SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 1995
Commission file number 1-6981
NATIONAL EDUCATION CORPORATION
(Exact name of registrant as specified in its charter)
Delaware I.R.S. No. 95-2774428
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
18400 Von Karman Avenue, Irvine, California 92715-1594
(Address of principal executive offices) (Zip Code)
(Registrant's telephone number, including area code) 714/474-9400
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 the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
29,576,757 common stock shares outstanding at May 1, 1995
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
Three Months Ended
March 31,
(amounts in thousands, except per share amounts) 1995 1994
____________________________________________________ __________ __________
<S> <C> <C>
(amount in thousands, except per share amount
Tuition and Contract Revenues $ 44,812 $ 39,997
Publishing Revenues 11,147 9,475
_________ _________
Net Revenues 55,959 49,472
Costs and Expenses:
Contract course materials and service costs 17,596 13,870
Publishing costs and materials 3,356 2,837
Product development 5,055 4,694
Selling and promotion 30,384 25,433
General and administrative 9,311 8,901
Amortization of prior period deferred marketing 1,311 7,369
Amortization of acquired intangible assets 565 426
Interest expense 1,977 1,498
Investment income (409) (558)
Other income (236) (95)
_________ _________
Loss Before Tax Benefit, Minority Interest and Discontinued Operations (12,951) (14,903)
Tax benefit (4,533) (3,651)
_________ _________
Loss Before Minority Interest and Discontinued Operations (8,418) (11,252)
Minority interest in consolidated subsidiary 90 122
_________ _________
Loss From Continuing Operations (8,508) (11,374)
Loss from discontinued operations - (3,016)
Discontinued operations tax benefit - 1,008
_________ _________
Net Loss $ (8,508) $ (13,382)
========= =========
Loss Per Share From Continuing Operations $ (.29) $ (.38)
========= =========
Loss Per Share $ (.29) $ (.45)
========= =========
Weighted Average Number of Shares Outstanding:
Primary shares 29,632 29,661
Fully diluted shares 36,932 36,961
<FN>
Unaudited
See accompanying notes and management's discussion and analysis.
</FN>
</TABLE>
2
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
<TABLE>
<CAPTION>
March 31, December 31, March 31,
(dollars in thousands) 1995 1994 1994
____________________________________________________________________ _____________ _____________ _____________
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents $ 25,280 $ 17,297 $ 26,826
Investment securities 2,219 10,833 20,570
Receivables, net of allowance of $1,585, $2,787 and $10,690 31,426 45,186 38,902
Inventories and supplies 25,098 23,827 25,830
Net assets held for disposition 24,411 25,867 -
Prepaid and deferred marketing expenses 6,950 3,223 8,575
Other current assets 20,253 18,006 19,749
_________ __________ __________
Total current assets 135,637 144,239 140,452
Deferred Marketing 159 1,470 24,174
Land, Buildings and Equipment, less accumulated
depreciation of $63,200, $63,240 and $121,302 26,146 25,404 45,672
Acquired Intangible Assets, less accumulated amortization
of $89,590, $89,005 and $96,065 52,307 52,703 51,766
Deferred Income Taxes 28,482 28,482 25,793
Other Assets 5,685 6,778 11,224
_________ __________ __________
$ 248,416 $ 259,076 $ 299,081
========= ========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 7,168 $ 7,771 $ 7,379
Accrued expenses 24,320 29,328 36,334
Accrued salaries and wages 6,750 5,448 9,033
Accrued disposition costs 23,281 25,116 8,271
Deferred contract revenues 12,507 11,905 15,929
Current portion of long-term debt and short-term borrowings 9,382 6,407 654
Accrued and deferred income taxes 1,399 1,297 2,244
_________ __________ __________
Total current liabilities 84,807 87,272 79,844
_________ __________ __________
Liabilities Payable After One Year:
Long-term debt, less current portion 6,222 6,389 2,411
Senior subordinated convertible debentures 20,000 20,000 20,000
Convertible subordinated debentures 57,494 57,494 57,494
Other noncurrent liabilities 7,818 7,667 8,176
_________ __________ __________
91,534 91,550 88,081
_________ __________ __________
Minority Interest in Equity of Consolidated Subsidiary 8,216 8,221 8,168
_________ __________ __________
3
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
<CAPTION>
March 31, December 31, March 31,
(dollars in thousands) 1995 1994 1994
____________________________________________________________________ _____________ _____________ _____________
<S> <C> <C> <C>
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, 30,275,381 shares and 30,195,041 shares issued 2,110 2,110 2,109
Additional paid-in capital 133,043 133,043 132,615
Retained (deficit) earnings (58,752) (50,244) 299
Unrealized gain (loss) on available-for-sale securities, net of tax 21 (21) 943
Cumulative foreign exchange translation adjustment (7,655) (7,947) (8,070)
_________ __________ __________
68,767 76,941 127,896
Less common stock in treasury 697,556 shares, 697,556 shares and
697,461 shares (4,908) (4,908) (4,908)
_________ __________ __________
Total stockholders' equity 63,859 72,033 122,988
_________ __________ __________
$ 248,416 $ 259,076 $ 299,081
========= ========== ==========
<FN>
Unaudited
See accompanying notes and management's discussion and analysis.
</FN>
</TABLE>
4
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
_____________________________
(dollars in thousands) 1995 1994
____________________________________________________ __________ __________
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ (8,508) $ (13,382)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Loss on discontinued operations - 2,008
Tax benefit from discontinued operations - 1,008
Depreciation and amortization 1,372 1,347
Amortization of acquired intangible assets 565 426
Amortization of prior period deferred marketing 1,311 7,369
Provision for doubtful accounts 110 144
(Gain)/loss on foreign currency exchange (239) (95)
Change in assets and liabilities:
Receivables, net 14,213 14,482
Inventories and supplies (1,131) (378)
Prepaid and deferred marketing expenses (3,683) (5,310)
Accounts payable and accrued expenses (4,577) (5,926)
Accrued and deferred income taxes (245) (1,369)
Deferred contract revenues 448 184
Other (981) (1,552)
_________ _________
Net Cash From Operating Activities (1,345) (1,044)
_________ _________
Cash Flows For Investing Activities:
Additions to land, building and equipment (2,072) (1,533)
Dispositions of land, buildings and equipment 96 45
Purchases of investment securities - (4,243)
Proceeds from the sale or redemption of securities 8,682 1,402
Acquisition of business, net of cash acquired - (3,870)
Discontinued operations (379) (2,901)
_________ _________
Net Cash For Investing Activities 6,327 (11,100)
_________ _________
Cash Flows From Financing Activities:
Additions to long-term debt 58 -
Reductions of long-term debt (225) (86)
Changes in short-term borrowings 2,975 -
Minority interest in earnings of consolidated subsidiary (5) 122
Common stock, stock options and related tax benefits - 354
Purchase of common stock for treasury - (53)
_________ _________
Net Cash From Financing Activities 2,803 337
_________ _________
Effect of exchange rate changes on cash 198 87
_________ _________
5<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
<CAPTION>
Three Months Ended
March 31,
_____________________________
(dollars in thousands) 1995 1994
____________________________________________________ __________ __________
<S> <C> <C>
Net change in cash and equivalents 7,983 (11,720)
Cash and equivalents at the beginning of the period 17,297 38,546
_________ _________
Cash and equivalents at the end of the period $ 25,280 $ 26,826
========= =========
<FN>
Unaudited
See accompanying notes and management's discussion and analysis.
</FN>
</TABLE>
6
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
Note 1 -- Summary of Accounting Policies
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments necessary to present fairly the
financial position, results of operations and cash flows. Certain
information and footnote disclosure normally included in financial statements
prepared in accordance with generally accepted accounting principles have
been condensed or omitted pursuant to the rules and regulations of the
Securities and Exchange Commission. It is suggested that these financial
statements be read in conjunction with the financial statements, accounting
policies, and the notes thereto included in the Company's Annual Report on
Form 10-K for the year ended December 31, 1994. The results of operations
for interim periods are not necessarily indicative of the results of
operations to be expected for the year.
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. 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 first quarter charge of $13,508,000. The charge
consists of two components. First, a charge of $7,369,000 results from the
amortization of the deferred marketing balance at December 31, 1993 into
1994. Second, a charge of $6,139,000 results from increased selling and
promotion spending above the amortization that would have been expensed in
accordance with the Company's previous accounting policy. At December 31,
1994, a deferred marketing balance of $1,470,000 remained, of which
$1,311,000 was amortized in the first quarter of 1995.
A substantial portion of selling and promotion costs at National Education
Training Group (NETG) and Steck-Vaughn are deferred and fully amortized
within the calendar year to properly match the costs with revenues due to the
seasonal nature of revenue realization. Due to the seasonal nature of NETG's
and Steck-Vaughn's traditional selling cycle, selling and promotion costs are
typically deferred in the first half of the year and amortized in the latter
half of the year.
Certain prior year amounts have been reclassified to conform with the 1995
presentation.
7
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
NOTE 2 - Business Disposition
In June 1994, the Company adopted a plan to dispose of its Education Centers
subsidiary. As a result, the Company recorded a second quarter 1994 charge
of $40,032,000 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. Based on the current assumptions to close the
transaction, management believes that the amount reserved is adequate and no
further charges are currently anticipated. The Education Centers are being
accounted for as discontinued operations and prior period statements of
operations have been reclassified to reflect this treatment. Revenues for the
Education Centers' 28 open schools were $22,411,000 and $22,301,000 for the
three months ended March 31, 1995 and 1994, respectively. Education Centers'
negative cash flow of $379,000 for the three months ended March 31, 1995,
improved $2,522,000 from the prior year period due primarily to aggressive
cost reductions and control. As of May 3, 1995, the Company has collectively
entered into two letters of intent and signed a definitive agreement with
interested buyers to sell 18 of its 28 open schools. During the quarter, the
Company closed one campus and transferred those students to a nearby
educational facility for purposes of completing their course programs.
The estimated net realizable value of the Education Centers' assets were
segregated during the third quarter of 1994 on the balance sheet as net
assets held for disposition. Liabilities associated with the cost of
completing the transaction and providing for future obligations retained by
the Company have been segregated as accrued disposition costs. Prior period
balance sheet information has not been restated to reflect the discontinuance
of the Education Centers.
For purposes of presenting the statement of cash flows, prior year periods
have been reclassified to reflect the discontinued operations.
NOTE 3 - 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.
8
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
NOTE 4 - 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, 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 increases in
available-for-sale securities of $32,000 and a related deferred tax liability
of $11,000, resulting in a net increase of $21,000 in stockholders' equity.
During the three months ended March 31, 1995 and 1994, the Company did not
realize a material gain or loss from the sale of available-for-sale
securities.
NOTE 5 - Statements of Cash Flows Supplementary Information
<TABLE>
<CAPTION>
Three Months Ended
March 31,
_____________________________
(dollars in thousands) 1995 1994
____________________________________________________ __________ __________
<S> <C> <C>
Cash Paid During the Period For:
Interest expense $ 1,385 $ 1,101
Income taxes, net of income tax refunds $ 249 $ 719
</TABLE>
9
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
<TABLE>
<CAPTION>
Three Months Ended
March 31,
_____________________ Percent
(dollars in thousands) 1995 1994 Variance Change
______________________________________________ _________ _________ _________ ________
<S> <C> <C> <C> <C>
Net Revenues
ICS Learning Systems $ 33,944 $ 28,285 $ 5,659 20.0%
Steck-Vaughn Publishing 11,147 9,475 1,672 17.6
NETG 10,016 11,039 (1,023) (9.3)
Other 852 673 179 26.6
_________ _________ ________
Total Net Revenues $ 55,959 $ 49,472 $ 6,487 13.1
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Operating Income (Loss)
ICS Learning Systems before amortization $ (4,359) $ (1,065) $ (3,294) (309.3)
Amortization of prior year deferred marketing (1,311) (7,369) 6,058 82.2
_________ _________ ________
ICS Learning Systems (5,670) (8,434) 2,764 32.8
Steck-Vaughn Publishing 821 1,225 (404) (33.0)
NETG (4,994) (4,549) (445) (9.8)
Other 166 (268) 434 n/m
_________ _________ ________
Total Segment Operating Loss (9,677) (12,026) 2,349 19.5
General corporate expenses (1,942) (2,032) 90 4.4
Interest expense (1,977) (1,498) (479) (32.0)
Investment income 409 558 (149) (26.7)
Other income 236 95 141 148.4
_________ _________ ________
Loss Before Tax Benefit, Minority
Interest and Discontinued Operations (12,951) (14,903) 1,952 13.1
Tax benefit (4,533) (3,651) (882) (24.1)
_________ _________ ________
Loss Before Minority Interest and
Discontinued Operations (8,418) (11,252) 2,834 25.2
Minority interest 90 122 (32) (26.2)
_________ _________ ________
Loss From Continuing Operations (8,508) (11,374) 2,866 25.2
Loss from discontinued operations, net - (2,008) 2,008 n/m
_________ _________ ________
Net Loss $ (8,508) $ (13,382) $ 4,874 36.4
========= ========= ========
<FN>
n/m: Not meaningful.
</FN>
</TABLE>
10<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Detailed Segment Operating Results:
<TABLE>
<CAPTION>
(dollars in thousands) Three Months Ended March 31, 1995
_____________________________________________ ______________________________________________________________
ICS Steck-
Learning Vaughn
Total Systems Publishing NETG Other
_________ _________ __________ _________ _________
<S> <C> <C> <C> <C> <C>
Net Revenues $ 55,959 $ 33,944 $ 11,147 $ 10,016 $ 852
Costs and Expenses:
Contract course materials and service costs 17,596 12,573 20 4,524 479
Publishing costs and materials 3,356 - 3,356 - -
Product development 5,055 608 2,306 2,141 -
Selling and promotion 30,384 22,445 3,420 4,377 142
General and administrative 7,374 2,635 1,040 3,634 65
Amortization of prior period deferred marketing 1,311 1,311 - - -
Amortization of acquired intangible assets 560 42 184 334 -
_________ _________ __________ _________ _________
Segment Operating Income (Loss) $ (9,677) $ (5,670) $ 821 $ (4,994) $ 166
========= ========= ========== ========= =========
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) Three Months Ended March 31, 1994
_____________________________________________ ______________________________________________________________
ICS Steck-
Learning Vaughn
Total Systems Publishing NETG Other
_________ _________ __________ _________ _________
<S> <C> <C> <C> <C> <C>
Net Revenues $ 49,472 $ 28,285 $ 9,475 $ 11,039 $ 673
Costs and Expenses:
Contract course materials and service costs 13,870 8,466 15 4,771 618
Publishing costs and materials 2,837 - 2,837 - -
Product development 4,694 742 1,603 2,349 -
Selling and promotion 25,433 18,009 2,811 4,483 130
General and administrative 6,873 2,125 904 3,651 193
Amortization of prior period deferred marketing 7,369 7,369 - - -
Amortization of acquired intangible assets 422 8 80 334 -
_________ _________ __________ _________ _________
Segment Operating Income (Loss) $ (12,026) $ (8,434) $ 1,225 $ (4,549) $ (268)
========= ========= ========== ========= =========
</TABLE>
11
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Three Months Ended March 31, 1995 Compared to Three Months Ended March 31,
1994
Revenues of $55,959,000 for the three months ended March 31, 1995 were
$6,487,000, or 13.1% higher than revenues of $49,472,000 in the prior year.
Loss from continuing operations was $8,508,000, or $.29 per share, compared
to a loss of $11,374,000, or $.38 per share, in 1994. Net loss for the
period was $8,508,000 or $.29 per share compared to a net loss of $13,382,000
or $.45 per share in the prior year. The consolidated statements of
operations and cash flows for the first quarter of 1994 have been restated to
reflect the Company's Education Centers subsidiary as a discontinued
operation due to a plan of disposition adopted during the second quarter of
1994.
ICS Learning Systems:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
_____________________ Percent
(dollars in thousands) 1995 1994 Change
______________________________________________ _________ _________ _________
<S> <C> <C> <C>
Revenues:
Traditional Distance Education - Domestic $ 20,145 $ 15,501 30.0%
Traditional Distance Education - International 10,497 9,838 6.7
Industrial and Business 2,048 1,905 7.5
MicroMash 1,254 1,041 20.5
_________ _________
Total Revenues $ 33,944 $ 28,285 20.0
========= =========
New enrollments 116,358 97,552 19.3
Advertising, selling and promotion spending
(traditional business only) $ 21,203 $ 17,142 23.7
Future tuition revenue at March 31 <F1> $ 176,194 $ 141,207 24.8
<FN>
<F1> Approximately 45% of future tuition revenue is realized into revenue.
</FN>
</TABLE>
12
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
ICS Learning Systems (continued):
ICS revenues increased 20% in the quarter due primarily to a strong
performance in the domestic operation. Increased traditional revenues at
the domestic operation resulted primarily from a higher carry-in of active
students into 1995 as compared to the carry-in of students into 1994
(437,100 in 1995 versus 357,500 in 1994) and new enrollment increases of
24.8% during the quarter. The domestic new enrollment increase resulted
from the expanded telesales efforts, which represented 47.7% of total
domestic new enrollments in 1995 as compared to 27.1% in the prior year
period. In an effort to better qualify students which is expected to
improve student completion rates, the domestic operations initiated higher
down payments and instituted credit reviews for new enrollments in certain
courses. Although these efforts had an adverse effect on new enrollment
conversion rates, ICS expects that these steps will ultimately increase
revenues and the profitability of new enrollments. International revenues
increased 6.7% during the quarter with revenue increases in Australia/New
Zealand, Singapore, Canada and International Mail Sales (IMS), partially
offset by revenue decreases in the United Kingdom. Despite the increase
in revenue, international new enrollments declined 8.9% during the
quarter.
ICS operating loss improved $2,764,000 during the period due to the
reduction in amortization of prior year deferred marketing of $6,058,000.
Absent the effects of the amortization of prior year deferred marketing,
ICS operating loss increased $3,294,000. The increase in operating loss
is due primarily to an increase in advertising, selling and promotion
expenses of $4,436,000 and increased course materials costs primarily
related to computer related courses. Selling and promotion expenses
increased primarily in the traditional domestic operations, resulting in
future tuition revenue increases during the quarter of $13,144,000 or
8.1%; based on historical experience, approximately 45% will be realized
into revenue. Historically, ICS' advertising, selling and promotion
spending has been the highest in the first quarter. During 1994, the
percentage of advertising, selling and promotion spending for the
traditional distance education markets was approximately as follows: 1st
Quarter - 30%, 2nd Quarter - 22%, 3rd Quarter - 29% and 4th Quarter - 19%.
In addition, MicroMash experienced higher selling and promotion expenses
due to increased marketing for newly developed products and courses.
13
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Steck-Vaughn Publishing:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
_____________________ Percent
(dollars in thousands) 1995 1994 Change
______________________________________________ _________ _________ _________
<S> <C> <C> <C>
Revenues:
Elementary/High School $ 5,820 $ 4,934 18.0%
Adult Education 2,865 2,454 16.7
Library 2,462 2,087 18.0
_________ _________
Total Revenues $ 11,147 $ 9,475 17.6
========= =========
</TABLE>
Steck-Vaughn revenues increased $1,672,000 or 17.6% over the prior year
period due primarily to revenue increases in the northeast and
mid-Atlantic states, which experienced adverse weather conditions,
significantly disrupting the efforts of the direct sales force during the
first quarter of 1994. Steck-Vaughn experienced higher revenues in all
major product lines during the quarter with the largest increase in the
elementary/high school product line. The El/Hi products benefited from
the addition of the Berrent Publications product line and growth in Social
Studies, Reading, and Language Arts products. Adult education products
also experienced strong increases during the quarter due to growth in
sales of Adult Basic Education and English as a Second Language, which
have risen as a result of new and revised products introduced late in
1994.
14
<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Steck-Vaughn Publishing (continued):
Steck-Vaughn operating income decreased in the first quarter as compared
to the prior year period primarily due to higher publishing costs and
materials and product development expenses. Publishing costs and materials
increased during the quarter due to the higher volume and a rise in cost
of paper. Publishing costs and materials also increased due to higher
trade sales and sales of Magnetic Way products, all of which carry a
higher cost of sales. Product development expenses increased during the
quarter due to a planned increase in spending partially caused by the
addition of Berrent products and higher plant amortization resulting from
the increased sales of recently revised products. These 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's first
printing.
NETG:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
_____________________ Percent
(dollars in thousands) 1995 1994 Change
______________________________________________ _________ _________ _________
<S> <C> <C> <C>
Revenues:
Domestic revenues $ 5,369 $ 7,875 (31.8)%
International revenues 4,647 3,164 46.9
_________ _________
Total Revenues $ 10,016 $ 11,039 (9.3)
========= =========
</TABLE>
NETG revenues decreased $1,023,000 during the quarter as a result of lower
revenues at the domestic operations, partially offset by increased
international revenues. New orders during the period, however, increased
$1,280,000 or 15.8% when compared to the prior year period primarily due
to increases in the UK. Despite a slight increase in domestic new orders
of 5.9%, domestic revenues decreased due primarily to a lower carry-in of
deferred revenue backlog into 1995 as compared to the carry-in into 1994.
Operating loss of $4,994,000 in the period increased $445,000 when
compared to the prior year period primarily as a result of the decrease in
revenues. Operating expenses decreased in the period due to continued
cost control in all areas.
15<PAGE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
Operating results of the ICS and NETG foreign operations by geographic region
are discussed above. The first quarter foreign currency exchange gains,
recorded to other income, were $239,000 compared to gains of $95,000 in the
prior year.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash, investment securities
and cash provided from operations. At March 31, 1995, the Company had
$27,499,000 in cash and investment securities of which $16,716,000 was held
in the account of Steck-Vaughn.
As of March 31, 1995, the Company had a revolving bank credit agreement in
the amount of $13,500,000. During the quarter the Company increased its
borrowings under the credit facility by $3,000,000 to $8,000,000. The
Company also has an intercompany credit facility with Steck-Vaughn in the
amount of $10,000,000 of which none was outstanding.
For the three months ended March 31, 1995, negative net cash from operating
activities of $1,345,000 was $301,000 higher than the prior year period. Net
cash flows for 1994 were impacted by the acquisition of MicroMash in the
amount of $3,870,000, while cash outflows of $379,000 during the 1995 period
at the Education Centers (discontinued operation) improved $2,522,000 over
the prior year period.
The Company expects that cash, investment securities, the bank and
Steck-Vaughn credit facilities, cash provided from operations and the
continued funding of the Education Centers' students under government student
financial aid programs, subject to the timely disposition of schools, will be
sufficient to provide for planned working capital requirements, debt service,
and capital expenditures for the foreseeable future.
16
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<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) See Exhibit Index following this Form 10-Q.
(b) No reports on Form 8-K were filed for the period for which
this report is filed.
17
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<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
NATIONAL EDUCATION CORPORATION
Date: May 10, 1995
By /s/ Keith K. Ogata
___________________________
Keith K. Ogata
Vice President, Chief Financial Officer
and Treasurer
18
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<PAGE>
INDEX TO EXHIBITS
(Item 6(a))
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
_______ ___________ ____________
<S> <C> <C>
3.1 Restated Certificate of Incorporation of
the Company <F3> . . . . . . . . . . . . . . . . . . . <F1>
3.2 By-Laws of the Company, as amended <F4>. . . . . . . . <F1>
10.1<F2> National Education Corporation Retirement Plan
(Restated as of January 1, 1989 and as Amended
through January 1, 1992) <F5>. . . . . . . . . . . . . <F1>
10.2 National Education Corporation Retirement Plan
Trust <F6> . . . . . . . . . . . . . . . . . . . . . . <F1>
10.3<F2> Advanced Systems, Incorporated 1984 Stock
Option and Stock Appreciation Rights Plan <F7> . . . . <F1>
10.4<F2> 1986 Stock Option and Incentive Plan, as
amended <F8> . . . . . . . . . . . . . . . . . . . . . <F1>
10.5<F2> 1990 Stock Option and Incentive Plan <F9>. . . . . . . <F1>
10.6<F2> 1991 Directors' Stock Option Plan <F10>. . . . . . . . <F1>
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) <F11> . . . . . . . . . . . . . . . . . . . . <F1>
10.8 Addendum No. 1 to Rights Agreement, dated
August 5, 1991 <F12> . . . . . . . . . . . . . . . . . <F1>
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 <F13>. . . . . . . . . . . . . . . <F1>
10.10 Tripartite Agreement, dated as of May 31, 1990,
among National Education Corporation, Conti-
nental Bank as Resigning Trustee, and IBJ
Schroder Bank & Trust Company as Successor
Trustee <F14>. . . . . . . . . . . . . . . . . . . . . <F1>
19
<PAGE>
<PAGE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
_______ ___________ ____________
<S> <C> <C>
10.11 National Education Corporation Purchase Agree-
ment, Senior Subordinated Convertible Deben-
tures, dated as of February 15, 1991 <F15> . . . . . . <F1>
10.12<F2> National Education Corporation Supplemental
Executive Retirement Plan, as amended <F16>. . . . . . <F1>
10.13<F2> Supplemental Benefit Plan for Non-Employee
Directors <F17>. . . . . . . . . . . . . . . . . . . . <F1>
10.14 Intercompany Agreement between National
Education Corporation and Steck-Vaughn
Publishing Corporation, dated June 30, 1993 <F18>. . . <F1>
10.15 Tax Sharing Agreement between National
Education Corporation and Its Direct and
Indirect Corporate Subsidiaries, dated
January 1, 1993 <F19>. . . . . . . . . . . . . . . . . <F1>
10.16 Asset Purchase Agreement between Steck-Vaughn
Company and Creative Edge Inc., dated as of
April 26, 1993 <F20> . . . . . . . . . . . . . . . . . <F1>
10.17 $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) <F21>. . . . . <F1>
10.18 First Amendment to Intercompany Agreement,
dated June 10, 1994, between National Education
Corporation and Steck-Vaughn Publishing
Corporation <F22>. . . . . . . . . . . . . . . . . . . <F1>
10.19 $10,000,000 Credit Agreement between Steck-Vaughn
Company and NationsBank of Texas, dated as of
June 10, 1994 <F23>. . . . . . . . . . . . . . . . . . <F1>
10.20 Revolving Line of Credit Note and Option
Agreement between National Education Corporation and
Steck-Vaughn Publishing Corporation, dated
February 28, 1995 <F24>. . . . . . . . . . . . . . . . <F1>
20
<PAGE>
<PAGE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
_______ ___________ ____________
<S> <C> <C>
10.21<F2> Executive Employment Agreement between National
Education Corporation and Sam Yau <F25>. . . . . . . .
11.1 Calculation of Primary Earnings Per Share <F25>. . . .
11.2 Calculation of Fully Diluted Earnings Per Share <F25>.
27.1 Financial Data Schedule <F25>. . . . . . . . . . . . .
<FN>
<F1> incorporated by reference from a previously filed document
<F2> denotes management contract or compensatory plan or arrangement
<F3> Incorporated by reference to Exhibit 19-2 filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1987.
<F4> Incorporated by reference to Exhibit 10 filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1990.
<F5> 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.
<F6> Incorporated by reference to Exhibit 10(b) filed with Registrant's
Registration Statement on Form S-8 (No. 2-86904), filed October 3,
1983.
<F7> 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.
<F8> 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.
<F9> Incorporated by reference to Exhibit "A" filed with Registrant's 1990
Proxy Statement, filed April 2, 1990.
<F10> Incorporated by reference to Exhibit "A" filed with Registrant's 1991
Proxy Statement, filed April 1, 1991.
<F11> 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.
21
<PAGE>
<PAGE>
<F12> 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.
<F13> 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.
<F14> Incorporated by reference to Exhibit 4 filed with Registrant's
Quarterly Report on Form 10-Q for the quarter ended June 30, 1990.
<F15> Incorporated by reference to Exhibit 4 filed with Registrant's Current
Report on Form 8-K, dated February 20, 1991, filed February 27, 1991.
<F16> 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.
<F17> 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.
<F18> 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.
<F19> 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.
<F20> 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.
<F21> Incorporated by reference to Exhibit 10.18 filed with Registrant's
Annual Report on Form 10-K for the year ended December 13, 1994, filed
March 30, 1995.
<F22> 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 on August 11, 1994.
<F23> 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 on August 11, 1994.
<F24> 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.
<F25> Filed herewith.
</FN>
</TABLE>
22
<PAGE>
<PAGE>
EXHIBIT 10.21
EXECUTIVE EMPLOYMENT AGREEMENT
THIS EXECUTIVE EMPLOYMENT AGREEMENT ("Agreement") is made and entered
into as of March 1, 1995, by and between CHING YUEN ("SAM") YAU, currently
residing at 10 Hexham, Irvine, California 92715 (hereinafter referred to as
"Executive"), and NATIONAL EDUCATION CORPORATION (hereinafter referred to as
"Corporation").
WHEREAS:
A. The Corporation is a corporation organized under the laws of
the State of Delaware, and is engaged in the business of operating training
and learning centers, publishing educational and training materials, and the
development, sale, and marketing of educational goods and services; and
B. Executive is a person whose skills, experience and training
are required by the Corporation; and
C. Executive wishes to accept the employment offered by the
Corporation on the terms and conditions hereinafter set forth.
NOW THEREFORE, the parties hereto, intending to be legally bound, do
hereby agree as follows:
1. EMPLOYMENT
1.1 Position and Duties
The Corporation does hereby employ Executive and
Executive hereby accepts such employment as President and Chief Executive
Officer of Corporation upon the terms and provisions set forth in this
Agreement. Executive shall report only to the Board of Directors of the
Corporation ("the Board") and to the Executive Committee of the Board and,
subject to the directions of the Board or the Executive Committee, shall have
general supervision, direction and control of the business, officers and
employees of the Corporation. All officers and employees of the Corporation
shall report directly or indirectly to Executive. For the avoidance of
doubt, subject to the approval of the Board, Executive shall have full
responsibility and authority to hire, discharge, discipline, promote and
compensate employees of the Corporation. Furthermore, Executive shall have
full general, managerial and financial authority of the Corporation, subject
to such directions and control as the Board may specify from time to time.
Executive shall devote his full working time and effort to the business and
affairs of the Corporation as necessary to faithfully discharge the duties
and responsibilities of his office.
1
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<PAGE>
Executive may participate in other business and act as a
director of any profit or nonprofit corporation, so long as such activity is
not competitive with the business of the Corporation in any material respect
and does not materially detract from the performance of his duties as a full
time executive of the Corporation.
1.2 Board Seat
During the term hereof, including any extensions,
Executive shall be a member of the Board of Directors of the Corporation and
a member of the Executive Committee of the Board.
2. TERM
This Agreement shall continue in full force and effect for a
period (the "Term") which shall commence as of March 1, 1995 (the "effective
date") and shall continue for a period of three (3) years, unless sooner
terminated as hereafter provided. Thereafter, this Agreement will
automatically renew for annual one year periods, unless either party gives to
the other written notice at least ninety (90) days prior to the commencement
of the next year, of such party's intent not to renew this Agreement.
3. COMPENSATION
3.1 Base Salary
As compensation for the services to be performed by
Executive during the continuance of this Agreement, the Corporation shall pay
Executive a base salary of not less than $350,000 per year for each year of
his employment hereunder, payable in accordance with Corporation practices in
effect from time to time, but not less often than monthly (the "Base
Salary"). For the period from March 1 to April 30, 1995, the Corporation
shall be credited with amounts paid to Executive on a consulting basis and
Executive agrees to accept adjustment of his consulting fee to an amount
equivalent to the pro rata portion of his Base Salary for such period. Base
Salary shall be payable in substantially equal installments and reduced on a
pro rata basis for any fraction of a year or month during which Executive is
not so employed.
3.2 Bonus
Executive shall be entitled to earn a bonus in an
amount from thirty-five percent (35%) up to one hundred forty percent (140%)
of Base Salary per year (the "Bonus"), based upon achievement of financial
and other goals established by the Board based on the recommendations of
Executive. The target bonus will be seventy percent (70%) of Base Salary
upon achievement of the established goals with a lesser or greater amount due
in the event the goals are not fully achieved or exceeded, as the case may
be. In the event that an agreed percent of the agreed-upon goals is not
achieved, Executive shall not be entitled to a bonus unless authorized by the
Board in its discretion. For the initial year of this Agreement the Bonus
shall be prorated from March 1, 1995, but the minimum bonus for the initial
2
<PAGE>
<PAGE>
year shall not be less than seventy percent (70%) of Base Salary. Any such
Bonus earned by Executive shall be paid annually within ninety (90) days
after the conclusion of the Corporation's fiscal year or, upon mutual
agreement of the parties, in another fashion.
3.3 Additional Benefits
Executive shall be entitled to all rights and
benefits for which Executive is otherwise entitled under any pension plan,
profit sharing plan, life, medical, dental, disability or other insurance
plan or policy or other similar plan or benefit the Corporation may provide
for senior executives generally and for employees of the Corporation
generally from time to time in effect during the term of this Agreement
(collectively, "Additional Benefits"). Executive shall receive financial
planning benefits, private club memberships, participation in the Executive
Medical Plan and the Supplemental Executive Retirement Plan and shall
commence such participation immediately as of May 1, 1995. For the avoidance
of doubt, the benefits granted or afforded to Executive under any such plans
shall be not less than the most favorable benefits granted to the most
favored employee of the Corporation and not less than those provided to
Executive's predecessor as Chief Executive Officer.
3.4 Stock Options
As an additional element of compensation to Executive
in consideration of the services to be rendered hereunder, Employer shall
grant to Executive options to acquire
shares of Corporation's common stock as follows:
(A) An initial option to acquire up to Five Hundred
Thousand (500,000) shares at the closing price on March 17, 1995 vesting in
thirty-five (35) equal monthly increments of 13,889 each commencing June 1,
1995 and continuing on the first of each month thereafter and concluding with
a final installment of 13,885 shares on May 1, 1998. If there is a change of
control as defined below, the option shall fully vest as of that date. The
options shall be treated as incentive stock options to the maximum extent
permissible under the Internal Revenue Code and regulations thereunder and
otherwise as non-qualified stock options and, so long as Executive remains
employed by the Corporation, shall remain exercisable for a period of ten
(10) years from March 17, 1995.
(B) In addition to the foregoing option,
for a 30 day period commencing on May 8, 1995, Executive shall be offered the
following opportunities for equity accumulation:
(i) The Corporation shall offer
to Executive the right to purchase from the Corporation up to Two Hundred
Forty Thousand (240,000) shares of Corporation common stock at the closing
price as of March 17, 1995. The purchase price shall be funded by a loan
from the Corporation bearing interest at the higher of i) Corporation's cost
of funds from time to time or ii) the minimum interest rate required under
Internal Revenue Code Regulations for the month of May, 1995; provided,
however, that the interest rate equivalent to the Corporation's cost of funds
shall apply only in the case where Corporation incurs indebtedness for the
3
<PAGE>
<PAGE>
specific purpose of funding the loan to Executive. The loan shall be secured
by the Corporation common stock acquired but with full recourse to Executive.
The loan shall provide for simple interest payable annually and shall further
provide that twenty-five percent (25%) of any bonus payment shall be applied
in satisfaction of principal on the loan until the loan is fully repaid;
provided however, any such payment from bonus proceeds shall be reduced to
the extent that Executive has prepaid all or any portion of such amount prior
to the payment of a bonus award to Executive. Otherwise, the loan shall not
require repayment prior to the earlier of the disposition of the securities
or ninety (90) days following the termination of Executive's employment with
the Corporation. The terms of the loan shall be substantially in accordance
with the form of Note and Stock Pledge Agreement attached hereto as Exhibit
A.
(ii) For each share of Corporation
common stock purchased by Executive pursuant to paragraph 3.4(B)(i) above,
the Corporation shall grant an option to purchase two and one half (2-1/2)
shares of Corporation common stock at the closing price per share as of March
17, 1995 up to an aggregate of Six Hundred Thousand (600,000) shares.
Subject to Executive's continued employment with the Corporation: (x) The
first one-third (1/3) of such option (up to 200,000 shares) shall vest when
the closing market price per share of the Corporation's common stock (as
adjusted for stock splits, stock dividends, recapitalizations, mergers and
similar events) for a period of four (4) consecutive weeks ("Average Stock
Price") equals Six Dollars ($6) or more per share; (y) An additional
one-third (1/3) of such option shares shall vest when the Average Stock Price
equals Nine Dollars ($9) or more per share; and, (z) The final one-third
(1/3) of such option shares shall vest when the Average Stock Price equals
Twelve Dollars ($12) or more per share. In all events, subject to
Executive's continued employment with the Corporation, such option shall
fully vest on November 1, 2004, and shall remain exercisable for six (6)
months thereafter.
(C) The specific terms of the
above-referenced options and purchase arrangements shall be as set forth in
the separate option and purchase agreements. To the extent that Corporation
does not have available options in its option plans to grant to Executive as
contractually committed hereinabove, Corporation agrees to amend its plans
and/or adopt new plans as promptly as possible to provide sufficient options
for such option grants. Corporation shall use its best efforts to prepare
and submit for approval by its directors and its shareholders at the 1995
Annual Meeting of Shareholders a new option plan which would provide
sufficient options to allow Corporation to meet its contractual obligations
to Executive herein and to provide for potential grants of options to other
key employees.
(D) Executive shall be considered for
additional grants of options, SARs, phantom stock rights and any similar
option or securities compensation when and as such grants are considered for
other executives or employees of the Corporation, but any grant is wholly at
the discretion of the Board.
4
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<PAGE>
(E) For all purposes of this Agreement, a
"change of control" shall mean and shall be deemed to have occurred if:
(1) There shall be consummated (x)
any consolidation or merger of the Corporation with another corporation or
entity and as a result of such consolidation or merger, a majority of the
outstanding voting securities of the surviving or resulting corporation or
entity shall be owned in the aggregate by persons who were not stockholders
of the Corporation prior to the merger or consolidation (excluding the
affiliates of the acquiror who acquired their shares within one hundred
eighty (180) days prior to such merger or consolidation), or (y) any sale,
lease, exchange or other transfer (or in one transaction or a series of
related transactions) of all, or substantially all, of the assets of the
Corporation, or
(2) the stockholders of the
Corporation shall have approved any plan or proposal for the liquidation or
dissolution of the Corporation; or
(3) any "person" (as such term is
used in the Sections 13(d) and 14(d)(2) of the Securities Exchange Act of
1934), shall have become the beneficial owner (within the meaning of Rule
13d-3 under the Exchange Act) of forty percent (40%) or more of the
Corporation's outstanding common stock, without the prior approval of the
Board, or
(4) during any period of two (2)
consecutive years, individuals who at the beginning of such period
constituted the entire Board of Directors shall have ceased for any reason to
constitute a majority thereof unless the election, or the nomination for
election by the Corporation's stockholders, of each new Director was approved
by vote of the Directors then still in office who were Directors at the
beginning of the period.
3.5 Periodic Review
The Corporation shall review Executive's Base Salary,
Bonus, Stock Options, and Additional Benefits then being provided to
Executive not less frequently then every twelve (12) months. Following such
review, the Corporation may, in its discretion, increase the Base Salary,
Bonus, Stock Options and Additional Benefits, but Corporation shall not
decrease the Base Salary, Bonus, Stock Options, and Additional Benefits
during the time Executive serves as an employee of this Corporation.
3.6 Reimbursements
3.6.1 General. Executive shall be promptly
reimbursed by the Corporation for amounts actually expended by Executive in
the course of performing duties for the Corporation where Executive tenders
receipts or other documentation reasonably substantiating the amounts as
required by the Corporation. As a condition of employment hereunder,
Executive shall entertain business prospects, provide and maintain an
appropriate automobile, maintain and improve Executive's professional skills
by participating in continuing education courses and seminars, and maintain
5
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<PAGE>
memberships in civic groups, professional societies and fraternal
organizations and Corporation agrees to reimburse Executive therefor
consistent with criteria under the Internal Revenue Code. The Corporation
shall pay directly, or reimburse Executive for all Executive's legal fees and
costs up to a maximum of $20,000.00, in connection with this Agreement, his
consulting and prior agreements with the Corporation, the terms of employment
and related agreements and related negotiations.
3.6.2 Business Expenses. During the term of this
Agreement to the extent that such expenditures satisfy the criteria under the
Internal Revenue Code for deductibility by the Corporation (whether or not
fully deductible by the Corporation) for federal income tax purposes as
ordinary and necessary business expenses, Corporation agrees to and shall
reimburse Executive promptly for all reasonable business expenditures
including travel, entertainment, parking, business meetings, professional
dues and the costs of and dues associated with maintaining club memberships
and expenses of education, made or substantiated in accordance with policies,
practices and procedures established from time to time by the Corporation
generally with respect to other senior executives/managers and other
employees of the Corporation and incurred in the pursuit and furtherance of
the Corporation's business and good will.
3.6.3 Travel. In connection with any travel by
Executive in the performance of his duties hereunder, Corporation shall
advance to Executive an amount equivalent to the reasonable and necessary
expenses of such travel and appropriate to Executive's position in
Corporation. For this purpose, airline travel arrangements shall be deemed
reasonable, necessary and appropriate for domestic United States travel
(except coast to coast flights) if Executive travels standard "business
class" or equivalent; all international or coast to coast (U.S.) flights
shall be at least "business class" or equivalent.
3.6.4 Automobile Expenses. During the term of this
Agreement, Corporation shall provide Executive with a monthly vehicle
allowance but shall not treat Executive less favorably than his predecessor
as Chief Executive Officer or other senior executives. In addition,
Corporation shall pay or reimburse Executive for reasonable and necessary
costs of all automobile insurance (liability or otherwise), fuel, lubricants
and automobile maintenance and repair incurred by Executive hereunder.
3.6.5 Entertainment. Executive shall be expected to
entertain those with whom the Corporation conducts business both at
Executive's home and at public restaurants, bars, theaters, etc. The
Corporation shall pay Executive for or promptly reimburse Executive for the
reasonable and necessary costs of such entertainment.
3.6.6 Credit Cards. To assist Executive in the
performance of his duties, Corporation shall provide Executive with a
Corporation credit card or cards for use in paying for any and all
reimbursable expenses.
6
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3.6.7 Relocation. In the event that the Corporation
relocates its headquarters from Orange County, California, Executive shall in
no event be required to move his residence from Orange County, California,
and shall be allowed to function as Chief Executive Officer from an
appropriate and satisfactory office and staff provided to him in Orange
County. In such event, Executive will increase his travel as necessary to
carry out his functions. The Corporation will provide a satisfactory
apartment and automobile for Executive's use in its new headquarters location
and will reimburse all expenses of his stays in such location. The provision
of such benefits will be tax protected and grossed up to the extent necessary
to avoid tax or other cost to Executive.
3.7 Deductions
There shall be deducted from Executive's gross
compensation appropriate amounts for standard employee deductions (e.g.,
income tax withholding, social security and state disability insurance) and
any other amounts authorized for deduction by Executive.
4. VACATION
Executive shall be entitled to not less than the amount of
paid vacation enjoyed by his predecessor for each twelve (12) month period of
employment which shall accrue on a pro rata basis from the date employment
commences under this Agreement. Subject to the foregoing minimum vacation,
Executive shall be entitled to paid vacation, holidays and leave time in
accordance with the plans, policies, programs and practices in effect
generally with respect to other senior employees of the Corporation.
Executive shall not forfeit or cease to accrue any paid vacation, if he is
unable to or does not use it, in any year or period of years during the term
hereof, or any extensions thereof, up to the maximum vacation accrual
currently permitted by the Corporation for its Chief Executive Officer.
5. INDEMNIFICATION
The Corporation shall, to the maximum extent permitted by
law, indemnify and hold Executive harmless from and against any expenses,
including reasonable attorney's fees, judgements, fines, settlements and
other amounts actually and reasonably incurred in connection with any
proceeding arising out of, or related to, Executive's employment by the
Corporation. The Corporation shall advance to Executive any expenses,
including reasonable attorneys' fees and costs of settlement, reasonably
incurred in defending any such proceeding to the maximum extent permitted by
law. The Corporation will include Executive under all directors' and
officers' liability insurance policies and will use its best efforts to
maintain existing coverage levels, assuming continuation of insurance
availability at commercially reasonable rates.
7
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6. TERMINATION OF EMPLOYMENT
Employment shall terminate upon the occurrence of any of the
following events:
6.1 Expiration of Term
Upon at least ninety (90) days prior written notice
by Corporation to Executive terminating this Agreement prior to the
expiration of the original term or an extended term as specified in Section
2; upon such termination, Executive shall be entitled to the compensation
provided in paragraph 6.4 payable as provided therein.
6.2 Mutual Agreement
Whenever the Corporation and Executive mutually agree
in writing to termination;
6.3 Termination for Cause
At any time for cause. For purposes of this
Agreement, "cause" shall be defined as any of the following, provided
however, that the board of directors of the Corporation by a duly adopted
resolution has determined the presence of such cause in good faith: (i)
Executive's material breach of any of his duties and responsibilities under
this Agreement (other than as a result of incapacity due to disability); (ii)
Executive's conviction by, or entry of a plea of guilty in, a court of
competent jurisdiction for a felony; or, (iii) Executive's commission of an
act of fraud or willful misconduct or gross negligence in the performance of
his duties.
Notwithstanding the foregoing, Executive shall not be
terminated for "cause" pursuant to the clauses above, unless and until
Executive has received notice of the proposed termination for cause including
details on the bases for such termination and has had an opportunity to be
heard before at least a majority of members of the board of directors of the
Corporation. Executive shall be deemed to have had such an opportunity if
written or telephonic notice is given at least ten (10) days in advance of a
meeting.
6.4 Termination without Cause
Without cause. Notwithstanding any other provision
of this section, the Corporation shall have the right to terminate
Executive's employment with the Corporation without cause at any time, but
any such termination shall be without prejudice to Executive's rights to
receive Base Salary, Bonus compensation and Additional Benefits provided
under this Agreement for two (2) years and, except as provided in the proviso
below, Executive shall be vested in all options granted to him pursuant to
paragraph 3.4(A) above, and shall have one (1) month for each month of
Executive's tenure, with a minimum of six (6) months and a maximum of one (1)
year, to exercise all vested options; provided, further, if the Board
determines that Executive's employment is being terminated for the reason
8
<PAGE>
<PAGE>
that the shared expectations of Executive and the Board are not being met, in
the Board's judgment, then Executive's vesting rights in options shall be
limited to such additional vesting as shall occur during a period following
the date of termination of Executive's employment equal to the number of
months of Executive's tenure with the Corporation, with a minimum of six (6)
months and a maximum of one (1) year, with the right to exercise for the same
period plus thirty (30) days. The continued vesting and exercise rights
relative to the options granted under paragraph 3.4(B)(ii) shall be subject
to the same limitations as set forth in the immediately preceding sentence
and the further limitation in that the Average Stock Price shall be met. The
Corporation shall provide Executive with senior executive outplacement at an
outplacement or executive search firm of Executive's selection (and
reasonably acceptable to Corporation). If Executive is terminated without
cause, Executive may elect to receive a lump sum payment representing the
aggregate cash compensation (including salary, bonus, auto allowance and any
other cash or equivalent compensation, other than continued vacation
accrual). Such lump sum payment shall be made not later than ten (10) days
after Executive makes such election. In the event of such lump sum election,
all insurance and other noncash benefits shall cease but Executive shall
continue to receive outplacement. Executive shall have the right to "gross
up" protection against any parachute tax treatment of such severance
payments.
6.5 Death/Disability
The death or disability of Executive. For the
purposes of this Agreement, disability shall mean the absence of Executive
performing Executive's duties with the Corporation on a full time basis for a
period of six (6) consecutive months, as a result of incapacity due to mental
or physical illness which is determined to be total and permanent by a
physician selected by the Corporation or its insurers and reasonably
acceptable to Executive or Executive's legal representative. If Executive
shall become disabled, Executive's employment may be terminated by written
notice to Executive. In the event of the death of Executive, all
compensation hereunder shall continue for a period of one (1) year after his
death and shall be paid to his estate or other proper beneficiary at his
death.
6.6 By Executive Without Cause
By Executive at any time upon ninety (90) days'
notice to Corporation. Executive shall not be entitled to any severance in
the event of such a termination.
7. CHANGE OF CONTROL
If there should occur a "change of control" of the
Corporation (or any successor), as defined in paragraph 3.4(E) hereof, and
Executive's employment is terminated (other than by Executive) or Executive
is adversely affected in terms of overall compensation, benefits, title,
authority, reports, reporting relationships, location of employment or
similar matters, then Executive, without limitation on any other rights
9
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<PAGE>
hereunder, may, within six (6) months after receiving notice of such event,
elect to resign from full time service to the Corporation. In the event of
such election by Executive, Executive shall be provided with senior executive
outplacement services at an outplacement or executive search firm of
Executive's selection (and reasonably acceptable to Corporation), and the
cash compensation and all benefits to which Executive is entitled hereunder
shall be discontinued twenty-four (24) months after the date of election (or
earlier, if a lump sum payment of cash compensation is specified).
Executive, at his election, shall have the right to request and, if
requested, shall be paid the full cash value of all amounts of cash
compensation due for the 24-month period (including salary, bonus, auto
allowance, and any other cash or equivalent compensation) in a lump sum, such
lump sum payment shall be made not later than ten (10) days after Executive
gives notice to the Corporation of his lump sum election. In the event of
such election, all insurance and noncash benefits shall cease but Executive
shall receive outplacement as provided in this paragraph. Executive shall
have the right to "gross up" protection against any parachute tax treatment
of such payment. The options granted to Executive under paragraph 3.4(B)(ii)
shall vest to the extent provided in paragraph 6.4 above. In addition, if an
acquiror of 100% of the Corporation stock is itself a publicly held company,
the Corporation shall make reasonable efforts to negotiate that Executive
shall have the right, but not the obligation, to convert all his Corporation
vested options (but with respect to the options granted under paragraph
3.4(B)(ii)), only such options as to which the applicable Average Stock Price
has been met, into options on the acquiror's stock and shall have two (2)
years to exercise those options, but Corporation shall have no obligation to
Executive if it fails to secure such rights or concludes that pursuing such
rights would materially prejudice the interests of the shareholders of the
Corporation.
8. BREAKUP AND DISPOSITION OF CORPORATION ASSETS
If within the first year of Executive's employment, the Board
determines to maximize shareholder value through disposition of a significant
amount of assets or business units of the Corporation, Executive shall assist
Corporation through such disposition and shall thereafter be entitled to
terminate this Agreement within six (6) months of such event (completion of
such disposition) and receive all benefits provided under section 6.4 hereof
but the number of options vested shall be limited to Five Hundred Thousand
(500,000) plus as many additional options as shall vest pursuant to paragraph
3.4(B)(ii) as determined by the highest Average Stock Price achieved
following announcement of such disposition. As used herein, the term
"significant amount of assets or business units of the Corporation" shall
mean either fifty percent (50%) or more of the gross revenues of
Corporation, or fifty percent (50) or more of the operating income of the
Corporation (but calculating total operating income by excluding losses from
business units of the Corporation which are operating at a loss.)
10
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<PAGE>
9. BUSINESS DISCLOSURES AND SOLICITATION OF EMPLOYEES
Executive agrees during the term of his employment by the
Corporation and thereafter that he will not disclose, other than to an
authorized employee, officer, director or agent of the Corporation, any
information relating to the Corporation's business, trade, practices, trade
secrets or knowhow or proprietary information without the Corporation's prior
express written consent. Following termination of Executive's employment,
Executive shall be permitted to continue in his usual occupation and shall
not be prohibited from competing with the Corporation except during the two
(2) year severance period and in the specific industry market segments in
which the Corporation competes and which represent twenty percent (20%) or
more of its revenues. Executive agrees that for a period of one (1) year
following the termination of Executive's employment with the Corporation for
any reason, Executive shall not directly or indirectly solicit, induce,
recruit or encourage any of the Corporation's employees to leave their
employment or take away such employees or attempt to solicit, induce,
recruit, encourage or take away employees of the Corporation.
10. MISCELLANEOUS
10.1 Arbitration
Any dispute, controversy or claim arising out of or
in respect of this Agreement (or its validity, interpretation or
enforcement), the employment relationship or the subject matter hereof shall,
at the request of either party, be settled by binding arbitration in Orange
County, California in accordance with the Commercial Arbitration Rules of the
American Arbitration Association and judgment upon the award rendered by the
arbitrator(s) may be entered in any court having jurisdiction thereof. The
parties shall have rights to discovery as provided in section 1283.05 of the
California Code of Civil Procedure. The prevailing party in any such matter
shall recover all of its costs and expenses, including reasonable attorney's
fees.
10.2 No Third-Party Beneficiaries
This Agreement shall not confer any rights or
remedies upon any person other than the parties and their respective
successors and permitted assigns.
10.3 Entire Agreement
This Agreement (including the documents referred to
herein) constitutes the entire agreement between the parties and supersedes
any prior understandings, agreements, or representations between the parties,
written or oral, to the extent they have related in any way to the subject
matter hereof.
11
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<PAGE>
10.4 Succession and Assignment
This Agreement shall be binding upon and inure to the
benefit of the parties named herein and their respective successors and
permitted assigns. No party may assign either this Agreement or any of his
or its rights, interests, or obligations hereunder without the prior written
approval of the Corporation and Executive; provided, however, that the
Corporation may (i) assign any or all of its rights and interests hereunder
to one or more of its affiliates and (ii) designate one or more of its
affiliates to perform its obligations hereunder (in any or all of which cases
the Corporation nonetheless shall remain responsible for the performance of
all of its obligations hereunder).
10.5 Counterparts
This Agreement may be executed in one or more
counterparts, each of which shall be deemed an original but all of which
together will constitute one and the same instrument.
10.6 Headings
The section headings contained in this Agreement are
inserted for convenience only and shall not affect in any way the meaning or
interpretation of this agreement.
10.7 Notices
All notices, requests, demands, claims, and other
communications required or permitted hereunder will be in writing. Any
notice, request, demand, claim, or other communication hereunder shall be
deemed duly given if (and then two business days after) it is sent by
registered or certified mail, return receipt requested, postage prepaid, and
addressed to the intended recipient as set forth below:
If To Corporation:
National Education Corporation
18400 Von Karman Avenue
Irvine, California 92715
Attention: General Counsel
Facsimile Number: (714) 474-9488
If To Executive:
Sam Yau
10 Hexham
Irvine, California 92715
Facsimile Number: (714) 509-1918
12
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<PAGE>
Any party may send any notice, request, demand, claim, or other communication
hereunder to the intended recipient at the address set forth above using any
other means (including personal delivery, expedited courier, messenger
service, telecopy, telex, ordinary mail, or electronic mail), but no such
notice, request, demand, claim, or other communication shall be deemed to
have been duly given unless and until it actually is received by the intended
recipient. Any party may change the address to which notices, requests,
demands, claims, and other communications hereunder are to be delivered by
giving notice in the manner herein set forth.
10.8 Governing Law
This Agreement shall be governed by, and construed
and enforced in accordance with, the laws of the State of California without
giving effect to any choice or conflict of law provision or rule (whether of
the State of California or any other jurisdiction) that would cause the
application of the laws of any jurisdiction other than the State of
California.
10.9 Amendments and Waivers
No amendment of any provision of this Agreement shall
be valid unless the same shall be in writing and signed by Corporation and
the Executive. No waiver by any party of any default, misrepresentation, or
breach of warranty or covenant hereunder, whether intentional or not, shall
be deemed to extend to any prior or subsequent default, misrepresentation, or
breach of warranty or covenant hereunder or affect in any way any rights
arising by virtue of any prior or subsequent such occurrence.
10.10 Severability
Any term or provision of this Agreement that is
invalid or unenforceable in any situation in any jurisdiction shall not
affect the validity or enforceability of the remaining terms and provisions
hereof or the validity or enforceability of the offending term or provision
in any other situation or in any other jurisdiction.
13
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<PAGE>
/
/
/
/
/
/
/
/
/
/
/
/
/
IN WITNESS THEREOF, the parties hereto have executed this
Agreement as of the date first above written.
"CORPORATION":
NATIONAL EDUCATION CORPORATION
By:______________________________
Its:__________________________
"EXECUTIVE":
________________________________
SAM YAU
14
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<PAGE>
EXHIBIT A
FORM OF NOTE AND STOCK PLEDGE AGREEMENT
$720,000.00 Irvine, California
May ___, 1995
PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned ("Maker") hereby promises
to pay to NATIONAL EDUCATION CORPORATION, a Delaware corporation, or order
("Holder") at Irvine, California, the sum of Seven Hundred Twenty Thousand
Dollars ($720,000.00), together with interest from the date hereof on the
unpaid principal at the rate of _________________ percent (___%) per annum
as follows:
a) Interest only annually on May 1 of 1996 and May 1 of
each year thereafter;
b) Principal shall be paid upon the payment of bonus income
from Holder to the extent of twenty-five percent (25%) of the gross amount of
such bonus; provided, however, Maker shall be credited with the amount of any
principal prepaid by Maker during the year prior to the bonus payment and not
previously credited to Maker, and to such extent the payment from any bonus
income shall be reduced;
c) Principal and accrued interest shall be paid upon
sale of all or any portion of the underlying security in an amount equal to
the proceeds of said sale, up to the principal balance owed and accrued
interest thereon: and
d) Principal and accrued interest shall be paid in full
upon the earlier of: (i) Ninety (90) days following the date of termination
of Maker's employment with Holder; or (ii) on May 1, 2001.
The undersigned shall have the right to prepayment of
principal and interest in full or in part at any time or from time to time
without premium or penalty.
Should default be made in any payment when due which shall
remain uncured thirty (30) days after notice in writing to Maker from Holder,
the whole sum of principal and interest shall become due immediately at the
option of Holder of this Note. Principal is payable in the lawful money of
the United States and such payment shall be made to Holder at Irvine,
California, or such other place as Holder shall designate in writing.
1
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<PAGE>
This Note is secured by a Pledge Agreement of even date
herewith by and between Maker, as Pledgor, and Holder, as Pledgee and is
entered into pursuant to that Stock Purchase and Option Agreement between
Maker and Holder dated as of May ____, 1995.
The undersigned further agrees that in the event that Holder
exercises its rights under the Pledge Agreement due to default on this Note
and if upon disposition of the collateral there is a deficiency owing, Holder
shall have the right to offset compensation and other amounts due Maker from
Holder to satisfy any such deficiency of principal, interest and other
amounts due under this Note.
The undersigned promises to reimburse Holder hereof for any
and all costs, including reasonable attorneys' fees and court costs, which
Holder may incur in collecting the obligation due hereunder, whether or not
suit is filed thereon.
The undersigned does hereby waive presentment, demand,
protest and notice of protest.
/s/ Sam Yau
_________________________
SAM YAU
2
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<PAGE>
STOCK PLEDGE AGREEMENT
SAM YAU, as "PLEDGOR", does hereby deposit with
_________________________________, as "PLEDGE HOLDER" for the pledgee herein
and does hereby pledge to NATIONAL EDUCATION CORPORATION as "PLEDGEE", as
collateral security for the payment and full, faithful, true and exact
performance and observance of all of the covenants and conditions of PLEDGOR
with regard to that certain Promissory Note ("Note") dated May_________,
1995, delivered pursuant to the terms of that Stock Purchase and Option
Agreement among PLEDGOR and PLEDGEE, INC., dated May________, 1995, with
respect to Two Hundred Forty Thousand (240,000) shares of common stock of
PLEDGEE, represented by Certificate No. _______ (the "Collateral") and
PLEDGOR, PLEDGEE and PLEDGE HOLDER further agree as follows:
1. PLEDGOR, upon the default of the PLEDGOR in the timely
payment of principal or interest due pursuant to the Note, hereby authorizes
and empowers PLEDGEE, at its option and without notice to PLEDGOR, except as
specifically herein provided, to collect, sell, assign and deliver, the whole
or any part of the Collateral, or any substitute therefor, or any addition
thereto, at public or private sale, or at any broker's board or stock
exchange, for cash, upon credit, or for future delivery, without the
necessity of the Collateral being present at any such sale, or in view of
prospective purchasers thereof, and without any presentment, demand for
performance, protest, notice of protest, or notice of dishonor, or
advertisement, any such demand or advertisement being expressly waived.
PLEDGEE shall give PLEDGOR and the PLEDGE HOLDER of the Collateral thirty
(30) days notice at the addresses specified herein, of the time and place of
any public or private sale. Upon such sale, PLEDGEE may become the purchaser
of the whole or any part of the Collateral sold, discharged from all claims
and free from any right of redemption. The foregoing is hereby made subject
to the following provisions, to wit: That PLEDGEE shall include in such
notice of the time and place of such sale a statement of the grounds upon
which such default(s) is (are) based; and, that during such thirty (30) day
period, PLEDGOR may cure such default, in which event said sale shall not be
held and it shall be deemed that no such default occurred. In the event of a
sale as described in this paragraph 1, PLEDGOR shall remain obligated for any
deficiency in PLEDGOR's obligation following such sale.
2. In case of any sale or disposal of the Collateral, the
proceeds thereof shall first be applied to the payment of the expenses of
such sale, commissions, attorneys' fee and all charges paid or incurred by
PLEDGEE pertaining to said sale, including any taxes or other charge imposed
by law upon the Collateral and/or the owning, holding or transferring
thereof. Secondly, to pay, satisfy and discharge the duties and obligations
of PLEDGOR as set forth in said Note, and thirdly, to pay the surplus, if
any, to PLEDGOR.
1
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<PAGE>
3. PLEDGEE specifically and expressly reserves the right and
remedy to disregard the security hereof, and to sue on the obligations
secured hereby, and expressly declares that its remedies under this Pledge
Agreement, to cause the sale of the Collateral at public or private sale in
the manner as hereinabove set forth, or to bring an action of foreclosure and
have the Collateral sold at judicial sale, are cumulative, and in addition to
all other remedies that it may possess under the Uniform Commercial Code.
PLEDGEE shall have the right to recover, as a part of any judgment in an
action of foreclosure, commissions, attorneys' fees and all charges and
expenses paid or incurred by it in connection with any such foreclosure sale.
PLEDGEE reserves the right to recover any deficiency judgment arising from
such sale or sales, whether judicial or by any way of pledge sale.
In case of any such sale by PLEDGEE of all or any of said
Collateral on credit, or for future delivery, such property so sold may be
retained by PLEDGEE or the PLEDGE HOLDER hereof until the selling price is
paid by the purchaser. The PLEDGE HOLDER and/or PLEDGEE shall incur no
liability in case of the failure of the purchaser to take up and pay for the
property so sold. In case of any such failure, the said Collateral may be
again, and from time to time, sold.
4. Any stock splits or distributions of stock dividends or other
securities with respect to the Shares, which PLEDGOR may hereafter become
entitled to receive on account of the Shares, shall be and become a part of
the Collateral, and in the event that PLEDGOR shall receive any such
property, he will immediately deliver it to the PLEDGE HOLDER to be held by
him in the same manner as the Collateral originally pledged hereunder.
5. The PLEDGOR hereby irrevocably appoints PLEDGE HOLDER as his
true and lawful attorney, until such time as this Pledge Agreement shall be
cancelled by payment of all of the obligations under the Note or as herein
provided, in order to transfer the Collateral and has executed such lawful
instruments as may be required, in order to effect the same.
6. In case of any adverse claims in respect to the Collateral or
any portions thereof, arising out of any act done or suffered by PLEDGOR,
PLEDGOR promises and agrees to hold harmless and to indemnify PLEDGEE and
PLEDGE HOLDER from and against any losses, liabilities, damages, expense,
costs and reasonable attorneys' fees incurred in or about defending,
protecting or prosecuting the security interest hereby created.
7. PLEDGOR agrees to pay, prior to delinquency, all taxes, liens
and assessments against the Collateral, and upon their failure to do so,
PLEDGEE, at his option may pay any of them, and shall be the sole judge of
the legality or validity thereof and the amount necessary to discharge same.
8. Any foreclosure or failure, or delay by PLEDGEE in exercising
any right, power or remedy hereunder shall not be deemed to be a waiver of
such right, power or remedy, and any single or partial exercise of any right,
power or remedy of PLEDGEE shall continue in full force and effect until such
right, power or remedy is specifically waived by an instrument in writing,
executed by PLEDGEE.
2
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9. When all of said obligations under the Note shall have been
fully performed and satisfied and PLEDGEE shall have received payment in full
of said obligations, and only then, this Pledge Agreement shall be cancelled
and of no further force and effect, and PLEDGEE shall thereupon cause to be
delivered to PLEDGOR the Collateral free and clear of the lien of this
pledge.
10. All provisions of law, in equity, and by statute providing
for, relating to, or pertaining to pledges and the sale of pledged property,
or which prescribe, prohibit, limit or restrict the right to, or conditions,
notice or manner of sale, together with all limitations of law, in equity or
by statute on the right of attachment in the case of secured obligations, are
hereby expressly waived by PLEDGOR.
11. Any notice or demand to be given hereunder shall be in
writing and shall be served personally, by facsimile, or by registered or
certified mail. If served by registered or certified mail, it shall be
deemed given or made twenty-four (24) hours after the deposit thereof in the
United States mail, postage prepaid.
Any notice or demand unto PLEDGOR shall be given to SAM YAU,
10 Hexham, Irvine, California 92715; Facsimile No. (714) 509-1918.
Any notice or demand unto PLEDGEE shall be given to NATIONAL
EDUCATION CORPORATION located at 18400 Von Karman Avenue, Irvine, California
92715; Attention: General Counsel; Facsimile No. (714) 474-9488.
Any notice or demand unto PLEDGE HOLDER shall be given to
___________________ located at ___________________________________
_____________________________________________________________.
Any party may designate in writing from time to time such
other place or places that such notices and demands may be given.
3
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12. This Pledge Agreement and all of its terms and provisions
shall be binding upon the heirs, successors, transferees and assigns of each
of the parties hereto.
PLEDGOR:
_________________________
SAM YAU
Accepted this _____ day of
____________________, 19__
PLEDGEE:
NATIONAL EDUCATION CORPORATION
by__________________________
PLEDGE HOLDER:
__________________________
4
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<PAGE>
EXHIBIT 11.1
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CALCULATION OF PRIMARY EARNINGS PER SHARE
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
________________________
1995 1994
_________ _________
<S> <C> <C>
LOSS FROM CONTINUING OPERATIONS $ (8,508) $(11,374)
======== ========
NET LOSS $ (8,508) $(13,382)
======== ========
COMMON STOCK:
Shares outstanding from beginning of period 29,578 29,405
Pro rata shares:
Stock options exercised - 76
Shares purchased for treasury, from date of purchase - -
Assumed exercise of stock options, using treasury
stock method 54 180
________ _________
Weighted average number of shares outstanding 29,632 29,661
======== ========
LOSS PER SHARE FROM CONTINUING OPERATIONS $ (.29) $ (.38)
======== ========
LOSS PER SHARE $ (.29) $ (.45)
======== ========
</TABLE>
<PAGE>
<PAGE>
EXHIBIT 11.2
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CALCULATION OF FULLY DILUTED EARNINGS PER SHARE
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
__________________________
1995 1994
_________ _________
<S> <C> <C>
NET LOSS $ (8,508) $(13,382)
Add back senior debenture interest 300 241
Add back junior debenture interest 380 570
________ ________
NET LOSS FOR FULLY DILUTED COMPUTATION $ (7,828) $(12,571)
======== ========
COMMON STOCK:
Shares outstanding from beginning of period 29,578 29,405
Stock options exercised -- 76
Shares purchased for treasury, from date of purchase -- --
Assumed exercise of stock options, using treasury
stock method 54 180
Assumed conversion of senior subordinated debentures,
from the latter of the beginning of the period or
the date of issue 5,000 5,000
Assumed conversion of junior subordinated debentures,
from the latter of the beginning of the period or
the date of issue 2,300 2,300
________ ________
Weighted average number of shares outstanding 36,932 36,961
======== ========
FULLY DILUTED LOSS PER SHARE FROM CONTINUING OPERATIONS $ (.29) $ (.38)
======== ========
FULLY DILUTED LOSS PER SHARE $ (.29) $ (.45)
======== ========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
Company's unaudited consolidated financial statements included in the
Company's quarterly report on Form 10-Q for the quarter ended March 31, 1995,
and is qualified in its entirety by reference to such unaudited consolidated
financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1995
<PERIOD-END> MAR-31-1995
<CASH> 25,280
<SECURITIES> 2,219
<RECEIVABLES> 33,011
<ALLOWANCES> 1,585
<INVENTORY> 25,098
<CURRENT-ASSETS> 135,637
<PP&E> 89,346
<DEPRECIATION> 63,200
<TOTAL-ASSETS> 248,416
<CURRENT-LIABILITIES> 84,807
<BONDS> 93,098
<COMMON> 2,110
0
0
<OTHER-SE> 61,749
<TOTAL-LIABILITY-AND-EQUITY> 248,416
<SALES> 55,959
<TOTAL-REVENUES> 55,959
<CGS> 26,007
<TOTAL-COSTS> 67,578
<OTHER-EXPENSES> 1,332
<LOSS-PROVISION> 110
<INTEREST-EXPENSE> 1,977
<INCOME-PRETAX> (12,951)
<INCOME-TAX> (4,533)
<INCOME-CONTINUING> (8,508)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (8,508)
<EPS-PRIMARY> (.29)
<EPS-DILUTED> (.29)
</TABLE>
