the right to plead any statute of limitations as
a defense to any demand hereunder. THE BORROWER IRREVOCABLY WAIVES ALL RIGHT
TO TRIAL BY JURY IN ANY JUDICIAL PROCEEDING RELATING TO THIS NOTE.
IN WITNESS WHEREOF, the Borrower has caused this Note to be
executed and delivered by a duly authorized officer, as of the day and year and
at the place first above written.
NATIONAL EDUCATION CORPORATION
By _________________________
Title ______________________
E-3
<PAGE> 103
TRANSACTIONS ON REVOLVING NOTE
<TABLE>
<CAPTION>
Amount of Outstanding
Type of Amount of Principal Principal
Loan Made Loan Made Paid Balance Notation
Date This Date This Date This Date This Date Made By
- ---- --------- --------- --------- --------- -------
<S> <C> <C> <C> <C> <C>
</TABLE>
E-4
<PAGE> 104
EXHIBIT F
[FORM OF SUBSIDIARY GUARANTY]
GUARANTY
This Guaranty is entered into as of December 22, 1993 by the
undersigned ("Guarantors") in favor of and for the benefit of Bankers Trust
Company, as agent for and representative of (in such capacity herein called
"Agent") the banks ("Banks") party to that certain Credit Agreement dated as of
December 22, 1993 by and among National Education Corporation, a Delaware
corporation (the "Borrower"), the Banks named therein and Bankers Trust
Company, as Agent (said Credit Agreement, as it may hereafter be amended,
supplemented or otherwise modified from time to time, being the "Credit
Agreement"; capitalized terms defined therein and not otherwise defined herein
being used herein as therein defined).
R E C I T A L S
WHEREAS, The Borrower and Banks are, concurrently herewith,
entering into the Credit Agreement which provides for Loans to be made by the
Banks to the Borrower as working capital for general corporate purposes and for
the issuance of Letters of Credit;
WHEREAS, certain of the proceeds of the Loans made to the
Borrower by the Banks under the Credit Agreement may be advanced to the
Guarantors and thus the obligations of the Borrower being incurred under the
Credit Agreement are being incurred for and will inure to the benefit of such
Guarantors;
WHEREAS, it is a condition to the effectiveness of the Credit
Agreement that this Guaranty be executed and delivered by the Guarantors on or
prior to the Closing Date; and
WHEREAS, the Guarantors desire to induce the Banks to enter
into the Credit Agreement and to make Loans and issue the Letters of Credit
thereunder.
A G R E E M E N T
NOW, THEREFORE, in consideration of the foregoing premises and
for other good and valuable consideration, the receipt of which is hereby
acknowledged, the Guarantors hereby agree as follows:
F-1
<PAGE> 105
The Guarantors hereby jointly and severally irrevocably and
unconditionally guaranty, as primary obligors and not merely as sureties, the
due and punctual payment in full of all Guarantied Obligations (as hereinafter
defined) when the same shall become due, whether at stated maturity, by
acceleration, demand or otherwise (including amounts that would become due but
for the operation of the automatic stay under Section 362(a) of the Bankruptcy
Code, 11 U.S.C. Section 362(a)). The term "Guarantied Obligations" is used
herein in its most comprehensive sense and includes any and all Obligations of
the Borrower now or hereafter made, incurred or created, whether absolute or
contingent, liquidated or unliquidated, whether due or not due, and however
arising under or in connection with the Credit Agreement and the other Credit
Documents, including those arising under successive borrowing transactions
under the Credit Agreement which shall either continue the Obligations of the
Borrower or from time to time renew them after they have been satisfied.
Each Guarantor agrees that its obligations hereunder are
irrevocable, absolute, independent and unconditional and shall not be affected
by any circumstance which constitutes a legal or equitable discharge of a
guarantor or surety other than indefeasible payment in full of the Guarantied
Obligations. In furtherance of the foregoing and without limiting the
generality thereof, each Guarantor agrees as follows: (a) this Guaranty is a
guaranty of payment when due and not of collectibility; (b) the Agent or any
Bank may from time to time, without notice or demand and without affecting the
validity or enforceability of this Guaranty or giving rise to any limitation,
impairment or discharge of any Guarantor's liability hereunder, (i) renew,
extend, accelerate or otherwise change the time, place, manner or terms of
payment of the Guarantied Obligations, (ii) settle, compromise, release or
discharge, or accept or refuse any offer of performance with respect to, or
substitutions for, the Guarantied Obligations or any agreement relating thereto
and/or subordinate the payment of the same to the payment of any other
obligations, (iii) request and accept other guaranties of the Guarantied
Obligations and take and hold security for the payment of this Guaranty or the
Guarantied Obligations, (iv) release, exchange, compromise, subordinate or
modify, with or without consideration, any security for payment of the
Guarantied Obligations, any other guaranties of the Guarantied Obligations, or
any other obligation of any Person (including any other Guarantor) with respect
to the Guarantied Obligations, (v) enforce and apply any security now or
hereafter held by or for the benefit of the Agent or any Bank in respect of
this Guaranty or the Guarantied Obligations and direct the order or manner of
sale thereof, or exercise any other right or remedy that the Agent or the
Banks, or any of them, may have against any such security, as the Agent in
F-2
<PAGE> 106
its discretion may determine consistent with the Credit Agreement and any
applicable security agreement, including foreclosure on any such security
pursuant to one or more judicial or nonjudicial sales, whether or not every
aspect of any such sale is commercially reasonable, and even though such action
operates to impair or extinguish any right of reimbursement or subrogation or
other right or remedy of any Guarantor against the Borrower or any security for
the Guarantied Obligations, and (vi) exercise any other rights available to the
Agent or the Banks, or any of them, under the Credit Documents, at law or in
equity; and (c) this Guaranty and the obligations of the Guarantors hereunder
shall be valid and enforceable and shall not be subject to any limitation,
impairment or discharge for any reason (other than indefeasible payment in full
of the Guarantied Obligations), including without limitation the occurrence of
any of the following, whether or not any Guarantor shall have had notice or
knowledge of any of them: (i) any failure to assert or enforce or agreement not
to assert or enforce, or the stay or enjoining, by order of court, by operation
of law or otherwise, of the exercise or enforcement of, any claim or demand or
any right, power or remedy with respect to the Guarantied Obligations or any
agreement relating thereto, or with respect to any other guaranty of or
security for the payment of the Guarantied Obligations, (ii) any waiver,
amendment or modification of, or any consent to departure from, any of the
terms or provisions (including, without limitation, provisions relating to
events of default) of the Credit Agreement, any of the other Credit Documents
or any agreement or instrument executed pursuant thereto, or of any other
guaranty or security for the Guarantied Obligations, (iii) the Guarantied
Obligations, or any agreement relating thereto, at any time being found to be
illegal, invalid or unenforceable in any respect, (iv) the application of
payments received from any source to the payment of indebtedness other than the
Guarantied Obligations, even though the Agent or the Banks, or any of them,
might have elected to apply such payment to any part or all of the Guarantied
Obligations, (v) any failure to perfect or continue perfection of a security
interest in any collateral which secures any of the Guarantied Obligations,
(vi) any defenses, set-offs or counterclaims which the Borrower may allege or
assert against the Agent or any Bank in respect of the Guarantied Obligations,
including but not limited to failure of consideration, breach of warranty,
payment, statute of frauds, statute of limitations, accord and satisfaction and
usury, and (vii) any other act or thing or omission, or delay to do any other
act or thing, which may or might in any manner or to any extent vary the risk
of any Guarantor as an obligor in respect of the Guarantied Obligations.
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Anything contained in this Guaranty to the contrary
notwithstanding, the obligations of each Guarantor hereunder shall be limited
to a maximum aggregate amount equal to the largest amount that would not render
its obligations hereunder subject to avoidance as a fraudulent transfer or
conveyance under Section 548 of Title 11 of the United States Code or any
applicable provisions of comparable state law (collectively, the "Fraudulent
Transfer Laws"), in each case after giving effect to all other liabilities of
such Guarantor, contingent or otherwise, that are relevant under the Fraudulent
Transfer Laws (specifically excluding, however, any liabilities of such
Guarantor in respect of intercompany indebtedness to the Borrower or other
affiliates of the Borrower to the extent that such indebtedness would be
discharged in an amount equal to the amount paid by such Guarantor hereunder
and after giving effect as assets to the value (as determined under the
applicable provisions of the Fraudulent Transfer Laws) of any rights to
reimbursement or contribution of such Guarantor pursuant to (i) applicable law
or (ii) any agreement providing for an equitable allocation among such
Guarantor and other affiliates of the Borrower of obligations arising under
guaranties by such parties.
Guarantors under this Guaranty together desire to allocate
among themselves in a fair and equitable manner, their obligations arising
under this Guaranty. Accordingly, in the event any payment or distribution is
made on any date by any Guarantor under this Guaranty (a "Funding Guarantor")
that exceeds its Fair Share (as defined below) as of such date, that Funding
Guarantor shall be entitled to a contribution from each of the other Guarantors
in the amount of such other Guarantor's Fair Share Shortfall (as defined below)
as of such date, with the result that all such contributions will cause each
Guarantor's Aggregate Payments (as defined below) to equal its Fair Share as of
such date. "Fair Share" means, with respect to a Guarantor as of any date of
determination, an amount equal to (i) the ratio of (x) the Adjusted Maximum
Amount (as defined below) with respect to such Guarantor to (y) the aggregate
of the Adjusted Maximum Amounts with respect to all Guarantors, multiplied by
(ii) the aggregate amount paid or distributed on or before such date by all
Funding Guarantors under this Guaranty in respect of the obligations
guarantied. "Fair Share Shortfall" means, with respect to a Guarantor as of
any date of determination, the excess, if any, of the Fair Share of such
Guarantor over the Aggregate Payments of such Guarantor. "Adjusted Maximum
Amount" means, with respect to a Guarantor as of any date of determination, the
maximum aggregate amount of the obligations of such Guarantor under this
Guaranty, determined as of such date in accordance with the preceding paragraph
of this Guaranty; provided that, solely for purposes of calculating the
"Adjusted Maximum Amount" with respect to any Guarantor for
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purposes of this paragraph, any assets or liabilities of such Guarantor arising
by virtue of any rights to subrogation or reimbursement or any rights to or
obligations of contribution hereunder shall not be considered as assets or
liabilities of such Guarantor. "Aggregate Payments" means, with respect to a
Guarantor as of any date of determination, an amount equal to (i) the aggregate
amount of all payments and distributions made on or before such date by such
Guarantor in respect of this Guaranty (including, without limitation, in
respect of this paragraph) minus (ii) the aggregate amount of all payments
received on or before such date by such Guarantor from the other Guarantors as
contributions under this paragraph. The amounts payable as contributions
hereunder shall be determined as of the date on which the related payment or
distribution is made by the applicable Funding Guarantor. The allocation among
Guarantors of their obligations as set forth in this subsection 2.2(b) shall
not be construed in any way to limit the liability of any Guarantor hereunder.
Each Guarantor hereby waives, for the benefit of the Banks and
the Agent: (a) any right to require the Agent or the Banks, as a condition of
payment or performance by such Guarantor, to (i) proceed against the Borrower,
any other guarantor (including any other Guarantor) of the Guarantied
Obligations or any other Person, (ii) proceed against or exhaust any security
held from the Borrower, any other guarantor (including any other Guarantor) of
the Guarantied Obligations or any other Person, (iii) proceed against or have
resort to any balance of any deposit account or credit on the books of the
Agent or any Bank in favor of the Borrower or any other Person, or (iv) pursue
any other remedy in the power of the Agent or any Bank whatsoever; (b) any
defense arising by reason of the incapacity, lack of authority or any
disability or other defense of the Borrower including, without limitation, any
defense based on or arising out of the lack of validity or the unenforceability
of the Guarantied Obligations or any agreement or instrument relating thereto
or by reason of the cessation of the liability of the Borrower from any cause
other than indefeasible payment in full of the Guarantied Obligations; (c) any
defense based upon any statute or rule of law which provides that the
obligation of a surety must be neither larger in amount nor in other respects
more burdensome than that of the principal; (d) any defense based upon the
Agent's or any Bank's errors or omissions in the administration of the
Guarantied Obligations, except behavior which amounts to bad faith; (e) any
defense arising out of any election by the Agent or any Bank to foreclose on
any security held by or for the benefit of the Agent or any Bank pursuant to
one or more judicial or nonjudicial sales, even though such election operates
to impair or extinguish any right of reimbursement or subrogation or any other
right or remedy of
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any Guarantor against the Borrower or any security for the Guarantied
Obligations; (f) (i) any principles or provisions of law, statutory or
otherwise, which are or might be in conflict with the terms of this Guaranty
and any legal or equitable discharge of such Guarantor's obligations hereunder,
(ii) the benefit of any statute of limitations affecting such Guarantor's
liability hereunder or the enforcement hereof, (iii) any rights to set-offs,
recoupments and counterclaims, and (iv) promptness, diligence and any
requirement that the Agent or any Bank protect, secure, perfect or insure any
security interest or lien or any property subject thereto; (g) notices,
demands, presentments, protests, notices of protest, notices of dishonor and
notices of any action or inaction, including acceptance of this Guaranty,
notices of default under the Credit Agreement or any agreement or instrument
related thereto, notices of any renewal, extension or modification of the
Guarantied Obligations or any agreement related thereto, notices of any
extension of credit to the Borrower and notices of any of the matters referred
to in the preceding paragraph and any right to consent to any thereof; and (h)
to the fullest extent permitted by law, any defenses or benefits that may be
derived from or afforded by law which limit the liability of or exonerate
guarantors or sureties, or which may conflict with the terms of this Guaranty.
Each Guarantor hereby waives any claim, right or remedy,
direct or indirect, that such Guarantor now has or may hereafter have against
the Borrower or any of its assets in connection with this Guaranty or the
performance by such Guarantor of its obligations hereunder, in each case
whether such claim, right or remedy arises in equity, under contract, by
statute, under common law or otherwise and including without limitation (a) any
right of subrogation, reimbursement or indemnification that such Guarantor now
has or may hereafter have against the Borrower, (b) any right to enforce, or to
participate in, any claim, right or remedy that the Agent or any Bank now has
or may hereafter have against the Borrower, and (c) any benefit of, and any
right to participate in, any collateral or security now or hereafter held by
the Agent or any Bank. In addition, until the obligations hereby guarantied
shall have been indefeasibly paid in full, each Guarantor shall withhold
exercise of any right of contribution such Guarantor may have against any other
guarantor of such obligations. Each Guarantor further agrees that, to the
extent the waiver of its rights of subrogation, reimbursement, indemnification
and contribution as set forth herein is found by a court of competent
jurisdiction to be void or voidable for any reason, any rights of subrogation,
reimbursement or indemnification such Guarantor may have against the Borrower
or against any collateral or security, and any rights of contribution such
Guarantor may have against any such other guarantor, shall be junior and
subordinate to any rights the
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Agent and the Banks may have against the Borrower, to all right, title and
interest the Agent or the Banks may have in any such collateral or security,
and to any right the Agent or the Banks may have against such other guarantor.
The Agent or any Bank may use, sell or dispose of any item of collateral or
security as it sees fit without regard to any subrogation rights any Guarantor
may have, and upon any such disposition or sale any rights of subrogation
Guarantor may have shall terminate. If any amount shall be paid to any
Guarantor on account of any such subrogation, reimbursement or indemnification
rights at any time when all obligations hereby guarantied shall not have been
paid in full, such amount shall be held in trust for the Agent for the benefit
of the Banks and shall forthwith be paid over to the Agent to be credited and
applied against such obligations, whether matured or unmatured, in accordance
with the terms of the Credit Agreement or any applicable security agreement.
Any indebtedness of the Borrower now or hereafter held by any
Guarantor is hereby subordinated in right of payment to the Guarantied
Obligations, and any such indebtedness of the Borrower to such Guarantor
collected or received by such Guarantor after an Event of Default has occurred
and is continuing shall be held in trust for the Agent on behalf of the Banks
and shall forthwith be paid over to the Agent for the benefit of the Banks to
be credited and applied against the Guarantied Obligations.
Guarantors jointly and severally agree to pay, or cause to be
paid, and to save the Agent and the Banks harmless against liability for, any
and all costs and expenses (including fees and disbursements of counsel and
allocated costs of internal counsel) incurred or expended by the Agent or any
Bank in connection with the enforcement of or preservation of any rights under
this Guaranty.
It is not necessary for the Banks or the Agent to inquire into
the capacity or powers of any Guarantor or the Borrower or the officers,
directors or any agents acting or purporting to act on behalf of any of them.
The Banks and the Agent shall have no obligation to disclose
or discuss with any Guarantor their assessment, or any Guarantor's assessment,
of the financial condition of the Borrower. Each Guarantor has adequate means
to obtain information from the Borrower on a continuing basis concerning the
financial condition of the Borrower and its ability to perform its obligations
under the Credit Documents, and each Guarantor assumes the responsibility for
being and keeping informed of the financial condition of the Borrower and of
all circumstances bearing upon the risk of nonpayment of the Guarantied
Obligations. Each Guarantor hereby waives and
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relinquishes any duty on the part of the Agent or any Bank to disclose any
matter, fact or thing relating to the business, operations or conditions of the
Borrower now known or hereafter known by the Agent or any Bank.
The rights, powers and remedies given to the Banks and the
Agent by this Guaranty are cumulative and shall be in addition to and
independent of all rights, powers and remedies given to the Banks and the Agent
by virtue of any statute or rule of law or in any of the other Credit Documents
or any agreement between any Guarantor and the Banks and/or the Agent or
between the Borrower and the Banks and/or the Agent. Any forbearance or
failure to exercise, and any delay by any Bank or the Agent in exercising, any
right, power or remedy hereunder shall not impair any such right, power or
remedy or be construed to be a waiver thereof, nor shall it preclude the
further exercise of any such right, power or remedy.
Each Guarantor acknowledges and agrees that any interest on
any portion of the Guarantied Obligations which accrues after the commencement
of any proceeding, voluntary or involuntary, involving the bankruptcy,
insolvency, receivership, reorganization, liquidation or arrangement of the
Borrower (or, if interest on any portion of the Guarantied Obligations ceases
to accrue by operation of law by reason of the commencement of said proceeding,
such interest as would have accrued on such portion of the Guarantied
Obligations if said proceeding had not been commenced) shall be included in the
Guarantied Obligations because it is the intention of the Guarantors and the
Agent that the Guarantied Obligations which are guarantied by the Guarantors
pursuant to this Guaranty should be determined without regard to any rule of
law or order which may relieve the Borrower of any portion of such Guarantied
Obligations.
In the event that all or any portion of the Guarantied
Obligations are paid by the Borrower, the obligations of the Guarantors
hereunder shall continue and remain in full force and effect or be reinstated,
as the case may be, in the event that all or any part of such payment(s) are
rescinded or recovered directly or indirectly from the Agent or any Bank as a
preference, fraudulent transfer or otherwise, and any such payments which are
so rescinded or recovered shall constitute Guarantied Obligations for all
purposes under this Guaranty.
Each Guarantor hereby represents and warrants to the Banks
that: (a) such Guarantor is duly organized, validly existing and in good
standing under the laws of the state of its incorporation; (b) such Guarantor
has the corporate power, authority and legal right to execute, deliver and
perform this Guaranty and has taken all necessary corporate action to
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authorize its execution, delivery and performance of this Guaranty; (c) this
Guaranty has been duly executed and delivered by a duly authorized officer of
such Guarantor, and this Guaranty constitutes the legally valid and binding
obligation of such Guarantor, enforceable against such Guarantor in accordance
with its terms, except as enforcement may be limited by applicable bankruptcy,
insolvency, reorganization, moratorium or other similar laws or equitable
principles relating to or limiting creditors' rights generally; and (d) the
execution, delivery and performance of this Guaranty will not violate any
provision of any existing law or regulation binding on such Guarantor, or any
order, judgment, award or decree of any court, arbitrator or governmental
authority binding on such Guarantor, or the certificate of incorporation or
bylaws of such Guarantor or any securities issued by such Guarantor, or any
mortgage, indenture, lease, contract or other agreement, instrument or
undertaking to which such Guarantor is a party or by which such Guarantor or
any of its assets may be bound, the violation of which would have a material
adverse effect on the business, operations, assets or financial condition of
such Guarantor and will not result in, or require, the creation or imposition
of any Lien on any of its property, assets or revenues pursuant to the
provisions of any such mortgage, indenture, lease, contract or other agreement,
instrument or undertaking.
In case any provision in or obligation under this Guaranty
shall be invalid, illegal or unenforceable in any jurisdiction, the validity,
legality and enforceability of the remaining provisions or obligations, or of
such provision or obligation in any other jurisdiction, shall not in any way be
affected or impaired thereby.
THIS GUARANTY AND THE RIGHTS AND OBLIGATIONS OF GUARANTORS,
THE AGENT AND THE BANKS HEREUNDER AND ALL OTHER ASPECTS HEREOF SHALL BE DEEMED
TO BE MADE UNDER, SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK APPLICABLE TO CONTRACTS MADE
AND PERFORMED IN SUCH STATE.
This Guaranty is a continuing guaranty and shall be binding
upon each Guarantor and its respective successors and assigns. This Guaranty
shall inure to the benefit of the Banks, the Agent and the Agent and their
respective successors and assigns.
Each Guarantor hereby irrevocably submits to the jurisdiction
of any New York state or Federal court sitting in New York, in any action or
proceeding arising out of or relating to this Guaranty, and each Guarantor
hereby irrevocably agrees that all claims in respect of such action
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or proceeding may be heard and determined in such New York state or Federal
court. Each Guarantor hereby irrevocable waives, to the fullest extent it may
effectively do so, the defense of an inconvenient forum to the maintenance of
such action or proceeding. Each Guarantor hereby irrevocably appoints CT
Corporation with offices at 818 West Seventh Street, Suite 1004, Los Angeles,
California 90017, as its agent to receive, on behalf of such Guarantor and its
property, service of copies of the summons and compliant and any other process
which may be served in any such action or proceeding. Such service may be made
by mail or by delivering a copy of such process to such Guarantor in care of
the agent named above, and such Guarantor hereby irrevocably authorizes and
directs such agent to accept such service on its behalf. As an alternative
method of service, each Guarantor also irrevocably consents to the service of
any and all process in any such action or proceeding by the mailing of copies
of such process to such Guarantor at its address set forth opposite its
signature hereto. Each Guarantor agrees that a final judgment in any such
action or proceeding shall be conclusive and may be enforced in other
jurisdictions by suit on the judgment or in any other manner provided by law.
Nothing herein shall affect the right of any Bank or the Agent to serve legal
process in any other manner permitted by law or affect the right of any Bank or
the Agent to bring any action or proceeding against any Guarantor or its
property in the courts of any other jurisdiction.
EACH GUARANTOR AND, BY ITS ACCEPTANCE OF THE BENEFITS HEREOF,
THE AGENT EACH HEREBY AGREES TO WAIVE ITS RESPECTIVE RIGHTS TO A JURY TRIAL OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS GUARANTY. The
scope of this waiver is intended to be all-encompassing of any and all disputes
that may be filed in any court and that relate to the subject matter of this
transaction, including without limitation contract claims, tort claims, breach
of duty claims and all other common law and statutory claims. Each Guarantor
and, by its acceptance of the benefits hereof, the Agent each (i) acknowledges
that this waiver is a material inducement for such Guarantor and the Agent to
enter into a business relationship, that such Guarantor and the Agent have
already relied on this waiver in entering into this Guaranty or accepting the
benefits thereof, as the case may be, and that each will continue to rely on
this waiver in their related future dealings, and (ii) further warrants and
represents that each has reviewed this waiver with its legal counsel and that
each knowingly and voluntarily waives its jury trial rights following
consultation with legal counsel. THIS WAIVER IS IRREVOCABLE, MEANING THAT IT
MAY NOT BE MODIFIED EITHER ORALLY OR IN WRITING, AND THIS WAIVER SHALL APPLY TO
ANY SUBSEQUENT AMENDMENTS, RENEWALS, SUPPLEMENTS OR MODIFICATIONS OF THIS
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GUARANTY. In the event of litigation, this Guaranty may be filed as a written
consent to a trial by the court.
This Guaranty may be executed in any number of counterparts
and by the different parties hereto in separate counterparts, each of which
when so executed and delivered shall be deemed to be an original for all
purposes; but all such counterparts together shall constitute but one and the
same instrument. This Guaranty shall become effective as to each Guarantor
upon the execution of a counterpart hereof by such Guarantor (whether or not a
counterpart hereof shall have been executed by any other Guarantor) and receipt
by the Agent of written or telephonic notification of such execution and
authorization of delivery thereof.
IN WITNESS WHEREOF, each Guarantor has caused this Guaranty to
be executed by its duly authorized officer as of the date first set forth
above.
NETG HOLDING, INC., A DELAWARE
CORPORATION
By: __________________________
Title:________________________
NATIONAL EDUCATION TRAINING
GROUP, INC., A Nevada
Corporation
By: __________________________
Title:________________________
SPECTRUM INTERACTIVE,
INCORPORATED, a Delaware
Corporation
By: __________________________
Title:________________________
NATIONAL EDUCATION CENTERS,
INC., a California
Corporation
By: __________________________
Title:________________________
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ICS LEARNING SYSTEMS, INC.,
A Delaware Corporation
By: __________________________
Title:________________________
INTERNATIONAL CORRESPONDENCE
SCHOOLS, INC.,
a Pennsylvania Corporation
By: __________________________
Title:________________________
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EXHIBIT G
[FORM OF SUBORDINATION AGREEMENT]
SUBORDINATION AGREEMENT
SUBORDINATION AGREEMENT, dated as of December 22, 1993 (the
"Agreement"), made by National Education Corporation (the "Borrower") and each
of the companies listed on Annex I attached hereto (each a "Subordinated
Creditor" and collectively, the "Subordinated Creditors") in favor of the
Banks, the Agent and holders of Senior Obligations (as such terms are defined
below).
RECITALS
A. Each of the Subordinated Creditors is a direct
subsidiary of the Borrower and the Borrower is the borrower under a Credit
Agreement dated as of December 22, 1993, among the Borrower, the banks party
thereto from time to time (the "Banks") and Bankers Trust Company, as agent for
the Banks (Bankers Trust Company and any successor as Agent under the Loan
Agreement, as hereinafter defined, hereinafter the "Agent"). The terms defined
in such Loan Agreement and not otherwise defined herein shall have the meanings
provided in the Loan Agreement.
B. The Borrower is or may hereafter become indebted to
or otherwise obligated to the Subordinated Creditors in various amounts. The
Borrower's intercompany accounts payable, indebtedness, obligations and other
liabilities (contingent or otherwise) of any and every nature whatsoever, now
or hereafter existing (whether created directly or acquired by assignment or
otherwise) to the Subordinated Creditors, and interest and premiums, if any,
thereon and other amounts payable in respect thereof or in connection
therewith, are herein referred to as "Subordinated Debt."
C. The Borrower, Banks and Agent, upon entering into the
Loan Agreement, contemplated that the Subordinated Debt would be subordinated
to the Senior Obligations, as hereinafter defined.
D. Each Subordinated Creditor desires to subordinate the
Subordinated Debt at any time owed to such Subordinated Creditor to the Senior
Obligations in accordance with the provisions of this Agreement.
NOW, THEREFORE, in consideration of the premises, the
Subordinated Creditors and the Borrower hereby agree as follows:
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AGREEMENT
SECTION 1 Agreement to Subordinate. Each of the Subordinated
Creditors and the Borrower agrees that the Subordinated Debt is and shall be
subordinate, to the extent and in the manner hereinafter set forth, in right of
payment to the prior payment in full in cash of all "Senior Obligations."
The term "Senior Obligations" means all indebtedness,
obligations and other liabilities of the Borrower (contingent or otherwise)
arising under or with respect to the Loan Agreement and including, without
limitation, all interest, accrued and accruing after the commencement of any
insolvency or bankruptcy case or proceeding or any receivership, liquidation,
reorganization or other similar case or proceeding relative to the Borrower or
its creditors, as such, or to its assets or any liquidation, dissolution,
reorganization or winding up of the Borrower whether voluntary or involuntary,
any assignment for the benefit of creditors or other marshalling of assets and
liabilities of the Borrower (collectively "Proceeding") in accordance with and
at the contract rate specified in the Loan Agreement, whether or not pursuant
to applicable law or otherwise, the claim for such interest is allowed as a
claim in such Proceeding.
"Loan Agreement" means the Credit Agreement dated as of
December 22, 1993, among the Borrower, Banks and Agent, as the same may from
time to time be amended, renewed, supplemented or otherwise modified and any
other agreements (including, without limitation, the Credit Documents) pursuant
to which any of the indebtedness, obligations, costs, expenses, fees,
reimbursements and other indemnities payable or owing thereunder may be
refinanced, restructured, renewed or refunded, as any such other agreement may
from time to time at the option of the parties thereto be amended,
supplemented, renewed or otherwise modified.
SECTION 2 No Payment on the Subordinated Debt. Upon the
occurrence and continuance of a Default or an Event of Default under the Loan
Agreement, each Subordinated Creditor hereby agrees not to ask, demand, sue
for, take, create or receive from the Borrower, directly or indirectly, in cash
or other property or by set-off or in any other manner (including without
limitation from or by way of collateral), payment of all or any of the
Subordinated Debt unless and until the Senior Obligations shall have been paid
in full in cash.
SECTION 3 In Furtherance of Subordination. Each Subordinated
Creditor hereby agrees as follows:
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3.1 Upon any distribution of all or any of the assets of the
Borrower to creditors of the Borrower in connection with a Proceeding, any
payment or distribution of any kind (whether in cash, property or securities)
which otherwise would be payable or deliverable upon or with respect to the
Subordinated Debt shall be paid or delivered directly to the Agent under the
Loan Agreement or if there is no agent under the Loan Agreement the
representative of the holders of Senior Obligations for application (in case of
cash) to or as collateral (in case of non-cash property or securities) for the
payment or prepayment of the Senior Obligations until the Senior Obligations
shall have been paid in full in cash.
3.2 If any Proceeding is commenced by or against the Borrower:
3.2.1 The Agent (or if there is no Agent, the
Required Banks or their representative) is hereby irrevocably authorized and
empowered (in its own name or in the name of any Subordinated Creditor or
otherwise), but shall have no obligation, to demand, sue for, collect and
receive every payment or distribution referred to in subsection 3.1 above and
give acquittance therefor and to file claims and proofs of claim and take such
other actions (including without limitation voting the Subordinated Debt or
enforcing any security interest or other lien securing payment of the
Subordinated Debt) as it may deem necessary or advisable for the exercise or
enforcement of any of the rights or interests of any of the Banks, the Agent or
the holders of Senior Obligations (all of the foregoing being referred to
herein collectively as "Holders") hereunder; and
3.2.2 Each Subordinated Creditor shall duly and
promptly take such action as the Agent may request (A) to collect the
Subordinated Debt for account of the Holders and to file appropriate claims or
proofs of claim in respect of the Subordinated Debt, (B) to execute and deliver
to the Agent such powers of attorney, assignment, or other instruments as it
may request in order to enable it to enforce any and all claims with respect
to, and any security interests and other liens securing payment of, the
Subordinated Debt, and (C) to collect and receive any and all payments or
distributions which may be payable or deliverable upon or with respect to the
Subordinated Debt.
3.3 All payments or distributions upon or with respect to
the Subordinated Debt which are received by any Subordinated Creditor contrary
to the provisions of this Agreement shall be received in trust for the benefit
of any Holders, shall be segregated from other funds and property held by such
Subordinated Creditor and shall be forthwith paid over to the Agent in the same
form as so received (with
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any necessary indorsement) to be applied (in the case of cash) to or held as
collateral (in the case of non-cash property or securities) for the payment or
prepayment of the Senior Obligations in accordance with the terms of the Loan
Agreement.
3.4 The Agent is hereby authorized to demand specific
performance of this Agreement, whether or not the Borrower shall have complied
with any of the provisions hereof applicable to it, at any time when any
Subordinated Creditor shall have failed to comply with any of the provisions of
this Agreement applicable to it. Each Subordinated Creditor hereby irrevocably
waives any defense based on the adequacy of a remedy at law, which might be
asserted as a bar to such remedy of specific performance.
SECTION 4 No Commencement of Any Proceeding. Each
Subordinated Creditor agrees that, so long as any of the Senior Obligations
shall remain unpaid, it will not commence, or join with any creditor other than
the Holders in commencing, any Proceeding.
SECTION 5 Rights of Subrogation. Each Subordinated Creditor
agrees that no payment or distribution to the Holders pursuant to the
provisions of this Agreement shall entitle any Subordinated Creditor to
exercise any rights of subrogation in respect thereof until the Senior
Obligations shall have been paid in full in cash.
SECTION 6 Subordination Legend; Further Assurances. Each
Subordinated Creditor and the Borrower will cause each instrument evidencing
Subordinated Debt to be endorsed with the following legend:
"THE INDEBTEDNESS EVIDENCED BY THIS INSTRUMENT IS SUBORDINATED TO THE
PRIOR PAYMENT IN FULL OF THE SENIOR OBLIGATIONS (AS DEFINED IN THE
SUBORDINATION AGREEMENT HEREINAFTER REFERRED TO) PURSUANT TO, AND TO
THE EXTENT PROVIDED IN, THE SUBORDINATION AGREEMENT DATED AS OF
DECEMBER 22, 1993 BY THE MAKER HEREOF AND PAYEE NAMED HEREIN AND
OTHERS IN FAVOR OF THE BANKS, THE AGENT AND THE HOLDERS OF SENIOR
OBLIGATIONS REFERRED TO IN SUCH SUBORDINATION AGREEMENT."
Each Subordinated Creditor and the Borrower will further mark its books of
account in such a manner as shall be effective to give proper notice of the
effect of this Agreement and will, in the case of any Subordinated Debt which
is not evidenced by any instrument, upon the Agent's written request, cause
such Subordinated Debt to be evidenced by an appropriate instrument or
instruments endorsed with the above legend. The Subordinated Creditors will
upon the Agent's request deliver to the Agent true and
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correct copies of all instruments, if any, evidencing Subordinated Debt. The
Subordinated Creditors and the Borrower will, at their expense and at any time
and from time to time, 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 reasonably request, in
order to protect any right or interest granted or purported to be granted
hereby or to enable the Agent to exercise and enforce its rights and remedies
hereunder.
SECTION 7 No Change in or Disposition of Subordinated Debt.
No Subordinated Creditor will, without the consent of the Agent:
7.1 Cancel or otherwise discharge any of the Subordinated
Debt (except upon payment in full in cash thereof paid to the Agent as
contemplated by Section 3.3) or subordinate any of the Subordinated Debt to any
indebtedness of the Borrower other than the Senior Obligations;
7.2 Sell, assign, pledge, encumber or otherwise dispose of
any of the Subordinated Debt; or
7.3 Permit the terms of any of the Subordinated Debt to be
changed in any manner.
SECTION 8 Agreements by the Borrower. The Borrower agrees
that it will not make any payment of any of the Subordinated Debt, or take any
other action, in contravention of the provisions of this Agreement.
SECTION 9 Obligations Hereunder Not Affected. All rights and
interests of the Holders hereunder, and all agreements and obligations of the
Subordinated Creditors and the Borrower under this Agreement, shall remain in
full force and effect irrespective of:
9.1.1 any lack of validity or enforceability of the
Loan Agreement, any Note, or any other Credit Documents, or any agreement or
instrument relating thereto;
9.1.2 any change in the time, manner of place of
payment of, or in any other term of, all or any of the Senior Obligations, or
any other amendment or waiver of or any consent to departure from the Loan
Agreement or any other Credit Document;
9.1.3 any taking and holding of any collateral or
security or additional guarantees for all or any of the Senior Obligations; or
any amendment, alteration, exchange, substitution, transfer, enforcement,
waiver, subordination, termination or release of any collateral or
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such guarantees, or any non-perfection of any collateral, or any consent to
departure from any such guaranty;
9.1.4 any manner of application of collateral or
proceeds thereof, to all or any of the Senior Obligations, or the manner of
sale of any collateral or other security;
9.1.5 any consent by any of the Holders or any other
Person to the change, restructure or termination of the corporate structure or
existence of the Borrower or any Subsidiary thereof and any corresponding
restructure of the Senior Obligations, or any other restructure or refinancing
of the Senior Obligations or any portion thereof;
9.1.6 any modification, compounding, compromise,
settlement, release by the Holders or any of them or any other Person (or by
operation of law or otherwise), collection or other liquidation of the Senior
Obligations or of any collateral or security in whole or in part, and any
refusal of payment to any Holder in whole or in part, from any obligor or
guarantor in connection with any of the Senior Obligations, whether or not with
notice to, or further assent by, or any reservation of rights against, the
Subordinated Creditors; or
9.1.7 any other circumstance (including, but not
limited to, any statute of limitations) which might otherwise constitute a
defense available to, or a discharge of, the Borrower or any Subordinated
Creditor.
Without limiting the generality of the foregoing, each
Subordinated Creditor hereby consents to, and hereby agrees, that the rights of
each Holder hereunder, and the enforceability hereof, shall not be affected by
any and all releases of any collateral or security from the liens and security
interests created by any security agreement, pledge agreement or other
agreement whether for purposes of sales or other dispositions of assets or for
any other purpose. This Agreement shall continue to be effective or be
reinstated, as the case may be, if at any time any payment of any of the Senior
Obligations is rescinded or must otherwise be returned by any of the Holders
upon the insolvency, bankruptcy or reorganization of the Borrower or otherwise,
all as though such payment had not been made.
SECTION 10 Waiver.
10.1 Each Subordinated Creditor and the Borrower hereby
waives promptness, diligence, notice of acceptance and any other notice with
respect to any of the Senior Obligations and this Agreement and any requirement
that any
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<PAGE> 122
Holder protect, secure, perfect or insure any security interest or lien or any
property subject thereto or exhaust any right or take any action against a
debtor or any other Person or any collateral or security.
10.2 Each Subordinated Creditor and the Borrower hereby waive
any right to require any Holder or any other Person to proceed against any
party hereto or any other Person, or proceed against or exhaust any collateral
or security, or pursue any other remedy in the power of any Holder any other
Person.
10.3 Each Subordinated Creditor and the Borrower agrees that
the Holders or any of them in their sole discretion, without notice or demand
and without affecting the enforceability of this Agreement, may foreclose on
any deed of trust or mortgage securing all or a portion of the Senior
Obligations and the interests in real property secured thereby by nonjudicial
sale; and each Subordinated Creditor and the Borrower hereby waives any defense
to the enforceability hereof by Holders or any of them or any other Person
against any Subordinated Creditor or the Borrower after a nonjudicial sale even
though such Subordinated Creditor's right of subrogation may be altered,
impaired or extinguished thereby.
SECTION 11 Representations and Warranties. Each of the
Subordinated Creditors and the Borrower hereby represents and warrants as
follows:
11.1 The Subordinated Debt outstanding at any time (i) has,
or will have been, duly authorized by the Borrower, (ii) has not been, and will
not be, amended or otherwise modified and (iii) constitutes, or will
constitute, the legal, valid and binding obligation of the Borrower,
enforceable against the Borrower, in accordance with its terms. There exists
no default in respect of any such Subordinated Debt.
11.2 The Subordinated Creditors own the Subordinated Debt now
outstanding free and clear of any lien, security interest, charge or
encumbrance or any rights of others.
SECTION 12 Amendments, Etc. No amendment or waiver of any
provision of this Agreement nor consent to any departure by any Subordinated
Creditor or by the Borrower therefrom 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.
G-7
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SECTION 13 Expenses. Each of the Subordinated Creditors and
the Borrower jointly and severally agrees to pay, upon demand, to the Agent the
amount of any and all reasonable expenses, including the reasonable fees and
expenses of its counsel, which any Holder may incur in connection with the
exercise or enforcement of any of the rights or interests of any Holder
hereunder.
SECTION 14 Addresses for Notices. All notices, requests,
demands and other communications provided for or permitted hereunder shall,
unless otherwise stated herein, be in writing (including telex, or telecopied
communications) and shall be sent by mail (by registered or certified mail,
return receipt requested), telex, telecopier or hand delivery:
14.1 If to a Subordinated Creditor or the Borrower, to it at
its address set forth on the signature pages hereof or at such other address as
shall be designated by it in a written notice to the Agent complying as to
delivery with the terms of this Section; or
14.2 If to a Holder addressed to it at its address for
notices provided in Section 11.03 of the Loan Agreement.
All such notices, requests, demands and other communications shall be effective
(a) when mailed, on the earlier of receipt or the third Business Day after
being deposited in the mails with postage prepaid, (b) when sent by telex, upon
confirmation by telex answerback, (c) when sent by telecopy, upon receipt
thereof, and (d) upon personal delivery thereof.
SECTION 15 References to Holders. Any reference herein to
"the Holders" shall be a reference herein to any or all of them.
SECTION 16 No Waiver; Remedies. No failure on the part of
any Holder to exercise, and no delay in exercising, any right hereunder shall
operate as a waiver thereof; nor shall any single or partial exercise of any
right hereunder preclude any other or further exercise thereof or the exercise
of any other right. The remedies herein provided are cumulative and not
exclusive of any remedies provided by law.
SECTION 17 Continuing Agreement; Transfer of Notes. This
Agreement is a continuing agreement and shall (i) remain in full force and
effect until the Senior Obligations shall have been paid in full in cash, (ii)
be binding upon the Subordinated Creditors, the Borrower and their respective
successors and assigns, and (iii) inure to
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<PAGE> 124
the benefit of and be enforceable by the Holders and their respective
successors, transferees and assigns. Without limiting the generality of the
foregoing clause (iii), any Bank may assign or otherwise transfer any Note held
by it, or any interest therein, or grant any participation in its rights or
obligations under the Loan Agreement (or any other Credit Document), subject to
the provisions of the Loan Agreement (or such Credit Document), to any other
Person, who shall thereupon become vested with all the rights in respect
thereof granted to such Bank herein or otherwise.
SECTION 18 Counterparts. This Agreement may be signed in any
number of counterparts, each of which shall be an original, with the same
effect as if the signatures thereto and hereto were upon the same instrument.
This Agreement shall become effective as to each party hereto after a
counterpart hereof shall have been signed by such party.
SECTION 19 Waiver of Jury Trial. Each Subordinated Creditor
and the Borrower hereby irrevocable waives all right to trial by jury in any
action, proceeding or counterclaim arising out of or relating to this Agreement
or any of the other Credit Documents.
SECTION 20 Governing Law. This Agreement shall be governed
by, and construed in accordance with, the laws of the State of New York.
WITNESS WHEREOF, the Subordinated Creditors and the Borrower
have caused this Agreement to be duly executed and delivered by its officer
thereunto duly authorized as of the date first above written.
NATIONAL EDUCATION CORPORATION
By_________________________________
Its______________________________
Address: 18400 Von Karman Ave.
Irvine, CA 92715
G-9
<PAGE> 125
STECK-VAUGHN PUBLISHING CORPORATION
By_________________________________
Its______________________________
Address: 8701 N. MoPac Expressway
Suite 200
Austin, TX 78759-8364
NATIONAL EDUCATION INTERNATIONAL
CORP.
By_________________________________
Its______________________________
Address: 18400 Von Karman Ave.
Irvine, CA 92715
NATIONAL EDUCATION CREDIT
CORPORATION
By_________________________________
Its______________________________
Address: 18400 Von Karman Ave.
Irvine, CA 92715
NATIONAL EDUCATION FOREIGN SALES
CORP.
By_________________________________
Its______________________________
Address: 18400 Von Karman Ave.
Irvine, CA 92715
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<PAGE> 126
NATIONAL EDUCATION PAYROLL CORP.
By_________________________________
Its______________________________
Address: 18400 Von Karman Ave.
Irvine, CA 92715
NEC SUB. INC.
By_________________________________
Its______________________________
Address: 18400 Von Karman Ave.
Irvine, CA 92715
NATIONAL EDUCATION CENTERS, INC.
By_________________________________
Its______________________________
Address: 1732 Reynolds Street
Irvine, CA 92714
ICS LEARNING SYSTEMS, INC.
By_________________________________
Its______________________________
Address: 925 Oak Street
Scranton, PA 18515
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<PAGE> 127
NETG HOLDING, INC.
By_________________________________
Its______________________________
Address: 1751 West Diehl Road
Naperville, IL 60566
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<PAGE> 128
ANNEX I
ANNEX I TO SUBORDINATION AGREEMENT
SUBORDINATED CREDITORS
Steck-Vaughn Publishing Corporation
National Education International Corp.
National Education Credit Corporation
National Education Foreign Sales Corp.
National Education Payroll Corp.
NEC Sub. Inc.
National Education Centers, Inc.
ICS Learning Systems, Inc.
NETG Holding, Inc.
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<PAGE> 1
EXHIBIT 10.21
NATIONAL EDUCATION CORPORATION
FIRST AMENDMENT
TO CREDIT AGREEMENT
This FIRST AMENDMENT TO CREDIT AGREEMENT (this "Amendment") is
dated as of December 31, 1993 and entered into by and among National Education
Corporation, a Delaware corporation (the "Borrower") , the Bank listed on the
signature pages hereof (the "Bank"), and Bankers Trust Company, as agent for
the Bank (the "Agent") and, for purposes of Sections 2 and 3 hereof, the
Subsidiaries of the Borrower listed on the signature pages hereof, and is made
with reference to that certain Credit Agreement dated as of December 22, 1993
(the "Credit Agreement") by and among the Borrower, the Bank and the Agent.
Capitalized terms used herein without definition shall have the same meanings
herein as set forth in the Credit Agreement.
RECITALS
WHEREAS, the Borrower and the Bank have agreed, upon the terms
and conditions set forth herein, that the Credit Agreement should be amended to
eliminate the effect of certain charges to be taken against income in
connection with a planned a restructuring of the operations of NETG; and
WHEREAS, the each of the Subsidiaries of the Company party to
the Subsidiary Guaranty ("Subsidiary Guarantors") or the Subordination
Agreement ("Subordinated Subsidiaries") desires to acknowledge and consent to
this Amendment and to reaffirm the continuing effectiveness of the Subsidiary
Guaranty or the Subordination Agreement, as the case may be;
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements set forth herein, the parties hereto agree as
follows:
SECTION 1. AMENDMENT TO THE CREDIT AGREEMENT
1.1 AMENDMENT TO SECTION 1.01: DEFINED TERMS. Section
1.01 of the Credit Agreement is hereby amended by amending and restating the
definition of "Consolidated EBIT" in its entirety as follows:
"'Consolidated EBIT' shall mean, as to any Person and for any
period, the consolidated net income of such Person and its
Subsidiaries for such period, before interest expense and provision
for taxes and without giving effect to (i) any extraordinary gains (or
extraordinary losses), (ii) gains (or losses) from sales
1
<PAGE> 2
of assets (other than sales of inventory in the ordinary course of
business) to the extent that the net gain or loss from all such sales
is, in the aggregate, less than $500,000 per annum and (iii) charges
(and any resulting losses), in an amount not exceeding $750,000, taken
by the Company to establish reserves in connection with the
restructuring of NETG's operations; it being agreed and understood
that the excluded gains and losses described in clauses (i) and (ii)
above shall include, among other things, (A) gains realized in July
1993 as the result of the public offering of the common stock of SV
and (B) any losses arising from the restructuring charges taken in
September 1993 in relation to Ed Centers, various school closures, and
the write-down of certain assets, including intangible assets of
NETG."
SECTION 2. REPRESENTATIONS AND WARRANTIES
In order to induce the Bank to enter into this Amendment and
to amend the provisions of the Credit Agreement in the manner provided herein,
the Borrower and each Subsidiary party to the Subsidiary Guaranty and/or the
Subordination Agreement represents and warrants to the Bank that the following
statements are true, correct and complete:
A. CORPORATE POWER AND AUTHORITY. The Borrower has all
requisite corporate power and authority to enter into this Amendment and to
carry out the transactions contemplated by, and perform its obligations under,
the Credit Agreement as amended by this Amendment (the "Amended Agreement") .
Each such Subsidiary has all requisite corporate power and authority to enter
into this Amendment and to be bound hereby.
B. AUTHORIZATION OF AGREEMENTS. The execution and
delivery of this Amendment by the Borrower and each such Subsidiary and the
performance of the Amended Agreement by the Borrower have been duly authorized
by all necessary corporate action by the Borrower and each such Subsidiary, as
the case may be.
C. NO CONFLICT. The execution and delivery by the
Borrower and each such Subsidiary of this Amendment and the performance by the
Borrower of the Amended Agreement do not and will not (i) violate any provision
of any law, rule or regulation applicable to the Borrower or any of its
Subsidiaries, the Certificate of Incorporation or Bylaws of the Borrower or any
of its Subsidiaries or any order, judgment or decree of any court or other
agency of government binding on the Borrower or any of its Subsidiaries, (ii)
conflict with, result in a breach of or constitute (with due notice or lapse of
time or both) a default under, or require the consent
2
<PAGE> 3
of any Person under, any mortgage, deed of trust, credit agreement, loan
agreement or any other agreement contract or instrument to which the Borrower
or any of its Subsidiaries is a party or by which it or any of its property or
assets is bound or to which it may be subject or (iii) result in or require the
creation or imposition of any Lien upon any of their properties or assets.
D. GOVERNMENTAL CONSENTS. The execution and delivery by
the Borrower and each such Subsidiary of this Amendment and the performance by
the Borrower of the Amended Agreement do not and will not require any
registration with, consent or approval of, or notice to, or other action to,
with or by, any Federal, state or other governmental authority or regulatory
body or other Person.
E. BINDING OBLIGATION. This Amendment and, in the case
of the Borrower, the Amended Agreement, are the legally valid and binding
obligation(s) of the Borrower and each such subsidiary, enforceable against the
Borrower or such Subsidiary in accordance with its terms, except as enforcement
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or limiting creditors' rights generally or by
equitable principles relating to enforceability.
F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM
CREDIT AGREEMENT. The representations and warranties contained in Section 6 of
the Credit Agreement are and will be true, correct and complete in all material
respects on and as of the date hereof to the same extent as though made on and
as of that date, except to the extent that such representations and warranties
specifically relate to an earlier date, in which case they are true, correct
and complete in all material respects as of such earlier date.
G. ABSENCE OF DEFAULT. No event has occurred and is
continuing or will result from the consummation of the transactions
contemplated by this Amendment which would constitute an Event of Default or a
Default.
SECTION 3. ACKNOWLEDGEMENT AND CONSENT
Each of the undersigned Subsidiaries of the Borrower
acknowledges that it has reviewed the terms and provisions of the Credit
Agreement and this Amendment and consents to the amendment and extension of the
Credit Agreement effected pursuant to this Amendment. Each of the undersigned
Subsidiary Guarantors hereby confirms that the Subsidiary Guaranty will
continue to guaranty to the fullest extent possible the payment and performance
of all Guarantied obligations (as defined in the Subsidiary Guaranty),
3
<PAGE> 4
including, without limitation, the payment and performance of all Obligations
of the Borrower now or hereafter existing under or in respect of the Amended
Agreement. Each of the undersigned Subordinated Subsidiaries hereby confirms
that the Subordination Agreement will continue to subordinate the Subordinated
Debt (as defined in the Subordination Agreement) to Senior Obligations (as
defined in the Subordination Agreement), including, without limitation, all
obligations of the Borrower now or hereafter existing to make payments under or
in respect of the Amended Agreement.
Each Subsidiary Guarantor acknowledges and agrees that the
Subsidiary Guaranty shall continue in full force and effect and that all of its
obligations thereunder shall be valid and enforceable and shall not be impaired
or affected by the execution or effectiveness of this Amendment. Each
Subsidiary Guarantor represents and warrants that all representations and
warranties contained in the Amended Agreement and the Subsidiary Guaranty are
true, correct and complete in all material respects on and as of the date
hereof to the same extent as though made on and as of that date except to the
extent that such representations and warranties specifically relate to an
earlier date, in which case they are true, correct and complete in all material
respects as of such earlier date.
Each Subordinated Subsidiary acknowledges and agrees that the
Subordination Agreement shall continue in full force and effect and that all of
its obligations thereunder shall be valid and enforceable and shall not be
impaired or affected by the execution or effectiveness of this Amendment. Each
Subordinated Subsidiary represents and warrants that all representations and
warranties contained in the Amended Agreement and the Subordination Agreement
are true, correct and complete in all material respects on and as of the date
hereof to the same extent as though made on and as of that date except to the
extent that such representations and warranties specifically relate to an
earlier date, in which case they are true, correct and complete in all material
respects as of such earlier date.
Each of the undersigned Subsidiaries of the Borrower
acknowledges and agrees that (i) notwithstanding the conditions to
effectiveness set forth in this Amendment, such Subsidiary is not required by
the terms of the Credit Agreement or any other Credit Document to consent to
the amendments to the Credit Agreement effected pursuant to this Amendment and
(ii) nothing in the Credit Agreement, this Amendment or any other Credit
Document shall be deemed to require the consent of any such Subsidiary to any
future amendments to the Credit Agreement.
4
<PAGE> 5
SECTION 4. MISCELLANEOUS
A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND
THE OTHER CREDIT DOCUMENTS.
(i) On and after the date hereof, each reference in the
Credit Agreement to "this Agreement", "hereunder", "hereof ", "herein"
or words of like import referring to the Credit Agreement, and each
reference in the other Credit Documents to the "Credit Agreement",
"thereunder", "thereof" or words of like import referring to the
Credit Agreement shall mean and be a reference to the Credit Agreement
as amended by this Amendment.
(ii) Except as specifically amended or modified by this
Amendment, the Credit Agreement and the other Credit Documents shall
remain in full force and effect and are hereby ratified and confirmed.
(iii) The execution, delivery and performance of this
Amendment shall not, except as expressly provided herein, constitute a
waiver of any provision of, or operate as a waiver of any right, power
or remedy of the Agent or any Lender under, the Credit Agreement or
any of the other Credit Documents.
B. FEES AND EXPENSES. The Borrower acknowledges that
all costs, fees and expenses as described in subsection 11.01 of the Credit
Agreement incurred by the Agent and its counsel with respect to this Amendment
and the documents and transactions contemplated hereby shall be for the account
of the Borrower.
C. EXECUTION IN COUNTERPARTS; EFFECTIVENESS. This
Amendment may be executed in any number of counterparts, and by different
parties hereto in separate counterparts, each of which when so executed and
delivered shall be deemed an original, but all such counterparts taken together
shall constitute but one and the same instrument. This Amendment shall become
effective as of the date hereof upon the execution of a counterpart hereof by
the Borrower, each Subsidiary of the Borrower party to the Subsidiary Guaranty
or the Subordination Agreement and the Bank and the delivery of such
counterparts to the Agent.
D. HEADINGS. Section and subsection headings in this
Amendment are included herein for convenience of reference only and shall not
constitute a part of this Amendment for any other purpose or be given any
substantive effect.
5
<PAGE> 6
E. Applicable Law. THIS AMENDMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HERETO AND ALL OTHER ASPECTS HEREOF SHALL BE DEEMED
TO BE MADE UNDER, SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK.
[Remainder of Page Intentionally Left Blank]
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed as of the date first above written by their respective
officers thereunto duly authorized.
NATIONAL EDUCATION CORPORATION
By: _______________________________
Title: ____________________________
NETG HOLDING, INC.
NATIONAL EDUCATION TRAINING
GROUP, INC.,
SPECTRUM INTERACTIVE INCORPORATED
NATIONAL EDUCATION CENTERS, INC.
ICS LEARNING SYSTEMS, INC.
INTERNATIONAL CORRESPONDENCE
SCHOOLS, INC.,
as the Subsidiary Guarantors
By: _______________________________
Title: ____________________________
STECK-VAUGHN PUBLISHING CORPORATION
NATIONAL EDUCATION INTERNATIONAL CORP.
NATIONAL EDUCATION CREDIT CORPORATION
NATIONAL EDUCATION FOREIGN SALES CORP.
NATIONAL EDUCATION PAYROLL CORP.
NEC SUB. INC
NATIONAL EDUCATION CENTERS, INC.
ICS LEARNING SYSTEMS, INC.
NETG HOLDING, INC.
as the Subordinated subsidiaries
By: _______________________________
Title: ____________________________
S-1
<PAGE> 8
BANKERS TRUST COMPANY, as the
Bank and as the Agent
By: _______________________________
Title: Assistant Vice President
____________________________
S-2
<PAGE> 1
EXHIBIT 11.1
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CALCULATION OF PRIMARY EARNINGS PER SHARE
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------------------------
1993 1992 1991 1990 1989
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
NET INCOME (LOSS) $(9,619) $ 515 $ 5,359 $(14,939) $(29,341)
======= ======= ======= ======== ========
COMMON STOCK:
Shares outstanding from
beginning of period 29,968 29,822 29,718 29,596 29,265
Pro rata shares:
Stock options exercised 41 136 12 1 271
Shares purchased for treasury,
from date of purchase (380) (6) -- -- (3)
Assumed exercise of stock
options, using treasury
stock method 226 344 386 15 191
Shares issued for restricted
stock -- -- -- 31 --
------- ------- ------- -------- --------
Weighted average number of
shares outstanding 29,855 30,296 30,116 29,643 29,724
======= ======= ======= ======== ========
PRIMARY EARNINGS (LOSS) PER SHARE $(.32) $ .02 $ .18 $(.50) $(.99)
======= ======= ======= ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 11.2
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CALCULATION OF FULLY DILUTED EARNINGS PER SHARE
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended
---------------------------------------------------------
1993 1992 1991 1990 1989
------- ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
NET INCOME (LOSS) $(9,619) $ 515 $ 5,359 $(14,939) $(29,341)
Add back debenture interest,
debt discount and expense
amortization, less
applicable taxes 3,243 3,111 3,394 2,280 2,280
------- ------- ------- -------- --------
NET INCOME (LOSS) FOR FULLY
DILUTED COMPUTATION $(6,376) $ 3,626 $ 8,753 $(12,659) $(27,061)
======= ======= ======= ======== ========
COMMON STOCK:
Shares outstanding from
beginning of period 29,968 29,822 29,718 29,596 29,265
Stock options exercised 41 136 12 1 271
Shares purchased for treasury,
from date of purchase (380) (6) -- -- (3)
Assumed exercise of stock options,
using treasury stock method 226 344 500 15 191
Shares issued for restricted stock -- -- -- 31 --
Assumed conversion of subordinated
debentures, from the latter of
the beginning of the period or
the date of issue 7,300 7,300 6,588 2,300 2,300
------- ------- ------- -------- --------
Weighted average number of
shares outstanding 37,155 37,596 36,818 31,943 32,024
======= ======= ======= ======== ========
FULLY DILUTED EARNINGS (LOSS)
PER SHARE $(.32) $ .02 $ .18 $(.50) $(.99)
======= ======= ======= ======== ========
</TABLE>
<PAGE> 1
EXHIBIT 13
NATIONAL EDUCATION CORPORATION
1993 ANNUAL REPORT
[NATIONAL EDUCATION CORPORATION LOGO]
<PAGE> 2
TABLE OF CONTENTS
1. Our Mission
2. NEC at a Glance
4. Letter to Shareholders
10. Business Profiles
18. Financial Highlights
19. Management's Discussion and Analysis
24. Financial Statements
28. Notes to Financial Statements
33. Industry Segment Data
35. Report of Independent Accountants
36. Directory of Worldwide Facilities
37. Corporate Information
<PAGE> 3
1.
OUR MISSION
National Education Corporation's mission is to provide quality multimedia
products and services for the education and training marketplace. We are
committed to being a leader in the transfer of knowledge and skills to improve
job performance and to enhance personal and professional growth. We believe
that through a participative management style and empowered work force, we will
foster a dynamic environment for every National Education Corporation employee
to make a significant contribution. By anticipating and responding to the
needs of our customers, we will meet our commitment to maximize shareholders'
value.
<PAGE> 4
2.
NEC AT A GLANCE
ICS LEARNING SYSTEMS
Independent Study
ICS is the world's largest and most established provider of independent study
opportunities. With headquarters in Scranton, Pennsylvania, the Company serves
students in nearly 150 countries and has offices in Canada, the United Kingdom,
Australia, New Zealand and Singapore.
REVENUES: $101 million
PRODUCTS/SERVICES: Prospective ICS students can choose from over 50 courses in
the United States, all accredited by the National Home Study Council, and more
than 100 courses abroad. Courses of study offered include associate degree
programs in business and technology, training in paraprofessional and
occupation fields, a high school diploma program and courses in personal
enrichment. Computer-related training is the Company's fastest growing product
line. ICS also offers training opportunities to business and government
through its Business and Industrial Training Division.
CUSTOMERS: According to statistics compiled by the National Home Study
Council, ICS' new enrollments in 1993 represented over 50 percent of the new
enrollments reported by the Council's members. Over 27,000 students enrolled
in 11 two-year associate degree programs in business and technology, while
approximately 35,000 students enrolled in ICS' high school diploma program. An
additional 250,000 students pursued courses of study in other career and
hobby-related areas in 1993.
EMPLOYEES: Approximately 700
NATIONAL EDUCATION CENTERS
Post-Secondary Career Schools
National Eduction Centers is one of the largest operators of post-secondary
career schools in the United States. The Company provides learning
opportunities primarily in five targeted occupational areas: medical,
electronics, business, automotive and aviation. Increasingly, training is
carried out in an environment that as much as possible simulates the actual
circumstances of the workplace.
REVENUES: $133 million
PRODUCTS/SERVICES: With headquarters in Irvine, California, National Education
Centers offers its training opportunities through 33 schools in 16 states.
Most schools offer multiple curricula but no school offers every discipline.
Courses offered in the Education Centers programs, which range in length from 8
to 36 months, are developed internally or with the assistance of consultants.
In many instances, these courses feature a modular nonsequential curriculum
design structure that creates scheduling flexibility for students.
CUSTOMERS: National Education Centers serves a variety of clients and
customers with diverse needs: individual students, government agencies with a
training mandate and businesses that provide continuing education opportunities
for their employees. The student population is ethnically diverse and most
receive some form of financial assistance from the federal government to fund
tuition and other educational expenses.
EMPLOYEES: Approximately 2,300
<PAGE> 5
3.
NEC AT A GLANCE
STECK-VAUGHN PUBLISHING CORPORATION
Supplemental Educational Publishing
As one of the country's largest publishers of supplemental educational
materials, Austin, Texas-based Steck-Vaughn offers educators a broad range of
quality products that address educational needs from early childhood through
adulthood. The term "supplemental materials" generally refers to softcover,
curriculum-based books, workbooks and other support materials that are used in
conjunction with or instead of traditional hardcover "basal" textbooks. The
Company also publishes reference and nonfiction products for school and public
libraries, as well as bookstores.
REVENUES: $53 million
PRODUCTS/SERVICES: For elementary, junior high and high school students with
diverse skill levels and from a variety of cultural backgrounds, Steck-Vaughn
provides more than 1,500 titles, including traditional and innovative
curriculum materials in every major content area. Reference and nonfiction
titles include two encyclopedia series and nearly 1,000 other reference titles.
The Steck-Vaughn adult education products are designed to help adult
learners-- both English and non-English speaking-- achieve literacy, basic work
and daily living skills and to prepare them to pass the General Educational
Development (GED) test. In 1990, and again in 1993, Steck-Vaughn was awarded
the exclusive distribution of the Official Practice Test of the GED Testing
Service of the American Council for Education.
CUSTOMERS: Educators and librarians in the over 80,000 elementary, junior high
and high schools throughout the United States, adult education centers, public
libraries, and bookstores.
EMPLOYEES: Approximately 300
NATIONAL EDUCATION TRAINING GROUP
Multimedia Training
NETG is a leading producer and worldwide distributor of multimedia products to
educate, train and transfer skills to corporate and government employees, with
specific emphasis on information systems (IS) training. Headquartered in
Naperville, Illinois, NETG course offerings range from hands-on, skill-based
training to courses which build awareness or provide a theoretical
understanding of today's business developments.
REVENUES: $68 million
PRODUCTS/SERVICES: NETG emphasizes multimedia training in business areas
characterized by rapidly changing computer technologies. The products offered
by the Company focus on topics which have the greatest potential impact on IS
professionals, such as computer-aided software engineering, downsizing
mainframes to client/server computing, development techniques for systems
designers, analysts and programmers and systems reengineering. In addition,
NETG offers an extensive library of training courseware featuring major
end-user software programs, as well as human resources and management
development programs.
CUSTOMERS: NETG serves customers in 34 countries from 74 offices and
production and distribution centers worldwide. Clients are offered customized
support for their training programs whether their needs require a specialized
area of NETG's training library or the entire offering. Customers can receive
products through the following major types of delivery media: Linear Video,
Computer-Based Training, CD-ROM, Interactive Video Instruction or
Instructor-Led Training.
EMPLOYEES: Approximately 600
<PAGE> 6
4.
TO OUR SHAREHOLDERS
As 1993 began, National Education Corporation (NEC) faced several major
challenges in both our corporate training subsidiary, National Education
Training Group (NETG), and our post-secondary career education subsidiary,
National Education Centers. We believe we have made substantive progress
toward turning around these two operations during the past year. As a result,
National Education Corporation's operating performance in the fourth quarter
improved for the first time since the third quarter of 1992. This was brought
about to a large extent by an improvement in NETG's operating results over the
prior year period. National Education Corporation's operating loss for the
year reflects the substantial investments we made during 1993 in product
development and marketing at NETG, which we believe are necessary to return the
operation to profitability. In addition, we brought in new senior management
staff at both NETG and the Education Centers to provide strong leadership and
implement the newly focused strategies of both organizations.
ICS Learning Systems, one of the world's largest and most well-established
providers of independent study, and Steck-Vaughn Publishing Corporation, one of
the nation's leading publishers of supplemental education materials, both
reported record financial performances for the year, which were fueled by
aggressive investments in product development, marketing and sales.
National Education Corporation's total revenues for 1993 were $355.9 million
with a net loss of $9.6 million, or $.32 per share. That compares to net
income of $515,000, or $.02 per share in 1992 on revenue of $375.0 million.
The 1993 loss includes a third quarter $32.9 million pretax write-off for the
closure of 14 schools at National Education Centers, as well as a write-down of
certain intangible assets at the National Education Training Group. The loss
was partially offset by a one-time after tax gain of $21.3 million on the
initial public offering of Steck-Vaughn shares.
<PAGE> 7
5.
TO OUR SHAREHOLDERS
NATIONAL EDUCATION TRAINING GROUP -- Our NETG subsidiary reported an operating
loss before unusual items of $26.0 million in 1993 on revenues of $68.3
million. By comparison, this subsidiary reported an operating loss before
unusual items of $21.9 million on revenues of $82.6 million in 1992. The
revenue decrease reflects the declining demand for mainframe computer training.
During 1993, NETG focused on the development of training courses that are
significantly growing in demand in such areas as client/server computing,
business process reengineering, LAN, UNIX, Windows, computer-aided software
design and desktop computing. All told, we generated 163 new products in 1993,
most of which were in the high demand areas listed above. In addition to
product development investments, part of the year's loss also is related to
investment in other critical areas, including sales and marketing. Although
product development and marketing costs increased, total operating expenses
were down $8.6 million for the year. At the same time, we have signed up and
licensed 15 business partners such as Novell Corp. to have their products
distributed through our channels of distribution.
In February 1993, we named Robert Soto as president of NETG. Much of Mr. Soto's
experience has been as a turnaround specialist at other high technology
organizations. During the year, we also strengthened the management team with
new vice presidents in such key areas as product development, marketing and
sales. With this new management team in place, much of 1993 was spent in
restructuring the organization, conducting market research, and developing
training products more appropriately suited to the marketplace. During the
latter half of the year, we saw positive indications that the steps taken
during the year to reposition NETG's training products in the marketplace were
beginning to take hold. During the third and fourth quarters of 1993, new
orders and contracts increased by 23 percent and 48 percent, respectively.
Overall, we believe we have begun to successfully reposition NETG's training
products in the marketplace and to turn around this operation. Going forward,
we expect to focus significant effort on opportunities that exist at NETG to
provide product to meet changing market demands, reengineer our business
processes and reduce costs in the operation, while also generating growth in
revenues.
NATIONAL EDUCATION CENTERS -- Revenues at our post-secondary career school
subsidiary totaled $133.2 million in 1993, down from $157.0 million in 1992.
Loss from operations before unusual items amounted to $5.5 million, in
comparison to operating income of $10.8 million in 1992. The decreases in
revenues and income for the year are related to a decline in the number of
students enrolled at our National Education Centers. These reduced enrollments
were due in part to our decision in 1993 to cease admitting new students at 15
of these post-secondary career schools, located primarily in low-income urban
areas where the risk of student loan defaults is high. An increasing number of
lenders and guarantors are declining to serve students of post-secondary career
schools with higher default rates. As a result, many potential Education
Centers' students have been unable to pursue educational opportunities. Such
diminished access to funding for students of these 15 schools would have
resulted in further operating losses for the year at this subsidiary.
In addition, National Education Centers raised its admission standards for new
enrollments at the remaining 33 schools. While we believe higher admission
requirements will attract a better qualified student who is more likely to
complete any given course of study, in addition to repaying their student loans
and becoming successfully employed, the
<PAGE> 8
6.
TO OUR SHAREHOLDERS
total number of new student enrollments was lower in 1993, partially as a
result of these higher admission standards. On the other hand, both completion
and placement rates improved in 1993.
These higher completion and placement rates have resulted, in part, from an
ambitious value creation program which the Education Centers embarked on during
1993. Our objective is to evaluate our strengths and weaknesses as an
organization in attracting students to our schools and in delivering the level
of service they deserve and expect as customers. Initial results, as measured
by student surveys, retention and placement rates, indicate that we have
improved our delivery of a quality curriculum product to a student-client that
can benefit from that product.
Our mission at the Education Centers is to train workers who can make a
contribution to the growth of American business and industry. To accomplish
this, we begin by offering curriculum driven by the needs of employers. For
example, the 1992-93 Occupational Outlook Handbook published by the United
States government predicts that the number of jobs in computer programming and
most allied health fields will grow nearly 35 percent through the year 2005.
Clerical and secretarial opportunities, as well as automotive and aircraft
mechanics' jobs, will increase as much as 24 percent. By tracking such
national trends and developing strong alliances with key employers in the areas
where our schools are located, we are able to modify existing curriculum and
introduce new courses of study to address specific market needs. Toward this
end, based on employer surveys and focus groups held across the country, we
revised both our allied health and electronics curricula, during 1993.
Well-trained, qualified instructors who have relevant occupational experience
and strong instructional skills also are key to the Education Centers' ability
to attract students and to keep them enrolled throughout the length of their
courses. In 1993, we initiated a number of efforts to improve instructor
qualifications and the delivery of learning experiences to our students. Those
efforts included pilot projects in instructor training focused on providing
expanded academic counseling and identifying and responding to different
student learning styles. We believe these projects, as well as increased
management focus on completion, helped in the material improvement in
completion rates experienced in 1993. In addition, placement resources were
increased by 24 percent throughout the system. Consequently, placement rates
rose substantially.
During 1994, we will continue to work on strategies to expand our business
opportunities in non-Title IV areas. We believe Accelerated Adult Learning
(joint venture projects with accredited four-year educational institutions),
contract training, and the continued development of revenue from government
sources, other than the U.S. Department of Education, hold the most promise in
the coming year.
ICS LEARNING SYSTEMS -- Our independent study subsidiary had a strong year,
with revenues increasing about 12 percent to $101.3 million in 1993, compared
to $90.3 million in 1992. Operating income rose nearly 14 percent to $21.4
million in 1993, up from $18.8 million in 1992. These increases in revenues
and operating income resulted primarily from an approximate 10 percent increase
in student enrollments and the transfer of the Industrial Print division from
NETG in early 1993.
<PAGE> 9
7.
TO OUR SHAREHOLDERS
The primary factors contributing to increased enrollments were an expanded
telesales operation which improved the conversion of inquiries from prospective
students into enrollments, several new product introductions, and increased
advertising. Our computer related training is ICS' fastest growing product
line and has achieved compound annual growth of over 30 percent in revenue and
enrollments since 1988.
One of the most exciting developments of the year was the creation of ICS
On-Line -- an electronic campus now available on America Online, the fastest
growing service of its kind in the United States. Such a user-friendly service
gives us the ability to enroll students electronically and to offer real-time
instruction. For example, our computer students have the opportunity to
participate in on-line sessions which focus on specific aspects of a course
that are particularly interesting or challenging for students. They can query
their instructor, they can learn from other students, and they can discuss
various aspects of their lessons.
As the first independent study school to establish an on-line service, we
believe ICS has demonstrated an important commitment to utilizing new and
innovative methods to expand its reach into the marketplace. In anticipation
of future opportunities to make even greater use of telecommunications and
enhance in-house development capabilities, during 1993, we completed a
conversion of our entire library of ICS course materials into a digital format.
This process has also served as a platform for the completion of several new
multimedia CD-ROM products for introduction during the first quarter of 1994.
With the 1993 transfer of the Industrial Print operation from NETG, which we
have renamed ICS Learning Systems Business and Industrial Training Division,
ICS is in a strong position to pursue business and industrial training
opportunities with business and government agencies. As organizations around
the country face the growing need to upgrade and broaden the skills of current
workers, ICS' independent study programs provide several unique advantages.
For example, students can learn at a time and place convenient for them and
their employer; the pace of the learning process can be adapted to the needs of
the individual student; examinations can be tailored to measure the
proficiencies in areas of specific interest to employers; and progress reports
can be generated to enable employers to track a student's advancement. Through
renewed marketing and sales efforts, which include an expanded sales force, a
streamlined course catalog offering even more courses, and a database marketing
system, we expect to increase significantly the customer base for this division
in the coming year.
Overall, as technological advances such as personal computers, and eventually
the interactive Information SuperHighway, transform the way we all receive and
transmit information, we believe ICS will have substantial new opportunities to
expand its business beyond today's traditional target markets. Additionally,
the emerging global marketplace will provide international opportunities, not
only in the markets we primarily serve today but also in regions such as Latin
America, Southeast Asia and Eastern Europe. Going forward, we believe expanded
domestic and international telesales operations, new product development
emphasis on computer courses, and the new Business and Industrial Training
operation, place ICS in a strong position to participate fully in the
increasingly exciting marketplace of distance learning and independent study.
<PAGE> 10
8.
TO OUR SHAREHOLDERS
STECK-VAUGHN PUBLISHING CORPORATION -- Our supplemental educational publishing
company, Steck-Vaughn (NASDAQ:STEK), completed an initial public offering of
approximately 2.7 million shares in 1993 while also reporting record financial
performance. Revenues for 1993 were $53.2 million, compared to revenues of
$45.1 million for the prior year. Net income for 1993 was $8.0 million, or
$.61 per share, compared to net income of $7.9 million, or $.59 per share (pro
forma), for the same period in 1992. Income increased slightly in 1993 over
the prior year, as selling and marketing efforts expanded to position the
company for growth opportunities in 1994 and beyond. Over a five-year period,
sales have grown at a 21 percent compound annual growth rate while earnings
have more than doubled.
Throughout 1993, sales in the library and adult education segments performed at
anticipated levels while the elementary and secondary segments were somewhat
constrained during part of the year by budgetary pressures on schools in
certain areas of the country.
We believe that among Steck-Vaughn's greatest strengths as an educational
publisher is the broad reach of the Company's supplemental educational
materials. Essentially, Steck-Vaughn is the only supplemental publishing
company to offer a wide range of quality products that address educational
needs from early childhood through adulthood.
Throughout 1993, one of Steck-Vaughn's most important accomplishments was our
success in developing 232 new and revised products, including 150 curriculum
products and 82 library titles. We believe each of these products is an
excellent example of Steck-Vaughn's commitment to develop high quality,
reasonably priced products that focus on the changing needs of today's
teachers. Whether students are in the primary grades or in non-English
speaking adult literacy programs, our goal is to be responsive to educators'
needs for materials that work in modern classrooms where skill levels vary and
cultural backgrounds are increasingly diverse.
Because supplemental educational materials have shorter product development
cycles than hardcover "basal" textbooks, they are less costly to produce. We
think this gives our products an important advantage in the dynamic environment
of today's classrooms. A leading industry research group, SIMBA, recently
confirmed this trend. In 1993, they reported that supplemental educational
materials, with estimated sales at $1.1 billion in 1992, was the fastest
growing category of sales to the school market for the 1990-92 period.
Another major accomplishment for Steck-Vaughn during 1993 was the successful
acquisition of The Magnetic Way(R) product. By giving students the opportunity
to manipulate characters and scenes on a magnetic board to create their own
stories, this interactive, multidimensional product provides educators a
powerful tool for teaching reading, writing, critical thinking, speaking and
listening skills. Since the acquisition of Magnetic Way, Steck-Vaughn's
product development staff has expanded this exciting product to include a full
range of language and content area programs for kindergarten through adult
education for both English and non-English speaking students.
We will continue to look for opportunities to grow our business through
acquisitions of products like Magnetic Way and the Raintree Publishers library
product (acquired in 1991) that support our growth strategies. We also
consider acquisitions an excellent means of moving into new complementary
education markets and of expanding our technology-based educational materials.
<PAGE> 11
9.
TO OUR SHAREHOLDERS
Even though we believe that print will remain a primary means of instruction in
most classrooms in the near future, we recognize that computers hold
significant potential as a teaching tool. As a result, we have complemented
several of our existing products with software programs that can be used
independently or in conjunction with the print series of that same product. In
1993, Steck-Vaughn committed to the latest technology by developing a CD-ROM
component for our World of Dinosaurs series for introduction in early 1994.
Unlike other educational CD-ROM products, World of Dinosaurs is more than an
electronic book. It is a complete reading program built on well-established
reading instruction principles, including pre- and post-reading activities.
Aimed at children 6 to 10 years old, this innovative product features animated
dinosaurs, video clips, dramatic graphics and full audio to bring the printed
word -- and extinct animals -- to life.
In the fourth quarter of 1993, we completed another major accomplishment -- the
expansion and realignment of the Steck-Vaughn sales force into two segments.
One group will concentrate on the elementary, and junior high schools and
school libraries, and the other group will focus on the high school and adult
education markets. This reorganization, of what was previously a smaller group
calling on all Steck-Vaughn markets and selling all products, will allow the
two groups to focus their expertise, time and energy in a more productive way.
As a result, we expect to increase Steck-Vaughn's market penetration and market
share.
------------
As National Education Corporation looks to the future, we continue to see
growing demand for our products and services. We have made significant
investments and implemented considerable changes to turn around the operations
at both NETG and the Education Centers. Additionally, our investments in ICS
and Steck-Vaughn have produced continued record financial performance. We
believe that the management strategies we have undertaken exemplify our resolve
to return NEC to profitability and our commitment to maximize shareholders'
value.
Sincerely,
DAVID C. JONES JEROME W. CWIERTNIA
David C. Jones Jerome W. Cwiertnia
Chairman of the Board President and Chief Executive Officer
[PHOTO] [PHOTO]
<PAGE> 12
10.
ICS LEARNING SYSTEMS
For more than a century, ICS Learning Systems has provided long distance
education and training to students of all ages and backgrounds. Since 1890,
more than 10 million students have enrolled in ICS courses throughout the
world: Accounting, Computers, Engineering, Wildlife/Forestry and hundreds of
other titles. Some ICS students seek to complete degree programs while
training for a new career. Others enhance a current career by taking one or
two courses. Still others take a course for fun and leisure. But all have one
thing in common: the learning takes place at the convenience of the student.
When Mr. Henry Campos came to the United States from the Philippines in 1985,
he took a job as an insurance claims adjuster with Aetna Life & Casualty Co. at
their Seattle branch office. Soon thereafter, he developed an interest in
computers. But going to school was not an option -- not enough time, not
enough money, not enough energy.
Henry vividly recalled an electronics course his father took through ICS some
35 years ago in the Philippines. That course launched his father's career as
manager of a large radio station. So Henry signed up to take a series of ICS
computer programming courses. "The lessons were very clear, very
self-explanatory," he says. "It jump-started me into the world of computers."
Since he completed the courses, Aetna has moved him to the home office in
Connecticut and promoted him five times. His current title is "Business
Analyst/Software Developer," and his duties include programming of personal and
mainframe computers. "The computer programming world has changed tremendously
over the past four years," says Henry. "But with the ICS course as a solid
foundation, I can read any new computer language developed for either the IBM
or Apple."
------------
Mr. Jergen Vind began his career in the construction industry during the
Depression. He wanted to study architecture but couldn't afford to go to nearby
U.C. Berkeley. One day, he saw a trade magazine advertisement describing ICS.
He signed up for a four-year course and has used the architectural knowledge
ever since. "I used the architectural background for 40 years in the
construction business," he says. During World War II, his architectural
knowledge helped him get a job in the engineering department with the U.S. Navy
in San Diego. Afterwards, the Navy sent him to Berkeley to study structural
engineering. "Without ICS, I would not have had all of these opportunities,"
Jergen says.
In 1982, he retired from the construction business and moved to Reno, Nevada.
One evening, he saw a television advertisement for ICS. The course of study
this time: Civil Engineering. "I thought about going to the University of
Nevada, Reno, but I couldn't see tying myself up like that every day," says
Jergen, now 77. How's the course going? "It's difficult but very thorough."
<PAGE> 13
11.
ICS LEARNING SYSTEMS
[An original color illustration of an adult learner working on a
computer at home with educational materials received through the
mail.]
<PAGE> 14
12.
NATIONAL EDUCATION CENTERS
Never before has there been such rapid change in the work force. Entire
industries come and go in just a few years' time. At NEC's Education Centers,
our goal is to help people learn new skills for the U.S. economy of the 1990s
and beyond. With 33 schools in 16 states, we provide job-oriented training in
high-growth and high-technology areas of business and industry. Our programs
include post-secondary training in such diverse fields as medical and dental
assisting, electronics, personal computers, automotive repair, aviation, and
broadcasting. The courses are offered on a flexible schedule so that students
can keep working if they need to do so. Success depends on commitment and hard
work, but in the end the effort pays off, as it did for the NEC student
profiled here.
Mr. Ted Keys was working in the construction industry in San Bernardino,
California, when he came to the conclusion that his future opportunities were
limited. Working three months straight was great, but then he would go three
months without work. Also, he wasn't a kid anymore, and his muscles were
getting increasingly sore with each new job.
A few years ago, he saw a television advertisement for National Education
Centers' training in electronics. He had often considered going back to
college, but his work schedule was too inflexible, and the courses never seemed
to be offered at the time he was interested in enrolling. So he called NEC's
toll-free number. Within weeks, he received brochures, a tour of the school,
and an invitation to get started.
That's not to say that the program he chose was easy. The 22-month night
program covered semiconductors, computers, digital electronics, programming --
plus resume' writing and job interview skills. "Ted worked all day, was a
student at night, had perfect attendance and a 3.93 grade point average,"
recalls Winefred Johnson, NEC's placement director in San Bernardino.
Ted epitomized one of the most important attributes of successful students: "A
determination to better themselves," says Johnson, who placed 600 graduates in
1993 and is shooting for 800 graduates in 1994.
These days, Ted works for American Greetings Corp., the greeting card company
based in Cleveland, Ohio. American Greetings has installed thousands of
"Create-A-Card" computers in the greeting card sections of retail stores
throughout the U.S. The machines allow a customer to create his or her own
greeting card, if none of the traditionally printed cards are to their liking.
At NEC, Ted took courses on computer repair. "I install the units, do upkeep
on them, train store personnel on how to operate the machines, and do minor
repairs," he says.
The days can be long. Recently, Ted worked from 7:30 a.m. to 8:30 p.m., but
the work is steady, the pay is good, and the company offers upward mobility.
"I can see becoming a regional manager. Or, if something opens up at corporate
headquarters, I would move there." How has NEC helped Ted? "Now I've got
something that's solid and steady," he says. "I really feel that without them,
a job like this would only be a dream."
<PAGE> 15
13.
NATIONAL EDUCATION CENTERS
[An original color illustration of the lobby area of an
Education Center with students reviewing information on
a bulletin board related to courses in business, medical
services, automotive, aviation, broadcasting and electronics.]
<PAGE> 16
14.
STECK-VAUGHN PUBLISHING CORPORATION
A growing diversity in the classroom, the increasing cost of the traditional
textbook, the continuing challenges in adult literacy-- these are among the
reasons why Steck-Vaughn has flourished over the past several years. With a
broad range of quality products that address educational needs from early
childhood through adulthood, Steck-Vaughn is one of the nation's largest
publishers of softcover curriculum-based books, library and reference
materials, as well as other instructional materials.
Flip through any one of Steck-Vaughn's 1994 catalogues and you'll find titles
as varied as World of Dinosaurs (CD-ROM format), Big Books of Poetry, Early
Math, Critical Thinking, Reading For Today, Stories of America, World Myths,
Vocabulary Connections and literally hundreds of other titles for students in
kindergarten through high school, as well as for adults.
"Today, we have to provide for a wide variety of abilities and interests in the
classroom," says Maxine LaRaus, a teacher in Spring Valley, New York, who has
been using Steck-Vaughn materials for more than 15 years. What does she like
about Steck-Vaughn? The variety of offerings-- workbooks under $10, responsive
customer service and a market-driven focus. "My sales rep is fantastic," says
LaRaus. "First of all, she's very knowledgeable. Secondly, she's always
available. Thirdly, she seems to be very interested in what I do. And I like
that." Ms. LaRaus coordinates the English as a Second Language (ESL) program
for her school. "In the 6th grade, I've used Geography & You and America's
Story because the content is strong yet the sentences are a little bit easier,"
she says. "Teachers like these books because they create access. We have lots
of children who wouldn't be getting this information if they had to read a
traditional textbook."
Indeed, America's classrooms are characterized not only by students with
diverse academic skill levels but also diverse cultural heritages.
Steck-Vaughn has taken a keen interest in this dynamic marketplace and has
developed products accordingly. One of the African-American authors
Steck-Vaughn works with is Dr. Evangeline Nicholas, who writes educational
materials for children based on her life experiences, the children she knows
and the things that have happened to them. "At one school in Chicago where I
taught early in my career," Dr. Nicholas says, "we had children from about 30
or 40 different ethnic groups who spoke 100 or so different dialects and
languages. I began making up stories on the spot about youngsters who were in
the room instead of reading about someone in a book with whom they were not
familiar. So I became a storyteller out of the need to identify with the
children in my classroom," Nicholas says. In 1993, Steck-Vaughn published a
series entitled "In Vann's Classroom" written by Dr. Nicholas to teach children
reading and writing skills.
Steck-Vaughn also offers a comprehensive group of products for the adult
learner from literacy through GED test preparation. "We use Steck-Vaughn math
products and Vocabulary Connections," says Jim Faust, supervisor of adult
education in Tangipahoa Parrish, Louisiana. "Their materials are very easy to
use and allow students to develop and practice basic skills in the context of
real-life situations."
<PAGE> 17
15.
STECK-VAUGHN PUBLISHING CORPORATION
[An original color illustration of a young student with a
teacher sitting on top of a pile of softcover books for such
curriculum areas as Mathematics, English, and Writing.]
<PAGE> 18
16.
NATIONAL EDUCATION TRAINING GROUP
The mission of NETG is to train and develop people to upgrade their skills and
to use technology in a powerful, cost-effective way. With over 1,200 courses,
and 10,000 hours of stimulating instruction, NETG offers the right subjects for
the 1990s: client/server and desktop computing, networking, application
development -- as well as courses in manufacturing and human resources.
Another key: we deliver training products in a variety of media -- video,
personal computers, workstations, CD-ROM -- as well as more traditional
formats.
At Mercury Marine Company, a marine engine manufacturer based in Fond du Lac,
Wisconsin, we helped more than 700 people upgrade their skills in computing,
management and leadership skills. "NETG offered us an open-ended contract by
which we had access to hundreds of training programs for our personal
development center," says Joseph Slezak, the company's director of training.
"That capability allowed us to instantly gear up to offer hundreds of employees
access to training programs," Slezak says.
At a large state health insurer, the manager of corporate learning centers had
the task of disseminating skills training to nearly 7,000 employees. So he
called NETG to design a learning center at corporate headquarters and two other
locations to upgrade PC literacy skills, for such software programs as Lotus
1-2-3(R) and WordPerfect(R), as well as basic skills in reading, mathematics
and writing, and interpersonal skills training for supervisors and managers.
The results: "We've seen measurable improvements in our employees' ability
levels in each of the skills areas where training has been made available," he
says. "NETG was extremely responsive to our needs. I have found them to be
probably the most cooperative vendor that I have ever worked with."
Here are a few other ways we have helped corporate America retrain:
- -- At Halliburton Energy Services, a Halliburton Company organization and one
of the world's largest suppliers of energy products and services, the internal
training department needed a cost-effective alternative to instructor-led
training. NETG's self-paced courseware provided PC skills training in an
interactive learning environment.
- -- Marine Midland Bank asked NETG to develop courses in personal computing,
network technology, voice and data communications and effective writing.
Employees check training materials in and out as often as they require. As a
result, the bank was able to not only reinforce its employee training programs
but also reduce training expenses.
- -- U.S. Steel recently opened a new NETG Multimedia Learning Center in its
Fairfield, Alabama plant. The learning center is open around the clock, an
ideal arrangement to train employees who work evening and graveyard shifts and
can't commit to a traditional classroom schedule. Employees can choose courses
in computer skills, as well as electrical, mechanical and hydraulic
maintenance.
<PAGE> 19
17.
NATIONAL EDUCATION TRAINING GROUP
[An original color illustration of a corporate training center
with employees working with computer and video-based training
materials.]
<PAGE> 20
18.
National Education Corporation and Subsidiaries
FIVE YEAR FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(amounts in thousands, except per share amounts) 1993 1992 1991 1990 1989
- ------------------------------------------------ -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET REVENUES $355,885 $375,041 $385,424 $371,394 $400,828
Income (loss) before amortization of acquired
intangible assets, unusual items, nonoperating
items and income taxes (benefit) $ (3,284) $ 15,765 $ 26,437 $ 6,596 $ 5,814
Amortization of acquired intangible assets 4,775 6,206 6,570 6,896 6,986
Unusual items, net* 32,858 3,690 - (154) 27,356
Other nonoperating expenses, net 3,071 4,742 8,844 9,476 9,149
Gain on Steck-Vaughn Publishing
Corporation public stock offering (21,260) - - - -
Income taxes (benefit) (13,713) 612 5,664 5,317 (8,336)
Minority interest 604 - - - -
-------- ------- -------- --------- --------
NET INCOME (LOSS) $ (9,619) $ 515 $ 5,359 $ (14,939) $(29,341)
======== ======= ======== ========= ========
PER SHARE DATA
Primary earnings (loss) per share $ (.32) $ .02 $ .18 $ (.50) $ (.99)
======== ======= ======== ========= ========
Fully diluted earnings (loss) per share $ (.32) $ .02 $ .18 $ (.50) $ (.99)
======== ======= ======== ========= ========
Weighted average number of shares outstanding:
Primary 29,855 30,296 30,116 29,643 29,724
Fully diluted 37,155 37,596 36,818 31,943 32,024
SELECTED FINANCIAL INFORMATION
Cash and marketable securities $ 54,846 $ 59,464 $ 23,250 $ 33,115 $ 20,153
Total assets 323,891 333,911 330,642 378,294 407,507
Capital expenditures 15,885 11,877 6,527 7,475 18,360
Total debt 80,657 82,128 80,839 127,771 135,785
Stockholders' equity 135,631 151,282 152,808 147,081 157,909
Return on average equity (6.7)% .3% 3.6% (9.8)% (17.1)%
Total debt-equity ratio .6-1 .5-1 .5-1 .9-1 .9-1
======== ======= ======== ========= ========
</TABLE>
* See Notes to the Consolidated Financial Statements for discussion of the
1993 and 1992 unusual items.
In 1990, the Company reached an agreement with its former chairman and chief
executive officer to settle damages under his employment agreement and all
other claims asserted by him arising out of the termination of his
employment. Accordingly, the Company settled in an amount of $5,346,000
which has been reflected as an unusual charge in its 1990 operating results.
Also in 1990, the Company received from its insurance underwriter an amount
of $5,500,000 to settle its contribution to class action settlement costs of
$11,850,000 recorded in 1989 for class action lawsuits against the Company
and certain present and former officers and directors. This amount was
recorded as an unusual gain in the 1990 operating results.
In 1989, the Company recorded unusual charges of $27,356,000 ($17,871,000
after tax or $.60 per fully diluted share). Unusual items in the amount of
$11,850,000 reflect the settlement costs of the class action lawsuits
against the Company and certain present and former officers and directors.
The unusual items also reflect restructuring, consolidation and other
expenses of $11,506,000 which include, but are not limited to, severance
payments to individuals, the closing and relocation of facilities and the
write-down of certain acquired intangible assets, and a $4,000,000 charge
resulting from issued credits arising from the reconciliation of customer
accounts following the conversion to a new management information system at
NETG during 1989.
<PAGE> 21
19.
National Education Corporation and Subsidiaries
MANAGEMENT'S DISCUSSION AND ANALYSIS
1993 COMPARED TO 1992
Revenues of $355,885,000 for the year ended December 31, 1993 were $19,156,000
or 5.1% lower than revenues of $375,041,000 in the prior year. Net loss of
$9,619,000 or $.32 loss per share compared to net income of $515,000 or $.02
per share in 1992. The decrease in revenue primarily results from the closure
of one school during the first quarter of 1993 and 14 schools during the third
quarter of 1993 at the Education Centers and reduced revenues at NETG. These
revenue declines were partially offset by increased revenues at ICS and
Steck-Vaughn. The loss during the year was primarily due to the net revenue
reductions and unusual charges totaling $32,858,000 ($22,921,000 after tax or
$.77 loss per share) recorded at the Education Centers and NETG. The Education
Centers recorded unusual charges of $23,626,000 resulting from a restructuring
charge for the write-down of certain assets and the estimated costs of closing
14 schools announced in the third quarter of 1993. Unusual charges of
$9,232,000 at NETG resulted from the write-down of certain acquired intangible
assets. Partially offsetting these unusual charges was a gain of $21,260,000
resulting from an initial public offering of 2,668,000 shares of Steck-Vaughn
Publishing Corporation common stock. The public offering reduced the Company's
ownership of Steck-Vaughn from 100% to 81.7%.
ICS Learning Systems revenues of $101,319,000 increased $11,027,000 or 12.2%
from revenues of $90,292,000 in 1992. Operating income of $21,368,000
increased $2,588,000 or 13.8% from operating income of $18,780,000 in the prior
year. The revenue and operating income increases at ICS primarily resulted
from a 10.1% increase in enrollments, the transfer of the Industrial Print
division from NETG to ICS as of January 1, 1993 and a higher student population
carry-in at the beginning of the year in comparison to the prior year. The
enrollment increase at ICS was primarily due to continued improvement in
converting leads to enrollments resulting from telesales and other
telemarketing efforts in the domestic operations and certain international
locations. The acquisition of the Industrial Print operation has enhanced ICS'
ability to effectively penetrate the business and corporate industrial
marketplaces. Partially offsetting the revenue and operating increases was the
impact of lower average exchange rates at the international locations,
particularly in the United Kingdom. Selling and promotional costs decreased as
a percentage of revenues in the domestic operations while they were partially
offset by increases in the international operations. The decrease in the
domestic operations was primarily due to the efficiencies associated with
telesales and other telemarketing efforts, and proportionately lower costs
associated with Industrial Print. Higher selling and promotional costs as a
percentage of revenue were experienced at the international operations as a
result of increased marketing efforts designed to continue stimulating
enrollment growth.
Steck-Vaughn Publishing Corporation revenues of $53,156,000 were $8,032,000 or
17.8% higher than revenues of $45,124,000 in the prior year. Operating income
of $13,566,000 increased $1,010,000 or 8.0% as compared to operating income of
$12,556,000 in 1992. The revenue and operating income increases at
Steck-Vaughn were primarily due to the successful marketing of new and revised
products introduced during the past several years by the expanded sales and
marketing organization and new product acquisitions during the year.
Steck-Vaughn's commitment to the development of new and revised products has
positioned them for strong growth in the supplemental educational marketplace.
By continuing to expand its product offerings, Steck-Vaughn expects to continue
to capitalize on the increasing demand for supplemental educational, library
and adult education products despite severe budgetary pressure on schools
located in certain geographic areas of the country. The sales and marketing
organization was significantly expanded during 1992 which facilitated the
growth experienced during 1993, however; the full impact of this expansion
increased costs during 1993 resulting in higher selling and marketing expense
as a percentage of revenue. Due to the rapidly expanding product offerings,
Steck-Vaughn reorganized its sales force effective January 2, 1994. During
1993, each salesperson was responsible for the whole product range which
included elementary, high school, library and adult education markets.
Beginning in 1994, the sales force will be segmented into two groups. One
group will focus on the elementary and library markets while the other group
will focus on the high school and adult education marketplaces.
Education Centers revenues of $133,151,000 decreased $23,892,000 or 15.2% from
revenues of $157,043,000 in the prior year. Operating losses before unusual
items of $5,511,000 compared to operating income before unusual items of
$10,835,000 in 1992. During the third quarter of
<PAGE> 22
20.
MANAGEMENT'S DISCUSSION AND ANALYSIS
1993, the Education Centers restructured its operations and ceased new student
enrollments at 14 of its school locations, while allowing existing students to
complete their educational programs at these schools. As a result, the
Education Centers recorded an unusual charge of $23,626,000 which included a
write-down of assets and estimated costs of closing 14 schools. The school
closures were due primarily to an increasing number of lenders and guarantors
declining to serve students of vocational schools with higher default rates.
As a result, many potential Education Centers' students have been unable to
enroll due to the lack of funding, especially in the longer term, higher priced
courses such as the electronics program. Since the date of the announcement to
close these schools, the related revenues and operating results have been
recorded to accrued restructuring expense. Additionally, revenues decreased
due to more restrictive admission standards established by Education Centers
for new enrollments at the remaining schools which resulted in fewer starts for
the year. Due to lower revenues and the high level of fixed costs necessary to
operate post-secondary career schools such as these, course materials and
service costs and selling and promotional costs have increased as a percentage
of revenues. Provision for doubtful accounts decreased during the year
primarily due to the reduced revenues and favorable collection trends. General
and administrative costs increased during the year as a result of increased
training and ongoing quality and productivity initiatives at the Education
Centers.
NETG revenues of $68,259,000 decreased $14,323,000 or 17.3% from revenues of
$82,582,000 in the prior year. Operating losses before unusual items of
$25,950,000 increased $4,096,000 from losses of $21,854,000 in the prior year.
During the third quarter of 1993, NETG recorded an unusual charge of $9,232,000
which resulted from the write-down of certain acquired intangible assets. The
decrease in revenue and increased operating loss at NETG primarily resulted
from lower contract backlog at the beginning of the year and the transfer of
the Industrial Print operation to ICS effective January 1, 1993. New orders
and contracts increased 39.5% during the later half of the year resulting in an
11.2% increase for the year. Product development expenses increased $3,028,000
or 28.6% during the year as NETG continued to develop new training products in
the areas of client/server computing, business process reengineering, end user
desktop computing, and personal and professional development. As a result of
the decreased revenue and increased product development expense, course
materials and service costs increased significantly as a percentage of revenue.
Despite lower selling and promotion expenses, these expenses increased as a
percentage of revenue during 1993 primarily as a result of the significant
revenue decline. During December 1993, NETG sold certain assets and
liabilities of NETG-Canada to SHL Systemhouse, Inc. at approximately book
value. The sales agreement also provides for certain future royalties on the
sale of NETG products in Canada. The net assets and operating results of NETG
Canada are not material to the operations of NETG.
General corporate expenses of $11,532,000 increased $774,000 or 7.2% from
expenses of $10,758,000 in the prior year. The increase in corporate expenses
primarily resulted from initial investments in the reengineering of certain
company-wide finance processes and information systems.
Operating results of ICS and NETG foreign operations by geographic region
experienced similar changes in revenues and income as previously discussed.
Foreign currency losses of $243,000 were recorded during 1993 compared to
losses of $2,570,000 in 1992. The prior year currency losses primarily
resulted from the significant exchange rate decline of the British pound
sterling and its effect on the U.S. dollar denominated current intercompany
balance at NETG-U.K. payable to the U.S. operations.
1992 COMPARED TO 1991
Revenues of $375,041,000 for the year ended December 31, 1992 were $10,383,000
or 2.7% lower than revenues of $385,424,000 in the prior year. Net income for
1992 of $515,000 or $.02 per share compared to net income of $5,359,000 or $.18
per share in the prior year. The decrease in revenue is due to reduced revenues
at NETG which were offset by increased revenues at Education Centers, ICS and
Steck-Vaughn. The reduction in income before income taxes is principally
caused by decreased revenues at NETG and unusual charges of $3,690,000
($2,251,000 after tax or $.07 per share) at NETG and Education Centers. The
unusual charges, recorded during the fourth quarter of 1992, represent
severance payments to individuals and lease termination charges which include
the write-down of fixed assets and leasehold improvements. Partially offsetting
the reductions to income is favorable loss experience in the areas of group
medical, general insurance and workers' compensation which resulted from loss
control programs implemented during prior years.
ICS revenues of $90,292,000 increased $8,221,000 or 10.0% from $82,071,000 in
1991. Operating income of $18,780,000 increased $2,732,000 or 17.0% from
operating income of $16,048,000 in the prior year. Revenue and operating
income at ICS increased during the year due to increases in the active student
population and new product introductions during 1992. The higher active
student population at ICS primarily resulted from increased enrollments
<PAGE> 23
21.
MANAGEMENT'S DISCUSSION AND ANALYSIS
at the international locations due to new selling methods which enroll students
over the telephone. Continued cost control throughout ICS reduced course
materials and service costs as a percentage of revenue.
Steck-Vaughn revenues of $45,124,000 were $7,080,000 or 18.6% higher than
revenues of $38,044,000 in 1991. Operating income of $12,556,000 increased
$3,906,000 or 45.2% from operating income of $8,650,000 in the prior year.
Revenue and operating income at Steck-Vaughn grew significantly during the year
primarily due to new product introductions and expanded sales and marketing
efforts. New and revised products introduced during the last three years have
increased sales in Steck-Vaughn's markets. Additionally, reductions in school
budgets have better positioned Steck-Vaughn's lower priced supplemental
textbooks. Increased library sales have resulted from new and revised products
introduced during the last year. As a result of the growth experienced over
the past three years, Steck-Vaughn sold its warehouse during the year at a gain
and purchased a larger warehouse which will better accommodate current and
future operating requirements. Operating margins improved 6.3% due to lower
incremental costs required to service revenue growth and reduced selling and
marketing costs as a percentage of revenues.
Education Centers revenues of $157,043,000 increased $4,503,000 or 3.0% from
$152,540,000 in 1991. Operating income before unusual items of $10,835,000
increased $1,411,000 or 15.0% from operating income of $9,424,000 in the prior
year. The increases in revenue and operating income were primarily due to
higher average tuition rates resulting from price increases during the year
which were partially offset by a slightly lower active earning student
population. Operating income improved due to favorable loss experience in the
areas of group medical, general insurance and workers' compensation. Selling
and promotional costs as a percentage of revenue declined due to improved
advertising and selling efficiencies in attracting new students. In an effort
to lower the default rate of certain schools with higher default rate profiles,
Education Centers initiated a policy at 23 schools which allows students of
these schools to attend the initial 30 days of class free of charge and
obligation. Upon completion of the initial 30 days of class, eligible students
can then obtain guaranteed student loans. This measure, in conjunction with
other default rate improvement measures initiated in 1992 and prior years, is
expected to lower student attrition rates, improve job placement for graduates,
and reduce default rates.
NETG revenues of $82,582,000 decreased $30,187,000 or 26.8% from $112,769,000
in 1991. Losses before unusual items of $21,854,000 compared to losses of
$1,760,000 in the prior year. The revenue decline was partially due to the
economic conditions that have significantly affected the large corporate
customer base of NETG. Further impacting NETG's core markets are reductions in
the mainframe computer training marketplace due to downsizing and changes in
information systems architecture. Despite continued cost control throughout
the organization, the significant shortfall in new contracts and related
revenues resulted in increased losses for the period.
Corporate expenses of $10,758,000 were $1,737,000 or 13.9% lower than expenses
of $12,495,000 in the prior year. The reductions are primarily due to
favorable loss experience in the areas of group medical, general insurance and
workers' compensation. Additionally, continued cost control favorably impacted
operating results.
Interest expense decreased $5,062,000 during the year primarily due to the
repayment and termination of the Company's outstanding bank loans in December
1991.
Operating results of ICS and NETG foreign operations by geographic region
experienced similar changes in revenues and income as discussed above. Foreign
currency exchange losses of $2,570,000 were recorded during the year compared
to losses of $1,005,000 in the prior year. Current and prior year currency
losses were primarily due to the significant exchange rate decline of the
British pound sterling on NETG-U.K.'s U.S. dollar denominated current
intercompany balance payable to the U.S. operations.
In 1992, the Company adopted, effective January 1, 1992, Statement of Financial
Accounting Standards No. 109 (Accounting for Income Taxes). The adoption of
FAS 109 did not have a material effect on the Company's results of operations.
Under the provisions of FAS 109, the Company recognized a deferred tax asset at
December 31, 1992 of $32,083,000, net of a valuation allowance of $11,025,000.
Management believes that the deferred tax asset will be realized through future
reversals of existing taxable temporary differences and future taxable income
of approximately $7,000,000. Such levels of future taxable income are
consistent with existing levels of pretax earnings for financial reporting
purposes.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash, marketable securities and
cash provided from operations, which includes funding for Education Centers'
students under government financial aid programs partially provided through
lending institutions. At December 31, 1993, the Company had $54,846,000 in
cash and marketable securities, of which $16,127,000 was held in the account of
Steck-Vaughn. On
<PAGE> 24
22.
MANAGEMENT'S DISCUSSION AND ANALYSIS
December 22, 1993, the Company entered into a revolving bank credit agreement
in the amount of $10,000,000 which matures on December 21, 1994. The credit
agreement will provide borrowings at prime plus .5 percent or, at the Company's
option, at LIBOR plus 1.5 percent. Under the terms of the credit agreement,
the cash and marketable securities maintained by Steck-Vaughn shall be
available for borrowing to the Company in an amount up to $10,000,000.
During the third quarter, Steck-Vaughn Publishing Corporation completed an
initial public offering for 2,668,000 shares of its common stock at $12.00 per
share. The initial public offering represented 18.3% of the stock of the
Company's Steck-Vaughn subsidiary. The offering resulted in net proceeds of
$29,775,000 of which approximately $20,000,000 was remitted to the Company as
payment for a previously declared dividend. The net proceeds were reduced by
expenses of $1,074,000 which were incurred in connection with the initial
public offering.
Cash outflows before financing activities for 1993 of $33,539,000 was
$62,763,000 lower than the prior year due primarily to lower operating results
of the Company which includes the teachout of 15 Education Centers' schools,
and increases in working capital from (1) reduced prepaid cash at NETG and
Education Centers resulting from decreased levels of new contracts and
students, (2) income taxes paid despite income tax benefits recorded in 1993,
(3) increases in other current assets, and (4) higher advertising spending
primarily at ICS.
In addition, changes in net cash flow for 1993 as compared to 1992 were further
impacted by increased net capital expenditures of $5,594,000, the acquisition
of The Magnetic Way(R) product line from Creative Edge, Inc. in the amount of
$5,417,000, and additional purchases of the Company's common stock for treasury
of $4,515,000.
The Company expects that cash, marketable securities, the revolving bank credit
agreement and cash provided from operations, which includes to a certain
extent, the continued funding of Education Centers' students under government
student financial aid programs, will be sufficient to provide for planned
working capital requirements, debt service and capital expenditures for the
foreseeable future. During the third quarter, the Company initiated a program
to provide internal financing to Education Centers' students as student loan
access to government student financial aid programs continues to become more
restrictive due to an increasing number of lenders and guarantors declining to
serve vocational schools with shorter-term programs and/or high default rates.
As a result of the internal financing program, working capital usage at the
remaining Education Centers is anticipated to increase as this program is
modestly expanded to selected schools in future years.
During 1993, the Company's Education Centers subsidiary restructured its
operations and ceased new student enrollment at 15 of its 48 school locations,
while allowing existing students to complete their educational programs at
these schools. For the year ended December 31, 1992, the revenues of the 15
schools represented approximately 10.6 percent of National Education
Corporation's 1992 consolidated revenues. As a result of students experiencing
increasing difficulty in obtaining access to federally guaranteed student loan
funding, the Company believes that continuing to operate these 15 schools would
have resulted in significant operating losses in future years, due primarily to
a lack of federally guaranteed student loan funding. The Company believes that
the Education Centers' restructuring, which includes the closing of 15 of its
schools, will not have a material adverse effect upon the financial condition
of the Company.
Fiscal year 1991 cohort default rates were published in August 1993 by the U.S.
Department of Education. The Higher Education Act, which was reauthorized and
signed in 1992, reduced the cohort default rate threshold percentage for
institutional eligibility to participate in Federal Family Education Loan
Program (FFELP), formerly the Guaranteed Student Loan Programs, from 35 percent
to 30 percent for three consecutive fiscal years ended September 30, 1991 and
from 30 to 25 percent for the three consecutive fiscal years ended 1992.
Based on the 1991 fiscal year default rate information for the Education
Centers' remaining 33 schools, three schools currently have single year default
rates in excess of 40 percent. These three schools can continue to participate
in all federal student aid programs, including Federal Pell Grants, unless the
government acts to limit, suspend or terminate their financial aid eligibility.
One school currently has cohort default rates for three consecutive fiscal
years ended 1991 in excess of 30 percent. This school is currently appealing
the default rate calculations by the government and has temporarily maintained
eligibility to participate in FFELP. In the event that this school is not
successful in appealing the default rate calculations by the government, this
school may continue to participate in the Federal Pell Grant program. In
addition to the above schools, 14 schools currently have cohort default rates
for two consecutive fiscal years ended 1991 in excess of 25 percent. These 14
schools may no longer be eligible to participate in FFELP if the 1992 cohort
default rates expected to be published in the third quarter of 1994 are 25
percent or higher. In the past, the Company has successfully appealed the
cohort default rate calculations
<PAGE> 25
23.
MANAGEMENT'S DISCUSSION AND ANALYSIS
by the government which has resulted in several percentage point decreases in
cohort default rates for certain schools. The Company's 33 schools will
continue to have opportunities to review and, if appropriate, appeal the cohort
default rate calculations recently published by the government.
The following table, representing the most recent data published by the
government, contains information regarding the 1991 cohort default rates of the
Education Centers' 33 schools.
<TABLE>
<S> <C>
School Default Rates:
- ---------------------
50 percent and higher 0
Between 40 percent and 50 percent 3
Between 30 percent and 40 percent 10
Between 25 percent and 30 percent 10
Less than 25 percent 10
--
Total Schools 33
==
</TABLE>
The overall fiscal year 1991 and 1990 cohort default rates for the Education
Centers' remaining 33 schools are 27.7 percent and 27.3 percent, respectively.
For the year ended December 31, 1993, the revenues and operating income before
Education Centers headquarters expense allocation for the three schools with
single year default rates in excess of 40 percent are $8,250,000 and $1,546,000
respectively. For the year ended December 31, 1993, the revenue and operating
income before allocation for the one school with default rates for the three
consecutive fiscal years ending 1991 of 30 percent or more is $4,305,000 and
$677,000, respectively.
The Education Centers have continued to introduce significant measures during
the past several years to reduce default rates at their schools. The Company
believes that these default rate reduction efforts should have a positive
impact on 1992 fiscal year default rates. However, because of the significant
complexity in projecting future cohort default rates, the Company is unable at
this time to quantify what impact the default rate reduction efforts will have
on 1992 fiscal year cohort default rates.
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (FAS 109). FAS 109 requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the financial statement and tax
basis of assets and liabilities. As of December 31, 1993, the Company had a
gross deferred tax asset of $60,250,000 (see Notes to Consolidated Financial
Statements). A significant portion of the deferred tax asset is comprised of
U.S. Federal and international net operating loss carryforwards. At December
31, 1993, the Company had available federal consolidated net operating loss
carryforwards of $41,415,000 (exclusive of certain "SRLY" losses) expiring in
years 2004 through 2008. In addition, the Company had federal SRLY loss
carryforwards totaling $16,450,000 ($5,593,000 deferred tax asset) expiring in
years 1998 through 2007 that may only be used to offset income generated by the
particular entity that generated the loss.
FAS 109 requires that the Company record a valuation allowance when it is "more
likely than not that some portion of the deferred tax asset will not be
realized." The Company has recorded a valuation allowance of $9,941,000,
including full allowance against the SRLY loss carryforwards.
The ultimate realization of deferred tax assets, net of the valuation
allowance, of $50,309,000 depends on the Company's ability to generate
sufficient taxable income in the future. A portion of this asset will be
realized through the reversal of taxable temporary differences totaling
$30,382,000, reflected as deferred tax liabilities in the financial statements.
Furthermore, as a result of the significant investments in management
infrastructure, product development, marketing, and sales during 1993 at NETG,
this operation recorded an increase of approximately 40 percent in new orders
and contracts for the six months ended December 1993. This early indication of
a sales trend reversal coupled with opportunities to further reduce costs at
NETG during 1994, and the continuing record financial performances at ICS and
Steck-Vaughn, together with the reversal of taxable temporary differences
provides the basis for management's conclusion that it is more likely than not
that the Company will generate sufficient taxable income to realize its
deferred tax asset.
The effect of inflation had little impact on the Company in 1993.
<PAGE> 26
24.
National Education Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
(amounts in thousands, except per share amounts) 1993 1992 1991
-------- -------- --------
<S> <C> <C> <C>
TUITION AND CONTRACT REVENUES $302,729 $329,917 $347,380
PUBLISHING REVENUES 53,156 45,124 38,044
-------- -------- --------
NET REVENUES 355,885 375,041 385,424
Costs and Expenses
Tuition and contract course materials and service costs 154,267 158,902 159,654
Publishing costs and materials 19,511 16,697 14,829
Selling and promotion 130,429 127,556 129,563
General and administrative 50,298 50,234 48,401
Provision for doubtful accounts 4,664 5,887 6,540
Amortization of acquired intangible assets 4,775 6,206 6,570
Interest expense 5,786 5,972 11,034
Investment income (2,577) (2,546) (3,195)
Other (income) and expense (138) 1,316 1,005
Unusual items 32,858 3,690 -
Gain on Steck-Vaughn Publishing Corporation public stock offering (21,260) - -
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT) AND MINORITY INTEREST (22,728) 1,127 11,023
Income taxes (benefit) (13,713) 612 5,664
-------- -------- --------
INCOME (LOSS) BEFORE MINORITY INTEREST (9,015) 515 5,359
Minority interest in consolidated subsidiary 604 - -
-------- -------- --------
NET INCOME (LOSS) $ (9,619) $ 515 $ 5,359
======== ======== ========
PRIMARY EARNINGS (LOSS) PER SHARE $ (.32) $ .02 $ .18
======== ======== ========
FULLY DILUTED EARNINGS (LOSS) PER SHARE $ (.32) $ .02 $ .18
======== ======== ========
Weighted Average Number of Shares Outstanding:
Primary 29,855 30,296 30,116
Fully diluted 37,155 37,596 36,818
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 27
25.
National Education Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------
(dollars in thousands) 1993 1992
- ---------------------- ------- -------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash, including time deposits of $32,855 and $46,252 $ 38,546 $ 48,469
Marketable securities, market value of $17,964 and $12,180 16,300 10,995
Receivables, net of allowance of $10,437 and $10,119 54,012 60,623
Inventories and supplies 25,594 25,959
Prepaid and deferred marketing expenses 37,187 36,064
Other current assets 19,038 14,092
-------- --------
Total current assets 190,677 196,202
Contracts Receivable 2,212 9,693
Land, Buildings and Equipment, net 46,056 44,230
Acquired Intangible Assets, net 48,497 61,394
Deferred Income Taxes 25,793 10,460
Other Assets 10,656 11,932
-------- --------
$323,891 $333,911
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 8,635 $ 9,781
Accrued expenses 42,351 41,727
Accrued salaries and wages 8,726 8,301
Accrued restructuring expenses 12,282 -
Deferred contract revenues 16,425 25,237
Current portion of long-term debt 607 1,413
Accrued and deferred income taxes 3,149 6,188
-------- --------
Total current liabilities 92,175 92,647
-------- --------
LIABILITIES PAYABLE AFTER ONE YEAR
Long-term debt, less current portion 2,556 3,221
Senior subordinated convertible debentures 20,000 20,000
Convertible subordinated debentures 57,494 57,494
Other noncurrent liabilities 7,989 9,267
-------- --------
88,039 89,982
-------- --------
MINORITY INTEREST IN EQUITY OF CONSOLIDATED SUBSIDIARY 8,046 -
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value; 5,000,000 shares authorized and unissued - -
Common stock, $.01 par value; 50,000,000 shares authorized;
30,092,810 (1993) and 30,017,968 shares (1992) issued 2,108 2,107
Additional paid-in capital 132,262 131,903
Retained earnings 13,681 23,300
Cumulative foreign exchange translation adjustment (7,565) (5,751)
Notes receivable under stock option plans - (107)
-------- --------
140,486 151,452
Less common stock in treasury (4,855) (170)
-------- --------
Total stockholders' equity 135,631 151,282
-------- --------
323,891 333,911
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 28
26.
National Education Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------
(dollars in thousands) 1993 1992 1991
--------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ (9,619) $ 515 $ 5,359
Adjustments to reconcile net income (loss) to net cash
provided by (used for) operating activities:
Depreciation and amortization 12,898 14,437 13,960
Amortization of acquired intangible assets 4,775 6,206 6,570
Provision for doubtful accounts 4,664 5,887 6,540
Gain on Steck-Vaughn Publishing Corporation public stock offering (21,260) - -
Net gain on sale of land and buildings (381) (769) -
Write-off of acquired intangible assets 11,998 - -
Write-off of certain assets and liabilities of closed schools 4,516 - -
Loss on foreign currency exchange 243 2,570 1,005
Change in assets and liabilities:
Receivables, net 8,391 13,570 19,971
Inventories and supplies 91 291 (2,357)
Prepaid and deferred marketing expenses (4,133) 1,268 (4,366)
Accounts payable and accrued expenses 12 1,915 415
Accrued restructuring expenses 12,282 - -
Deferred contract revenues (8,240) 70 (4,277)
Deferred income taxes and income taxes payable (18,340) (6,791) (3,853)
Other (4,521) 6,274 3,918
-------- -------- --------
Net cash from operating activities (6,624) 45,443 42,885
-------- -------- --------
CASH FLOWS FOR INVESTING ACTIVITIES:
Additions to land, buildings and equipment (15,885) (11,877) (6,527)
Dispositions of land, buildings and equipment 586 2,172 87
Acquisition of business, net of cash acquired (5,417) - -
Changes in marketable securities (5,305) (4,756) 790
-------- -------- --------
Net cash for investing activities (26,021) (14,461) (5,650)
-------- -------- --------
CASH FLOWS FOR FINANCING ACTIVITIES:
Payment of current portion of long-term debt (786) (268) (20,259)
Additions to long-term debt - 2,525 20,000
Reductions of long-term debt (685) (968) (46,127)
Minority interest in equity of consolidated subsidiary 604 - -
Net proceeds from Steck-Vaughn Publishing Corporation public stock offering 28,701 - -
Common stock, stock options and related tax benefits 360 1,041 379
Notes receivable under stock option plan 107 74 94
Purchase of common stock for treasury (4,685) (170) (1)
-------- -------- --------
Net cash for financing activities 23,616 2,234 (45,914)
-------- -------- --------
EFECT OF EXCHANGE RATE CHANGES ON CASH (894) (1,758) (396)
-------- -------- --------
NET CHANGE IN CASH AND EQUIVALENTS (9,923) 31,458 (9,075)
CASH AND EQUIVALENTS AT THE BEGINNING OF THE YEAR 48,469 17,011 26,086
-------- -------- --------
CASH AND EQUIVALENTS AT THE END OF THE YEAR $ 38,546 $ 48,469 $ 17,011
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 29
27.
National Education Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1993 1992 1991
------------------- ------------------- -------------------
(amounts in thousands) Shares Amount Shares Amount Shares Amount
- ---------------------- ------ -------- ------ -------- ------ --------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK AND PAID-IN CAPITAL
Balance at beginning of year 30,018 $134,010 29,862 $133,148 29,759 $132,769
Stock options and related tax
benefits 75 360 197 1,065 103 229
Restricted stock - - - (24) - 150
Retirement of treasury shares - - (41) (179) - -
------ -------- ------ -------- ------ --------
Balance at end of year 30,093 $134,370 30,018 $134,010 29,862 $133,148
====== ======== ====== ======== ====== ========
RETAINED EARNINGS
Balance at beginning of year $ 23,300 $ 23,547 $ 18,188
Net income (loss) (9,619) 515 5,359
Retirement of treasury shares - (762) -
-------- -------- --------
Balance at end of year $ 13,681 $ 23,300 $ 23,547
======== ======== ========
TREASURY STOCK
Balance at beginning of year 50 $ (170) 41 $ (941) 40 $ (940)
Purchase of common stock for
treasury 639 (4,685) 50 (170) 1 (1)
Retirement of treasury shares - - (41) 941
------ -------- ----- -------- ---- --------
Balance at end of year 689 $ (4,855) 50 $ (170) 41 $ (941)
====== ======== ===== ======== ==== ========
</TABLE>
See Notes to Consolidated Financial Statements.
<PAGE> 30
28.
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
all subsidiaries. Certain prior year amounts have been reclassified to conform
with 1993 presentation.
REVENUES AND EXPENSES
Steck-Vaughn Publishing revenues are recognized upon shipment of product.
Plant costs which include costs associated with text layout and publishing
set-up are deferred and amortized to expense with the sale of the product
produced during the first printing. A portion of selling and marketing
expenses are deferred and fully amortized within the calendar year to better
match the expenses with revenues due to the seasonal nature of revenue
realization. Expenses associated with the development of product catalogs are
deferred and amortized to expense over the useful life of the catalog which is
typically one year.
Independent Study Contract Revenues are recognized when cash is received, but
only to the extent such cash can be retained by the Company. Cash received in
excess of revenue recognized is recorded as deferred contract revenues.
Generally, the Company follows the guidelines of the National Home Study
Council in determining retention rights. Direct response advertising and
promotional literature costs associated with independent study contracts are
deferred and amortized within eighteen months of incurrence which approximates
the recognition of related revenues.
Education Centers Tuition Revenues are recorded ratably over the terms of the
courses which range from eight to thirty-six months. Course service costs are
charged to expense as incurred. Certain selling and marketing costs, which
include direct response advertising, are deferred and amortized into expense
within nine months of incurrence which approximates the recognition of related
revenues.
NETG Contract Revenues consist primarily of access agreements and custom
contract revenues. Revenues under access agreements, which are generally one
year in length, are recognized upon shipment of the selected courseware.
Custom contract revenues under time and materials contracts are recognized as
costs are incurred, and revenues from fixed price contracts are recognized
using the percentage-of-completion method. Course service costs, which include
product development costs, are expensed as incurred. Sales and marketing costs
are expensed within the calendar year except for sales commissions on training
contracts sold, which are deferred and amortized into expense as contract
revenues are recognized.
INCOME TAXES
Effective January 1, 1992, the Company adopted Statement of Financial
Accounting Standards No. 109 (Accounting for Income Taxes). The adoption of
FAS 109 changed the Company's method of accounting for income taxes from the
deferred method (APB 11) to an asset and liability approach. FAS 109 requires
the recognition of deferred tax liabilities and assets for the expected future
tax consequences of temporary differences between the financial statement and
tax bases of assets and liabilities at the applicable enacted tax rates. The
cumulative adjustment of adopting FAS 109 was not material to the accompanying
financial statements.
EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per share are computed based on the weighted average
number of common shares outstanding during the respective periods, including
dilutive stock options. Fully diluted earnings (loss) per share are computed
based on the assumption that the convertible debentures had been converted to
common stock, with a corresponding increase in net income to reflect a
reduction in related interest expense, less applicable taxes.
MARKETABLE SECURITIES
Substantially all of the marketable securities are income producing instruments
carried at the lower of cost or market.
INVENTORIES AND SUPPLIES
Inventories and supplies at Steck-Vaughn are stated on the last-in, first-out
(LIFO) method. At December 31, 1993 and 1992, the allowance to reduce the
carrying value to the LIFO basis was $1,114,000 and $970,000, respectively.
Other inventories, primarily consisting of course materials and supplies, are
stated at the lower of first-in, first-out cost or market.
LAND, BUILDINGS AND EQUIPMENT
Land, buildings and equipment are stated at cost and are depreciated
principally using the straight-line method over the estimated useful lives of
the various classes of property.
<PAGE> 31
29.
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
ACQUIRED INTANGIBLE ASSETS
Acquired intangible assets, which include rental contracts, product and text
materials, course development costs, copyrights, and other identified
intangibles, are amortized ratably over various useful lives which do not
exceed ten years. Acquired intangible assets representing the excess of cost
over acquired net assets purchased by the Company in conjunction with various
acquisitions are amortized ratably over lives which do not exceed forty years.
DEFERRED CONTRACT REVENUES
Deferred contract revenues represent the portion of training contract payments
and student tuition received in advance of services being performed.
MINORITY INTEREST
Minority interest in equity of consolidated subsidiary represents the minority
stockholders' proportionate share of the equity of Steck-Vaughn Publishing
Corporation. At December 31, 1993, the Company owned 81.7% of Steck-Vaughn's
common stock.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of international subsidiaries have been translated at
current exchange rates. Revenues, expenses and cash flows have been translated
at average rates of exchange in effect during the year. Resulting cumulative
foreign exchange translation adjustments have been recorded as a separate
component of stockholders' equity. Also included in this component of
stockholders' equity are exchange gains and losses on hedges of foreign
intercompany accounts of a long-term nature. Gains and losses on foreign
currency transactions are recorded to other income and expense.
NOTE 2 -- BUSINESS COMBINATION
In April 1993, the Company, through Steck-Vaughn Publishing Corporation,
purchased certain assets of Creative Edge, Inc. (Magnetic Way product line) for
$5,417,000 in cash. The transaction was accounted for as a purchase and the
operating results of Creative Edge have been included in the Company's
consolidated financial statements since the date of acquisition. The net
assets and operating results of Creative Edge are not material to the
consolidated financial statements of the Company.
NOTE 3 -- UNUSUAL ITEMS
During the third quarter of 1993, the Company recorded unusual item charges of
$32,858,000 ($22,921,000 after tax or $.77 loss per share). The unusual item
charges resulted from the Education Centers restructuring charge of $23,626,000
which included a write-down of assets and estimated costs of closing 14
schools, and a charge related to NETG of $9,232,000 which resulted from the
write-down of certain acquired intangible assets.
During December 1992, the Company recorded unusual charges of $3,690,000
($2,251,000 after tax or $.07 per share) at NETG and Education Centers. The
unusual items represent severance payments to individuals, and lease
termination charges which include the write-down of fixed assets and leasehold
improvements.
NOTE 4 -- PUBLIC OFFERING OF SUBSIDIARY COMMON STOCK
During the third quarter of 1993, Steck-Vaughn Publishing Corporation, the
Company's publishing subsidiary, completed an initial public offering of
2,668,000 shares of its common stock at $12.00 per share. The offering
resulted in proceeds of $29,775,000 of which $20,000,000 was remitted to the
Company as payment for a previously declared dividend. The proceeds were
reduced by expenses of $1,074,000 which were incurred in connection with the
offering, of which $393,000 was paid to Richard C. Blum and Associates (RCBA).
The Chairman of the Board of RCBA is Richard C. Blum, a director of the
Company. The completion of the offering decreased the Company's ownership of
Steck-Vaughn from 100% to 81.7% and the Company recorded an after-tax gain of
$21,260,000 or $.71 per share. The gain is currently nontaxable and deferred
tax expense was not provided for on this gain given the Company's ability and
intent to indefinitely postpone the payment of tax in the future.
NOTE 5 -- INCOME TAXES
Income (loss) before tax from continuing operations was taxed under the
following jurisdictions:
<TABLE>
<CAPTION>
(dollars in thousands) 1993 1992 1991
- ---------------------- -------- ------- -------
<S> <C> <C> <C>
Domestic $(24,191) $ 3,822 $ 8,604
Foreign 1,463 (2,695) 2,419
-------- ------- -------
Total $(22,728) $ 1,127 $11,023
</TABLE> ======== ======= =======
Taxes (benefits) on income were provided as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1993 1992 1991
- ---------------------- -------- ------- -------
<S> <C> <C> <C>
CURRENT:
Federal $ - $ 1,370 $ 281
State 2,100 2,740 1,634
Foreign 1,883 1,692 2,221
-------- ------- -------
Total current provision 3,983 5,802 4,136
-------- ------- -------
DEFERRED:
Federal (15,109) (3,518) 2,419
Foreign (2,680) (2,087) (1,042)
-------- ------- -------
Total deferred provision (benefit) (17,789) (5,605) 1,377
-------- ------- -------
CURRENT TAX BENEFITS NOT TREATED AS A
REDUCTION OF INCOME TAX EXPENSES
RESULTING FROM:
Exercise of stock options 93 415 151
-------- ------- -------
Total income tax provision (benefit) $(13,713) $ 612 $ 5,664
</TABLE> ======== ======= =======
<PAGE> 32
30.
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The balance of deferred tax liabilities and assets reflected in the balance
sheet as of December 31, 1993 and 1992 are comprised of the following:
<TABLE>
<CAPTION>
(dollars in thousands) 1993 1992
- --------------------- ------- --------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Revenue recognition differences $ 7,014 $ 8,676
Advertising/commissions 11,838 11,257
Course material amortization 4,558 6,149
Other 6,972 3,653
------- --------
Gross Deferred Tax Liabilities $30,382 $ 29,735
======= ========
DEFERRED TAX ASSETS:
Property, plant and equipment $ 2,912 $ 2,442
Inventories 6,447 6,041
Revenue recognition differences 5,009 2,827
Allowance for doubtful accounts 3,560 3,244
Loss carryforwards 25,719 14,741
Credit carryforwards 4,583 6,625
Other 12,020 7,188
------- --------
Gross Deferred Tax Assets 60,250 43,108
Deferred tax asset valuation allowance (9,941) (11,025)
------- --------
Deferred Tax Assets, Net of Valuation
Allowance $50,309 $ 32,083
======= ========
</TABLE>
The 1993 income tax provision includes a decrease in the valuation allowance
for deferred tax assets of $1,084,000. The valuation reserve decrease
primarily relates to losses incurred by certain subsidiaries for which no tax
benefit had previously been expected.
At December 31, 1993, the Company had federal net operating loss carryforwards
of $41,415,000 expiring through 2008. In addition, the Company had available
$1,275,000 of alternative minimum tax credit carryforwards, with no expiration
date, which may be utilized to offset future regular tax liabilities. If
certain substantial changes in the Company's ownership should occur, there
could be an annual limitation on the amount of carryforwards which can be
utilized. The Company also has available net operating loss carryforwards of
approximately $12,300,000 at Spectrum, a subsidiary of NETG, for federal tax
purposes expiring through 2003. This amount may be utilized to offset
Spectrum's future taxable income. A valuation allowance against the remaining
Spectrum loss carryforward has been provided in the financial statements.
During 1991, the Company received a notice of proposed adjustment from the
Internal Revenue Service for the years 1985 and 1986 for matters primarily
relating to the tax benefit of certain acquisitions. Management is vigorously
contesting these matters and believes that the ultimate tax liability and
related interest thereon will not have a material adverse effect on the
consolidated financial position of the Company.
A reconciliation of the income tax provision (benefit) with the amount computed
by applying the federal statutory tax rate is as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1993 1992 1991
- --------------------- -------- ------ ------
<S> <C> <C> <C>
Tax (benefit) computed at statutory rate $ (7,728) $ 383 $3,748
State taxes, net of federal benefit 1,386 1,808 1,078
Foreign rate differential (1,580) (539) 357
Dividend income and municipal interest
exclusion (436) (246) (253)
Amortization of excess costs over
acquired net assets 996 190 190
Gain on public stock offering of
subsidiary (7,228) - -
Other, net 877 (984) 544
-------- ------ ------
Total income tax provision (benefit) $(13,713) $ 612 $5,664
======== ====== ======
</TABLE>
Provision has not been made for U.S. or additional foreign taxes on the
undistributed earnings of the Company's foreign subsidiaries. Those earnings
are expected to be reinvested in the foreign operations. Such earnings would
become subject to additional U.S. and foreign taxes if remitted as dividends.
It is not practicable to estimate the amount of additional tax that might be
payable on the foreign earnings; however, the Company believes that U.S.
foreign tax credits would for the most part eliminate any additional U.S. tax.
NOTE 6 -- LAND, BUILDINGS AND EQUIPMENT
<TABLE>
<CAPTION>
(dollars in thousands) Depreciable Lives 1993 1992
- --------------------- ------------------ --------- ---------
<S> <C> <C>
Land $ 2,544 $ 2,544
Buildings and
improvements Not to exceed 45 years 15,652 13,246
Leaseholds and
improvements Life of lease 23,942 22,794
Machinery and
equipment Not to exceed 10 years 91,589 88,404
Furniture and
fixtures Not to exceed 10 years 31,326 32,210
--------- --------
165,053 159,198
Less accumulated depreciation
and amortization (118,997) (114,968)
--------- --------
Total $ 46,056 $ 44,230
========= =========
</TABLE>
NOTE 7 -- ACQUIRED INTANGIBLE ASSETS
<TABLE>
<CAPTION>
(dollars in thousands) 1993 1992
- --------------------- -------- --------
<S> <C> <C>
Product and text materials, courseware, etc. $ 57,380 $ 55,160
Rental contracts 20,559 20,559
Excess of cost over net assets of businesses acquired 58,866 57,211
Other acquired intangible assets 7,327 7,329
-------- --------
144,132 140,259
Less accumulated amortization (95,635) (78,865)
-------- --------
Total $ 48,497 $ 61,394
======== ========
</TABLE>
<PAGE> 33
31.
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 -- DEBT
<TABLE>
<CAPTION>
(dollars in thousands) 1993 1992
- --------------------- ------- -------
<S> <C> <C>
LONG-TERM DEBT:
Mortgage notes, maturing on various dates
through 2004, with interest from 4.9% to 9.5% $ 2,716 $ 3,876
Other 447 758
------- -------
3,163 4,634
Less current portion of long-term debt (607) (1,413)
------- -------
Total long-term debt $ 2,556 $ 3,221
======= =======
Senior subordinated convertible debentures $20,000 $20,000
======= =======
Convertible subordinated debentures $57,494 $57,494
======= =======
</TABLE>
At December 31, 1993, the Company had a revolving bank credit facility in the
amount of $10,000,000 which expires on December 21, 1994. The credit agreement
will provide borrowings at prime plus .5% or, at the Company's option, at LIBOR
plus 1.5%. Commitment fees are paid on the unused line of credit and there
are certain restrictions on dividend payments, indebtedness and covenants
regarding the Company's financial performance and condition. As of December
31, 1993, no amounts were outstanding under the revolving bank credit
agreement.
At December 31, 1993, the Company had outstanding $20,000,000 of senior
subordinated convertible debentures due February 15, 2006 which are convertible
at any time prior to maturity into common stock at $4.00 per share. The senior
debentures were issued to certain entities affiliated with Richard C. Blum &
Associates, Inc. (RCBA) or over which RCBA exercises discretionary investment
control and bear interest at 7% per year until February 15, 1993 and 10%
thereafter. The senior debentures are redeemable at the option of the Company,
in whole or in part, commencing August 15, 1994 at 105% of the principal amount
through February 15, 2002, and thereafter at 100%, providing that the Company's
common stock equals or exceeds 150% of the conversion price for a specified
trading period prior to the notice of redemption. Based on the conversion
feature and the trading value of the Company's common stock during 1993, the
Company anticipates early redemption or conversion of the debt and accordingly
has reduced the effective interest rate charged to expense from 9.3% in 1991 to
6.8% in 1992 and 1993. The senior debentures are subject to an annual sinking
fund requirement beginning February 15, 2002 sufficient to retire 100% of the
aggregate principal amount of the senior debentures prior to maturity. The
Chairman of the Board of RCBA is Richard C. Blum, a director of the Company.
Based on the December 31, 1993 closing price of the Company's common stock as
traded on the New York Stock Exchange of $6.25, the fair value of the senior
subordinated convertible debentures, assuming conversion into the Company's
common stock, is $31,250,000.
At December 31, 1993, the Company had outstanding $57,494,000 of 6.5%
convertible subordinated debentures due May 14, 2011 which are convertible at
any time prior to maturity into common stock at $25.00 per share. The
debentures are redeemable at the option of the Company, in whole or in part, at
specified amounts ranging from 106.5% to 100.65% of the principal amount
through May 14, 1996, and thereafter at 100%. The debentures are subject to an
annual sinking fund requirement beginning May 15, 1997 sufficient to retire 70%
of the aggregate principal amount of the debentures prior to maturity. Based
on the December 31, 1993 closing price of the Company's convertible
subordinated debentures as traded on the New York Stock Exchange of $72.00, the
fair value of the convertible subordinated debentures is $41,396,000.
Mortgage notes aggregating $2,716,000 at December 31, 1993 were collateralized
by certain real and personal property having a net book value of $5,129,000.
At December 31, 1993, the fair value of the mortgage notes approximated their
carrying value.
Aggregate maturities of long-term debt in each of the following years are:
1995--$604,000, 1996--$388,000, 1997--$392,000, and 1998--$397,000.
NOTE 9 -- COMMITMENTS AND CONTINGENCIES
Aggregate commitments at December 31, 1993 under noncancelable operating leases
for land, buildings and equipment are as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
- ----------------------
<S> <C>
FISCAL YEAR:
1994 $15,661
1995 13,245
1996 10,017
1997 6,722
1998 5,696
1999 and thereafter 7,779
-------
Total $59,120
=======
</TABLE>
Some of the leases contain renewal options, escalation clauses and requirements
that the Company pay taxes, insurance and maintenance costs. Total rent
expense aggregated $24,307,000, $24,907,000, and $25,843,000 for years ended
December 31, 1993, 1992, and 1991, respectively.
At December 31, 1993, there were no material commitments outstanding for
capital expenditures.
In the ordinary course of business, the Company is generally subject to claims,
complaints and legal actions. In the opinion of management, these matters will
not have a material adverse effect upon the financial condition of the Company.
<PAGE> 34
32.
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 -- UNEARNED FUTURE TUITION INCOME
Unearned future tuition on active student contracts at Education Centers and
ICS totaled $181,147,000 at December 31, 1993 and $172,391,000 at December 31,
1992. Based upon previous experience it is estimated that approximately 57% of
the unearned future income will ultimately be recognized as revenue. Unearned
future tuition income will be included in revenues in future years when
services and courseware are provided as described in Note 1.
NOTE 11 -- STOCKHOLDERS' EQUITY
The Company has stock option plans that authorize the granting of options to
key employees and directors to purchase unissued common stock subject to
certain conditions, such as continued employment. Options are generally
granted at the fair market value of the Company's common stock at the date of
grant, become exercisable within five years from the date of grant, and expire
in ten years.
Changes during the years ended December 31, 1993, 1992, and 1991 under the
plans were as follows:
<TABLE>
<CAPTION>
Average
Number Exercise Total
of Price Per Option
(amounts in thousands, except per share amounts) Shares Share Value
- ------------------------------------------------ ------ -------- ------
<S> <C> <C> <C>
Balance, December 31, 1990 1,471 $ 6.92 $10,185
Granted 287 4.84 1,389
Canceled (239) 16.93 (4,047)
Exercised (103) 3.41 (351)
----- -------
Balance, December 31, 1991 1,416 5.07 7,176
Granted 299 8.95 2,675
Canceled (237) 8.08 (1,914)
Exercised (197) 3.30 (651)
----- -------
Balance, December 31, 1992 1,281 5.69 7,286
Granted 392 5.86 2,296
Canceled (306) 6.68 (2,044)
Exercised (75) 3.55 (266)
----- ------
Balance, December 31, 1993 1,292 $ 5.63 $7,272
===== ======
</TABLE>
Common shares reserved for future grants under the above option plans totaled
986,000 and 812,000 at December 31, 1993 and 1992, respectively. Of the
1,292,000 shares previously granted and outstanding at December 31, 1993,
739,000 shares were vested and exercisable at prices ranging from $2.25 to
$14.44 per share.
There are no charges to income in connection with the issuance of options.
Upon exercise, proceeds from the sale of shares under the stock options plans
are credited to common stock and additional paid-in capital.
During 1990, the Company issued to key employees common shares of restricted
stock which vest over three years from the date of issuance. Charges to income
in connection with the issuance of restricted stock are made ratably over three
years.
In October 1986, the Company declared a dividend of one preferred stock
purchase right for each share of common stock. Under certain conditions, each
right may be exercised to purchase one-hundredth of a share of a new series of
participating junior preferred stock at a purchase price of $75.00, subject to
adjustment. The rights may be exercised only after a public announcement that
a person has acquired or obtained the right to acquire 20% or more of the
Company's outstanding common stock, or after commencement or public
announcement of an offer for 30% or more of the Company's outstanding common
stock. The rights, which do not have voting rights, may be redeemed by the
Company at a price of $.05 per right within ten days after the announcement
that a person has acquired 20% or more of the outstanding common stock of the
Company and the redemption period may be extended under certain circumstances.
In the event that the Company is acquired in a merger or other business
combination transaction, provision shall be made so that each holder of a right
shall have the right to receive that number of shares of common stock of the
surviving company which at the time of the transaction would have a market
value of two times the exercise price of the right. The Board of Directors,
upon the 1991 issuance of the $20,000,000 senior subordinated convertible
debentures to entities affiliated with Richard C. Blum & Associates, Inc. (RCBA
Affiliates), excluded all shares issuable to RCBA Affiliates upon conversion of
the senior debentures from the provisions of the rights plan.
NOTE 12 -- STATEMENTS OF CASH FLOWS
For purposes of presenting the Consolidated Statements of Cash Flows, the
Company considers all highly liquid debt securities to be cash equivalents.
<TABLE>
<CAPTION>
Supplementary information
(dollars in thousands) 1993 1992 1991
- --------------------- ------ ------ -------
<S> <C> <C> <C>
CASH PAID DURING THE YEAR FOR:
Interest expense $5,915 $5,400 $10,253
Income taxes, net of refunds $4,028 $6,947 $ 8,483
DETAIL OF NONCASH INVESTING AND
FINANCING ACTIVITIES:
Sale of land, building and equipment
Sale of land, building and equipment
in exchange for note receivable $ - $1,168 $ 3,230
</TABLE>
<PAGE> 35
33.
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 -- INDUSTRY SEGMENT DATA
Information about the Company's operations in different industries is as
follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1993 1992 1991
- --------------------- -------- -------- --------
<S> <C> <C> <C>
NET REVENUES:
ICS Learning Systems $101,319 $ 90,292 $ 82,071
Steck-Vaughn Publishing Corporation 53,156 45,124 38,044
Education Centers 133,151 157,043 152,540
National Education Training Group 68,259 82,582 112,769
-------- -------- --------
Total Net Revenues $355,885 $375,041 $385,424
======== ======== ========
OPERATING INCOME (LOSS):
ICS Learning Systems $ 21,368 $ 18,780 $ 16,048
-------- -------- --------
Steck-Vaughn Publishing Corporation 13,566 12,556 8,650
-------- -------- --------
Education Centers operating income
(loss) before unusual items (5,511) 10,835 9,424
Unusual items (23,626) (1,184) -
-------- -------- --------
Education Centers (29,137) 9,651 9,424
-------- -------- --------
National Education Training Group
operating loss before unusual items (25,950) (21,854) (1,760)
Unusual items (9,232) (2,506) -
-------- -------- --------
National Education Training Group (35,182) (24,360) (1,760)
-------- -------- --------
Total segment operating income (loss) (29,385) 16,627 32,362
General corporate expenses (11,532) (10,758) (12,495)
Interest expense and investment
income, net (3,209) (3,426) (7,839)
Other (income) and expense 138 (1,316) (1,005)
Gain on Steck-Vaughn Publishing
Corporation public stock offering 21,260 - -
-------- -------- --------
Income (Loss) Before Income Taxes
(Benefit) and Minority Interest $(22,728) $ 1,127 $ 11,023
======== ======== ========
IDENTIFIABLE ASSETS:
ICS Learning Systems $ 60,576 $ 50,911 $ 45,046
Steck-Vaughn Publishing Corporation 55,280 30,141 24,562
Education Centers 59,320 60,706 63,753
National Education Training Group 93,592 135,616 174,248
-------- -------- --------
Segments subtotal 268,768 277,374 307,609
Corporate assets 55,123 56,537 23,033
-------- -------- --------
Total Assets $323,891 $333,911 $330,642
======== ======== ========
TOTAL DEPRECIATION AND AMORTIZATION:
ICS Learning Systems $ 920 $ 892 $ 852
Steck-Vaughn Publishing Corporation 1,157 719 315
Education Centers 5,711 6,281 5,973
National Education Training Group 9,315 12,277 12,889
-------- -------- --------
Total Segments $ 17,103 $ 20,169 $ 20,029
======== ======== ========
CAPITAL EXPENDITURES:
ICS Learning Systems $ 2,209 $ 417 $ 1,131
Steck-Vaughn Publishing Corporation 2,956 4,677 450
Education Centers 7,154 5,119 3,109
National Education Training Group 2,591 1,566 1,750
-------- -------- --------
Total Segments $ 14,910 $ 11,779 $ 6,440
======== ======== ========
</TABLE>
The following table sets out the amount of consolidated net revenues, operating
income and identifiable assets by geographic area:
<TABLE>
<CAPTION>
(dollars in thousands) 1993 1992 1991
- --------------------- -------- -------- --------
<S> <C> <C> <C>
NET REVENUES:
United States $297,243 $311,075 $315,834
Europe 28,000 33,850 39,309
Canada 19,547 19,219 19,289
Other foreign 11,095 10,897 10,992
-------- -------- --------
Total Net Revenues $355,885 $375,041 $385,424
======== ======== ========
OPERATING INCOME (LOSS):
United States operating income
before unusual items $ 220 $ 18,028 $ 27,228
Unusual items (32,858) (3,561) -
-------- -------- --------
United States (32,638) 14,467 27,228
-------- -------- --------
European operating income (loss)
before unusual items (1,902) (1,287) 999
Unusual items - (129) -
-------- -------- --------
Europe (1,902) (1,416) 999
-------- -------- --------
Canada 2,032 482 1,925
-------- -------- --------
Other foreign 3,123 3,094 2,210
-------- -------- --------
Total Segments Operating Income (Loss) $(29,385) $ 16,627 $ 32,362
======== ======== ========
IDENTIFIABLE ASSETS:
United States $222,191 $219,844 $234,199
Europe 26,964 37,563 52,217
Canada 14,417 14,631 15,717
Other foreign 5,196 5,336 5,476
-------- -------- --------
Total Segment Assets $268,768 $277,374 $307,609
======== ======== ========
</TABLE>
The Company's operations are conducted in the United States, Canada, United
Kingdom, Germany, Australia and several other foreign countries.
Operating income by segment and geographic area includes net revenues less
operating expenses. The operating income by segment and geographic area
excludes general corporate expenses, net interest expense and income taxes.
Unusual items are more fully described in the Notes to the Consolidated
Financial Statements. Intersegment sales were immaterial for all years
presented. Identifiable assets are those assets used in the Company's
operations in each segment and geographic area and exclude corporate assets.
<PAGE> 36
34.
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 -- QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1993 and 1992 are as follows:
<TABLE>
<CAPTION>
(amounts in thousands, except per First Second Third Fourth
share amounts) Quarter Quarter Quarter Quarter
- --------------------------------- ------- -------- ------- -------
<S> <C> <C> <C> <C>
1993
NET REVENUES $83,035 $89,180 $ 87,574 $ 96,096
Costs and expenses 89,608 93,309 90,250 90,777
Unusual items - - 32,858 -
Other nonoperating expenses 442 1,244 340 1,045
Gain on Steck-Vaughn
Publishing Corporation
public stock offering - - (21,260) -
Income taxes (benefit) (2,666) (1,827) (11,143) 1,923
Minority interest - - 341 263
------- ------- -------- --------
NET INCOME (LOSS) $(4,349) $(3,546) $ (3,812) $ 2,088
======= ======= ======== ========
Primary earnings (loss) per share $ (.14) $ (.12) $ (.13) $ .07
======= ======= ======== ========
Fully diluted earnings (loss)
per share $ (.14) $ (.12) $ (.13) $ .07
======= ======= ======== ========
1992
NET REVENUES $87,319 $91,421 $ 94,285 $102,016
Costs and expenses 89,560 90,735 88,245 96,942
Unusual items - - - 3,690
Other nonoperating expenses 1,976 236 471 2,059
Income taxes (benefit) (1,576) 180 1,996 12
------- ------- -------- --------
NET INCOME (LOSS) $(2,641) $ 270 $ 3,573 $ (687)
======= ======= ======== ========
Primary earnings (loss) per share $ (.09) $ .01 $ .12 $ (.02)
======= ======= ======== ========
Fully diluted earnings (loss)
per share $ (.09) $ .01 $ .12 $ (.02)
======= ======= ======== ========
</TABLE>
<PAGE> 37
35.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of National Education Corporation Price Waterhouse [logo]
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
National Education Corporation and its subsidiaries at December 31, 1993 and
1992, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993, in conformity with generally
accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As described in Note One to the consolidated financial statements, the Company
changed its method of accounting for income taxes in 1992.
PRICE WATERHOUSE
Price Waterhouse
Costa Mesa, California
February 4, 1994
<PAGE> 38
36.
NATIONAL EDUCATION CORPORATION FACILITIES WORLDWIDE
<TABLE>
<S> <C> <C>
NATIONAL EDUCATION TRAINING GROUP (NETG) NETG APPLIED LEARNING Nutley, New Jersey
1751 West Diehl Road One Hogarth Business Park Philadelphia, Pennsylvania
Naperville, Illinois 60563 Burlington Lane Rosemead, California
(708) 369-3000 Chiswick, London W4 2TJ Sacramento, California
Atlanta, Georgia England San Antonio, Texas
Baltimore, Maryland (81) 994-4404 San Bernardino, California
Boston, Massachusetts Siemansring 54 San Francisco, California
Charlotte, North Carolina D-4156 Willich 1 San Jose, California
Chicago, Illinois Germany Tampa, Florida
Cincinnati, Ohio 2154-929-3 Tulsa, Oklahoma
Cleveland, Ohio West Des Moines, Iowa
Columbus, Ohio NETG SPECTRUM Winnetka, California
Dallas, Texas 9 Oak Park Drive Wyoming, Michigan
Denver, Colorado Bedford, Massachusetts 01730
Detroit, Michigan (617) 271-0500 ICS LEARNING SYSTEMS
Hartford, Connecticut 925 Oak Street
Houston, Texas NATIONAL EDUCATION CENTERS Scranton, Pennsylvania 18515
Irvine, California 1732 Reynolds Street (717) 342-7701
Kansas City, Kansas Irvine, California 92714
Los Angeles, California (714) 261-7606 Glasgow
Milwaukee, Wisconsin Montreal
Minneapolis, Minnesota Allentown, Pennsylvania Riyadh
Nashville, Tennessee Anaheim, California Singapore
New York, New York Atlanta, Georgia Sydney
Norwalk, Connecticut Blairsville, Pennsylvania Trinidad
Omaha, Nebraska Brookline, Massachusetts Wellington
Philadelphia, Pennsylvania Cleveland, Ohio
Phoenix, Arizona Cross Lanes, West Virginia STECK-VAUGHN PUBLISHING CORPORATION
Richmond, Virginia Cuyahoga Falls, Ohio 8701 North MoPac Expressway
Rochester, New York Dallas, Texas Ste. 200
San Francisco, California Fort Lauderdale, Florida Austin, Texas 78759
Seattle, Washington Fort Worth, Texas (512) 343-8227
Somerset, New Jersey Glendale, Arizona Chatham, New Jersey
St. Louis, Missouri Harrisburg, Pennsylvania Cambridge, U.K.
Tampa, Florida Houston, Texas
Washington, D.C. Livonia, Michigan
Long Beach, California
Los Angeles, California
Louisville, Kentucky
Minneapolis, Minnesota
New Orleans, Louisiana
</TABLE>
<PAGE> 39
37.
CORPORATE INFORMATION
<TABLE>
<S> <C> <C>
DIRECTORS SUBSIDIARY PRESIDENTS AVAILABILITY OF FORM 10-K
David C. Jones* Gary M. Cook The Company's Annual Report on Form 10-K
Chairman of the Board President, National Education Centers (including financial statements and
financial statement schedules) filed
Richard C. Blum* Gary M. Keisling with the Securities and Exchange
Investment Banker President, ICS Learning Systems Commission is available to any
stockholder, without charge, upon
David Bonderman Roy E. Mayers request. Inquiries should be sent to:
Principal, Texas Pacific Group President and Chief Executive Officer
Steck-Vaughn Publishing Corporation National Education Corporation
Jerome W. Cwiertnia* 18400 Von Karman Avenue
President and Chief Executive Officer Robert T. Soto Irvine, California 92715
President, National Education Attention: Investor Relations
Leonard W. Jaffe* Training Group
Private Investor, Consultant INDEPENDENT ACCOUNTANTS
MARKET DIVIDEND INFORMATION
Michael R. Klein Price Waterhouse
Partner, Wilmer, Cutler & Pickering The Company's common stock is listed on 575 Anton Boulevard, Suite 1100
the New York Stock Exchange and the Costa Mesa, California 92626
Frederic V. Malek Pacific Stock Exchange. The number of
Co-Chairman, CB Commercial stockholders of record of the Company's CORPORATE OFFICE
Real Estate Group common stock on February 4, 1994, was 18400 Von Karman Avenue
3,030. No cash or stock dividends were Irvine, California 92715
Dr. Paul MacCready declared or paid on the Company's common Telephone: (714) 474-9400
President, AeroVironment, Inc. stock during 1993 or 1992. The high and Telecopier: (714) 474-9488
low market prices for the Company's
John J. McNaughton* stock during each quarter for the COMMON STOCK TRADED
Founder last two years are as follows: New York Stock Exchange
Pacific Stock Exchange
Harold Segal, C.P.A. 1993 High Low Trading Symbol: NEC
President, Segal, Chadroff & Wolff, Inc. ---- ------- -------
William D. Walsh First Quarter $ 7 3/4 $ 5 1/8 STOCK TRANSFER AGENT AND REGISTRAR
General Partner, Sequoia Associates Second Quarter 8 1/8 6 1/8 The First National Bank of Boston
Third Quarter 8 5 1/2 Mail Stop: 45-02-09
*Executive Committee Fourth Quarter 6 7/8 5 5/8 P.O. Box 644
Boston, Massachusetts 02102-0644
EXECUTIVE OFFICERS 1992 High Low
---- ------- -------
David C. Jones
Chairman of the Board First Quarter $12 1/4 $ 8 1/4
Second Quarter 10 7/8 7 3/4
Jerome W. Cwiertnia Third Quarter 9 1/8 6 3/8
President and Chief Executive Officer Fourth Quarter 7 3/8 4 5/8
Christine A. Gattenio
Vice President and Corporate Controller
Philip C. Maynard
Vice President, Secretary
and General Counsel
Keith K. Ogata
Vice President, Chief Financial Officer
and Treasurer
</TABLE>
<PAGE> 1
EXHIBIT 21
ACTIVE SUBSIDIARIES OF NATIONAL EDUCATION CORPORATION
Country or State
Subsidiaries: of Incorporation
- ------------- ----------------
NATIONAL EDUCATION CORPORATION DELAWARE
- ------------------------------ --------
NETG Holding, Inc. Delaware
Its Subsidiaries:
-----------------
National Education Training Group, Inc. Nevada
Its Subsidiary:
---------------
James Martin Insight, Inc. (51% ownership) Illinois
NETG Applied Learning Ltd. United Kingdom
NETG Applied Learning GmbH Germany
Applied Learning Lernsysteme GesmbH Austria
A.S.I. (Computer Training) Netherlands B.V. Netherlands
A.S.I.(UK) Limited United Kingdom
Deltak Training GmbH Germany
Spectrum Interactive Incorporated Delaware
ICS Learning Systems, Inc. Delaware
Its Subsidiaries:
-----------------
International Correspondence Schools Canadian, Limited Canada
International Correspondence Schools, Inc. Pennsylvania
Its Subsidiary:
---------------
ICS Intangibles Holding Company California
Intertext Group Limited England
Its Subsidiaries:
-----------------
The School of Accountancy Limited Scotland
International Correspondence Schools Limited England
International Correspondence Schools (Overseas) Limited England
International Correspondence Schools (Australasia) Limited Australia
Its Subsidiary:
---------------
International Correspondence Schools (New Zealand) Limited New Zealand
National Learning Systems, Inc. Delaware
NBD Incorporated Delaware
National Education Centers, Inc. California
Its Subsidiary:
---------------
Bauder Fashion College, Inc. Florida
National Education Credit Corporation California
National Education Enterprises, Inc. California
National Education International Corp. California
National Education Payroll Corp. California
NEC Sub, Inc. California
Steck-Vaughn Publishing Corporation Delaware
Its Subsidiary:
---------------
Steck-Vaughn Company Delaware
<PAGE> 1
Exhibit 23
NATIONAL EDUCATION CORPORATION
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectuses
constituting part of the Registration Statements on Form S-8 (Nos. 2-67273,
2-71650, 2-83454, 2-86904, 33-18086, 33-5658, 33-25056 and 33-43850) of
National Education Corporation of our report dated February 4, 1994 appearing
on page 35 of the 1993 Annual Report to Stockholders which is incorporated by
reference of our report on the Financial Statement Schedules, which appears on
page 24 of this Form 10-K.
PRICE WATERHOUSE
Costa Mesa, California
March 23, 1994
