<PAGE> 1
==============================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 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, 1994
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 CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-2774428
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
</TABLE>
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:
<TABLE>
<CAPTION>
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
<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
</TABLE>
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 the registrant's voting stock held by
nonaffiliates of the registrant as of March 17, 1995, based on the closing
price for such Common Stock on the New York Stock Exchange on such date, was
$85,173,993.
The number of shares of registrant's Common Stock outstanding as of
March 17, 1995 was 29,576,757.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from material that will
be filed with the Securities and Exchange Commission within 120 days of
registrant's fiscal year end (December 31, 1994), either as part of a Proxy
Statement for the registrant's Annual Meeting of Stockholders or as an
amendment to this Form 10-K.
===============================================================================
<PAGE> 2
PART I
ITEM 1. BUSINESS.
National Education Corporation (the "Company") provides training and
educational services and products to individuals, businesses and governments.
The Company was originally incorporated in California in 1954 and
reincorporated in Delaware in 1972. The Company's business is conducted
primarily through three operating entities: ICS Learning Systems, Inc.
("ICS"), which offers distance education opportunities; Steck-Vaughn Publishing
Corporation ("Steck-Vaughn"), one of the largest publishers of supplemental
educational materials; and National Education Training Group, Inc. ("NETG"),
one of the largest providers of multimedia products to educate and train
corporate and government employees, with specific emphasis on information
systems training. Historically, the Company also has conducted business
through a fourth operating entity, National Education Centers, Inc. ("Education
Centers"); however, in 1994 those operations were reclassified as discontinued
operations as the Company has pursued a strategy to sell off or otherwise
dispose of Education Centers' operations. See "Discontinued Operations:
Education Centers" below in this Item 1.
COMPANY RESULTS AND DEVELOPMENTS IN 1994
The following provides a brief discussion of the Company's significant
developments in 1994. A more detailed discussion of each of the Company's
primary operating entities appears later in this Item 1; a more detailed
description of the Company's results of operations appears in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," starting on page 17 below.
Year End 1994. For 1994, the Company reported revenues of $241.6
million, which were 7.8% higher than revenues of $224.2 million in 1993.
Increased revenues from continuing operations at ICS, Steck-Vaughn and National
Education International, Inc. (which provides training services to foreign
governments, primarily in the Middle East) were offset, in part, by reduced
revenues at NETG. For 1994, the Company recorded a net loss from continuing
operations of $14.5 million, compared to net income from continuing operations
of $10.1 million in 1993. The $24.6 million decline in income from continuing
operations was due to the adoption in 1994 by the Company of Statement of
Position 93-7 (discussed in the next paragraph), and a one-time gain in 1993 of
$21.3 million on the initial public offering of Steck-Vaughn shares, partially
offset by an unusual charge in 1993 of $9.2 million recorded at NETG for the
write-down of certain acquired intangible assets. For 1994, the Company
recorded a net loss of $63.9 million, as compared to a net loss of $9.6 million
in 1993. The increased net loss for 1994 over 1993 primarily related to a 1994
loss from discontinued operations of $9.4 million and a second quarter 1994
charge of $40.0 million to write-down Education Centers' assets, provide for
estimated gains/losses on the sale of certain Education Centers' schools, and
to provide for the estimated costs of closing and teaching-out certain
Education Centers' schools. In addition, the net loss in 1993 included a $23.6
million unusual restructuring charge for the write-down of certain assets and
estimated costs of closing fourteen Education Centers' schools announced in the
third quarter of 1993.
In December 1993, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
No. 93-7, "Reporting on Advertising Costs" (the "SOP"). The SOP generally
requires advertising costs, other than direct response advertising, to be
expensed as incurred. The SOP is effective for financial statements for fiscal
years beginning after December 15, 1994, but may be adopted early. In the
fourth quarter of 1994, the Company adopted the SOP, effective January 1, 1994.
Adoption of the SOP caused the Company to expense all of ICS' advertising,
selling and promotion costs ("ICS Marketing Costs") as they were incurred in
1994, rather than deferring and amortizing the ICS Marketing Costs as in prior
periods. In addition, SOP transition rules required amortization during 1994
of $19.8 million worth ICS Marketing Costs that had been deferred from periods
prior to December 31, 1993; accordingly, 1994 quarterly results for the Company
have been restated in Note 16 to the Company's Consolidated Financial
Statements to reflect adoption of the SOP (see page F-20 below). For more
information on adoption by ICS of the SOP, please see Item 7, "Management's
Discussion and Analysis
2
<PAGE> 3
of Financial Condition and Results of Operations," beginning on page 17 below,
and Note 1 to the Company's Consolidated Financial Statements, beginning on
page F-6 below.
ICS Learning Systems, Inc. In 1994, ICS achieved a 21.2% increase in
revenues, from $101.3 million in 1993 to $122.8 million in 1994. These results
were directly related to a 61,106, or 19.6%, increase in enrollments
world-wide, which arose, in part, from an expanded telesales operation that
improved the conversion of prospective students into enrollments, new product
introductions, the acquisition of MicroMash (discussed below), and a 17.0%
growth in revenues from ICS' Business and Industrial Training Division.
However, ICS experienced an operating loss in 1994 of $3.9 million, as compared
to operating income of $21.4 million in 1993. The 1994 operating loss at ICS
resulted solely from the change in accounting of ICS Marketing Costs required
by the SOP.
In 1994, ICS' computer and related training continued as its fastest
growing product line and has achieved compound annual growth since 1988 of 39%
in revenue and 27% in enrollments. Also during 1994, ICS introduced the
following new courses: Master Computer Programming, PC Specialist with
Multi-Media, Appliance Repair, Professional Locksmithing, Medical Office
Assistant, Professional Secretary with Computer, and Total Health, Body and
Mind, a comprehensive multimedia fitness and health course on CD-ROM.
Effective January 1, 1994, ICS acquired M-Mash, Inc. (commonly known
as "MicroMash"), a leader in computer based training (CBT) for the accounting
industry. MicroMash sells a wide variety of exam preparation and continuing
professional education ("CPE") products for the entire accounting and tax
professional industry. MicroMash sells primarily through direct response
marketing, but also markets and sells to major corporate and government bodies.
Based on statistics compiled by the Distance Education and Training
Council ("DETC"), the accrediting body for independent study schools recognized
by the United States Department of Education, ICS continues as the industry
leader in generating new enrollments. During 1994, more than 48,000 students
enrolled in ICS' high school diploma program and more than 35,000 students
enrolled in ICS' eleven two-year associate degree programs in business and
technology. An additional 289,000 students worldwide pursued courses in other
ICS career and hobby-related areas.
Steck-Vaughn Publishing Corporation. Historically, Steck-Vaughn has
experienced strong annual growth rates in revenues and operating income;
however, in 1994, Steck-Vaughn recorded revenues that were flat compared to
1993. This change in historical growth rates was chiefly attributed to several
factors. Adverse winter weather conditions, which affected the midwest,
mid-Atlantic and northeast regions of the United States, hampered sales
conditions in early 1994. In addition, Steck-Vaughn's sales force expansion
and related reorganization in the beginning of 1994 required more time than
anticipated to assimilate, reducing sales productivity. Moreover, a continuing
trend towards site-based selling, which is driving the decision making process
down to the faculty level and requires a greater number of sales calls per
revenue dollar, resulted in an increase in selling costs. Finally, revenues
were impacted by funding pressures on adult education centers. Operating
income was negatively impacted by lower than planned revenues and increased
costs from a reorganized sales force. In addition, Steck-Vaughn maintained its
aggressive product development effort, producing and releasing more than 220
new products in 1994.
In November 1994, Steck-Vaughn acquired the assets, including the
product lines, of Berrent Publications, Inc. ("Berrent Publications"), an
educational materials publisher in New York. Berrent Publications' product
lines, which had only been marketed regionally, consist primarily of test
preparation and assessment materials and complement Steck-Vaughn's offerings to
this market. Steck-Vaughn will market these products through its existing
sales organization, with the Steck-Vaughn/Berrent Publications Division
continuing to develop new product offerings.
Due to the rapidly expanding number of products offered, and to
address the trend toward site-based purchasing in the instructional materials
marketplace, Steck-Vaughn reorganized and expanded 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 was segmented into two
groups. One group focused on the elementary, junior high school and library
markets, while the other group
3
<PAGE> 4
focused on the high school and adult education markets. This reorganization
allows the two groups to focus their expertise, time and energy in a more
productive way.
National Education Training Group, Inc. NETG experienced a large
operating loss for 1994; however, NETG was able to show substantial improvement
from its operating loss in 1993 based, in part, on reductions in product
development costs, general and administrative expenses and amortization of
acquired intangible assets. NETG's operating loss of $14.0 million for 1994
compared favorably with an operating loss before unusual items of $26.0 million
for 1993, which, along with an unusual charge of $9.2 million in 1993 to
write-down certain acquired intangible assets, resulted in a total segment loss
of $35.2 million for 1993. Revenues of $61.9 million in 1994 decreased 9.3%
compared to 1993 revenues of $68.3 million, based in part from a lower volume
of contract backlog at the beginning of 1994 as compared to the beginning of
1993, and from a small reduction in the volume of new orders at NETG's domestic
operations in 1994. New orders increased in the international operation due to
increased new business activity in the United Kingdom operation; however,
decreasing contract backlog, which more than offset the new orders business,
and the sale of NETG-Canada in 1993 resulted in reduced revenues in the
international operation.
FINANCIAL INFORMATION ABOUT INDUSTRY SEGMENTS
Revenues and operating income (loss) by industry segment for the
Company's continuing operations for the past three years are as follows (for
more detailed information, please see Note 15 to Consolidated Financial
Statements, beginning on page F-18 below):
<TABLE>
<CAPTION>
1994 1993 1992
<S> <C> <C> <C>
NET REVENUES: (dollars in thousands)
ICS $122,815 $101,319 $ 90,292
Steck-Vaughn 53,608 53,156 45,124
NETG 61,937 68,259 82,582
Other 3,254 1,438 271
-----------------------------------------------------------------------------------------------------------
TOTAL NET REVENUES $241,614 $224,172 $218,269
===========================================================================================================
OPERATING INCOME (LOSS):
ICS operating income before
amortization of prior period
deferred marketing $ 15,909 $ 21,368 $ 18,780
Amortization of prior period
deferred marketing (19,836) - -
-----------------------------------------------------------------------------------------------------------
ICS (3,927) 21,368 18,780
-----------------------------------------------------------------------------------------------------------
Steck-Vaughn 10,425 13,566 12,556
-----------------------------------------------------------------------------------------------------------
NETG operating loss before
unusual items (13,993) (25,950) (21,854)
Unusual items -- (9,232) (2,506)
-----------------------------------------------------------------------------------------------------------
NETG (13,993) (35,182) (24,360)
-----------------------------------------------------------------------------------------------------------
Other (50) (657) (470)
-----------------------------------------------------------------------------------------------------------
TOTAL SEGMENT OPERATING
INCOME (LOSS) $ (7,545) $ (905) $ 6,506
===========================================================================================================
</TABLE>
4
<PAGE> 5
DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENTS
ICS LEARNING SYSTEMS, INC.
ICS Learning Systems, Inc. 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.
In addition, ICS offers associate technology degree programs in business and
engineering. All of ICS' independent study courses in the United States are
accredited by the Distance Education and Training Council ("DETC"), the
accrediting body for independent study schools recognized by the United States
Department of Education. ICS also offers over 1,200 training products and
10,000 hours of training to industrial clients under the name "ICS Business and
Industrial Training."
In addition, with the acquisition of MicroMash in 1994, ICS
established a presence in the large and diverse field of professional and
continuing education. MicroMash offers over 70 professional exam and
continuing professional education products to the financial and accounting
industries.
Curricula and Product Development. Curricula are carefully designed
to reflect the most important trends in employment opportunities, consumer
interest, professional development and industrial training needs. New courses
introduced during 1994 include Master Computer Programming, PC Specialist with
Multi-Media, Professional Secretary with Computer, Appliance Repair,
Professional Locksmithing, Medical Assistant, and a CD-ROM based product on
health and fitness. In 1994, ICS continued its project to convert all existing
print-based products to an electronic format. With the installation of a
digital data network to facilitate on-line editing, filing and retrieval, and
transfer of products, and the purchase of sophisticated digital product
development and revision software, ICS now has the complete capability to
produce and update a wide range of multimedia and on-line digitally based
products. This format also facilitates the transfer of documents directly to
high technology printers in digital format, which eventually will allow ICS to
reduce inventory requirements and virtually eliminate any material
obsolescence, and will position ICS to move further into the electronic
delivery markets.
Traditionally, ICS distance education 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 6 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 95% of the 2.0 million exams graded by ICS
during 1994 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.
Tuition for ICS' distance education courses ranges from approximately
$400 to $2,500, which, in many cases, includes auxiliary equipment for the
courses, such as personal computers for certain PC courses. Students generally
pay a portion of the tuition upon enrollment and the balance on a monthly
basis. While many ICS students complete their entire distance education
course, ICS estimates that, on average, students complete in the range of
approximately 40% to 65% of lessons, depending on the course. ICS' 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 DETC or applicable law. ICS is not dependent on students'
entitlement to financial aid from the federal government.
5
<PAGE> 6
ICS has established telesales departments in its U.S. and major
foreign operations, by which in-bound telephone inquires 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, Australia and the U.S., adding to
the existing telesales operations in the United Kingdom. The telesales
operations improved the number of prospective students converted into
enrollments and, accordingly, contributed to the 19.6% increase in enrollments
at ICS from 1993 to 1994.
During 1994, ICS produced its first two products on CD-ROM technology.
"Total Health, Body and Mind" was launched in July and is sold in retail
software stores and through software catalogs. ICS has an agreement for
marketing this and other software based products with one of the leading
software marketing and distribution firms. The second CD-ROM product is part
of the "PC Specialist with Multi-Media" course and provides students with a
wide exposure to multimedia development techniques. ICS has several additional
CD-ROM products in development.
In addition, ICS is reformulating several of its existing products for
digital on-line delivery via "ICS On-Line," an electronic campus established by
ICS in 1993 on the fastest growing on-line service in the United States,
America Online ("AOL"). ICS was one of the first distance education providers
to establish this service and currently offers the following online services
through links between personal computers: ICS Library, ICS Bookstore,
Electronic Bulletin Board, On-Line Classroom and On-Line Enrollment. ICS
students access ICS On-Line by subscribing to AOL; accordingly, ICS students
who use ICS On-Line have access to the hundreds of features available on the
AOL service.
In 1994, ICS' Business and Industrial Training Division expanded its
marketing efforts by equipping its sales force with PC technology and training.
ICS also converted the Division's catalog of 1,200 products to a computer data
base, giving each sales representative the ability to create quickly custom
curricula for their clients. The Division has established a telesales
operation to generate new customer leads and to sell products over the phone.
In addition, in 1994, the Division dramatically increased the revenue it
generates from corporate "Tuition Assistance Programs" ("TAP") through
development of new marketing materials and expansion of the sales force
committed to the TAP market.
Shortly after acquiring MicroMash, ICS began to invest in expanding
the MicroMash product line. During 1994, MicroMash acquired rights to select
video training products to complement its computer based training (CBT) product
line. In December, MicroMash began its expansion into other professional
training markets through the acquisition of an established "Bar Review" course
used by prospective lawyers to prepare for state bar exams.
Also during 1994, MicroMash produced Windows-based enhancements to its
products and completed development of a series of multimedia training products
with "Video Clips," a series of situational videos on its CD-ROM training
products to enhance the situational learning of the professional.
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.
ICS also offers courses in many English speaking countries throughout the
world; in 1994, ICS enrolled students from more than 150 different countries.
Telemarketing also is used in the United States, Canada, the United Kingdom,
and Australia. ICS has over 200 telesales representatives who speak directly
to the customers about enrolling in courses.
Competition. The distance education and training industry is highly
competitive. ICS 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
6
<PAGE> 7
and the manner in which it is delivered, thereby increasing the entities with
which ICS competes for student enrollments. ICS believes that the principal
competitive factors in its industry are breadth and quality of course
offerings, price and quality of customer services. Overall, the Company
believes that ICS competes favorably on the basis of these factors.
STECK-VAUGHN PUBLISHING CORPORATION
Steck-Vaughn is one of the country's largest publishers of
supplemental educational materials, offering 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 for purchase by the general public through
bookstores.
In July 1993, Steck-Vaughn completed an initial public offering of
2,668,000 shares of its common stock at $12.00 per share, generating
approximately $29,775,000 of net proceeds. This initial public offering
represented approximately 18.3% of Steck-Vaughn's stock, the remainder of which
is held by the Company. 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 had 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 1994, Steck-Vaughn announced a program
to repurchase from the public market up to 500,000 shares of its common stock;
as of December 31, 1994, Steck-Vaughn had repurchased 230,200 shares,
effectively raising the Company's ownership of Steck-Vaughn's common stock from
81.7% as of the public offering to 83.0% as of December 31, 1994.
Product Development. Steck-Vaughn continually evaluates, updates and
adds to its product lines through internal development of new educational
materials, performance of development contracts by outside authors, production
of revised and supplementary materials based on existing products, and
acquisitions of educational materials from authors and publishers. In 1994
alone, Steck-Vaughn produced and released more than 220 new products.
Recent product development and acquisition achievements include the
following:
* In April 1993, Steck-Vaughn acquired THE MAGNETIC WAY(TM)
product line from Creative Edge, Inc., which 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. In
addition, Steck-Vaughn introduced a lower-priced, smaller set
of similar products in the fall of 1993, as well as a number
of new learning packages in Science and Social Studies in
1994, to extend the original THE MAGNETIC WAY(TM) product
line.
* In November 1994, Steck-Vaughn acquired from Berrent
Publications its product lines of test preparation and
assessment materials, which lines complement Steck-Vaughn's
offerings to this market.
* In December 1994, Steck-Vaughn became the exclusive
distributor to schools and public libraries in the United
States for the Larousse Kingfisher Chambers line of books,
which line expands and complements Steck-Vaughn's library
division line of products with additional reference,
nonfiction and fiction titles.
Sales and Marketing. Steck-Vaughn markets all of its products through
multiple distribution channels, including its national sales and telesales
organization. Additionally, Steck-Vaughn markets and sells its products
7
<PAGE> 8
through a distributor organization that 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.
During 1994, the instructional materials marketplace continued its
trend toward site-based selling, as more personnel at the school and faculty
level participated in the buying decisions for educational materials. While
site-based selling is a relative strength of Steck-Vaughn, site-based selling
requires a greater number of sales calls per revenue dollar, resulting in
increased selling costs.
Based in part on the trend toward site-based selling, Steck-Vaughn
expanded and realigned its sales force, effective January 2, 1994, into two
groups. One group concentrates on the elementary and junior high schools and
school libraries, and the other group focuses on the high school and adult
education markets. Prior to this reorganization, Steck-Vaughn's sales force
was a smaller group that focused on all Steck-Vaughn markets. The reorganized
sales force can focus the expertise, time and energy of its members in a more
productive way.
Competition. Many companies larger and smaller than Steck-Vaughn
compete with Steck-Vaughn in the educational publishing field. No single
company is dominant in the industry segments for which Steck-Vaughn publishes.
Steck-Vaughn believes that the principal competitive factors in its industry
are breadth and quality of product offerings, price, quality of support
services and market responsiveness. Overall, the Company believes that
Steck-Vaughn competes favorably on the basis of these factors, and that growth
has occurred due to new products and increased sales and market penetration.
NATIONAL EDUCATION TRAINING GROUP, INC.
Established in the late 1960s, the Company's NETG subsidiary
specializes in providing multimedia products to educate, train and transfer
skills to corporate and government employees. Headquartered in Naperville,
Illinois, NETG offers multimedia training solutions to help organizations
worldwide maximize their performance and their investments in people and
technology.
Markets and Products. NETG's line of over 600 training products
addresses all audience levels, providing analytical perspective as well as
practical skills and knowledge in information technology, desktop computing,
and management and professional development.
NETG provides multimedia training that combines data, text, audio,
video, animation and graphics with computer technology as appropriate to meet
the needs of its markets and customers. NETG courses have been offered on
virtually every technology-based medium and are provided in the formats of
mainframe computer-based training, video, diskette, CD-ROM and interactive
video. The NETG course library is divided into three primary product lines:
Information Technologies, Desktop Computing, and Management and Professional
Development.
1. Information Technologies Product Line. NETG's Information
Technologies product line focuses on training information system professionals
and users in new technologies. NETG currently offers and supports a large line
of multimedia-based training curricula for Information Technologies, with
courses in Client/Server Concepts, Front End Development Languages and Tools,
Back End Database Servers, Object- Oriented Development, GUI Design, UNIX,
Networking and Enterprise Systems (IBM Mainframe).
2. Desktop Computing Product Line. NETG's Desktop Computing
product line focuses on training end users in business applications on personal
computers and workstations. NETG uses current technologies, including CD-ROM
and Local Area Networks (LANs), to create sophisticated training and work
support systems. The product line includes training products covering many
popular business application programs used in the workplace, including the
following: Microsoft(R) Windows(TM), Microsoft(R) Word, Lotus(R) 1-2-3(R),
Windows NT(TM),
8
<PAGE> 9
Microsoft(R) Excel, Lotus Notes(R), DOS, Microsoft(R) PowerPoint(R), Lotus Ami
Pro(TM), OS/2(R), Microsoft(R) Access(R) and WordPerfect(R).
In addition, NETG has developed a set of skills-based courses known
collectively as SKILL BUILDER(R) products. SKILL BUILDER(R) courses provide
simulations of the actual software to be learned. The courses feature specific
business case scenarios that allow participants to quickly learn relevant
skills they can immediately apply to their jobs. Major SKILL BUILDER(R) titles
include the following: Microsoft Windows 3.1, Microsoft Windows NT, OS/2 2.0,
Microsoft Mail 2.0 for Windows, Lotus Notes 3.0, Microsoft Windows for
Workgroups 3.1, Microsoft Word 6.0 for Windows, Wordperfect 5.1 for Windows,
Ami Pro 3.01, Lotus 1-2-3 4.0 for Windows, Microsoft Access, Microsoft Excel
5.0 for Windows and Microsoft PowerPoint 4.0.
3. Management and Professional Development Product Line. NETG
offers multimedia courses for improving personal, management and business
skills that are essential for highly productive and professional employees.
Topics include Reskilling Business, Total Quality Management, Fundamental
Skills, Interpersonal Skills, Management Skills and Customer Service.
Customized Services. NETG-Spectrum in Bedford, Massachusetts, is the
consulting and custom development division of NETG. For more than 15 years,
Spectrum has provided a full range of services in the design and delivery of
custom multimedia training and performance systems. Spectrum helps clients
achieve their business goals by combining its expertise in education,
multimedia, technology and project management to produce effective training
tailored to clients' needs.
Integration with Instructor-Led Training. NETG also offers
Instructor-Led Training (ILT) as part of a total integrated training delivery
strategy. Although NETG's primary training delivery method is media-based,
NETG can provide businesses with an integrated curriculum track to meet
specific needs. NETG combines the benefits of both delivery methods to meet
particular cost and time factors for its customers.
Customer Assistance. NETG's Customer Assistance, located in
Naperville, Illinois, provides customers with 24-hour, seven day per week,
toll-free order processing and technical assistance. Support analysts provide
answers to software and hardware questions, and assistance in the installation
and ongoing use of courseware products. All costs for technical assistance are
included in the price of NETG's products. In addition, NETG has established a
LAN-based call tracking and reporting system that allows support analysts to
electronically track customer inquiries, problems and solutions for faster
response time to customers.
International Distribution, Service, Marketing and Sales. NETG and
its sister subsidiaries in the United Kingdom, the Netherlands, Germany and
Austria are all direct subsidiaries of NETG Holding, Inc., a direct subsidiary
of the Company ("NETG Holding"). Together, the subsidiaries of NETG Holding
form an international organization with 76 sales offices and more than 450
employees, and an international network of agents and distributors in 50
countries, including Argentina, Australia, Bahrain, Bolivia, Brazil, Canada,
Denmark, Egypt, France, Hong Kong, India, Japan, Korea, Malaysia, New Zealand,
Nigeria, Norway, Peru, Russia, Saudi Arabia, Singapore, South Africa, Sweden,
Taiwan, Turkey, the United Arab Emirates, and Venezuela.
NETG Sales Organization and Distribution Channels. NETG's revenues
are generated primarily by its field sales force that focuses on large business
and government organizations. Customers license NETG's products and services
under agreements that, depending on the customer's needs, provide access to all
or part of NETG's product lines on a limited or unlimited basis. During the
third quarter of 1994, NETG introduced in the United States a new product
licensing agreement, known as the "Multimedia Licensing Agreement" (or "MLA").
The MLA provides NETG customers additional flexibility in licensing specific
products from NETG, and has allowed NETG to use additional distribution
channels. Moreover, in 1994 NETG developed an inside sales organization in the
United States to address the training needs of small and medium sized
companies. The inside sales group
9
<PAGE> 10
concentrates its efforts on licensing NETG products to clients via telephone.
A telemarketing lead generation group also was created in 1994 to support the
needs of both inside and field sales groups.
Competition. According to Training magazine's October 1994 Industry
Report, the total training market in North America is in excess of $50 billion
annually for industry and government. Eighty percent of that (more than $40
billion) is spent on overhead and internal training staff salaries. The
remaining 20% ($9.9 billion) is divided into five outside expenditures
categories of which 4% ($1.8 billion) is off-the-shelf materials, where NETG
directly competes. NETG is one of the largest multimedia training companies in
this very large, highly fragmented and competitive market.
NETG competes in the training market on the factors of timeliness of
new courses, instructional effectiveness, breadth of subject matter and
delivery media, price and solution-oriented customer support. Overall, NETG
believes that it is competitive on the basis of these factors. In 1995 and
beyond, NETG anticipates stiffening competition from other suppliers of
media-based training, which include major competitors CBT Systems, DPEC, SRA (a
division of McGraw Hill, Inc.) and Comsell.
FINANCIAL INFORMATION ON THE COMPANY'S FOREIGN OPERATIONS
The following table shows consolidated net revenues of the Company in
foreign countries for 1994, 1993 and 1992 (for more detailed information,
please see Note 15 to Consolidated Financial Statements beginning on page F-18
below). These revenues are derived principally from the foreign operations of
ICS and NETG:
<TABLE>
<CAPTION>
(Dollars in thousands) 1994 1993 1992
---- ---- ----
<S> <C> <C> <C>
Net revenues outside the
United States $55,990 $58,642 $63,966
Percent of consolidated
net revenues 23.2% 26.2% 29.3%
</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
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.
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.
DISCUSSION OF ADDITIONAL BUSINESS FACTORS
RESEARCH AND DEVELOPMENT
The amount spent during 1994, 1993 and 1992 on Company-sponsored
research and development activities was approximately $19 million, $24 million
and $20 million, respectively. In 1994, the Company continued to invest in
research and development to ensure new product availability for future revenue
generation. The Company
10
<PAGE> 11
spends substantial sums primarily in the development of new products at NETG
and Steck-Vaughn, and curricula for ICS.
SEASONALITY OF THE BUSINESS
Steck-Vaughn's sales are relatively higher in the third quarter of the
year due to its customers purchasing 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. NETG's business is
seasonal due to the sales cycle from a disproportionate number of long-term,
large contracts for NETG's products and services that are renewed in the fourth
quarter 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 revenue for ICS, which represents amounts
estimated to be recognized as revenue in subsequent years as services and
courseware are provided, is described in Note 12 to Consolidated Financial
Statements on page F-15 below.
Financial information about industry segments is described in Note 15
to Consolidated Financial Statements on page F-18 below.
Compliance with federal, state or local provisions concerning the
discharge of materials into the environment or otherwise relating to the
protection of the environment had no material effect in 1994 on the Company's
capital expenditures, earnings or competitive position.
The Company employed approximately 3,147 persons as of January 31,
1994, including 1,605 at the Company's Education Centers subsidiary that has
been reclassified as discontinued operations. See "Discontinued Operations:
Education Centers" below.
DISCONTINUED OPERATIONS: EDUCATION CENTERS
Historically, in addition to ICS, Steck-Vaughn and NETG, the Company
has conducted business through Education Centers; however, in 1994 those
operations were reclassified as discontinued business operations, and the
Company has pursued a strategy to sell off or otherwise dispose of Education
Centers' operations.
Education Centers has been one of the largest operators of private
postsecondary schools in the United States; however, in 1993, it became more
difficult for students at a number of locations, especially in urban areas, to
obtain access to federally guaranteed student loans. Certain provisions of the
Higher Education Act of 1992, as well as the 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, in 1993 Education Centers elected to cease new
student enrollments at 15 of its 48 schools (two of which have since begun
again taking new enrollments), and in 1994 Education Centers elected to cease
new student enrollments at an additional 6 schools.
1994 Performance. Currently, Education Centers operates 36 schools
(including seven that are no longer taking new enrollments and are scheduled to
close permanently in the next six months, following the time that all existing
students have been provided an opportunity to complete their scheduled courses
of study); Education Centers has closed twelve schools in the past two years.
The Company's consolidated statement of operations for 1994 includes a second
quarter $40.0 million charge to write-down Education Centers' assets, provide
for estimated gains/losses on the sale of certain Education Centers' schools,
and to provide for the estimated costs of closing and
11
<PAGE> 12
teaching-out certain Education Centers' schools. In addition, in 1994, the
Company recorded a $9.4 million operating loss from Education Centers'
discontinued operations. In 1993, Education Centers had an operating loss
before unusual items of $5.5 million, along with an unusual charge of $23.6
million, which charge included a write-down of assets and estimated costs of
closing 14 schools announced in the third quarter of 1993.
Sale and Other Disposition of Schools. Education Centers has, since
June 1994, negotiated with several potential buyers for one or more of
Education Centers' schools. In 1994, Education Centers was unable to
consummate a transaction with a potential buyer of Education Centers' entire
operations. Currently, Education Centers is negotiating with a potential buyer
under the terms of a letter of intent to sell certain of Education Centers'
schools. In addition, Education Centers has had discussions with a number of
other potential purchasers of one or more schools.
The sale of each school typically is conditioned on, among other
things, re-certification of the school by the United States Department of
Education as eligible for its students to receive federal student aid. In the
event that the Department of Education refuses to re-certify any school, or
such school, while still owned and operated by Education Centers, loses its
certification for students to receive federal student aid (which can occur
based on, among other reasons, its former students maintaining too high of a
default rate in repayment of student loans made under federal student loan
programs), Education Centers may determine to cease taking new enrollments at
such school, and close that school after all existing students have been
provided an opportunity to complete their scheduled courses of study.
Business and Curricula. Each school provides various combinations of
classroom, laboratory, hands-on and externship training for entry-level
occupations in one or more of five major disciplines: Medical, Electronics,
Business, Automotive, and Aviation. 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. 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.
Completion and Job Placement. The completion rate for 1994 was 60%,
as compared to 59.5% for 1993, with better rates in short-term programs. Over
the past three years Education Centers has placed almost 23,900 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. Education
Centers monitors its overall placement rate, including monitoring graduates for
at least three months after placement, as an indicator of the success of
Education Centers' schools.
Financial Aid and Accreditation. Federal and state financial aid
represented approximately 85 percent of Education Centers' revenues in 1994.
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 year; historically, many Education Centers' students 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. Please see "Sale
and Other Disposition of Schools" above, and please see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" beginning on page 21 below.
All schools operated by Education Centers are accredited by either the
Accrediting Commission of Career Schools and Colleges of Technology or the
Accrediting Council for Independent Colleges and Schools, and each school holds
one or more state licenses allowing the school to operate or recruit students
in such states. Each school undergoes periodic accrediting evaluations by
teams of qualified examiners.
12
<PAGE> 13
Advertising, Marketing and Competition. 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, and maintains a staff to make sales calls and to prepare
proposals to governmental and quasi-governmental organizations and agencies
based on training needs analyses or the existing government request for
proposal process.
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.
Education Centers competes on curriculum content and availability, location,
tuition and other fees charged, the duration of the course, and the job
placement success rate. Overall, the Company believes Education Centers'
competitive position is satisfactory.
EXECUTIVE OFFICERS OF THE COMPANY
The following table provides information regarding executive officers
of the Company, including their ages as of March 17, 1995:
<TABLE>
<CAPTION>
Name, Age and Title: Five-Year Business Experience:
------------------- -----------------------------
<S> <C>
David C. Jones (73) Chairman of the Board since July 1989. Acting Chief Executive
Chairman of the Board 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 (53) President and Chief Executive Officer since April 1990. President
President and Chief and Chief Operating Officer from August 1989 to April 1990.
Executive Officer 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 (39) Vice President and Corporate Controller since April 1989.
Vice President and Corporate Controller since January 1987.
Corporate Controller
Philip C. Maynard (40) Vice President, Secretary and General Counsel since February 1994.
Vice President, Secretary and General Counsel of Orchids Paper Products Company from May 1993
General Counsel 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.
Keith K. Ogata (40) Vice President, Chief Financial Officer and Treasurer since April
Vice President, Chief 1991. Vice President and Treasurer from April 1989 to April 1991.
Financial Officer and Treasurer since January 1987.
Treasurer
</TABLE>
13
<PAGE> 14
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 an
Education Centers school.
(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 an Education Centers school.
(d) The Company owns the land and buildings in Oakland Park,
Florida, that formerly served as a dormitory for the Company's former Ft.
Lauderdale, Florida Education Centers school. These buildings, which the
Company currently has listed for sale, aggregate approximately 107,000 square
feet of space on approximately 4.8 acres of land.
(e) 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.
(f) The Company owns an 82,000 square foot building on
approximately 31 acres of land in Ransom, Pennsylvania for an ICS warehouse.
(g) 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.
(h) The Company owns 22,000 square feet of buildings on
approximately 4.8 acres of land in West Des Moines, Iowa, for an Education
Centers school.
(i) The Company owns 60,000 square feet of buildings on
approximately 3.1 acres of land in Blairsville, Pennsylvania, for an Education
Centers school.
(j) The Company owns 10,000 square feet of buildings on
approximately .5 acres of land in Minneapolis, Minnesota, for an Education
Centers school.
(k) The Company has approximately 120 leases for its operating
units and offices, including the following: Education Centers' headquarters in
Irvine, California - approximately 24,000 square feet; NETG's headquarters in
Naperville, Illinois - approximately 130,000 square feet; Steck-Vaughn's
headquarters in Austin, Texas - approximately 31,000 square feet; and
NETG-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 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.
14
<PAGE> 15
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 1994.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS.
The Company's Common Stock is listed on the New York Stock Exchange
and the Pacific Stock Exchange. The high and low market prices for the
Company's stock during each quarter for the last two years are as follows:
<TABLE>
<CAPTION>
1994 1993
---- ----
High Low High Low
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
First Quarter $ 7 3/8 $ 6 $ 7 3/4 $ 5 1/8
Second Quarter 6 5/8 4 7/8 8 1/8 6 1/8
Third Quarter 5 3/4 4 7/8 8 5 1/2
Fourth Quarter 5 1/8 3 3/4 6 7/8 5 5/8
</TABLE>
The number of stockholders of record of the Company's Common Stock as
of March 17, 1995 was 2,778. 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.
No cash or stock dividends have been declared or paid on the Company's
Common Stock during 1994 or 1993. The Company has no present intent to pay
cash dividends; in addition, the Company's Credit Agreement with its lending
institutions restricts the payment of cash dividends.
15
<PAGE> 16
ITEM 6. SELECTED FINANCIAL DATA.
National Education Corporation and Subsidiaries
FIVE YEAR FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(amounts in thousands, except per share amounts) 1994 1993 1992 1991 1990
--------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET REVENUES $241,614 $224,172 $218,269 $233,670 $221,616
Income (loss) before amortization of acquired intangible
assets, amortization of prior period deferred marketing,
unusual items, nonoperating items, gain on sale of stock,
income taxes (benefit) and minority interest $ 6,813 $ 1,400 $ 4,190 $ 16,596 $ (1,125)
Amortization of acquired intangible assets 1,824 4,605 5,936 6,253 6,465
Amortization of prior period deferred marketing 19,836 -- -- -- --
Unusual items, net* -- 9,232 2,506 -- (154)
Other nonoperating expenses, net 2,610 3,025 5,141 8,627 11,908
Gain on sale of stock (3,247) (21,260) -- -- --
Income taxes (benefit) (849) (4,944) (3,109) 2,345 1,717
Minority interest 1,112 604 -- -- --
--------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (14,473) 10,138 (6,284) (629) (21,061)
Income (loss) from discontinued operations (9,420) (19,757) 6,799 5,988 6,122
Loss on disposal of discontinued operations (40,032) -- -- -- --
--------------------------------------------------------
NET INCOME (LOSS) $(63,925) $ (9,619) $ 515 $ 5,359 $(14,939)
--------------------------------------------------------
PER SHARE DATA
EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS:
Primary earnings (loss) per share $ (.49) $ .34 $ (.21) $ (.02) $ (.71)
--------------------------------------------------------
Fully diluted earnings (loss) per share $ (.49) $ .32 $ (.21) $ (.02) $ (.71)
--------------------------------------------------------
EARNINGS (LOSS) PER SHARE $ (2.16) $ (.32) $ .02 $ .18 $ (.50)
--------------------------------------------------------
Weighted average number of shares outstanding:
Primary 29,640 29,855 30,296 30,116 29,643
Fully diluted 36,940 37,155 37,596 36,818 31,943
SELECTED FINANCIAL INFORMATION
Cash and investment securities $ 28,130 $ 54,846 $ 59,464 $ 23,250 $ 33,115
Total assets 259,076 323,891 333,911 330,642 378,294
Capital expenditures 8,805 8,655 6,784 3,419 4,184
Total debt 90,290 80,657 82,128 80,839 127,771
Stockholders' equity 72,033 135,631 151,282 152,808 147,081
Return on average equity (61.6)% (6.7)% 0.3% 3.6% (9.8)%
Total debt-equity ratio 1.3-1 .6-1 .5-1 .5-1 .9-1
--------------------------------------------------------
</TABLE>
* See Notes to Consolidated Financial Statements for discussion of the 1993 and
1992 unusual items.
Effective January 1, 1994, the Company changed its method of accounting for
advertising and other deferred marketing costs. See Note 1 to Consolidated
Financial Statements for further discussion.
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.
16
<PAGE> 17
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
National Education Corporation and Subsidiaries
1994 Compared to 1993
Revenues of $241,614,000 for the year ended December 31, 1994 were $17,442,000
or 7.8% higher than revenues of $224,172,000 in the prior year. Loss from
continuing operations was $14,473,000 or $.49 loss per fully diluted share
compared to income from continuing operations of $10,138,000 or $.32 per fully
diluted share in 1993. Net loss of $63,925,000 or $2.16 loss per share
compared to net loss of $9,619,000 or $.32 loss per share in 1993.
Effective June 30, 1994, the Company adopted a plan to dispose of its Education
Centers subsidiary. The plan resulted in a charge of $40,032,000 ($1.35 loss
per share) to write-down assets, provide for estimated gains/losses on the sale
of certain schools, and to provide for the estimated costs of closing and
teaching-out certain schools. The revenues and expenses of the Education
Centers have been netted and segregated as discontinued operations for 1994,
and prior period statements of operations have been restated to reflect this
change.
In December 1993, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
No. 93-7 ("SOP"), "Reporting on Advertising Costs". The SOP generally requires
advertising costs, other than direct-response advertising, to be expensed as
incurred. The SOP is effective for financial statements for fiscal years
beginning after December 15, 1994, but may be adopted early. In the fourth
quarter of 1994, the Company adopted the SOP at its ICS Learning Systems
subsidiary effective January 1, 1994. In adopting the SOP in 1994, ICS' total
advertising, selling and promotion costs were expensed as incurred rather than
deferred and amortized as in prior periods. Furthermore, the transition rules
of the SOP required amortization of the deferred balances existing as of the
beginning of the year in accordance with the Company's previous accounting
policy. The SOP does not permit restatement of prior periods (1993 and 1992).
The effect of the transition rules is to reflect as an expense in the year of
adoption (1994), both the current year's advertising, selling and promotion
costs, and the amortization of balances deferred as of the beginning of the
year. Adoption of the SOP in 1994, resulted in a charge of $27,410,000
($21,181,000 after tax or $.72 per share). The charge consists of two
components. First, a charge of $19,836,000 results from the amortization of
the deferred marketing balance as of December 31, 1993 into 1994. Second, a
charge of $7,574,000 results from increased selling and promotion spending
above the amortization that would have been expensed in accordance with the
Company's previous accounting policy. For comparative purposes only, assuming
the Company had adopted the SOP effective January 1, 1992, income before taxes
would have decreased $3,411,000 ($2,251,000 after tax or $.08 per share) in
1993 and increased $1,679,000 ($1,108,000 after tax or $.04 per share) in 1992.
Increased revenues from continuing operations related to ICS, Steck-Vaughn and
National Education International, which provides training services to foreign
governments primarily in the Middle East, were partially offset by reduced
revenues at NETG. The decline in income from continuing operations of
$24,611,000 was due to the 1994 adoption of the SOP discussed above, and a
nonrecurring 1993 after tax gain of $21,260,000 ($.71 per share) resulting from
an initial public offering of 2,668,000 shares of Steck-Vaughn Publishing
Corporation common stock partially offset by the 1993 unusual charge of
$9,232,000 ($6,558,000 after tax or $.22 loss per share) recorded at NETG for
the write-down of certain acquired intangible assets. Excluding the effects of
the net unusual items, income from continuing operations in 1994 was favorably
impacted by reduced operating losses at NETG and a gain on sale of a
partnership interest of a start-up operation in the amount of $3,247,000
($2,143,000 after tax or $.07 per share). The net loss was primarily related
to the loss from discontinued operations and the loss on disposal of
discontinued operations of the Education Centers totaling $49,452,000 in 1994.
The loss from discontinued operations decreased from the prior year due to the
nonrecurring unusual charge of $23,626,000 ($16,363,000 after tax or $.55 loss
per share) resulting from a restructuring charge for the write-down of certain
assets and the estimated costs of closing the 14 schools announced in the third
quarter of 1993.
17
<PAGE> 18
ICS Learning Systems revenues of $122,815,000 increased $21,496,000 or 21.2%
from revenues of $101,319,000 in 1993. Operating loss of $3,927,000 decreased
$25,295,000 from operating income of $21,368,000 in the prior year solely due
to the change in accounting for advertising, selling and promotion costs
required by the SOP as discussed earlier. The revenues at ICS increased
primarily due to strong revenue performance at the domestic operation. The
international operations experienced a slight increase in revenues. Domestic
revenues grew significantly due to a 32.7% increase in enrollments, revenues
from MicroMash, and increases in Business and Industrial Division revenues.
The significant domestic enrollment increase primarily resulted from the
success of the expanded telesales efforts, which enroll students directly over
the phone and have produced a higher conversion of leads to enrollments and
tuition down payments upon enrollment than that experienced in the prior year.
In addition, a shift in product mix towards higher priced computer related
courses contributed to the revenue growth. During the first quarter, ICS
acquired MicroMash, a leading provider of computer based interactive courses
for accounting professionals and students. Through this acquisition, ICS is
strategically positioned to aggressively pursue the continuing professional
education marketplace. Business and Industrial Division revenues grew during
the year as a result of further selling penetration of the existing
marketplace. The revenue increase at the international operation primarily
resulted from higher revenues at the Australia/New Zealand, Canada and
International Mail Sales (IMS) operations. The combined Australia/New Zealand
operation experienced strong enrollment growth of 17.9% as a result of the
successful telesales efforts which increased conversion of leads to
enrollments. The higher revenues at Canada and IMS primarily resulted from
increased student payments partially reduced by a decrease in Canada's
enrollments. The United Kingdom experienced lower revenues due to lower
student payments despite flat enrollments as compared to the prior year. The
operating loss at ICS results solely from the adoption of the SOP in 1994. The
following table provides the total advertising, selling and promotion spending
for the years presented.
<TABLE>
<CAPTION>
(amounts in thousands) 1994 1993 1992
------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Advertising, selling and promotion spending $51,103 $39,122 $30,011
</TABLE>
As a result of the increased promotion and selling spending of $11,981,000 in
1994 over 1993, revenues increased $21,496,000 and unearned future tuition
revenue on student contracts at ICS increased $36,883,000 or 29.2% to
$163,050,000. Based upon previous experience, it is estimated that
approximately 45% of the unearned future tuition revenue will ultimately be
recognized as revenue. As ICS continues to increase its advertising, selling
and promotion costs to support the growth in the student population, operating
margins will be lower than in previous years. As required by the SOP,
expensing these costs as incurred fully burdens the current year with expenses
that benefit future years with the related revenue stream. Higher course
service costs at the domestic operation were primarily related to the
significant volume increases and changes in product mix towards a higher
percentage of lower margin computer related courses. General and
administrative costs were higher during the year primarily due to costs
associated with MicroMash and the initial costs to convert and integrate new
information systems. These costs were partially offset by lower insurance
costs related to favorable loss experience.
Steck-Vaughn Publishing Corporation revenues of $53,608,000 were $452,000 or
.9% higher than revenues of $53,156,000 in the prior year. Operating income of
$10,425,000 decreased $3,141,000 or 23.2% as compared to operating income of
$13,566,000 in 1993. The slight increase in revenue was attributable to a
general price increase of 6.7% and a modest increase in sales of the elementary
school product line which benefited from growth primarily in the Math, Reading,
and Science products and a full year of Magnetic Way product sales. The adult
education product line experienced a decrease in revenues due to a reduction in
software sales of GED products, new competition for GED products and tight
funding in the adult education sector. In addition, a decline in sales of
mature library products was not entirely offset by sales of newer products,
resulting in lower library revenues. Several factors contributed to these
results. Selling conditions in early 1994 were hampered by adverse winter
weather conditions which affected the midwest, mid-Atlantic and northeast
regions of the United States. Additionally, the sales force expansion and
related reorganization effective January 1994, resulted in longer than
anticipated assimilation and reduced sales productivity. Finally, a continuing
trend towards site-based selling, which is a competitive strength of
Steck-Vaughn, is driving the decision making process down to the faculty level
requiring a greater number of sales calls per revenue dollar, resulting in an
increase in selling costs. Operating income decreased significantly during
1994 primarily due to an increase in publishing costs, product development
expenses, and selling and promotion costs. Higher publishing costs primarily
resulted from the higher distributor
18
<PAGE> 19
and Magnetic Way sales which have lower profit margins and resulted in a
slight increase in publishing costs as a percentage of revenues.
Publishing costs and materials, which include product development and product
acquisition expenses, increased over the prior year due to Steck-Vaughn's
commitment to develop new and revised products and to acquire certain library
products to position Steck-Vaughn for growth in the supplemental educational
marketplace. By continuing to expand its product offerings, Steck-Vaughn
expects to continue to capitalize on the anticipated increasing demand for
supplemental educational, library and adult education products despite severe
budgetary pressure on schools located in certain geographic areas of the
country. Selling and promotion costs increased during the year due to the
expansion of the sales organization during January 1994. The expansion and
related reorganization resulted in the segmentation of the sales force into two
groups. One group focuses on the elementary, junior high and library
marketplaces while the other group focuses on the high school and adult
education marketplaces. This segmentation positions Steck-Vaughn to maximize
the opportunities of their rapidly expanding product offerings and to respond
to additional requirements resulting from the trend towards site-based selling.
General and administrative expenses decreased in 1994 primarily due to lower
insurance expenses caused by favorable loss experience and reduced management
incentive compensation expenses.
NETG revenues of $61,937,000 decreased $6,322,000 or 9.3% from revenues of
$68,259,000 in the prior year. Operating losses of $13,993,000 decreased
$11,957,000 from losses before unusual items of $25,950,000 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 revenues at the domestic and international operations primarily
resulted from lower contract backlog at the beginning of 1994 as compared to
1993 and slightly lower volume of new orders in the domestic operation. In
addition, the decrease in revenues was partially attributable to the
introduction in the third quarter of a new product licensing agreement, called
Multimedia Licensing Agreement (MLA), which simplifies the customers' ability
to acquire NETG products; however, unlike sales contracts used in prior years,
the MLA does not require upfront commitments to acquire product upon the
signing of a contract. As the number of customers signing MLAs increases, new
orders will become less meaningful as a key indicator of future revenue
activity. New orders increased in the international operation due to increased
new business activity in the United Kingdom operation; however, decreasing
contract backlog, which more than offset the new orders business, and the sale
of NETG-Canada in 1993 resulted in reduced revenues in the international
operation. During December 1993, NETG sold certain assets and liabilities of
NETG-Canada to SHL Systemhouse, Inc. at approximately book value. The sales
agreement also provided for certain future royalties on the sale of NETG
products in Canada. Operating losses before unusual items decreased
significantly in the domestic operation during 1994 primarily due to reductions
in product development costs, general and administrative expenses and
amortization of acquired intangible assets. Reengineering the processes in
product development and focusing the 1994 development efforts to concentrate in
areas such as multimedia end user desktop computing and client/server computing
resulted in a 46.5% reduction in product development expenses. The decrease in
general and administrative expenses primarily resulted from lower employee
headcount and favorable loss experience which resulted in lower insurance
expenses partially offset by higher consulting costs. Amortization of acquired
intangible assets decreased in 1994 due to the write-down of certain acquired
intangible assets in 1993 which was recorded as an unusual charge of
$9,232,000. Despite slightly lower selling and promotion expenses, these
expenses increased as a percentage of revenue during 1994 primarily as a result
of the revenue decline.
National Education International (NEI) revenues of $2,927,000 increased
$1,675,000 or 133.8% above the prior year revenues of $1,252,000. Operating
income of $958,000 increased $742,000 over the prior year income of $216,000.
The higher revenue and operating income levels are attributable to multi-year
training contracts with Egypt and Kuwait, which span from one to four years in
duration. As of December 31, 1994, these contracts carried a contract backlog
of $4,348,000.
In December 1994, the Company sold its interest in a start-up partnership
venture previously entered into for the development of an automated enrollment
and financial aid application process. As a result of the sale, which was
accounted for as a sale of stock, the Company recorded a gain on sale of
$3,247,000 ($2,143,000 after tax or $.07 per share).
19
<PAGE> 20
General corporate expenses of $7,302,000 decreased $4,230,000 or 36.7% from
expenses of $11,532,000 in the prior year. The decrease in corporate expenses
primarily resulted from a one-time contract settlement charge in 1993,
favorable loss experience which resulted in lower insurance expenses, reduced
outside consulting costs primarily from the company-wide financial
reengineering effort and other cost reductions.
Operating results of ICS and NETG foreign operations by geographic region
experienced similar changes in revenues and income as previously discussed.
Foreign currency gains of $492,000 were recorded during 1994 compared to losses
of $243,000 in 1993. The current year currency gains primarily resulted from
the rise in the exchange rates of the British pound and the German mark and
their effect on the U.S. dollar denominated current intercompany balances at
NETG-U.K. and NETG-Germany payable to the U.S. operations.
1993 Compared to 1992
Revenues of $224,172,000 for the year ended December 31, 1993 were $5,903,000
or 2.7% higher than revenues of $218,269,000 in the prior year. Income from
continuing operations was $10,138,000 or $.32 per fully diluted share as
compared to loss from continuing operations of $6,284,000 or $.21 loss per
fully diluted share in 1992. Net loss of $9,619,000 or $.32 loss per share
compared to net income of $515,000 or $.02 per share in 1992.
Effective June 30, 1994, the Company adopted a plan to dispose of its Education
Centers subsidiary. The revenues and expenses of the Education Centers have
been restated and segregated for 1993 and 1992 to reflect this change.
The increase in revenue primarily results from increased revenues at ICS and
Steck-Vaughn partially offset by reduced revenues at NETG. The growth in
income from continuing operations was primarily due to the net revenue increase
and an after tax gain of $21,260,000 ($.71 per share) resulting from an initial
public offering of 2,668,000 shares of Steck-Vaughn Publishing Corporation
common stock in 1993. The public offering reduced the Company's ownership of
Steck-Vaughn from 100% to 81.7%. Partially offsetting this gain was an unusual
charge of $9,232,000 ($6,558,000 after tax or $.22 loss per share) at NETG
which resulted from the write-down of certain acquired intangible assets in
1993. The net loss during the year was primarily due to the loss from
discontinued operations which includes an unusual charge of $23,626,000
($16,363,000 after tax or $.55 loss per share) recorded at the Education
Centers 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.
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 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 promotion costs decreased as a
percentage of revenues in the domestic operations while they were partially
offset by increases in such costs 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 the Industrial Print Division. Higher selling and
promotion 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. 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
20
<PAGE> 21
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 was segmented into two groups.
One group focuses on the elementary and library markets while the other group
focuses on the high school and adult education marketplaces.
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. (Systemhouse) 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.
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash, investment securities and
cash provided from operations. At December 31, 1994, the Company had
$28,130,000 in cash and investment securities, of which $16,959,000 was held in
the account of Steck-Vaughn.
As of December 31, 1994, the Company had a revolving bank credit agreement in
the amount of $10,000,000, of which $5,000,000 was outstanding. On February
28, 1995, the Company amended its revolving bank credit agreement with its
existing bank to increase the available amount to $13,500,000, which matures on
December 31, 1995. The credit agreement, which is secured by the stock of
principal subsidiaries, will initially provide borrowings at prime plus 1
percent or, at the Company's option, at LIBOR plus 2 percent, with incremental
borrowing rate increases at June 30 and September 30, 1995.
Under the intercompany agreement between the Company and Steck-Vaughn, the
Company has the ability to borrow up to $10,000,000 from Steck-Vaughn.
Effective February 28, 1995, the Company and Steck-Vaughn entered into a
revolving loan agreement which provides that any borrowing by the Company will
bear interest at LIBOR plus 2 percent, and will be secured by the Company's
holdings of Steck-Vaughn stock. Steck-Vaughn also received an option to
repurchase from the Company up to 290,000 shares of Steck-Vaughn stock held by
the Company, at $6.50 per share. The option becomes exercisable one year after
grant, expires December 31, 1996, and may be redeemed by the Company prior to
exercise or expiration for the greater of $750,000 or the amount necessary to
increase to 25 percent the annualized yield to Steck-Vaughn on all amounts
borrowed by the Company under the revolving loan agreement.
21
<PAGE> 22
Cash outflows from 1994 operating activities of $1,362,000 were $9,680,000
lower than cash flows from 1993 operating activities of $8,318,000 due
primarily to higher advertising spending at ICS.
In addition, net cash flows for 1994 were further impacted by the acquisitions
of MicroMash and Berrent Publications in the amount of $6,430,000, cash outflow
of $21,085,000 at the Education Centers and additional investments in property,
plant and equipment at ICS to support the continued growth in that operation.
The Company expects that cash, marketable securities, the bank and Steck-Vaughn
credit facilities, cash provided from operations and the continued funding of
Education Centers' students under government student financial aid programs,
subject to a timely disposition of schools, will be sufficient to provide for
planned working capital requirements, debt service, and capital expenditures
for the foreseeable future.
During 1994, the Company adopted a plan to dispose of its Education Centers
subsidiary. As a result, the Company recorded a charge of $40,032,000 to
write-down assets to estimated net realizable value and provide for estimated
costs of disposing of the operation. During the second half of the year, the
Company negotiated with an interested buyer to sell the total operations of the
Education Centers. In December, the Company terminated the negotiations with
this interested buyer due to significant complexities in issues raised in the
regulatory review process. In January 1995, the Company announced that it had
signed a letter of intent with a buyer to purchase certain of its Education
Centers' schools. The Company is undertaking discussions with other potential
buyers with specific geographic and/or curricula interests related to the
remaining schools. In the event the Company is unable to sell certain schools
anticipated for sale due to a lack of buyers, default rate issues or other
factors, the Company may initiate the teachout of these schools in 1995, and if
appropriate, increase the reserve for the loss on disposal of discontinued
operations.
At December 31, 1994 and 1993, the excess of cost over net assets of businesses
acquired (goodwill) at NETG was $42,158,000 and $43,495,000, respectively. At
each balance sheet date, the Company reviews the recoverability of intangible
assets by comparing projected operating income on an undiscounted basis to the
net book value of the related assets. Despite the improvement in operating
losses at NETG in 1994 and management's projection of the recoverability of its
goodwill on an undiscounted basis as of December 31, 1994, management continues
to explore various alternatives to either minimize the future risk of NETG or
maximize the value of NETG to shareholders. In the event management develops a
definitive plan to significantly redirect the strategic plan at NETG, the
Company at that time will again assess the recoverability of goodwill.
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, 1994, the Company had a
gross deferred tax asset of $73,556,000 (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, 1994, the Company had available federal consolidated net operating loss
carryforwards of $71,000,000 (exclusive of certain "SRLY" losses) expiring
through 2009. In addition, the Company had federal SRLY loss carryforwards
totaling $16,967,000 ($5,769,000 deferred tax asset) expiring in years 1998
through 2007 that may only be used to offset income generated by the particular
entities that generated the losses.
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 $30,613,000,
including full allowance against the SRLY loss carryforwards.
The ultimate realization of deferred tax assets, net of the valuation
allowance, of $42,943,000 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
$17,298,000 reflected as deferred tax liabilities in the financial statements.
Eliminating the effects of adopting the SOP in 1994, the improving
profitability of the continuing operations, 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 1994.
22
<PAGE> 23
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements at December 31, 1994 and 1993,
and for each of the three years in the period ended December 31, 1994, and the
Report of Price Waterhouse LLP, Independent Accountants, are included in this
Annual Report on Form 10-K on pages F-1 through F-21 below.
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 material that will be filed
with the Securities and Exchange Commission within 120 days of the Company's
fiscal year end (December 31, 1994), either as part of a Proxy Statement for
the Company's Annual Meeting of Stockholders or as an amendment to this Form
10-K.
(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
material that will be filed with the Securities and Exchange Commission within
120 days of the Company's fiscal year end (December 31, 1994), either as part
of a Proxy Statement for the Company's Annual Meeting of Stockholders or as an
amendment to this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated herein by reference from
material that will be filed with the Securities and Exchange Commission within
120 days of the Company's fiscal year end (December 31, 1994), either as part
of a Proxy Statement for the Company's Annual Meeting of Stockholders or as an
amendment to this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated herein by reference from
material that will be filed with the Securities and Exchange Commission within
120 days of the Company's fiscal year end December 31, 1994), either as part of
a Proxy Statement for the Company's Annual Meeting of Stockholders or as an
amendment to this Form 10-K.
23
<PAGE> 24
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as part of this report:
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C> <C>
(1) Financial Statements:
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . F-1
Consolidated Statements of Operations for each of the
three years in the period ended December 31, 1994 . . . . . . . . . . . . F-2
Consolidated Balance Sheets at December 31, 1994 and 1993 . . . . . . . . F-3
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 1994 . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended December 31, 1994 . . . . . . . . . F-5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . F-6
(2) Financial Statement Schedules: **
II Valuation and Qualifying Accounts . . . . . . . . . . . . . . F-21
** Schedules numbered in accordance with Rule 5.04 of Regulation S-X.
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: Management contracts and compensatory plans and arrangements required to be filed
as an exhibit to this Annual Report on Form 10-K are denoted with an "**" after the Exhibit
number.
</TABLE>
<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 and as Amended through January 1, 1992) (3) . . . . . . *
10.2 National Education Corporation Retirement Plan Trust (4) . . . . . . . . *
10.3** Advanced Systems, Incorporated 1984 Stock Option and Stock
Appreciation Rights Plan (5) . . . . . . . . . . . . . . . . . . . . . . *
10.4** 1986 Stock Option and Incentive Plan, as amended (6) . . . . . . . . . . *
</TABLE>
24
<PAGE> 25
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
------ ----------- ------------
<S> <C> <C>
10.5 ** 1990 Stock Option and Incentive Plan (7) . . . . . . . . . . . . . . . . *
10.6 ** 1991 Directors' Stock Option Plan (8) . . . . . . . . . . . . . . . . . *
10.7 Rights Agreement, dated October 29, 1986, between National Education
Corporation and Bank of America National Trust and Savings
Association, Rights Agent (including exhibits thereto) (9) . . . . . . . *
10.8 Addendum No. 1 to Rights Agreement, dated August 5, 1991 (10) . . . . . *
10.9 Indenture, dated as of May 15, 1986, between National Education
Corporation and Continental Illinois National Bank and Trust Company
of Chicago, as Trustee (11) . . . . . . . . . . . . . . . . . . . . . . *
10.10 Tripartite Agreement Dated as of May 31, 1990, among National
Education Corporation, Continental Bank as Resigning Trustee, and IBJ
Schroder Bank & Trust Company as Successor Trustee (12) . . . . . . . . *
10.11 National Education Corporation Purchase Agreement, Senior
Subordinated Convertible Debentures, dated as of February 15, 1991 (13) *
10.12 ** National Education Corporation Supplemental Executive Retirement Plan,
as amended (14) . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
10.13 ** Supplemental Benefit Plan for Non-Employee Directors (15) . . . . . . . *
10.14 ** Retirement Agreement with J.J. McNaughton (16) . . . . . . . . . . . . . *
10.15 Intercompany Agreement Between National Education Corporation and
Steck-Vaughn Publishing Corporation dated June 30, 1993 (17) . . . . . . *
10.16 Tax Sharing Agreement Between National Education Corporation and Its
Direct and Indirect Corporate Subsidiaries dated January 1, 1993 (18) . *
10.17 Asset Purchase Agreement Between Steck-Vaughn Company and Creative
Edge Inc. dated as of April 26, 1993 (19) . . . . . . . . . . . . . . . *
10.18 $13,500,000 Amended and Restated Credit Agreement among National
Education Corporation, the Banks named therein and Bankers Trust
Company as Agent, dated February 28, 1995 (the "Credit Agreement")
(Confidential treatment under Rule 24b-2 has been requested for portions
of this exhibit) (23) . . . . . . . . . . . . . . . . . . . . . . . . .
10.19 First Amendment to Intercompany Agreement, dated June 10, 1994,
between National Education Corporation and Steck-Vaughn Publishing
Corporation (20) . . . . . . . . . . . . . . . . . . . . . . . . . . . . *
</TABLE>
25
<PAGE> 26
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
------ ----------- ------------
<S> <C> <C>
10.20 $10,000,000 Credit Agreement between Steck-Vaughn Company and
NationsBank of Texas, dated as of June 10, 1994 (21) . . . . . . . . . . *
10.21 Revolving Line of Credit Note and Option Agreement between National
Education Corporation and Steck-Vaughn Publishing Corporation, dated
February 28, 1995 (22) . . . . . . . . . . . . . . . . . . . . . . . . . *
11.1 Calculation of Primary Earnings Per Share (23) . . . . . . . . . . . . .
11.2 Calculation of Fully Diluted Earnings Per Share (23) . . . . . . . . . .
21 Subsidiaries of National Education Corporation (23) . . . . . . . . . .
23 Consent of Price Waterhouse LLP (23) . . . . . . . . . . . . . . . . . .
27 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . . .
------------------
</TABLE>
* incorporated by reference from a previously filed document
** denotes management contract or compensatory plan or arrangement
(1) Incorporated by reference to Exhibit 19-2 filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1987.
(2) Incorporated by reference to Exhibit 10 filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30,
1990.
(3) Incorporated by reference to Exhibit 10.1 filed with Registrant's
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
Registrant's Registration Statement on Form S-8 (No. 2-86904),
filed October 3, 1983.
(5) Incorporated by reference to Exhibit 10.15 filed with
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1987, filed March 30, 1988.
(6) Incorporated by reference to Exhibit 10.17 filed with
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1990, filed April 1, 1991.
(7) Incorporated by reference to Exhibit "A" filed with Registrant's
1990 Proxy Statement, filed April 2, 1990.
(8) Incorporated by reference to Exhibit "A" filed with Registrant's
1991 Proxy Statement, filed April 1, 1991.
(9) Incorporated by reference to Exhibit 4.1 filed with Registrant's
Current Report on Form 8-K, dated October 29, 1986, filed October
30, 1986.
(10) Incorporated by reference to Exhibit 10.19 filed with
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1991, filed April 1, 1992.
26
<PAGE> 27
(11) Incorporated by reference to Exhibit 4.2 filed with Amendment No.
1 to Registrant's Registration Statement on Form S-3 (No. 33-
5552), filed May 16, 1986.
(12) Incorporated by reference to Exhibit 4 filed with Registrant's
Quarterly Report on Form 10-Q for the quarterly period ended June
30, 1990.
(13) Incorporated by reference to Exhibit 4 filed with Registrant's
Current Report on Form 8-K, dated February 20, 1991, filed
February 27, 1991.
(14) Incorporated by reference to Exhibit 10.17 filed with
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1991, filed April 1, 1992.
(15) Incorporated by reference to Exhibit 10.18 filed with
Registrant's Annual Report on Form 10-K for the year ended
December 31, 1991, filed April 1, 1992.
(16) Incorporated by reference to Exhibit 10.9 filed with Registrant's
Annual Report on Form 10-K for the year ended December 31, 1987,
filed March 30, 1988.
(17) Incorporated by reference to Exhibit 10.8 filed with Amendment
No. 1 to Steck-Vaughn Publishing Corporation's Registration
Statement on Form S-1, File No. 33-62334, filed June 17, 1993.
(18) Incorporated by reference to Exhibit 10.9 filed with Amendment
No. 1 to Steck-Vaughn Publishing Corporation's Registration
Statement on Form S-1, File No. 33-62334, filed June 17, 1993.
(19) Incorporated by reference to Exhibit 10.13 filed with
Steck-Vaughn Publishing Corporation's Registration Statement on
Form S-1, File No. 33-62334, filed May 7, 1993.
(20) Incorporated by reference to Exhibit 10.23 filed with
Registrant's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1994, filed August 11, 1994.
(21) Incorporated by reference to Exhibit 10.14 filed with
Steck-Vaughn Publishing Corporation's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994, filed August 11, 1994.
(22) Incorporated by reference to Exhibit 10.12 filed with
Steck-Vaughn Publishing Corporation's Annual Report on Form 10-K
for the year ended December 31, 1994, filed March 29, 1995.
(23) Filed herewith.
(b) No reports on Form 8-K were filed during the fourth quarter of 1994.
(c) The exhibits required by this Item are listed under Item 14(a)(3) above.
(d) The consolidated financial statements required by this Item are listed
under Item 14(a)(2).
27
<PAGE> 28
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.
<TABLE>
<CAPTION>
NATIONAL EDUCATION CORPORATION Date
<S> <C> <C>
By /s/ JEROME W. CWIERTNIA March 27, 1995
---------------------------
Jerome W. Cwiertnia
President and Chief
Executive Officer
</TABLE>
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.
<TABLE>
<CAPTION>
Date
<S> <C> <C>
By /s/ JEROME W. CWIERTNIA March 27, 1995
---------------------------
Jerome W. Cwiertnia,
Director, President and Chief
Executive Officer
(Principal Executive Officer)
By /s/ KEITH K. OGATA March 27, 1995
---------------------------
Keith K. Ogata, Vice President,
Chief Financial Officer and
Treasurer (Principal Financial
Officer)
By /s/ CHRISTINE A. GATTENIO March 22, 1995
---------------------------
Christine A. Gattenio, Vice
President and Corporate
Controller (Principal
Accounting Officer)
</TABLE>
28
<PAGE> 29
<TABLE>
<CAPTION>
Date
<S> <C> <C>
By: /s/ RICHARD C. BLUM March 23, 1995
----------------------------
Richard C. Blum, Director
By: /s/ DAVID BONDERMAN March 22, 1995
----------------------------
David Bonderman, Director
By: /s/ LEONARD W. JAFFE March 24, 1995
----------------------------
Leonard W. Jaffe, Director
By: /s/ DAVID C. JONES March 22, 1995
-----------------------------
David C. Jones, Director
By: /s/ MICHAEL R. KLEIN March 24, 1995
----------------------------
Michael R. Klein, Director
By: /s/ PAUL B. MACCREADY March 22, 1995
----------------------------
Paul B. MacCready, Director
By: /s/ FREDERIC V. MALEK March 22, 1995
---------------------------
Frederic V. Malek, Director
By: /s/ JOHN J. MCNAUGHTON March 22, 1995
----------------------------
John J. McNaughton, Director
By: /s/ WILLIAM D. WALSH March 22, 1995
----------------------------
William D. Walsh, Director
</TABLE>
29
<PAGE> 30
NATIONAL EDUCATION CORPORATION
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of National Education Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 24 present fairly, in all
material respects, the financial position of National Education Corporation and
its subsidiaries at December 31, 1994 and 1993, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1994, 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 discussed in Note One to the consolidated financial statements, the Company
changed its method of accounting for advertising costs in 1994.
Price Waterhouse LLP
Costa Mesa, California
February 6, 1995
F-1
<PAGE> 31
National Education Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
(amounts in thousands, except per share amounts) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
TUITION AND CONTRACT REVENUES $188,006 $171,016 $173,145
PUBLISHING REVENUES 53,608 53,156 45,124
-------- -------- --------
NET REVENUES 241,614 224,172 218,269
COSTS AND EXPENSES:
Contract course materials and service costs 72,735 72,937 70,725
Publishing costs and materials 21,976 19,588 16,797
Selling and promotion 111,058 93,046 89,275
General and administrative 29,032 37,201 37,282
Amortization of acquired intangible assets 1,824 4,605 5,936
Amortization of prior period deferred marketing 19,836 - -
Unusual items - 9,232 2,506
Interest expense 6,336 5,723 5,816
Investment income (3,234) (2,560) (2,541)
Other (income) and expense (492) (138) 1,866
Gain on sale of stock (3,247) (21,260) -
-------- -------- --------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT), MINORITY INTEREST AND
DISCONTINUED OPERATIONS (14,210) 5,798 (9,393)
Income taxes (benefit) (849) (4,944) (3,109)
-------- -------- --------
INCOME (LOSS) BEFORE MINORITY INTEREST AND DISCONTINUED
OPERATIONS (13,361) 10,742 (6,284)
Minority interest in consolidated subsidiary 1,112 604 -
-------- -------- --------
INCOME (LOSS) FROM CONTINUING OPERATIONS (14,473) 10,138 (6,284)
Income (loss) from discontinued operations (9,420) (19,757) 6,799
Loss on disposal of discontinued operations (40,032) - -
-------- -------- --------
NET INCOME (LOSS) $(63,925) $ (9,619) $ 515
======== ======== ========
EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS:
Primary earnings (loss) per share $(.49) $.34 $(.21)
======== ======== ========
Fully diluted earnings (loss) per share $(.49) $.32 $(.21)
======== ======== ========
EARNINGS (LOSS) PER SHARE $(2.16) $(.32) $.02
======== ======== ========
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Primary shares 29,640 29,855 30,296
Fully diluted shares 36,940 37,155 37,596
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE> 32
National Education Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
-------------------
(dollars in thousands) 1994 1993
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 17,297 $ 38,546
Investment securities:
Held-to-maturity and available-for-sale securities 10,833 -
At lower of cost or market (market value of $0 and $17,964) - 16,300
Receivables, net of allowance of $2,787 and $10,437 45,186 54,012
Inventories and supplies 23,827 25,594
Net assets held for disposition 25,867 -
Other current assets 21,229 22,392
------- -------
Total current assets 144,239 156,844
Deferred marketing 1,470 33,833
Land, buildings, and equipment, net 25,404 46,056
Acquired intangible assets, net 52,703 48,497
Deferred income taxes 28,482 25,793
Other assets 6,778 12,868
-------- --------
$259,076 $323,891
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 7,771 $ 8,635
Accrued expenses 29,328 42,351
Accrued salaries and wages 5,448 8,726
Accrued disposition costs 25,116 12,282
Deferred contract revenues 11,905 16,425
Current portion of long-term debt and short-term borrowings 6,407 607
Accrued and deferred income taxes 1,297 3,149
-------- --------
Total current liabilities 87,272 92,175
-------- --------
LIABILITIES PAYABLE AFTER ONE YEAR
Long-term debt, less current portion 6,389 2,556
Senior subordinated convertible debentures 20,000 20,000
Convertible subordinated debentures 57,494 57,494
Other noncurrent liabilities 7,667 7,989
-------- --------
91,550 88,039
-------- --------
MINORITY INTEREST IN EQUITY OF CONSOLIDATED SUBSIDIARY 8,221 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; 30,275,381 shares (1994)
and 30,092,810 shares (1993) issued 2,110 2,108
Additional paid-in capital 133,043 132,262
Retained (deficit) earnings (50,244) 13,681
Unrealized loss on available-for-sale securities, net of tax (21) -
Cumulative foreign exchange translation adjustment (7,947) (7,565)
-------- --------
76,941 140,486
Less common stock in treasury (4,908) (4,855)
-------- --------
Total stockholders' equity 72,033 135,631
-------- --------
$259,076 $323,891
======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 33
National Education Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
(dollars in thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $(63,925) $ (9,619) $ 515
Adjustments to reconcile net income (loss) to net cash provided by
(used for) operating activities:
(Income) loss from discontinued operations 9,420 19,757 (6,799)
Income (taxes) benefits on discontinued operations 1,008 8,769 (3,721)
Loss on disposal of discontinued operations 40,032 - -
Depreciation and amortization 5,610 7,390 8,432
Amortization of acquired intangible assets 1,824 4,605 5,936
Amortization of prior period deferred marketing 19,836 - -
Provision for doubtful accounts 250 1,777 1,777
Gain on Steck-Vaughn Publishing Corporation public stock offering - (21,260) -
Gain on sale of interest in partnership (3,247) - -
Gain on sale of land, buildings and equipment - (381) (769)
Write-off of acquired intangible assets - 9,232 -
(Gain) loss on foreign currency exchange (492) 243 2,570
Change in assets and liabilities:
Receivables, net (187) 13,669 18,220
Inventories and supplies 401 425 61
Deferred marketing expenses 270 (3,605) 50
Accounts payable and accrued expenses (10,840) 4,121 (1,330)
Accrued and deferred income taxes (4,752) (16,801) (5,045)
Deferred contract revenues 1,170 (5,469) 1,390
Other 2,260 (4,535) 6,225
-------- -------- -------
Net cash from operating activities (1,362) 8,318 27,512
-------- -------- -------
CASH FLOWS FOR INVESTING ACTIVITIES:
Additions to land, buildings and equipment (8,805) (8,655) (6,784)
Dispositions of land, buildings and equipment 192 412 1,770
Proceeds from sales of investment securities 10,680 3,310 1,313
Purchases of investment securities (5,249) (8,615) (6,069)
Acquisition of business, net of cash acquired (6,430) (5,417) -
Discontinued operations (21,085) (22,815) 12,365
-------- -------- -------
Net cash for investing activities (30,697) (41,780) 2,595
-------- -------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt 5,180 - 2,525
Reductions in long-term debt (703) (654) (93)
Net proceeds from Steck-Vaughn Publishing Corporation
public stock offering - 28,701 -
Changes in short-term borrowings 5,815 - (268)
Minority interest in equity of consolidated subsidiary 175 604 -
Common stock, stock options and related tax benefits 783 360 1,041
Notes receivable under a stock option plan - 107 74
Purchase of common stock for treasury (53) (4,685) (170)
-------- -------- -------
Net cash from financing activities 11,197 24,433 3,109
-------- -------- -------
EFFECT OF EXCHANGE RATE CHANGES ON CASH (387) (894) (1,758)
-------- -------- -------
NET CHANGE IN CASH AND EQUIVALENTS (21,249) (9,923) 31,458
CASH AND EQUIVALENTS AT THE BEGINNING OF THE YEAR 38,546 48,469 17,011
-------- -------- -------
CASH AND EQUIVALENTS AT THE END OF THE YEAR $ 17,297 $ 38,546 $48,469
======== ======== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 34
National Education Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1994 1993 1992
-------------------- -------------------- -------------------
(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 30,093 $134,370 30,018 $134,010 29,862 $133,148
Stock options and related tax benefits 182 783 75 360 197 1,065
Restricted stock - - - - - (24)
Retirement of treasury shares - - - - (41) (179)
------ -------- ------ -------- ------ --------
Balance at end of year 30,275 $135,153 30,093 $134,370 30,018 $134,010
------ -------- ------ -------- ------ --------
RETAINED EARNINGS
Balance at beginning of year $ 13,681 $ 23,300 $ 23,547
Net income (loss) (63,925) (9,619) 515
Retirement of treasury shares - - (762)
-------- -------- --------
Balance at end of year $(50,244) $ 13,681 $ 23,300
-------- -------- --------
TREASURY STOCK
Balance at beginning of year 689 $ (4,855) 50 $ (170) 41 $ (941)
Purchase of common stock for treasury 8 (53) 639 (4,685) 50 (170)
Retirement of treasury shares - - - - (41) 941
------ -------- ------ -------- ------ --------
Balance at end of year 697 $ (4,908) 689 $ (4,855) 50 $ (170)
------ -------- ------ -------- ------ --------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 35
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 1994 presentation. Prior year statements of operations and statements of
cash flows have been restated to exclude the discontinued operations of the
Education Centers.
REVENUES AND EXPENSES
ICS Tuition Revenues are recognized when cash is received, but only to the
extent such cash is earned and 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 Distance Education
Training Council in determining retention rights. All operating costs are
expensed as incurred.
In December 1993, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants (AICPA) issued Statement of Position
No. 93-7 ("SOP"), "Reporting on Advertising Costs". The SOP generally requires
advertising costs, other than direct-response advertising, to be expensed as
incurred. The SOP is effective for financial statements for fiscal years
beginning after December 15, 1994, but may be adopted early. In the fourth
quarter of 1994, ICS adopted the SOP effective January 1, 1994. In adopting
the SOP in 1994, ICS' total advertising, selling and promotion costs are
expensed as incurred in 1994 rather than deferred and amortized as in prior
periods. Adoption of the SOP in 1994, resulted in a charge of $27,410,000
($21,181,000 after tax or $.72 per share). The charge consists of two
components. First, a charge of $19,836,000 results from the amortization of
the deferred marketing balance as of December 31, 1993 into 1994. Second, a
charge of $7,574,000 results from increased selling and promotion spending
above the amortization that would have been expensed in accordance with the
Company's previous accounting policy. There remains a deferred marketing
balance of $1,470,000 which will be amortized in the first and second quarters
of 1995. As shown in Note 16 (Quarterly Financial Data), all periods presented
for 1994 only, were restated to reflect the adoption of the SOP. The SOP does
not permit restatement of the periods for 1993.
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 six months to one year.
NETG Contract Revenues consist of multimedia licensing agreements (MLAs),
access agreements and custom contract revenues. Revenues under MLAs and 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 to expense as contract revenues are recognized.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach which
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.
F-6
<PAGE> 36
NOTES TO CONSOLIDATED 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.
INVESTMENT SECURITIES
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards No. 115, Accounting for Certain Investments in Debt and
Equity Securities (FAS 115), which resulted in a change in the accounting for
debt and equity securities held for investment purposes. Prior to January 1,
1994, the Company carried debt and equity securities at the lower of aggregate
cost or market value. In accordance with FAS 115, the Company's debt and
equity securities are now considered as either held-to-maturity or
available-for-sale. Held-to-maturity securities represent those securities
that the Company has both the positive intent and ability to hold to maturity
and are carried at amortized cost. Available-for-sale securities represent
those securities that do not meet the classification of held-to-maturity, are
not actively traded and are carried at fair value. Unrealized gains and losses
on these securities are excluded from earnings and are reported as a separate
component of stockholders' equity, net of applicable taxes, until realized.
Since the adoption of this standard, the Company recorded decreases in
available-for-sale securities of $36,000 and a related deferred tax asset of
$15,000 resulting in a net decrease of $21,000 in stockholders' equity.
INVENTORIES AND SUPPLIES
Inventories and supplies at Steck-Vaughn are valued at the lower of market or
cost which is determined using the last-in, first-out (LIFO) method. At
December 31, 1994 and 1993, the allowance to reduce the carrying value to the
LIFO basis was $1,868,000 and $1,114,000, 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.
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.
At December 31, 1994 and 1993, the Company had $47,649,000 and $45,556,000,
respectively, of excess of cost over net assets of businesses acquired of which
$42,158,000 and $43,495,000, respectively, is related to NETG. At each balance
sheet date, the Company reviews the recoverability of intangible assets by
comparing projected operating income on an undiscounted basis to the net book
value of the related assets.
F-7
<PAGE> 37
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. During 1994, Steck-Vaughn Publishing Corporation repurchased
230,200 shares of its outstanding common stock which effectively increased the
Company's ownership interest to 83.0%.
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 COMBINATIONS
In November 1994, the Company, through Steck-Vaughn Publishing Corporation,
purchased substantially all of the assets of Berrent Publications, Inc.
(Berrent), a publisher of test preparation and assessment materials. The
transaction was accounted for as a purchase and the operating results of
Berrent have been included in the Company's consolidated financial statements
since the date of acquisition. The net assets and operating results of Berrent
are not material to the consolidated financial statements of the Company.
During the first quarter of 1994, the Company, through ICS Learning Systems,
purchased the stock of M-Mash, Inc. (MicroMash), a leading provider of
computer-based, interactive courses for accounting professionals and students.
The transaction was accounted for as a purchase and the operating results of
MicroMash have been included in the Company's consolidated financial statements
since the effective date of acquisition. The net assets and operating results
of MicroMash are not material to the consolidated financial statements of the
Company.
In April 1993, the Company, through Steck-Vaughn Publishing Corporation,
purchased certain assets of Creative Edge, Inc. (Magnetic Way product line), a
provider of educational products and materials for the elementary and secondary
school marketplace. 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 - BUSINESS DISPOSITIONS
In June 1994, the Company adopted a plan to discontinue the operation of its
Education Centers subsidiary. As a result, the Company recorded a second
quarter charge of $40,032,000 ($1.35 loss per share) to write-down assets to
estimated net realizable value and provide for estimated costs of disposing of
the operation. No tax benefits were provided on this charge.
During January 1995, the Company signed a letter of intent with a prospective
buyer to purchase all of the assets and substantially all of the operating
liabilities of certain of the schools. The Company is conducting discussions
with other potential buyers with interests related to the remaining schools to
be sold. Based upon current assumptions, management believes that the amount
reserved for disposition costs is adequate.
F-8
<PAGE> 38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Education Centers are being accounted for as discontinued operations in the
results of operations, and prior period statements of operations and statements
of cash flows have been reclassified to reflect this treatment. Results of
operations for the Education Centers were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------
(dollars in thousands) 1994 1993 1992
---------------------- -------- --------- --------
<S> <C> <C> <C>
Net Revenues $ 97,138 $ 131,713 $156,772
Income taxes (benefit) (1,008) (8,769) 3,721
Income (loss) from discontinued operations (9,420) (19,757) 6,799
Primary earnings (loss) per share (.32) (.66) .23
Loss on disposal of discontinued operations (40,032) -- --
Loss per share (1.35) -- --
</TABLE>
The estimated net realizable value of the Education Centers assets has been
segregated on the December 31, 1994 balance sheet as net assets held for
disposition. Liabilities associated with the cost of completing the
disposition have been segregated as accrued disposition costs. Prior period
balance sheet information and related footnotes have not been restated to
reflect the discontinuance of the Education Centers.
In December 1994, the Company sold its interest in a partnership venture whose
purpose was to develop an automated enrollment and financial aid application
process. As a result of the sale, the Company recorded a gain on sale of
$3,247,000 ($2,143,000 after tax or $.07 per share).
NOTE 4 - UNUSUAL ITEMS
During the third quarter of 1993, the Company recorded an unusual item charge
of $9,232,000 ($6,558,000 after tax or $.22 loss per share) related to NETG
which resulted from the write-down of certain acquired intangible assets.
During the fourth quarter of 1992, the Company recorded an unusual charge of
$2,506,000 ($1,528,000 after tax or $.05 per share) at NETG. This charge
represented severance payments, lease termination charges and fixed asset and
leasehold improvement write-downs.
NOTE 5 - PUBLIC OFFERING OF SUBSIDIARY COMMON STOCK
During the third quarter of 1993, Steck-Vaughn Publishing Corporation 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 were 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% at the date of the
offering. As a result of the offering, the Company recorded an after tax gain
of $21,260,000 or $.71 per share which is included in the results of operations
for the year ended December 31, 1993. The gain was 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.
F-9
<PAGE> 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES
Income (loss) before tax from continuing operations was taxed under the
following jurisdictions:
<TABLE>
<CAPTION>
(dollars in thousands) 1994 1993 1992
---------------------- -------- ------ -------
<S> <C> <C> <C>
Domestic $ (6,061) $4,335 $(6,698)
Foreign (8,149) 1,463 (2,695)
-------- ------ -------
Total $(14,210) $5,798 $(9,393)
-------- ------ -------
</TABLE>
Taxes (benefits) on income from continuing operations were provided as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1994 1993 1992
---------------------- ------ ------ ------
<S> <C> <C> <C>
CURRENT:
State $ 1,110 $ 1,999 $ 2,615
Foreign 1,457 1,883 1,692
------- ------- -------
Total current provision 2,567 3,882 4,307
------- ------- -------
DEFERRED:
Federal (74) (6,239) (5,744)
Foreign (3,498) (2,680) (2,087)
------- ------- -------
Total deferred provision (benefit) (3,572) (8,919) (7,831)
------- ------- -------
CURRENT TAX BENEFITS NOT TREATED AS A REDUCTION OF
INCOME TAX EXPENSE RESULTING FROM:
Exercise of stock options 156 93 415
------- ------- -------
Total income tax provision (benefit) $ (849) $(4,944) $(3,109)
------- ------- -------
</TABLE>
Deferred tax liabilities and assets reflected in the balance sheet as of
December 31, 1994 and December 31, 1993 are comprised of the following:
<TABLE>
<CAPTION>
(dollars in thousands) 1994 1993
---------------------- -------- -------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Revenue recognition differences $ 3,948 $ 7,014
Advertising/commissions 3,244 11,838
Course material amortization 2,767 4,558
Other 7,339 6,972
-------- -------
Gross Deferred Tax Liabilities $ 17,298 $30,382
-------- -------
DEFERRED TAX ASSETS:
Property, plant and equipment $ 3,269 $ 2,912
Inventories 6,374 6,447
Revenue recognition differences 4,678 5,009
Allowance for doubtful accounts 3,532 3,560
Loss carryforwards 35,939 25,719
Credit carryforwards 4,673 4,583
Loss on discontinued operations 8,500 --
Other 6,591 12,020
-------- -------
Gross Deferred Tax Assets 73,556 60,250
Deferred tax assets valuation allowance (30,613) (9,941)
-------- -------
Deferred Tax Assets, Net of Valuation Allowance $ 42,943 $50,309
-------- -------
</TABLE>
F-10
<PAGE> 40
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The 1994 income tax provision includes an increase in the valuation allowance
for deferred tax assets of $20,672,000. The valuation reserve increase
primarily relates to losses on discontinued operations for which no tax benefit
has been provided.
At December 31, 1994, the Company had federal net operating loss carryforwards
of approximately $71,000,000 expiring through 2009. 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
available for utilization. The Company also has available federal net
operating loss carryforwards of approximately $13,200,000 at Spectrum, a
subsidiary of NETG, 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 continues to
vigorously contest the matter 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 to pretax income from continuing
operations is as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1994 1993 1992
------- ------- -------
<S> <C> <C> <C>
Tax (benefit) computed at statutory rate $(4,831) $ 1,971 $(3,193)
State taxes, net of federal benefit 733 1,319 1,726
Rate differential on income of foreign operations 354 (1,580) (539)
Dividend income and municipal interest exclusion (332) (436) (246)
Amortization of excess of costs over acquired net assets 218 164 160
Gain on public stock offering of subsidiary - (7,228) -
Other, net 3,009 846 (1,017)
------- ------- -------
Total income tax provision (benefit) $ (849) $(4,944) $(3,109)
======= ======= =======
</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.
F-11
<PAGE> 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of the investment securities are as
follows:
<TABLE>
<CAPTION>
December 31, 1994
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gain Loss Value
---------------------- --------- ---------- ---------- -------
<S> <C> <C> <C> <C>
Held-to-maturity:
Banking certificates $ 3,236 $-- $ -- $ 3,236
Tax exempt municipal bond funds 12,700 -- -- 12,700
------- --- ---- -------
Total held-to-maturity 15,936 -- -- 15,936
------- --- ---- -------
Available-for-sale:
Corporate income funds 1,170 6 -- 1,176
Preferred stock 1,262 52 (93) 1,221
------- --- ---- -------
Total available-for-sale 2,432 58 (93) 2,397
------- --- ---- -------
18,368 58 (93) 18,333
Less cash equivalents (7,500) -- -- (7,500)
------- --- ---- -------
Total investment securities $10,868 $58 $(93) $10,833
======= === ==== =======
</TABLE>
Investments in debt securities classified as held-to-maturity at December 31,
1994, have various maturity dates which do not exceed one year.
<TABLE>
<CAPTION>
December 31, 1993
-------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Fair
(dollars in thousands) Cost Gain Loss Value
---------------------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Held-to-maturity:
Tax exempt municipal bond funds $ 20,200 $ -- $ -- $ 20,200
-------- ------ ----- --------
Available-for-sale:
Corporate income funds 6,678 503 (123) 7,058
Preferred stock 3,797 581 (54) 4,324
Other 325 757 -- 1,082
-------- ------ ----- --------
Total available-for-sale 10,800 1,841 (177) 12,464
-------- ------ ----- --------
31,000 1,841 (177) 32,664
Less cash equivalents (14,700) -- -- (14,700)
-------- ------ ----- --------
Total investment securities $ 16,300 $1,841 $(177) $ 17,964
======== ====== ===== ========
</TABLE>
Using the specific identification method, realized gains and losses on the
available-for-sale investment securities are as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
(dollars in thousands) 1994 1993 1992
---------------------- ------ ---- ----
<S> <C> <C> <C>
Realized gains $1,616 $135 $151
Realized losses 387 226 1
</TABLE>
F-12
<PAGE> 42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 8 - LAND, BUILDINGS AND EQUIPMENT
<TABLE>
<CAPTION>
(dollars in thousands) Depreciable Lives 1994 1993
-------- ---------
<S> <C> <C> <C>
Land -- $ 1,289 $ 2,544
Buildings and improvements Not to exceed 40 years 8,910 15,652
Leaseholds and improvements Life of lease 7,852 23,942
Machinery and equipment Not to exceed 10 years 52,321 91,589
Furniture and fixtures Not to exceed 10 years 18,272 31,326
-------- ---------
88,644 165,053
Less accumulated depreciation and amortization (63,240) (118,997)
-------- ---------
Total $ 25,404 $ 46,056
======== =========
</TABLE>
Machinery and equipment and furniture and fixtures under capital leases was
$2,460,000 and $1,100,000 with related accumulated depreciation and
amortization of $593,000 and $602,000 at December 31, 1994 and 1993,
respectively.
1993 balances have not been restated to exclude Education Centers.
NOTE 9 - ACQUIRED INTANGIBLE ASSETS
<TABLE>
<CAPTION>
(dollars in thousands) 1994 1993
-------- --------
<S> <C> <C>
Product and text materials, courseware, etc. $ 55,898 $ 57,380
Rental contracts 20,559 20,559
Excess of cost over net assets of businesses acquired 59,280 58,866
Other acquired intangible assets 5,971 7,327
-------- ---------
141,708 144,132
Less accumulated amortization (89,005) (95,635)
-------- ---------
Total $ 52,703 $ 48,497
======== =========
1993 balances have not been restated to exclude Education Centers.
</TABLE>
NOTE 10 - DEBT
<TABLE>
<CAPTION>
(dollars in thousands) 1994 1993
-------- --------
<S> <C> <C>
Short-term bank borrowings $ 5,000 --
------- --------
Long-term debt:
Mortgage and installment notes, maturing on various dates
through 2004, with interest from 6.8% to 8.9% $ 5,946 $ 2,716
Capital lease obligations 1,850 447
------- -------
7,796 3,163
Less current portion of long-term debt (1,407) (607)
------- -------
Total long-term debt $ 6,389 $ 2,556
======= =======
Senior subordinated convertible debentures $20,000 $20,000
======= =======
Convertible subordinated debentures $57,494 $57,494
======= =======
</TABLE>
As of December 31, 1994, the Company had a revolving bank credit agreement in
the amount of $10,000,000, of which $5,000,000 was outstanding. On February
28, 1995, the Company amended its revolving bank credit agreement with its
existing bank to increase the available amount to $13,500,000, which matures on
December 31, 1995. The credit agreement, which is secured by the stock of
principal subsidiaries, will initially provide borrowings at prime plus 1
percent or, at the Company's option, at LIBOR plus 2 percent, with incremental
borrowing rate increases at June 30 and September 30, 1995. 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.
F-13
<PAGE> 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the intercompany agreement between the Company and Steck-Vaughn, the
Company has the ability to borrow up to $10,000,000 from Steck-Vaughn.
Effective February 28, 1995, the Company and Steck-Vaughn entered into a
revolving loan agreement which provides that any borrowing by the Company will
bear interest at LIBOR plus 2 percent, and will be secured by the Company's
holdings of Steck-Vaughn stock. Steck-Vaughn also received an option to
repurchase from the Company up to 290,000 shares of Steck-Vaughn stock held by
the Company, at $6.50 per share. The option becomes exercisable one year after
grant, expires December 31, 1996, and may be redeemed by the Company prior to
exercise or expiration for the greater of $750,000 or the amount necessary to
increase to 25 percent the annualized yield to Steck-Vaughn on all amounts
borrowed by the Company under the revolving loan agreement.
At December 31, 1994, 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, L.P. (RCBA) or over which RCBA exercises discretionary investment
control and bore 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. 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, 1994 closing price
of the Company's common stock as traded on the New York Stock Exchange of
$4.125, the fair value of the senior subordinated convertible debentures,
assuming conversion into the Company's common stock, is $20,625,000.
At December 31, 1994, 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, 1994 closing price of the Company's convertible
subordinated debentures as traded on the New York Stock Exchange of $50.50, the
fair value of the convertible subordinated debentures is $29,034,000.
Mortgage notes aggregating $5,763,000 at December 31, 1994 were collateralized
by certain real and personal property having a net book value of $6,256,000.
At December 31, 1994, the fair value of the mortgage notes approximated their
carrying value.
Aggregate maturities of long-term debt in each of the following years are:
1996-$1,234,000, 1997-$1,259,000, 1998-$622,000, and 1999-$622,000.
F-14
<PAGE> 44
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Aggregate commitments at December 31, 1994 under noncancelable operating leases
for land, buildings and equipment are as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
<S> <C>
FISCAL YEAR:
1995 $ 8,940
1996 7,767
1997 5,923
1998 5,792
1999 738
2000 and thereafter 7,342
-------
Total $36,502
=======
</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 $10,841,000, $11,695,000 and $12,294,000 for years ended
December 31, 1994, 1993, and 1992, respectively.
At December 31, 1994, 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 position of the Company.
NOTE 12 - UNEARNED FUTURE TUITION REVENUE
Unearned future tuition revenue on student contracts at ICS Learning Systems
totaled $163,050,000 at December 31, 1994 and $126,167,000 at December 31,
1993. Based upon previous experience, it is estimated that approximately 45%
of the unearned future tuition revenue will ultimately be recognized as
revenue. Unearned future tuition revenue will be included in revenues in
future years when services and courseware are provided as described in Note 1.
F-15
<PAGE> 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCKHOLDERS' EQUITY
The Company has stock option plans that authorize the granting of options to
key employees and directors to purchase 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, vest and
become exercisable prorata over the four years following the date of grant, and
expire in ten years.
Changes during the years ended December 31, 1994, 1993 and 1992 under the plans
were as follows:
<TABLE>
<CAPTION>
Average
Exercise Total
Number Price Per Option
(amounts in thousands, except per share amounts) of Shares Share Value
--------- -------- --------
<S> <C> <C> <C>
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
Granted 407 6.28 2,557
Canceled (163) 7.29 (1,188)
Exercised (182) 3.44 (627)
----- -------
Balance, December 31, 1994 1,354 $5.92 $ 8,014
===== =======
</TABLE>
Common shares reserved for future grants under the above option plans totaled
1,018,000 and 986,000 at December 31, 1994 and 1993, respectively. Of the
1,354,000 shares previously granted and outstanding at December 31, 1994,
694,000 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.
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.
F-16
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - 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.
Supplementary information excluding Education Centers:
<TABLE>
<CAPTION>
(dollars in thousands) 1994 1993 1992
------ ------ ------
<S> <C> <C> <C>
CASH PAID DURING THE YEAR FOR:
Interest expense $6,531 $5,806 $5,198
Income taxes, net of refunds $2,634 $2,489 $5,201
DETAIL OF NON-CASH INVESTING AND FINANCING ACTIVITIES:
Sale of land, building and equipment in exchange for note receivable $ 583 $ - $1,168
</TABLE>
F-17
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - INDUSTRY SEGMENT DATA
Information about the Company's operations (excluding Education Centers except
for identifiable assets balances) in different industries is as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
NET REVENUES:
ICS Learning Systems $122,815 $101,319 $ 90,292
Steck-Vaughn Publishing Corporation 53,608 53,156 45,124
National Education Training Group 61,937 68,259 82,582
Other 3,254 1,438 271
-------- -------- --------
Total Net Revenues $241,614 $224,172 $218,269
======== ======== ========
OPERATING INCOME (LOSS):
ICS Learning Systems operating income before amortization of prior period
deferred marketing $ 15,909 $ 21,368 $ 18,780
Amortization of prior period deferred marketing (19,836) - -
-------- -------- --------
ICS Learning Systems (3,927) 21,368 18,780
-------- -------- --------
Steck-Vaughn Publishing Corporation 10,425 13,566 12,556
-------- -------- --------
National Education Training Group operating loss before unusual items (13,993) (25,950) (21,854)
Unusual items - (9,232) (2,506)
-------- -------- --------
National Education Training Group (13,993) (35,182) (24,360)
-------- -------- --------
Other (50) (657) (470)
-------- -------- --------
Total segment operating income (loss) (7,545) (905) 6,506
General corporate expenses (7,302) (11,532) (10,758)
Interest (expense) and investment income, net (3,102) (3,163) (3,275)
Other income and (expense) 492 138 (1,866)
Gain on sale of stock 3,247 21,260 -
-------- -------- --------
Income (Loss) Before Income Taxes (Benefit) and Minority Interest $(14,210) $ 5,798 $ (9,393)
======== ======== ========
IDENTIFIABLE ASSETS:
ICS Learning Systems $ 48,194 $ 60,576 $ 50,911
Steck-Vaughn Publishing Corporation 57,054 55,280 30,141
National Education Training Group 84,918 93,592 135,616
Education Centers - 58,525 60,380
Other 1,756 795 326
-------- -------- --------
Segments subtotal 191,922 268,768 277,374
Corporate assets 41,287 55,123 56,537
Education Centers assets held for disposition 25,867 - -
-------- -------- --------
Total Assets $259,076 $323,891 $333,911
======== ======== ========
TOTAL DEPRECIATION AND AMORTIZATION (INCLUDING AMORTIZATION OF PRIOR PERIOD
DEFERRED MARKETING):
ICS Learning Systems $ 21,055 $ 920 $ 892
Steck-Vaughn Publishing Corporation 1,564 1,157 719
National Education Training Group 3,999 9,315 12,277
Other 63 33 6
-------- -------- --------
Total Segments $ 26,681 $ 11,425 $ 13,894
======== ======== ========
CAPITAL EXPENDITURES:
ICS Learning Systems $ 5,250 $ 2,209 $ 417
Steck-Vaughn Publishing Corporation 900 2,956 4,677
National Education Training Group 1,929 2,591 1,566
Other 249 76 26
-------- -------- --------
Total Segments $ 8,328 $ 7,832 $ 6,686
======== ======== ========
</TABLE>
F-18
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table sets out the amount of consolidated net revenues, operating
income and identifiable assets by geographic area:
<TABLE>
<CAPTION>
(dollars in thousands) 1994 1993 1992
-------- -------- --------
<S> <C> <C> <C>
NET REVENUES:
United States $185,624 $165,530 $154,303
Europe 26,815 28,000 33,850
Canada 16,579 19,547 19,219
Other foreign 12,596 11,095 10,897
-------- -------- --------
Total Net Revenues $241,614 $224,172 $218,269
======== ======== ========
OPERATING INCOME(LOSS):
United States operating income before amortization of prior
period deferred marketing and unusual items $ 12,982 $ 5,074 $ 6,723
Amortization of prior period deferred marketing (14,949) - -
Unusual items - (9,232) (2,377)
-------- -------- --------
United States (1,967) (4,158) 4,346
-------- -------- --------
European operating loss before amortization of prior period
deferred marketing and unusual items (4,029) (1,902) (1,287)
Amortization of prior period deferred marketing (822) - -
Unusual items - - (129)
-------- -------- --------
Europe (4,851) (1,902) (1,416)
-------- -------- --------
Canada operating income before amortization of prior period
deferred marketing 258 2,032 482
Amortization of prior period deferred marketing (3,456) - -
-------- -------- --------
Canada (3,198) 2,032 482
-------- -------- --------
Other foreign operating income before amortization of prior
period deferred marketing 3,080 3,123 3,094
Amortization of prior period deferred marketing (609) - -
-------- -------- --------
Other foreign 2,471 3,123 3,094
-------- -------- --------
Total Segment Operating Income (Loss) $ (7,545) $ (905) $ 6,506
======== ======== ========
IDENTIFIABLE ASSETS:
United States $161,772 $222,191 $219,844
Europe 18,968 26,964 37,563
Canada 7,422 14,417 14,631
Other foreign 3,760 5,196 5,336
-------- -------- --------
Total Segment Assets $191,922 $268,768 $277,374
======== ======== ========
</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 and
Education Centers assets held for disposition.
F-19
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes quarterly financial data for 1994 and 1993. All
periods presented were restated for 1994 only, to reflect the adoption of the
SOP. The SOP does not permit restatement of the periods for 1993.
<TABLE>
<CAPTION>
First Second Third Fourth
(amounts in thousands, except per share amounts) Quarter Quarter Quarter Quarter
-------- -------- -------- --------
<S> <C> <C> <C> <C>
1994
NET REVENUES $ 49,472 $ 58,337 $ 63,339 $70,466
Income (loss) before amortization of acquired intangible
assets, amortization of prior period deferred marketing,
nonoperating items, gain on sale of stock, income taxes (benefit)
and minority interest (6,264) 2,741 1,730 8,606
Amortization of acquired intangible assets 426 427 530 441
Amortization of prior period deferred marketing 7,369 5,837 4,007 2,623
Other nonoperating (income) expenses 844 (87) 892 961
Gain on sale of stock - - - (3,247)
Income taxes (benefit) (3,651) (332) (140) 3,274
Minority interest 122 375 589 26
-------- -------- -------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS (11,374) (3,479) (4,148) 4,528
Loss from discontinued operations (2,008) (7,412) - -
Loss on disposal of discontinued operations - (40,032) - -
-------- -------- -------- -------
NET INCOME (LOSS) $(13,382) $(50,923) $ (4,148) $ 4,528
======== ======== ======== =======
EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS $ (.38) $ (.12) $ (.14) $ .15
======== ======== ======== =======
EARNINGS (LOSS) PER SHARE $ (.45) $ (1.72) $ (.14) $ .15
======== ======== ======== =======
1993
NET REVENUES $ 47,325 $ 55,680 $ 55,205 $65,962
Income (loss) before amortization of acquired intangible assets,
unusual items, nonoperating items, gain on sale of stock, income
taxes (benefit) and minority interest (3,220) 1,085 (1,079) 4,614
Amortization of acquired intangible assets 1,474 1,529 1,176 426
Unusual items - - 9,232 -
Other nonoperating expenses 410 1,227 330 1,058
Gain on sale of stock - - (21,260) -
Income taxes (benefit) (2,079) (689) (3,748) 1,572
Minority interest - - 341 263
-------- -------- -------- -------
INCOME (LOSS) FROM CONTINUING OPERATIONS (3,025) (982) 12,850 1,295
Income (loss) from discontinued operations (1,324) (2,564) (16,662) 793
-------- -------- -------- -------
NET INCOME (LOSS) $ (4,349) $ (3,546) $ (3,812) $ 2,088
======== ======== ======== =======
EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS:
Primary earnings (loss) per share $ (.10) $ (.03) $ .43 $ .04
======== ======== ======== =======
Fully diluted earnings (loss) per share $ (.10) $ (.03) $ .37 $ .04
======== ======== ======== =======
EARNINGS (LOSS) PER SHARE $ (.14) $ (.12) $ (.13) $ .07
======== ======== ======== =======
</TABLE>
F-20
<PAGE> 50
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)
<TABLE>
<CAPTION>
Balance at Charge/Credit Balance
beginning to costs and Deductions/ at end
Classification of period expenses Other of period
-------------- ---------- ------------- ------------ ---------
<S> <C> <C> <C> <C>
YEAR ENDED 1994:
Allowance for doubtful receivables $10,437 $(1,304) $(6,346) $ 2,787
Accumulated amortization of acquired intangible assets $95,635 $ 1,824 $(8,454)(B) $89,005
YEAR ENDED 1993: (A)
Allowance for doubtful receivables $10,119 $ 4,664 $(4,346) $10,437
Accumulated amortization of acquired intangible assets $78,865 $ 4,775 $11,995 (C) $95,635
YEAR ENDED 1992: (A)
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
</TABLE>
(A) 1993 and 1992 balances have not been restated to exclude Education
Centers.
(B) This amount primarily represents the restatement of the Company's
discontinued operations.
(C) 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.
F-21
<PAGE> 51
EXHIBITS FILED HEREIN
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
------ ----------- ------------
<S> <C>
10.18 $13,500,000 Amended and Restated Credit Agreement among National
Education Corporation, the Banks named therein and Bankers Trust
Company as Agent, dated February 28, 1995 (the "Credit Agreement")
(Confidential treatment under Rule 24b-2 has been requested for portions
of this exhibit) . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.1 Calculation of Primary Earnings Per Share . . . . . . . . . . . . . . .
11.2 Calculation of Fully Diluted Earnings Per Share . . . . . . . . . . . .
21 Subsidiaries of National Education Corporation . . . . . . . . . . . . .
23 Consent of Price Waterhouse LLP . . . . . . . . . . . . . . . . . . . .
27 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
<PAGE> 1
* PORTIONS OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE COMMISSION IN A REQUEST
FOR CONFIDENTIAL TREATMENT. SEE PAGES 64-73.
EXHIBIT 10.18
AMENDED AND RESTATED CREDIT AGREEMENT
This AMENDED AND RESTATED CREDIT AGREEMENT dated as of February
28, 1995 (as amended, supplemented or otherwise modified from time to time,
this "Credit Agreement"), is by and 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"). This Credit Agreement amends and restates
that certain Credit Agreement dated as of December 22, 1993, among the
Borrower, the Bank and the Agent, as amended to the date hereof (the "Existing
Credit Agreement").
R E C I T A L S
WHEREAS, the Borrower and Bank have agreed to amend and restate
the Existing Credit Agreement in the manner, and 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 that the Existing Credit Agreement is amended and restated in its
entirety 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):
"Acknowledgement and Consent" shall mean an Acknowledgement and
Consent dated as of the date hereof, executed by each Guarantor Subsidiary and
each of Borrower's Subsidiaries party to the Subordination Agreement,
substantially in the form annexed hereto as Exhibit K.
"Adjusted Consolidated Net Worth" shall mean, as to the Borrower,
the Consolidated Net Worth of the Borrower
<PAGE> 2
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 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.
"Asset Sale" means the sale by the Borrower or any of its
Subsidiaries to any Person other than the Borrower or any of its wholly-owned
Subsidiaries of (i) any of the stock of any of the Borrower's Subsidiaries,
(ii) substantially all of the assets of any division or line of business of the
Borrower or any of its Subsidiaries, or (iii) any other assets (whether
tangible or intangible) of the Borrower or any of its Subsidiaries outside of
the ordinary course of business.
2
<PAGE> 3
"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.
"Borrower Pledge Agreement" shall mean a Pledge Agreement dated
as of the date hereof, executed by the Borrower, substantially in the form
annexed hereto as Exhibit H, as modified, supplemented or amended from time to
time.
"Business Day" shall mean any day except Saturday, Sunday and any
day which shall be in New York City a legal holiday or a day on which banking
institutions are authorized or required by law or other government action to
close.
"Cash Proceeds" means, with respect to any Asset Sale, cash
payments (including any cash received by way of deferred payment pursuant to,
or monetization of, a note receivable or otherwise, but only as and when so
received) received from such Asset Sale.
"Certificate of Exemption" shall have the meaning assigned to
that term in subsection 2.06(g)(iii).
"Closing Date" shall mean January 4, 1994.
"Code" shall mean the Internal Revenue Code of 1986, as amended
from time to time.
"Collateral Agent" means Bankers Trust Company acting in the
capacity of the Collateral Agent on behalf of the Banks and SV pursuant to the
Intercreditor Agreement and the Intercreditor Pledge Agreement and shall
include any successor Collateral Agent appointed pursuant to this Agreement and
the Intercreditor Agreement.
"Consolidated EBIT" shall mean, as to the Borrower and for any
period, the consolidated net income of the Borrower 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 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, greater than $500,000 per annum and (iii) and any
changes, adopted by the Borrower after September 30, 1994, in the accounting
method used by the
3
<PAGE> 4
Borrower and its Subsidiaries to amortize or deduct expenses associated with
promotional activities tied to prior advertisements or any effect such changes
have on the consolidated net income of the Borrower and its Subsidiaries.
"Consolidated EBITDA" shall mean, as to the Borrower and for any
period, the Consolidated EBIT of the Borrower 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.
"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 the Borrower, the Net
Worth of the Borrower 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
4
<PAGE> 5
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.
"Convertible Notes" shall mean the Borrower's Senior Subordinated
Convertible Notes due 2006 in an aggregate original principal amount of
$20,000,000.
"Credit Documents" shall mean this Agreement, each Note, the
Letters of Credit, the Borrower Pledge Agreement, the Intercreditor Pledge
Agreement, the Intercreditor Agreement, and the Subsidiary Guaranty.
"Default" shall mean any event, act or condition which with
notice or lapse of time, or both, would constitute an Event of Default.
"Dollars" and "$" 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.
"Ed Centers Cash Flow" shall mean, for any period, the sum of the
amount of the increase (or decrease) in the cash account of Ed Centers measured
between the first and last days of such period plus the amount of the reduction
(or minus the amount of the increase) in the amount of intercompany
Indebtedness owed by Ed Centers to the Borrower and the other Subsidiaries of
the Borrower as measured
5
<PAGE> 6
between the first and last days of such period minus the amount of any actual
operating income earned from (or plus the amount of any actual operating loss
resulting from) the operations of any Ed Centers school sold to a an unrelated
third-party during such period minus any cash proceeds received by Ed Centers
from the disposition of any of its assets (including, without limitation, any
school) during such period, all determined in accordance with past practice
and, to the extent applicable, generally accepted accounting principles.
"Ed Centers Charge" shall mean the charge (net of tax in an
amount not exceeding $40,100,000) taken by the Borrower against its income in
the second quarter of its 1994 fiscal year in connection with its decision to
discontinue the operations of Ed Centers and the resulting write-down of its
investment in, and costs associated with the discontinuation of the operations
of, Ed Centers.
"Ed Centers Discontinued Operations" means, from and after the
date that the Company publicly announced its decision to discontinue the
operations of Ed Centers and to take the Ed Centers Charge, the operations of
Ed Centers.
"Effective Date" shall mean the date on or before February 28,
1995 on which all of the conditions to the effectiveness of this Agreement set
forth in Section 5.01 are satisfied or waived.
"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 Margin" shall mean, (a) during the period from and
including the Effective Date to but excluding June 30, 1995, 2.00% per annum,
(b) during the period from and including the June 30, 1995 to but excluding
September 30, 1995, 2.50% per annum, and (c) during the period from and
including September 30, 1995 and thereafter, 3.00% per annum.
"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
6
<PAGE> 7
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 Credit Agreement" shall have the meaning assigned to
that term in the introductory paragraph of this Agreement.
"Existing Loans" means the Loans outstanding under the Existing
Credit Agreement on the Effective Date.
"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.
"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.
7
<PAGE> 8
"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.
"Intercreditor Agreement" shall mean an Intercreditor Agreement
among the Agent, Bankers Trust Company, as the Collateral Agent thereunder, and
SV, substantially in the form annexed hereto as Exhibit I, as amended, modified
or supplemented from time to time.
"Intercreditor Pledge Agreement" shall mean an Intercreditor
Pledge Agreement between Bankers Trust Company, as the Collateral Agent
thereunder, and the Borrower, substantially in the form annexed hereto as
Exhibit J, as amended, modified or supplemented from time to time.
"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 date of the Interest Period applicable
to such Loan and (b) the last day of the Interest Period applicable to such
Loan.
8
<PAGE> 9
"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.
"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
9
<PAGE> 10
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 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.
"Net Cash Proceeds" means, with respect to any Asset Sale, Cash
Proceeds of such Asset Sale net of bona fide direct costs of sale including (i)
income taxes reasonably estimated to be actually payable as a result of such
Asset Sale within two years of the date of such Asset Sale and (ii) payment of
the outstanding principal amount of, premium or penalty, if any, and interest
on any Indebtedness (other than the Loans) that is secured by a Lien on the
stock or assets in question and that is required to be repaid under the terms
thereof as a result of such Asset Sale.
"NETG" shall mean NETG Holding, Inc., a Delaware corporation and
a direct Wholly-Owned Subsidiary of the Borrower.
10
<PAGE> 11
"Net Worth" shall mean, as to the Borrower, 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, adjusted, however, to exclude the effects of any changes,
adopted by the Borrower after September 30, 1994, in the accounting method used
by the Borrower and its Subsidiaries to amortize or deduct expenses associated
with promotional activities tied to prior advertisements or any effect such
changes have on the consolidated net income and, consequently, the Net Worth of
the Borrower and its Subsidiaries.
"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.
"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
11
<PAGE> 12
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.
"Prime Rate Margin" shall mean, (a) during the period from and
including the Effective Date to but excluding June 30, 1995, 1.00% per annum,
(b) during the period from and including June 30, 1995 to but excluding
September 30, 1995, 1.50% per annum, and (c) during the period from and
including September 30, 1995 and thereafter, 2.00% per annum.
"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
12
<PAGE> 13
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 and ICS.
"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 Effective 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.
"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.
13
<PAGE> 14
"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
December 22, 1993, executed by each Guarantor Subsidiary, a copy of which is
annexed hereto as Exhibit F, as modified, supplemented or amended from time to
time.
"SV" shall mean Steck-Vaughn Publishing Corporation, a Delaware
corporation.
"SV Stock Option" shall mean an option granted by the Borrower to
SV to purchase 290,000 shares of SV's outstanding common stock from the
Borrower for an exercise price of $6.50 per share, which option shall expire on
December 31, 1996, shall not be exercisable for a period of one year and shall
be redeemable by the Borrower at a price equal to the greater of $750,000 or
the amount that would, when added to all interest paid after the issuance date
of such option and prior to the redemption thereof on all intercompany loans
advanced by SV to the Borrower and outstanding during such period, cause SV's
annual return on the average principal amount of such loans outstanding during
such period to equal 25% per annum.
"Termination Date" shall mean the earlier of (a) December 21,
1995 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.
14
<PAGE> 15
"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.
"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.
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, on the Effective Date to
maintain and continue its Existing Loans as Revolving Loans hereunder and, from
time to time during the period from the Effective Date through but excluding
the Termination Date, to make additional Revolving Loans to the Borrower 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
15
<PAGE> 16
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 $13,500,000. The amount of the Revolving Loan Commitments shall
be reduced by the amount of all reductions thereof required or otherwise made
pursuant to Sections 4.01 and 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
16
<PAGE> 17
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 12:00
noon (New York time) on 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) whether such Revolving Loans are
initially to consist of Prime Rate Loans or Eurodollar Rate Loans or a
combination thereof, (d) 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 (e) 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; provided that no such
Notice of Borrowing shall be required to continue the Existing Loans as
Revolving Loans hereunder, and upon the occurrence of the Effective Date, all
Existing Loans shall automatically be continued as Loans hereunder, either as
Prime Rate Loans (in the case of Existing Loans bearing interest at a rate
determined by reference to the Prime Rate) or as Eurodollar Rate Loans (in the
case of Existing Loans bearing interest at a rate determined by reference to
the Eurodollar Rate), having, in the case of any such Eurodollar Rate Loans, an
initial Interest Period equal to the portion of the interest period applicable
to such loans under the Existing Credit Agreement remaining after the Effective
Date (regardless of the provisions Section 2.03(b) to the contrary). 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). 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
17
<PAGE> 18
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 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
18
<PAGE> 19
hereunder or to prejudice any rights that the Borrower may have against any
Bank as a result of any default by such Bank hereunder.
2.02 Notes. The Borrower shall execute and deliver to each Bank
(or to the Agent for that Bank) on the Effective 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. Upon the occurrence of the Effective Date and the delivery of a
Note to a Bank hereunder, any note issued to such Bank under the Existing
Credit Agreement shall be of no further effect.
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; it being agreed and understood
that Existing Loans continued as Revolving Loans hereunder on the Effective
Date shall bear interest for the period prior to the Effective Date at the
applicable interest rates specified in the Existing Credit Agreement and shall,
on and after the Effective Date, bear interest at the applicable rates
specified in this Agreement. Except as set forth in subsection 2.01(b) with
respect to Existing Loans that are continued as Revolving Loans hereunder on
the Effective Date, 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:
19
<PAGE> 20
(i) if a Prime Rate Loan, then at the sum of the Prime
Lending Rate plus the applicable Prime Rate Margin; and
(ii) if a Eurodollar Rate Loan, then at the sum of the
Adjusted Eurodollar Rate plus the applicable Eurodollar Margin.
(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;
(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.
20
<PAGE> 21
(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 the first such date occurring
after the Effective Date, 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.
(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.
The Borrower shall deliver a Notice of Conversion/Continuation to
the Agent no later than 12:00 noon (New York time) on 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
21
<PAGE> 22
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 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 3.00%); 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.
22
<PAGE> 23
(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 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
Effective 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, the
23
<PAGE> 24
reimbursement of the Issuing Bank of any amounts drawn under any Letter of
Credit as provided in subsection 2.07(c).
(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 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:
24
<PAGE> 25
(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 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 the Eurodollar Margin plus 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
25
<PAGE> 26
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 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 sub-
26
<PAGE> 27
section 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 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
27
<PAGE> 28
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 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
28
<PAGE> 29
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 Effective 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 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
29
<PAGE> 30
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 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
30
<PAGE> 31
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 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 Effective 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
31
<PAGE> 32
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 and 5.03, 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 and 5.03, as
applicable, to the issuing of such 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 5.02 and 5.03, 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.
Notwithstanding the provisions of the preceding paragraph, any
letter of credit issued and outstanding under the Existing Agreement, if any,
shall on and after the Effective Date be deemed to be issued and outstanding
hereunder and shall be a "Letter of Credit" for the purposes of this Agreement.
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
32
<PAGE> 33
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 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 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. 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) and such notice shall
be accompanied by a copy of the issued Letter of Credit.
(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
33
<PAGE> 34
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 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
34
<PAGE> 35
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 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) letter of credit fees, payable in relation to each Letter
of Credit on the outstanding stated amount of such Letter of Credit at the
rate of 2.00% per annum during the period from the Effective Date to but
excluding June 30, 1995, (b) 2.50% per annum during the period from and
including June 30, 1995 to but excluding September 30, 1995, and (c) 3.00%
per annum during the period from and including September 30, 1995 and
thereafter, such fees being payable in relation to any Letter of Credit in
arrears on the last day of February, May, August, and November, commencing
on the first such date occurring after the Effective Date, and on the date
such Letter of Credit expires or is surrendered for cancellation; provided
that the minimum amount of letter of credit fees payable in respect of
any Letter of Credit issued hereunder shall be $500;
(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
35
<PAGE> 36
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
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
36
<PAGE> 37
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);
(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 Effective 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 Effective 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:
37
<PAGE> 38
(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 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
38
<PAGE> 39
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
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,
39
<PAGE> 40
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 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 AND FEES. Interest and letter of
credit fees 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 such interest or fees accrue.
Section 3. Fees.
3.01 Fees.
(A) LOAN FEES. On the Signing Date, the Borrower agrees to pay
to Bankers Trust Company an extension fee in such amount as may be mutually
agreed upon, which fee shall be deemed fully earned upon such date.
(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
40
<PAGE> 41
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 1/2 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 the first such date occurring after the Effective Date,
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; Mandatory Reduction of Revolving Loan
Commitment.
(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 following terms and conditions: (i) the Borrower shall give the
Agent at its Notice Office at least one 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 TO EFFECT RESTRICTIONS ON LOANS.
The Borrower shall make prepayments on the Revolving Loans necessary to give
effect to the limitations set forth in subsection 2.01(a).
(C) PREPAYMENTS AND REDUCTIONS FROM ASSET SALES; MANDATORY
REDUCTION OF REVOLVING LOAN COMMITMENT. No later than the second Business Day
following the date of receipt by the Borrower or any of its Subsidiaries of
Cash Proceeds of any Asset Sale, the Borrower shall prepay the Revolving Loans
in an amount equal to the lesser of (i) the Net Cash Proceeds of such Asset
Sale or (ii) the amount, if any, by which the outstanding principal amount of
the Revolving Loans then exceeds $10,000,000, and the Revolving Loan
Commitments shall be permanently reduced, in an amount equal
41
<PAGE> 42
to the lesser of (1) the Net Cash Proceeds of such Asset Sale or (2) the
amount, if any, by which the Revolving Loan Commitment then exceeds
$10,000,000. Concurrently with any prepayment of the Loans and/or reduction of
the Revolving Loan Commitment pursuant to this subsection, the Borrower shall
deliver to the Agent a certificate of its chief financial officer or treasurer
demonstrating the derivation of the Net Cash Proceeds of the correlative Asset
Sale from the gross sales price thereof. In the event that the Borrower shall,
at any time after receipt of Cash Proceeds of any Asset Sale requiring a
prepayment or a reduction of the Revolving Loan Commitment pursuant to this
subsection, determine that the prepayments and/or reductions of the Revolving
Loan Commitment previously made in respect of such Asset Sale were in an
aggregate amount less than that required by the terms of this subsection, the
Borrower shall promptly make an additional prepayment of the Loans and the
Revolving Loan Commitment shall be permanently reduced, in the manner described
above in an amount equal to the amount of any such deficit, and the Borrower
shall concurrently therewith deliver to Agent a certificate of its chief
financial officer or treasurer demonstrating the derivation of the additional
Net Cash Proceeds resulting in such deficit.
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
42
<PAGE> 43
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 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:
43
<PAGE> 44
(A) EXECUTION OF AGREEMENT, NOTES AND PLEDGE AGREEMENTS. The
Agent shall have received: (i) a signed copy of this Agreement (whether
the same or different copies) duly executed by the Borrower, each Bank and
the Agent, (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, and (iii) signed copies of the Borrower Pledge Agreement and the
Intercreditor Pledge Agreement, together with certificates representing
all shares of stock pledged thereunder and related undated stock powers,
executed in blank.
(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 of the
Effective 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 Effective 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
Effective 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 Effective Date, the Agent shall have received
a certificate, dated the Effective 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 Pledge 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 Effective Date, the Agent shall have
received a certificate, dated the Effective Date,
44
<PAGE> 45
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 Acknowledgement and
Consent 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 Effective Date, the Agent shall have
received, with respect to the Borrower and each Guarantor Subsidiary, a
good standing certificate from its jurisdiction of incorporation dated a
recent date prior to the Effective Date.
(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) ACKNOWLEDGEMENT AND CONSENT. Each Guarantor Subsidiary
and each of Borrower's Subsidiaries party to the Subordination Agreement
shall have duly executed and delivered the Acknowledgement and Consent.
(E) INTERCREDITOR AGREEMENT. The Agent, Bankers Trust
Company, as the Collateral Agent thereunder, and SV shall have duly
executed and delivered the Intercreditor Agreement.
(F) PAYMENT OF FEES. The Borrower shall have paid the Fees
required by Section 3.01 to be paid on the Effective Date and the
reasonable fees and expenses of O'Melveny & Myers, counsel to the Agent,
as of the Effective Date.
(G) OPINIONS OF COUNSEL. On the Effective Date, the Agent
shall have received from Philip C. Maynard, counsel to the Borrower, an
opinion in form and substance satisfactory to the Agent, addressed to each
45
<PAGE> 46
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 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
46
<PAGE> 47
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;
(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.
5.03 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
47
<PAGE> 48
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.
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).
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 compliance by it with the terms and
provisions of any such Credit Documents, (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.
6.04 Governmental Approvals. No order, consent, approval,
license, authorization or validation of, or filing, recording or registration
with (except as have been
48
<PAGE> 49
obtained or made prior to the Effective 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,
or (ii) the legality, validity, binding effect or enforceability of any such
Credit Document.
6.05 Financial Statements; Financial Condition; Undisclosed
Liabilities; etc.
(a) The consolidated balance sheets of the Borrower and its
Consolidated Subsidiaries at December 31, 1993 and September 30, 1994, 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, 1994,
year-end audit adjustments.
(b) The consolidated balance sheet of each Reporting
Subsidiary and its Consolidated Subsidiaries at December 31, 1993 and September
30, 1994, 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, 1994, 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
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,
49
<PAGE> 50
1994 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 Effective 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, to any Reporting Subsidiary and its Subsidiaries taken as a whole or to
Ed Centers. Except as set forth in Schedule III, as of the Effective 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, to any
Reporting Subsidiary and its Subsidiaries taken as a whole or to Ed Centers.
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, or (iii) 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, of any Reporting
Subsidiary and its Subsidiaries taken as a whole or of Ed Centers.
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 is, and all other
such factual information (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
50
<PAGE> 51
time in light of the circumstances under which such information was provided.
6.08 Use of Proceeds; Margin Regulations. All proceeds of the
Loans (including the Existing Loans continued as Revolving Loans hereunder) 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 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.
51
<PAGE> 52
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 29,576,757 shares were issued and outstanding as of December
31, 1994. 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 and 1995 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 Effective Date, the corporations
listed on Schedule V are the only Subsidiaries of the Borrower. Schedule V
correctly sets forth, as of the Effective 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 business,
operations, property, assets, condition (financial or otherwise) or prospects
of the Borrower and its Subsidiaries taken as a whole, of any Reporting
Subsidiary and its Subsidiaries taken as a whole or of Ed Centers.
52
<PAGE> 53
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 has or is engaged in any unfair labor practice that would 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 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, (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, 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 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.
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
53
<PAGE> 54
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, 1993, 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,
of any Reporting Subsidiary and its Subsidiaries taken as a whole or of Ed
Centers.
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 Effective 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 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
54
<PAGE> 55
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 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
55
<PAGE> 56
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, 1995 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 22 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. 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
56
<PAGE> 57
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, any
Reporting Subsidiary and its Subsidiaries, taken as a whole, or Ed Centers
or (y) with respect to any Credit Document, (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, any
Reporting Subsidiary and its Subsidiaries, taken as a whole, or Ed
Centers.
(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 and Exchange Commission or any governmental agencies
substituted therefor (the "SEC").
(i) Financial Review. Promptly, commencing with the quarter
ended December 31, 1994, 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
57
<PAGE> 58
shall notify the Agent of such proposed transfer and the business purpose
therefor.
(k) Monthly Reports of Ed Centers. Within 22 days of the end
of each month, a report showing in detail reasonably satisfactory to the
Agent (i) the operating income of each school operated by Ed Centers
during such month, (ii) all costs incurred in connection with the closure
of each Ed Centers school closed during such month and all costs incurred
by Ed Centers to complete teaching courses at schools scheduled to be
closed or sold, (iii) general and administrative expenses of Ed Centers
and (iv) all capital expenditures of Ed Centers.
(l) 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 Effective 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 the same or
similar businesses, and (iii) furnish to each Bank, within 45 days after the
end of each fiscal quarter
58
<PAGE> 59
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
insolvent under Title IV of ERISA; that a Plan has an Unfunded Current
Liability giving rise to a Lien under ERISA
59
<PAGE> 60
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.
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
60
<PAGE> 61
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 Effective 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 Effective Date and until the Loans and the Notes,
together with interest, Fees and all other obligations incurred hereunder and
thereunder, are paid in full:
61
<PAGE> 62
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 to the
Existing Credit Agreement, a copy of which is annexed as Schedule VIII to
this Agreement (Liens described in this clause (iii), "Permitted Liens");
(iv) Liens created and existing under the Borrower Pledge
Agreement, the Intercreditor Pledge Agreement and other 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;
62
<PAGE> 63
(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;
(xii) Liens on assets purchased using the proceeds of
non-recourse purchase money Indebtedness permitted by clause (ix) of
Section 8.05; and
(xiii) Liens on personal property and assets of SV securing
Indebtedness permitted under clause (xii) 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)
63
<PAGE> 64
for cash, the stock, property or assets of any of its 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 Person making the sale) not to exceed $ * in any
calendar year;
* OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE COMMISSION IN
A REQUEST FOR CONFIDENTIAL TREATMENT
(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 Subsidiaries may make capital expenditures
to the extent not in violation of Section 8.08; and
(vii) SV and its Wholly-Owned Subsidiaries may acquire property and
assets of other Persons; provided that after giving effect to such
acquisition the aggregate sum of (x) the amount of SV's cash-on-hand and
short-term investments permitted under 8.06(vii) plus (y) the unused
available revolving commitments under credit lines permitted pursuant to
clause (xii) of Section 8.05 equals or exceeds the excess, if any, of $
* over the outstanding principal amount of all intercompany loans
advanced by SV to the Borrower.
* OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE COMMISSION IN
A REQUEST FOR CONFIDENTIAL TREATMENT
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 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
64
<PAGE> 65
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 $ * exceeds the aggregate amount of cash paid
by the Borrower after December 23, 1993 to repurchase subordinated debt or
to prepay other Indebtedness pursuant to subsection 8.13(i).
* OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE COMMISSION IN
A REQUEST FOR CONFIDENTIAL TREATMENT
(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:
(i) any Subsidiary of the Borrower may pay dividends to the
Borrower or any Wholly-Owned Subsidiary of the Borrower;
(ii) SV may pay dividends and make other distributions in
respect of its outstanding shares of common stock provided such dividends
and distributions are paid in cash and that, immediately after giving
effect to such dividends and distributions, the aggregate sum of (x) the
amount of SV's cash-on-hand and short-term investments permitted under
8.06(vii)
65
<PAGE> 66
plus (y) the unused available revolving commitments under credit lines
permitted pursuant to clause (xii) of Section 8.05 equals or exceeds the
excess, if any, of $ * over the outstanding principal amount of
all intercompany loans advanced by SV to the Borrower; and
* OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE COMMISSION IN
A REQUEST FOR CONFIDENTIAL TREATMENT
(iii) SV may acquire the SV Stock Option.
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), excluding any leases of real or
personal property that is only used in connection with Ed Centers Discontinued
Operations, to exceed $ * during any fiscal quarter.
* OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE COMMISSION IN
A REQUEST FOR CONFIDENTIAL TREATMENT
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 to the Existing Credit
Agreement, a copy of which is annexed as Schedule IX to this Agreement,
("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
66
<PAGE> 67
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 $ * 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, $ * ;
* OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE COMMISSION IN
A REQUEST FOR CONFIDENTIAL TREATMENT
(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;
67
<PAGE> 68
(xi) the Borrower and its Subsidiaries may enter into Interest
Rate/Currency Agreements (and guaranties thereof) with the prior approval
of Required Banks; and
(xii) 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 8.02(vii) 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 $ * , 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.
* OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE COMMISSION IN
A REQUEST FOR CONFIDENTIAL TREATMENT
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 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 $ * ;
* OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE COMMISSION IN
A REQUEST FOR CONFIDENTIAL TREATMENT
(iii) Loans and advances by any direct Subsidiary of the
Borrower to the Borrower; provided such loans or advances (other than
loans and advances made by SV) are at all times subordinated to the
Obligations of the Borrower pursuant to the Subordination Agreement;
68
<PAGE> 69
(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(xii), shall at no time exceed $ * ;
* OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE COMMISSION IN
A REQUEST FOR CONFIDENTIAL TREATMENT
(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;
(vii) 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 (vi) of this subsection 8.06,
is permitted pursuant to any other applicable clause of this subsection
8.06; and
(vii) SV and its Wholly-Owned Subsidiaries may make in
investments in other Persons; provided that after giving effect to each
such investment the aggregate sum of (a) the amount of SV's cash-on-hand
and short-term investments permitted under 8.06(vii) plus (b) the unused
available revolving commitments under credit lines permitted pursuant to
clause (xii) of Section 8.05 equals or exceeds the excess, if any, of
$10,000,000 over the outstanding principal amount of all intercompany
loans advanced by SV to the Borrower.
69
<PAGE> 70
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 or the JMI License Agreement.
8.08 Capital Expenditures. Except for expenditures made to
acquire assets that are only used in connection with the Ed Centers
Discontinued Operations in an aggregate amount not exceeding $ * during
its 1995 fiscal year, 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
1995 fiscal year which would cause the aggregate amount of all such
expenditures (excluding any such expenditures made to acquire assets for use in
connection with Ed Centers Discontinued Operations) for the Borrower and its
Subsidiaries to exceed $ * in such fiscal year.
* OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE COMMISSION IN
A REQUEST FOR CONFIDENTIAL TREATMENT
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; provided that, for purposes of
this Section, (a) any addition to the equity capital of the Borrower resulting
from the conversion of the Convertible Notes shall be deemed to constitute
Indebtedness for the purposes of determining Consolidated Liabilities and
Adjusted Consolidated Net Worth, (b) all liabilities that are attributable only
to Ed Centers Discontinued Operations shall be disregarded in determining
Consolidated Liabilities and (c) all additions to (or deductions from) Adjusted
Consolidated Net Worth that would result from any net income (or net loss,
other than the Ed Centers Charge) accruing on or after April 1, 1994, that is
attributable solely to Ed Centers Discontinued Operations
70
<PAGE> 71
shall be disregarded in determining Adjusted Consolidated Net Worth:
<TABLE>
<CAPTION>
Quarter Ended Ratio
------------- -----
<S> <C>
December 31, 1994 1.80:1.00
March 31, 1995 *
June 30, 1995 *
September 30, 1995 *
</TABLE>
* OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE COMMISSION IN
A REQUEST FOR CONFIDENTIAL TREATMENT
8.10 Minimum Consolidated EBITDA; Minimum Ed Centers Cash Flow.
(a) 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; provided that, for purposes of this Section, all income, interest
expense, depreciation expense, tax expense, amortization expense, non-cash
gains or losses, minority interests, and income (or losses) accruing on or
after April 1, 1994, that are attributable only to Ed Centers Discontinued
Operations shall be disregarded:
<TABLE>
<CAPTION>
Prior Four Fiscal
Quarters Ending Amount
----------------- ------
<S> <C>
December 31, 1994 $19,500,000
March 31, 1995 $ *
June 30, 1995 $ *
September 30, 1995 $ *
</TABLE>
* OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE COMMISSION IN
A REQUEST FOR CONFIDENTIAL TREATMENT
(b) Ed Centers Cash Flow. The Borrower will not permit Ed
Centers Cash Flow for the three-month period ending March 31, 1995, the
six-month period ending June 30, 1995, and the nine-month period ending
September 30, 1995 to be less than the amount set forth opposite the applicable
date below, in each case, reduced by the amount of the operating earnings (or
increased by the amount of the operating deficit) projected for the applicable
period for each school of Ed Centers that is sold to unrelated third-parties
during the applicable period as set forth on
71
<PAGE> 72
Schedule X annexed to this Agreement in relation to such school for such
period.
<TABLE>
<CAPTION>
Unadjusted Minimum
Period End Ed Centers Cash Flow
---------- --------------------
<S> <C>
March 31, 1995 $ *
June 30, 1995 $ *
September 30, 1995 $ *
</TABLE>
* OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE COMMISSION IN
A REQUEST FOR CONFIDENTIAL TREATMENT
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; provided that, for purposes of this Section, (i) any
addition to the equity capital of the Borrower resulting from the conversion of
the Convertible Notes shall be deemed to constitute Indebtedness for the
purposes of determining Adjusted Consolidated Net Worth and (ii) any addition
to (or deduction from) Adjusted Consolidated Net Worth that would result from
any net income (or net loss, other than the Ed Centers Charge) accruing on or
after April 1, 1994, that is attributable only to Ed Centers Discontinued
Operations shall be disregarded in determining Adjusted Consolidated Net Worth:
<TABLE>
<CAPTION>
Quarters Ending Amount
--------------- ------
<S> <C>
December 31, 1994 $102,000,000
March 31, 1995 $ *
June 30, 1995 $ *
September 31, 1995 $ *
</TABLE>
* OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE COMMISSION IN
A REQUEST FOR CONFIDENTIAL TREATMENT
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 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; provided that for the
purposes of this Section, all income, interest expense, depreciation expense,
tax
72
<PAGE> 73
expense, depreciation expense, amortization expense, non-cash gains or losses,
minority interests, and income (or losses) accruing on or after April 1, 1994,
that are attributable only to Ed Centers Discontinued Operations shall be
disregarded in determining Consolidated EBITDA of the Borrower and its
Subsidiaries, all lease payments made on or after April 1, 1994, that are
attributable only to Ed Centers Discontinued Operations shall be disregarded in
determining lease payments of the Borrower and its Subsidiaries, and all
Consolidated Fixed Charges accruing on or after April 1, 1994, that are
attributable only to Ed Centers Discontinued Operations shall be disregarded in
determining Consolidated Fixed Charges of the Borrower and its Subsidiaries:
<TABLE>
<CAPTION>
Prior Four Fiscal
Quarters Ending Ratio
----------------- -----
<S> <C>
December 31, 1994 1.45:1.00
March 31, 1995 *
June 30, 1995 *
September 30, 1995 *
</TABLE>
* OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE ACT
OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE COMMISSION IN
A REQUEST FOR CONFIDENTIAL TREATMENT
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 December 23, 1993 to repurchase its
common stock, 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
73
<PAGE> 74
or (iii) amend, modify, change, cancel or terminate the Subordination
Agreement, the JMI Joint Venture Agreement, the JMI Administrative Services
Contract or the JMI License 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, 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) any agreements, consented to by the Bank, pursuant to which
Indebtedness permitted under 8.05(xii) is or may be outstanding.
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 Effective 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 (a) transfers pursuant to licenses granted in the ordinary
course of business consistent with past practice and (b) transfers made in
connection with dispositions of Ed Centers and/or schools operated by Ed
Centers that, in either case, 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
74
<PAGE> 75
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 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
75
<PAGE> 76
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 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
76
<PAGE> 77
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
9.08 Borrower Pledge Agreement; Intercreditor Pledge Agreement;
Intercreditor Agreement. The Borrower Pledge Agreement, the Intercreditor
Pledge Agreement or any provision thereof shall cease to be in full force and
effect, or shall cease to give the Agent the Liens, rights, powers and
privileges purported to be created thereby, or the Borrower 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 Borrower Pledge Agreement or
the Intercreditor Pledge Agreement, or the Intercreditor Agreement or any
provision thereof shall cease to be in full force and effect or SV shall in
writing assert or claim that any of the provisions of the Intercreditor
Agreement are not binding on or enforceable against SV; or
9.09 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
77
<PAGE> 78
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
9.10 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
9.11 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 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
78
<PAGE> 79
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 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
79
<PAGE> 80
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.
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
80
<PAGE> 81
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 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.
81
<PAGE> 82
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.
10.10 Intercreditor Agreement, Intercreditor Pledge Agreement
and Collateral Agent. Each Bank hereby authorizes the Agent to enter into the
Intercreditor Agreement on behalf of and for the benefit of that Bank. Each
Bank hereby acknowledges and consents to and agrees to be bound by the terms of
the Intercreditor Agreement and hereby authorizes and empowers the Agent to
take all actions under, and to act on behalf of and for the benefit of that
Bank for all purposes under, the Intercreditor Agreement. Each Bank hereby
authorizes the Collateral Agent to enter into the Intercreditor Pledge
Agreement and acknowledges and consents to the Intercreditor Pledge Agreement
and agrees to be bound thereby and hereby authorizes and empowers the
Collateral Agent to act on behalf of and for the benefit of that Bank for all
purposes under the Intercreditor Pledge Agreement subject to the provisions of
the Intercreditor Agreement; provided, however that the Agent shall not enter
into or consent to any amendment, modification, termination or waiver of any
provisions contained in the Intercreditor Agreement without the prior consent
of the Banks. Each Bank agrees that no Bank shall have any right individually
to realize on the security granted by the Intercreditor Pledge Agreement, it
being understood and agreed that such rights and remedies may be exercised by
the Collateral Agent for the benefit of the Banks and Agent and the parties to
the Intercreditor Agreement upon the terms of the Intercreditor Pledge
Agreement and the Intercreditor Agreement.
82
<PAGE> 83
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 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,
83
<PAGE> 84
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 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.
84
<PAGE> 85
(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 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.
85
<PAGE> 86
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 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.
86
<PAGE> 87
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 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.
87
<PAGE> 88
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 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 Survival of Rights under Existing Agreement. The
Borrower acknowledges that any choses in action or other rights, if any,
created in favor of the Agent or the Bank party to the Existing Credit
Agreement arising out of the representations, warranties or covenants of the
Borrower contained in the Existing Credit Agreement and all amendment and
waivers relating thereto shall survive the execution and delivery of this
Agreement.
11.14 Domicile of Loans. Each Bank may transfer and carry its
Loans at, to or for the account of any office, Subsidiary or Affiliate of such
Bank.
[Remainder of Page Intentionally Left Blank]
88
<PAGE> 89
IN WITNESS WHEREOF, the parties hereto have caused their duly
authorized officers to execute and deliver this Agreement as of the date first
above written.
NATIONAL EDUCATION CORPORATION
By____________________________
Title
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
NOTE: EXHIBITS AND SCHEDULES HAVE BEEN INTENTIONALLY OMITTED, AND WILL BE
FURNISHED TO THE SECURITIES AND EXCHANGE COMMISSION UPON REQUEST.
S-1
<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
-----------------------------------------------------------------
1994 1993 1992 1991 1990
-------- ------- ------- ------- --------
<S> <C> <C> <C> <C> <C>
INCOME (LOSS) FROM
CONTINUING OPERATIONS $(14,473) $10,138 $(6,284) $ (629) $(21,061)
======== ======= ======= ======= ========
NET INCOME (LOSS) $(63,925) $(9,619) $ 515 $ 5,359 $(14,939)
======== ======= ======= ======= ========
COMMON STOCK:
Shares outstanding from beginning
of period 29,405 29,968 29,822 29,718 29,596
Pro rata shares:
Stock options exercised 134 41 136 12 1
Shares purchased for treasury,
from date of purchase (7) (380) (6) -- --
Assumed exercise of stock options
using treasury stock method 108 226 344 386 15
Shares issued for restricted stock -- -- -- -- 31
-------- ------- ------- ------- --------
Weighted average number of shares
outstanding 29,640 29,855 30,296 30,116 29,643
======== ======= ======= ======= ========
PRIMARY EARNINGS (LOSS) PER SHARE
FROM CONTINUING OPERATIONS $ (.49) $ .34 $ (.21) $ (.02) $ (.71)
======== ======= ======= ======= ========
PRIMARY EARNINGS (LOSS) PER SHARE $ (2.16) $ (.32) $ .02 $ .18 $ (.50)
======== ======= ======= ======= ========
</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
----------------------------------------------------------------------
1994 1993 1992 1991 1990
-------- -------- ------- ------ --------
<S> <C> <C> <C> <C> <C>
INCOME (LOSS) FROM
CONTINUING OPERATIONS $(14,473) $10,138 $(6,284) $ (629) $(21,061)
Add back debenture interest, debt
discount and expense amortization,
less applicable taxes 3,325 3,243 3,111 3,394 2,280
-------- -------- -------- ------- --------
INCOME (LOSS) FROM CONTINUING
OPERATIONS FOR FULLY DILUTED
COMPUTATION $(11,148) $13,381 $(3,173) $2,765 $(18,781)
======== ======= ======= ====== ========
NET INCOME (LOSS) $(63,925) $(9,619) $ 515 $5,359 $(14,939)
Add back debenture interest, debt
discount and expense amortization,
less applicable taxes 3,325 3,243 3,111 3,394 2,280
-------- -------- -------- ------- --------
NET INCOME (LOSS) FOR FULLY
DILUTED COMPUTATION $(60,600) $(6,376) $ 3,626 $8,753 $(12,659)
======== ======= ======= ====== ========
COMMON STOCK:
Shares outstanding from beginning
of period 29,405 29,968 29,822 29,718 29,596
Stock options exercised 134 41 136 12 1
Shares purchased for treasury,
from date of purchase (7) (380) (6) -- --
Assumed exercise of stock options,
using treasury stock method 108 226 344 500 15
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 7,300 6,588 2,300
------ ------ ------ ------ ------
Weighted average number of
shares outstanding 36,940 37,155 37,596 36,818 31,943
====== ====== ====== ====== ======
FULLY DILUTED EARNINGS (LOSS)
PER SHARE FROM CONTINUING
OPERATIONS $(.49) $.32 $(.21) $(.02) $(.71)
===== ==== ===== ===== =====
FULLY DILUTED EARNINGS
(LOSS) PER SHARE $(2.16) $(.32) $.02 $.18 $(.50)
====== ===== ==== ==== =====
</TABLE>
<PAGE> 1
EXHIBIT 21
ACTIVE SUBSIDIARIES OF NATIONAL EDUCATION CORPORATION
<TABLE>
<CAPTION>
Country or State
Subsidiaries: of Incorporation
------------ ----------------
<S> <C>
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
Its Subsidiary:
--------------
NETG Direct 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
M-Mash, Inc. Colorado
National Learning Systems, Inc. Delaware
NBD Incorporated Delaware
National Education Centers, Inc. California
National Education Credit Corporation California
National Education Enterprises, Inc. California
National Education International Corp. California
National Education Payroll Corp. California
Steck-Vaughn Publishing Corporation Delaware
Its Subsidiary:
--------------
Steck-Vaughn Company Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23
NATIONAL EDUCATION CORPORATION
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in 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 6, 1995 appearing on page F-1 of this Form 10-K.
Price Waterhouse LLP
Costa Mesa, California
March 29, 1995
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM (A) THE
COMPANY'S CONSOLIDATED FINANCIAL STATEMENTS INCLUDED ON PAGES F-1 THROUGH F-20
OF THE COMPANY'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1994, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH (B) CONSOLIDATED
FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> DEC-31-1994
<EXCHANGE-RATE> 1
<CASH> 17,297
<SECURITIES> 10,833
<RECEIVABLES> 47,973
<ALLOWANCES> 2,787
<INVENTORY> 23,827
<CURRENT-ASSETS> 144,239
<PP&E> 88,644
<DEPRECIATION> 63,240
<TOTAL-ASSETS> 259,076
<CURRENT-LIABILITIES> 87,272
<BONDS> 90,290
<COMMON> 2,110
0
0
<OTHER-SE> 69,923
<TOTAL-LIABILITY-AND-EQUITY> 259,076
<SALES> 241,614
<TOTAL-REVENUES> 241,614
<CGS> 94,711
<TOTAL-COSTS> 256,461
<OTHER-EXPENSES> (637)
<LOSS-PROVISION> (1,304)
<INTEREST-EXPENSE> 6,336
<INCOME-PRETAX> (14,210)
<INCOME-TAX> (849)
<INCOME-CONTINUING> (14,473)
<DISCONTINUED> (49,452)
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (63,925)
<EPS-PRIMARY> (2.16)
<EPS-DILUTED> (2.16)
</TABLE>
