SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
_______________
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1996
OR
" TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 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 incorporation or organization) (I.R.S.
Employer Identification No.)
2601 Main Street, Suite 700 Irvine, California 92714
(Address of principal executive offices, including zip code)
714/474-9400
(Registrant's telephone number, including area code)
18400 Von Karman Avenue, Irvine, California 92715-1594
(Former name, former address and former fiscal year, if changed since
last report)
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 35,244,514 common stock
shares outstanding at May 1, 1996
<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) 1996 1995
_______________________________________________________________________________________________
<S> <C> <C>
Tuition and Contract Revenues $ 43,908 $ 44,812
Publishing Revenues 15,461 11,147
_____________________
Net Revenues 59,369 55,959
Costs and Expenses:
Contract course materials and service costs 16,210 17,596
Publishing costs and materials 5,157 3,356
Product development 5,437 5,055
Selling and promotion 21,937 23,500
General and administrative 7,639 9,311
Amortization of prior period deferred marketing -- 1,311
Amortization of acquired intangible assets 378 565
Interest expense 2,021 1,977
Investment income (412) (409)
Other expense (income) 61 (236)
_____________________
Income (Loss) Before Tax Provision and Minority Interest 941 (6,067)
Tax provision 141 --
_____________________
Income (Loss) Before Minority Interest 800 (6,067)
Minority interest in consolidated subsidiary 135 90
_____________________
Net Income (Loss) $ 665 $ (6,157)
=====================
Earnings (Loss) Per Share $ .02 $ (.21)
=====================
Weighted Average Number of Shares Outstanding:
Primary shares 36,265 29,632
Fully diluted shares 38,697 36,932
<FN>
Unaudited
See accompanying notes and management's discussion and analysis.
</FN>
/TABLE
<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) 1996 1995 1995
__________________________________________________________________________________________________________________________
<S> <C> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 19,437 $ 22,120 $ 25,280
Investment securities 1,503 1,748 2,219
Receivables, net of allowance of $2,481, $2,742 and $1,585 32,047 36,397 31,426
Inventories and supplies 33,771 31,847 25,098
Net assets held for disposition -- -- 24,411
Income tax receivable 9,313 9,313 9,313
Prepaid and deferred marketing expenses 14,453 2,675 13,834
Other current assets 9,830 10,765 17,063
____________________________________________
Total current assets 120,354 114,865 148,644
Land, buildings and equipment, less accumulated
depreciation of $31,166, $31,992 and $63,200 24,631 24,028 26,146
Acquired intangible assets, less accumulated amortization
of $9,551, $13,333 and $89,590 12,919 13,428 52,307
Deferred income taxes 24,768 24,768 28,482
Other assets 6,199 8,173 9,034
____________________________________________
$ 188,871 $ 185,262 $ 264,613
============================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable $ 13,961 $ 6,072 $ 7,168
Accrued expenses 23,627 29,022 28,853
Accrued short-term restructuring charges 6,044 8,246 --
Accrued salaries and wages 6,530 5,627 6,750
Accrued disposition costs -- -- 23,281
Deferred contract revenues 6,421 7,421 12,507
Current portion of long-term debt and short-term borrowings 4,366 12,338 9,382
Accrued and deferred income taxes 14,281 14,446 10,712
____________________________________________
Total current liabilities 75,230 83,172 98,653
____________________________________________
Liabilities Payable After One Year
Long-term debt, less current portion 18,330 8,839 6,222
Senior subordinated convertible debentures -- -- 20,000
Convertible subordinated debentures 57,494 57,494 57,494
Accrued long-term restructuring charges 10,059 10,089 --
Other noncurrent liabilities 8,985 8,683 7,818
____________________________________________
94,868 85,105 91,534
____________________________________________
Minority Interest in Equity of Consolidated Subsidiary 9,656 9,504 8,216
____________________________________________
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
<CAPTION>
March 31, December 31, March 31,
(dollars in thousands) 1996 1995 1995
_____________________________________________________________________________________________________________________________
<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;
35,940,321, 35,820,468 and 30,275,381 shares issued 2,166 2,166 2,110
Additional paid-in capital 155,418 155,100 133,043
Accumulated deficit (135,819) (136,484) (56,401)
Unrealized gain on available-for-sale securities, net of tax 13 10 21
Cumulative foreign exchange translation adjustment (6,808) (7,005) (7,655)
Notes receivable under stock option plans (945) (1,398) --
____________________________________________
14,025 12,389 71,118
Less common stock in treasury, 697,556 shares (4,908) (4,908) (4,908)
____________________________________________
Total stockholders' equity 9,117 7,481 66,210
____________________________________________
$ 188,871 $ 185,262 $ 264,613
============================================
<FN>
Unaudited
See accompanying notes and management's discussion and analysis.
</FN>
</TABLE>
<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,
_______________________
(amounts in thousands, except per share amounts) 1996 1995
_______________________________________________________________________________________________
<S> <C> <C>
Cash Flows From Operating Activities:
Net income (loss) $ 665 $ (6,157)
Adjustments to reconcile net income (loss) to net cash used for
operating activities:
Depreciation and amortization 1,213 1,372
Amortization of acquired intangible assets 378 565
Amortization of prior period deferred marketing -- 1,311
Provision for doubtful accounts (50) 110
(Gain) loss on foreign currency exchange 50 (239)
Change in assets and liabilities:
Receivables, net 7,016 14,213
Inventories and supplies (1,922) (1,131)
Prepaid and deferred marketing expenses (11,782) (10,567)
Accounts payable and accrued expenses 3,236 (44)
Accrued restructuring reserve (2,072) --
Accrued and deferred income taxes (124) (245)
Deferred contract revenues (978) 448
Other 785 (981)
_____________________
Net cash from operating activities (3,585) (1,345)
_____________________
Cash Flows For Investing Activities:
Additions to land, building and equipment (1,915) (1,988)
Dispositions of land, buildings and equipment 64 96
Proceeds from the sale or redemption of securities 250 8,682
Discontinued operations -- (379)
_____________________
Net cash for investing activities (1,601) 6,411
_____________________
Cash Flows From Financing Activities:
Reductions of long-term debt (514) (225)
Changes in short-term borrowings 2,028 2,949
Minority interest in earnings of consolidated subsidiary 152 (5)
Common stock, stock options and related tax benefits 318 --
Payments received on notes receivable under stock option plans 453 --
_____________________
Net cash from financing activities 2,437 2,719
_____________________
Effect of exchange rate changes on cash 66 198
_____________________
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
<CAPTION>
Three Months Ended
March 31,
_______________________
(amounts in thousands, except per share amounts) 1996 1995
_______________________________________________________________________________________________
<S> <C> <C>
Net change in cash and equivalents (2,683) 7,983
Cash and equivalents at the beginning of the period 22,120 17,297
_____________________
Cash and equivalents at the end of the period $ 19,437 $ 25,280
=====================
<FN>
Unaudited
See accompanying notes and management's discussion and analysis.
</FN>
</TABLE>
<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, 1995. The results of operations for interim periods are not
necessarily indicative of the results of operations to be expected for the
year.
The Company accounts for its advertising costs in accordance with AICPA
Statement of Position No. 93-7 ("SOP 93-7"), "Reporting on Advertising Costs".
This SOP 93-7 generally requires advertising costs, other than direct-response
advertising, to be expensed as incurred. As a result of the adoption of SOP
93-7 in 1994, a deferred marketing balance of $1,470,000 remained at December
31, 1994, of which $1,311,000 was amortized in the first
quarter of 1995 in accordance with SOP 93-7.
Certain prior year amounts have been reclassified to conform with the 1996
presentation.
NOTE 2 - Restructuring
_________________________________________
NETG experienced significant operating losses over the past several years. In
the second quarter of 1995 management concluded that NETG could not return to
profitability in the foreseeable future without significant changes in its
operating structure and business direction. Accordingly, the Company approved
a restructuring plan for NETG in June 1995 to discontinue certain product lines
and to reorganize its sales and marketing efforts to enhance its channels of
distribution. This restructure plan resulted in an unusual charge of
$28,652,000 ($.90 per share). In the fourth quarter of 1995, NETG further
reduced its organization in Germany and recorded a restructure charge of
$1,952,000 ($.06 per share). No tax benefits were provided on these charges.
The charges include severance related payments, excess facilities costs, the
write-down of inventory and fixed assets of certain discontinued products and
other restructuring related items such as charges related to canceled contracts
and agreements. In addition, in the second quarter of 1995, the goodwill
balance at NETG of $47,509,000 was written-off.
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
NOTE 2 - Restructuring (continued)
_________________________________________
Set forth below is a summary of the restructuring activity for the first
quarter of 1996.
<TABLE>
<CAPTION>
Excess Severance
(dollars in thousands) Facilities Payments Other Total
_______________________________________________________________________________________________________
<S> <C> <C> <C> <C>
Accrued restructuring at December 31, 1995 $ 14,557 $ 2,611 $ 546 $ 17,714
Cash paid (1,102) (740) (219) (2,061)
___________________________________________________
Accrued restructuring at March 31, 1996 $ 13,455 $ 1,871 $ 327 $ 15,653
===================================================
</TABLE>
NOTE 3 - Business Disposition
_________________________________________
At March 31, 1995, the estimated net realizable value of the discontinued
Education Centers' assets was segregated on the balance sheet as net assets
held for disposition and liabilities associated with the cost of completing the
transaction and providing for future obligations retained by the Company were
segregated as accrued disposition costs. As of December 31, 1995,
substantially all of the operations and schools were sold or closed.
As of December 31, 1995 and March 31, 1996, the remaining liabilities, which
include accrued expenses for outstanding litigation and regulatory matters, and
obligations to maintain and service future financial aid and accounting
reporting requirements, are offset by certain notes receivable from buyers in
connection with the sale of schools. Since the net amount of these assets and
liabilities was not material to the consolidated financial statements of the
Company, the amounts were not segregated on the balance sheet.
NOTE 4 - 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 were
anti-dilutive for both periods and are not presented.
Effective September 11, 1995, the holders of $20,000,000 of the Company's 10%
senior subordinated convertible debentures converted such debentures, including
accrued interest, into 5,021,000 of the Company's common stock. Loss per share
for first quarter of 1995 on a pro forma basis, assuming the conversion had
taken place at January 1, 1995, would have been ($.16) compared to the reported
loss per share of ($.21).
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
NOTE 5 - Statements of Cash Flows Supplementary Information
_________________________________________
<TABLE>
<CAPTION>
Three Months Ended
March 31,
_______________________
(amounts in thousands, except per share amounts) 1996 1995
_______________________________________________________________________________________________
<S> <C> <C>
Cash Paid During the Period For:
Interest expense $ 852 $ 1,385
Income taxes, net of income tax refunds 197 249
Detail of Noncash Investing and Financing Activities:
Assets acquired through capital leases $ 3 $ 84
</TABLE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements (continued)
<TABLE>
<CAPTION>
Three Months Ended
March 31,
_____________________ Percent
(dollars in thousands) 1996 1995 Variance Change
___________________________________________________________________________________________________________
<S> <C> <C> <C> <C>
Net Revenues
ICS Learning Systems $ 34,006 $ 33,944 $ 62 0.2%
Steck-Vaughn Publishing 15,461 11,147 4,314 38.7
NETG 9,363 10,016 (653) (6.5)
Other 539 852 (313) (36.7)
__________________________________
Total Net Revenues $ 59,369 $ 55,959 $ 3,410 6.1
==================================
Operating Income (Loss)
ICS Learning Systems before amortization $ 2,904 $ 2,525 $ 379 15.0
Amortization of prior year deferred marketing -- (1,311) 1,311 n/m
__________________________________
ICS Learning Systems 2,904 1,214 1,690 139.2
Steck-Vaughn Publishing 1,035 646 389 60.2
NETG 53 (4,994) 5,047 n/m
Other 77 166 (89) (53.6)
__________________________________
Total Segment Operating Income (Loss) 4,069 (2,968) 7,037 n/m
General corporate expenses (1,458) (1,767) 309 17.5
Interest expense (2,021) (1,977) (44) (2.2)
Investment income 412 409 3 0.7
Other (expense) income (61) 236 (297) n/m
__________________________________
Income (Loss) Before Tax Provision and Minority Interest 941 (6,067) 7,008 n/m
Tax provision 141 -- 141 n/m
__________________________________
Income (Loss) Before Minority Interest 800 (6,067) 6,867 n/m
Minority interest 135 90 45 50.0
__________________________________
Net Income (Loss) $ 665 $ (6,157) $ 6,822 n/m
==================================
<FN>
n/m: Not meaningful.
</FN>
</TABLE>
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Part I. FINANCIAL INFORMATION
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Detailed Segment Operating Results:
<TABLE>
<CAPTION>
(dollars in thousands) Three Months Ended March
31, 1996
_______________________________________________________________________________
___________________________________
ICSSteck-
LearningVaughn
Total Systems
Publishing NETG Other
______________________________________________________________
<S> <C> <C>
<C> <C> <C>
Net Revenues $ 59,369 $ 34,006 $
15,461 $ 9,363 $ 539
Costs and Expenses:
Contract course materials and service costs 16,210 13,532 -
- - 2,396 282
Publishing costs and materials 5,157 --
5,157 -- --
Product development 5,437 1,033
2,666 1,738 --
Selling and promotion 21,937 13,058
4,989 3,775 115
General and administrative 6,185 3,451
1,268 1,401 65
Amortization of acquired intangible assets 374 28
346 -- --
______________________________________________________________
Segment Operating Income $ 4,069 $ 2,904 $
1,035 $ 53 $ 77
==============================================================
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) Three Months Ended March
31, 1995
_______________________________________________________________________________
___________________________________
ICSSteck-
LearningVaughn
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 17,576 12,573 -
- - 4,524 479
Publishing costs and materials 3,376 --
3,376 -- --
Product development 5,055 608
2,306 2,141 --
Selling and promotion 23,500 15,561
3,420 4,377 142
General and administrative 7,549 2,635
1,215 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) $ (2,968) $ 1,214 $
646 $ (4,994) $ 166
==============================================================
</TABLE>
<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, 1996 Compared to Three Months Ended March 31, 1995
_______________________________________________________________________________
Revenues of $59,369,000 for the three months ended March 31, 1996 were
$3,410,000, or 6.1% higher than revenues of $55,959,000 in the prior year. Net
income was $665,000, or $.02 per share, compared to a net loss of ($6,157,000),
or ($.21) per share, in 1995. All segments of the Company had increased
operating income for the quarter compared to the same period in the prior year.
The operating results for the first quarter of 1996 are significantly better
than the comparable period in 1995 principally due to the turnaround of NETG
which experienced operating income of $53,000 compared to an operating loss of
($4,994,000) for the quarters ended March 31, 1996 and 1995, respectively. The
improvement in operating results at NETG was due in large part to the
restructuring actions taken in the second quarter of 1995 as explained more
fully in the discussion of the NETG operating results which follow.
<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:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
_____________________ Percent
(dollars in thousands) 1996 1995 Change
________________________________________________________________________________________
<S> <C> <C> <C>
Revenues:
Traditional Distance Education - Domestic $ 19,257 $ 20,145 (4.4)%
Traditional Distance Education - International 10,992 10,497 4.7
Industrial and Business 2,443 2,048 19.3
MicroMash 1,314 1,254 4.8
______________________
Total Revenues $ 34,006 $ 33,944 0.2
======================
Traditional Business:
New Enrollments:
Domestic 80,847 79,726 1.4
International 31,149 36,632 (15.0)
______________________
Total New Enrollments 111,996 116,358 (3.7)
======================
Gross Enrollment Value (GEV):
Domestic $ 46,760 $ 61,692 (24.2)
International 23,704 22,527 5.2
______________________
Total GEV $ 70,464 $ 84,219 (16.3)
======================
Selling and Promotion Spending:
Domestic $ 13,411 $ 14,519 (7.6)
International 5,871 6,658 (11.8)
______________________
Total Selling and Promotion Spending $ 19,282 $ 21,177 (8.9)
======================
Unearned Gross Future Tuition Revenue $ 157,048 $ 176,194 (10.9)
======================
Estimated realization of future tuition revenue 51% 44% 15.9
</TABLE>
ICS revenues of $34,006,000 were $62,000, or 0.2%, more than the comparable
period last year. Traditional domestic revenues were lower than the prior
year by $888,000 or 4.4% due primarily to the elimination of the sale of
computer hardware with PC courses for all enrollments after September 15,
1995. Traditional domestic enrollments were up 1.4%. Domestic telesales
enrollments continued to increase while traditional enrollments declined.
The conversion rate of domestic inquiries increased from 8.9% to 11.2%
although inquiries were down 19.2%. Domestic gross enrollment value (GEV)
decreased $14,932,000 or 24.2% partially because of the decrease in the
average contract price as a result of eliminating the sale of hardware from
PC courses and a 7.6% decrease in selling and promotion spending.
<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):
International revenue increased $495,000 or 4.7% more than the comparable
period last year. Revenues in Canada increased $855,000 or 21% over the
prior year period due to an enrollment increase of 12.5% and a larger mix of
higher priced courses. International Mail Sales revenue increased $134,000
or 10.7%. These increases were partially offset by lower revenue in
Australia caused by telesales understaffing and lower revenue in the U.K. as
a result of advertising underspending. New enrollments decreased by 15.0%
primarily as a result of the lower performance in Australia and the U.K.
Although new enrollments declined, the GEV increased 5.2% due to a 35.5%
increase in Canada and a 23.3% increase at IMS, offset by lower performance
in Australia and the U.K. The increase in GEV in Canada is a result of a
12.5% increase in enrollments, as well as higher average contract price due
to a larger mix of higher priced courses.
Course service costs increased $959,000 or 7.6% due to increased cost of
better customer service initiatives, volume related increase in costs of the
Business and Industrial segment, and increased cost of higher priced PC
courses in Canada. The customer service initiatives are aimed at decreasing
non-starts and increasing completions, thus increasing revenue realization.
The cost increases were partially offset by lower PC shipments in the U.S.
and volume related lower costs in the U.K. and Australia.
Product development expense increased $425,000 or 69.9% due to more courses
under development in the 1996 first quarter compared to 1995. As a result
of the spending, ICS traditional business expects to introduce approximately
nine courses in 1996 versus four courses in 1995.
Selling and promotional expenses decreased $3,814,000 or 22.6% due to lower
advertising spending on lower margin yielding media in the U.S., Canada and
the U.K., as well as savings in the U.K. due to reduced telesales activity
and overall underspending for advertising. Additionally, the 1995 expenses
included $1,311,000 of amortization of prior period deferred marketing costs
from 1994 which, under SOP 93-7, were required to be written-off in the
first quarter of 1995. There were no such deferred costs written-off in
1996.
General and administrative expense increased $816,000 or 31.0% as a result
of higher information systems expenses related to system integration,
increased costs related to the Business and Industrial segment and higher
payroll in the U.K.
<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) 1996 1995 Change
__________________________________________________________________________________________
<S> <C> <C> <C>
Revenues:
Elementary/High School $ 7,152 $ 5,820 22.9%
Adult Education 2,821 2,865 (1.5)
Library 3,719 2,462 51.1
Summit 1,769 -- n/m
=====================
Total $ 15,461 $ 11,147 38.7
=====================
Operating Income:
El/Hi, Adult Ed, Library $ 1,251 $ 646 93.7%
Summit (216) -- n/m
=====================
Total $ 1,035 $ 646 60.2
=====================
<FN>
n/m: Not meaningful.
</FN>
</TABLE>
Steck-Vaughn revenues of $15,461,000 increased $4,314,000 or 38.7% over the
same quarter of the previous year, as the Company continued to reflect
increases in the Elementary and Library markets, while adding the Summit
Learning catalog business to reach individual decision makers within school
buildings. Revenues were also augmented by general price increases of 10.1%
and 5.7% effective September 1, 1995 and 1994, respectively.
El/Hi sales for the first quarter increased 22.9% over last year. As in the
fourth quarter, El/Hi sales increased primarily in the Company's traditional
skills products for the elementary school market in reading, spelling, and
math. Testing and assessment products continued to sell well. The strength
of both of these types of products is indicative of the return of schools to
teaching basic skills using traditional approaches and the increased use of
standardized tests as a means of assessing students' progress and measuring
the success of individual schools.
Sales of Adult education products were relatively flat compared to last
year's first quarter, as the limited availability of federal funds continued
to hamper sales. Library sales were up 51.1% for the first quarter compared
to the first quarter of 1995. Much of the sales growth was from the
Company's exclusive distribution agreements with Wayland Publishers
(effective January 1, 1996), Abdo & Daughters, and Larousse Kingfisher
Chambers, Inc. In addition, Library sales were boosted by the release of
the revised 53-volume Portrait of America series.
<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):
Summit Learning sales of $1,769,000 were all incremental as a result of the
acquisition of Summit in December 1995.
Product cost and fulfillment expense as a percentage of revenues increased
for the three-month period ended March 31, 1996, as compared to 1995,
primarily due to the inclusion of the Summit Learning business for the first
time. Product cost and fulfillment for the Company's publishing operations
for the three months ended March 31, 1996, represented 29.4% of publishing
revenues as compared to 30.1% for the same period in the previous year.
Increases in the cost of print products resulted from the increase in
products acquired through distribution agreements (which carry a higher
cost) rather than internal development, the increased use of wholesalers to
sell library titles, and the full absorption of paper price increases
incurred during the past eighteen months. These cost increases were offset
in part by the increased sales of testing products, which carry higher gross
margins, and the decline in royalty expense due to the increase in products
acquired through distribution agreements. Summit Learning's cost of product
and fulfillment costs, at 63.0% of its revenues, reflect the non-proprietary
nature of the product line.
Product development expense increased due to the addition of a development
office, the expansion of the library development office and more staffing as
more of the design work is done internally.
Selling and marketing costs increased for the three months ended March 31,
1996, as compared to the prior year, due to higher commissions which
resulted from increased revenues and higher catalog expense due in part to
the acceleration of the recognition of catalog expenses in accordance with
the Company's adoption of accounting standard SOP 93-7. Sales and marketing
costs also increased as the Company circulated two new smaller catalogs
targeted to specific audiences during the first quarter. In addition,
$716,000 of the total costs represents catalog expense recognized by Summit
Learning.
General and administrative expense for the three months ended March 31,
1996, increased as compared to the prior year due to the new Summit Learning
division, filling staff vacancies, and increased information systems costs.
For the first quarter, Summit Learning reported an operating loss reflecting
the seasonally lower sales in the first quarter, the high investment in
catalogs, and $65,000 in amortization of acquisition expenditures.
<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)
NETG:
<TABLE>
<CAPTION>
Three Months Ended
March 31,
_____________________ Percent
(dollars in thousands) 1996 1995 Change
__________________________________________________________________________________________
<S> <C> <C> <C>
Revenues:
Domestic $ 4,807 $ 4,619 4.1%
International 4,556 4,647 (2.0)
Spectrum -- 750 n/m
=====================
Total Revenues $ 9,363 $ 10,016 (6.5)
=====================
</TABLE>
<TABLE>
<CAPTION>
Three Months Ended
March 31,
_______________________
1996 1995
_______________________________________________________________________________________________
<S> <C> <C>
Number of Internally Developed Products Completed:
Client/Server 9 1
Mainframe -- 2
Desktop 14 1
Business Skills -- --
=====================
Total 23 4
=====================
Number of Third Party Developed Products Completed:
Client/Server 10 13
Mainframe 8 14
Desktop 18 1
Business Skills 41 7
=====================
Total 77 35
=====================
</TABLE>
NETG revenues of $9,363,000 decreased $653,000, or 6.5% during the quarter
due to Spectrum, which discontinued its operations in 1995. Excluding
Spectrum, revenues increased 1.0%. Domestic revenues increased $188,000, or
4.1% principally due to increased revenue from client/server and desktop
courses as the Company has increased its presence in these areas. These
increases were partially offset by decreased Instructor Led Training (ILT)
<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)
NETG (continued):
and mainframe courseware revenue. International revenue decreased $91,000,
or 2.0%. This decrease was primarily due to an unfavorable exchange rate
variance in the U.K. as the U.S. dollar strengthened. This decrease was
partially offset by increased revenue in Germany, South Africa and Northern
Asia. Consistent with domestic operations, international revenues for the
client/server and desktop courses were up compared to the comparable period
in the prior year.
Operating income of $53,000 improved $5,047,000 over the operating loss of
$4,994,000 reported in 1995. The turnaround of NETG is principally due to
restructure actions undertaken in the second quarter of 1995 to reduce the
cost structure and realign the business. These actions included
discontinuing certain product lines, closing excess facilities, reducing
headcount, writing-down inventory and fixed assets of certain product lines
and cancelling of certain contracts and agreements.
Course service costs decreased $2,128,000, or 47.0% principally as a result
of restructuring related headcount reductions and the discontinuance of the
Spectrum operation. Lower sales volume in the U.K., lower ILT volume, lower
royalties and less overhead costs also contributed to the decrease. Product
development expense decreased $403,000, or 18.8% due to the discontinuance
of Spectrum and lower overhead costs as a result of the restructuring,
partially offset by higher outside consulting costs.
Selling and promotion expense decreased $602,000, or 13.8% due to the
discontinuance of Spectrum, lower headcount and related expenses, and lower
overhead due to the restructuring. General and administrative expenses
decreased $2,233,000, or 61.4% due to restructure related reductions in
headcount, depreciation, and facilities rent, as well as lower legal fees
and the discontinuance of Spectrum.
Operating results of the ICS and NETG foreign operations by geographic region
are discussed above. The first quarter foreign currency exchange loss,
recorded to other (expense) income, was $61,000 compared to gains of $236,000
in the prior year.
Corporate and Other:
General corporate expenses decreased $309,000 or 17.5% as a result of lower
headcount and related expenses, as well as better cost control.
The average total debt outstanding decreased compared to the first quarter
of 1995 principally as a result of the conversion of the Company's 10%
senior subordinated debentures into 5,021,000 shares of the Company's common
stock in September 1995. Interest expense increased because of the
additional interest on higher bank borrowings and amortization of financing
fees incurred under the new bank credit agreement of January 19, 1996.
<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)
Liquidity and Capital Resources
The Company's primary sources of liquidity are cash, investment securities,
cash provided from operations, and bank credit facilities. At March 31, 1996,
the Company had $20,940,000 in cash and investment securities, of which
$9,507,000 was held in the account of Steck-Vaughn. As of March 31, 1996, the
Company had a revolving bank credit agreement in the amount of $20,000,000, of
which $12,100,000 was outstanding. The revolving credit agreement expires
January 19, 1998. The Company also has an intercompany credit agreement with
Steck-Vaughn in the amount of $5,000,000 which expires June 30, 1996. At March
31, 1996, $3,000,000 was outstanding under the intercompany agreement and was
eliminated in consolidation.
Steck-Vaughn has a revolving bank credit agreement in the amount of $15,000,000
with a maturity of June 10, 1997. No amounts were outstanding under the bank
credit facility in the first quarter of 1996 or the first quarter of 1995.
In September 1995, the holders of $20,000,000 of the Company's 10% senior
subordinated convertible debentures converted such debentures, including
accrued interest, into 5,021,000 shares of the Company's common stock.
Effective April 30, 1996, the Company, through Steck-Vaughn, acquired all of
the stock of Edunetics, Ltd., an Israeli corporation engaged in the development
of educational software, for cash consideration of $12,000,000. Approximately
$9,000,000 of the purchase price was financed under Steck-Vaughn's bank credit
agreement and the remaining $3,000,000 was provided by existing cash and
marketable securities. The acquisition will be accounted for using the
purchase method of accounting. Accordingly, in the second quarter of 1996 the
purchase price will be allocated to assets and liabilities, including
in-process research and development projects, based on their estimated fair
values as of the date of acquisition. The estimated value of the in-process
research and development projects will then be written-off in the second
quarter of 1996 as required by generally accepted accounting principles.
On April 24, 1996, ICS Learning Systems signed a definitive agreement to
acquire California College of Health Sciences (CCHS). CCHS provides healthcare
self-study courses and four-year and master degree distance learning programs.
The Company expects that cash, marketable securities, the bank credit
facilities, cash provided from operations, the intercompany credit agreement
with Steck-Vaughn, and an expected IRS refund in the amount of approximately
$10,000,000 will be sufficient to provide for planned working capital
requirements, product development, capital expenditures, debt service and the
pending acquisition of CCHS.
Net cash outflow from operating activities of $3,585,000 declined $2,240,000
from the negative cash flow of $1,345,000 reported in 1995. Despite the
improvement in operating results, cash flow was negatively impacted by: 1)
payment of $3,500,000, which was expensed in December 1995, as part of the
project to produce approximately 110 client/server products to be delivered in
the last half of 1996, 2) proceeds of $3,252,000 in the first quarter of 1995
from the sale of a start-up partnership venture in December 1994, and 3) cash
payments of $2,072,000 related primarily to the 1995 NETG restructuring.
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.
<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.
Date: May 8, 1996
By /s/ Keith K. Ogata
___________________________
Keith K. Ogata
Vice President, Chief Financial Officer
and Treasurer
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
INDEX TO EXHIBITS
(Item 6(a))
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
_______ ___________ ____________
<S> <C> <C>
3.1 Restated Certificate of Incorporation of National
Education Corporation (1) *
3.2 By-Laws of National Education Corporation, 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** Advanced Systems, Incorporated 1984 Stock Option and
Stock Appreciation Rights Plan (4) *
10.3** 1986 Stock Option and Incentive Plan, as amended (5) *
10.4** Amended and Restated 1990 Stock Option and Incentive
Plan (6) *
10.5** Amended and Restated 1991 Directors' Stock Option and
Award Plan (7) *
10.6 Rights Agreement, dated October 29, 1986, between National
Education Corporation and Bank of America National Trust
and Savings Association, Rights Agent (including exhibits
thereto) (8) *
10.7 Addendum No. 1 to Rights Agreement, dated August 5,
1991 (9) *
10.8 Indenture, dated as of May 15, 1986, between National
Education Corporation and Continental Illinois National
Bank and Trust Company of Chicago, as Trustee (10) *
10.9 Tripartite Agreement, dated as of May 31, 1990, among
National Education Corporation, Continental Bank as
Resigning Trustee, and IBJ Schroeder Bank & Trust Company
as Successor Trustee (11) *
10.10** National Education Corporation Supplemental Executive
Retirement Plan, as amended (12) *
10.11** Supplemental Benefit Plan for Non-Employee Directors (13) *
10.12** Executive Employment Agreement between National Education
Corporation and Sam Yau (14) *
10.13 Intercompany Agreement Between National Education
Corporation and Steck-Vaughn Publishing Corporation dated
June 30, 1993 (the "Intercompany Agreement") (15) *
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Sequentially
Exhibit Numbered
Number Description Page
_______ ___________ ____________
<S> <C> <C>
10.14 First Amendment to Intercompany Agreement, dated
June 10, 1994 (16) *
10.15 Tax Sharing Agreement between National Education
Corporation and Its Direct and Indirect Corporate
Subsidiaries, dated January 1, 1993 (17) *
10.16 $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
granted for portions of this exhibit) (18) *
10.17 First Amendment and Limited Waiver to Credit Agreement,
dated July 31, 1995 (19) *
10.18 Second Amendment to Credit Agreement, dated December 21,
1995 (20) *
10.19 Revolving Line of Credit Note and Option Agreement
between National Education Corporation and Steck-Vaughn
Publishing Corporation, dated February 28, 1995 (21) *
10.20 Renewal and Extension Agreement between National
Education Corporation and Steck-Vaughn Publishing
Corporation, effective December 31, 1995 (22) *
10.21 First Amendment to Stock Option Agreement between
National Education Corporation and Steck-Vaughn
Publishing Corporation, effective December 31,
1995 (23) *
10.22 Letter Amendment to Stock Option Agreement between
National Education Corporation and Steck-Vaughn
Publishing Corporation, dated February 1, 1996 (24) *
10.23 Second Renewal and Extension Agreement and Second
Amendment to Stock Option Agreement dated March 31,
1996 between National Education Corporation and
Steck-Vaughn Publishing Corporation (27)
10.24 Debenture Conversion Agreement among National Education
Corporation and the Holders identified therein, dated
August 31, 1995 (25) *
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
Sequentially
Exhibit Numbered
Number Description Page
_______ ___________ ____________
<S> <C> <C>
10.25 Credit Agreement among National Education Corporation,
certain banks and BZW Division of Barclays Bank PLC,
as Agent, dated January 19, 1996 (the "BZW Credit
Agreement") (Confidential treatment under Rule 24b-2
has been requested for portions of this exhibit) (26) *
10.26 Waiver and First Amendment to BZW Credit Agreement,
dated April 9, 1996 (27)
10.27 Loan Agreement dated April 29, 1996, between
Steck-Vaughn Company and NationsBank of Texas, N.A. (27)
11.1 Calculation of Primary Earnings Per Share (27)
11.2 Calculation of Fully Diluted Earnings Per Share (27)
27.1 Financial Data Schedule (27)
<FN>
_____________
* incorporated by reference from a previously filed document
** denotes management contract or compensatory plan or arrangement
1) Incorporated by reference to Exhibit 3.1 filed with National Education
Corporation's Annual Report on Form 10-K for the year ended December 31,
1995, filed March 19, 1996.
2) Incorporated by reference to Exhibit 10 filed with National Education
Corporation's Quarterly Report on Form 10-Q for the quarter ended June
30, 1990.
3) Incorporated by reference to Exhibit 10.1 filed with National Education
Corporation's Annual Report on Form 10-K for the year ended December 31,
1992, filed March 22, 1993.
4) Incorporated by reference to Exhibit 10.15 filed with National Education
Corporation's Annual Report on Form 10-K for the year ended December 31,
1987, filed March 30, 1988.
5) Incorporated by reference to Exhibit 10.17 filed with National Education
Corporation's Annual Report on Form 10-K for the year ended December 31,
1990, filed April 1, 1991.
6) Incorporated by reference to Exhibit "B" filed with National Education
Corporation's Proxy Statement, furnished in connection with the Annual
Meeting of Stockholders held June 27, 1995, filed May 22, 1995.
7) Incorporated by reference to Exhibit "A" filed with National Education
Corporation's Proxy Statement furnished in connection with the Annual
Meeting of Stockholders held June 27, 1995, filed May 22, 1995.
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
8) Incorporated by reference to Exhibit 4.1 filed with National Education
Corporation's Current Report on Form 8-K, dated October 29, 1986, filed
October 30, 1986.
9) Incorporated by reference to Exhibit 10.19 filed with National Education
Corporation's Annual Report on Form 10-K for the year ended December 31,
1991, filed April 1, 1992.
10) Incorporated by reference to Exhibit 4.2 filed with Amendment No. 1 to
National Education Corporation's Registration Statement on Form S-3 (No.
33-5552), filed May 16, 1986.
11) Incorporated by reference to Exhibit 4 filed with National Education
Corporation's Quarterly Report on Form 10-Q for the quarter ended June
30, 1990.
12) Incorporated by reference to Exhibit 10.17 filed with National Education
Corporation's Annual Report on Form 10-K for the year ended December 31,
1991, filed April 1, 1992.
13) Incorporated by reference to Exhibit 10.18 filed with National Education
Corporation's Annual Report on Form 10-K for the year ended December 31,
1991, filed April 1, 1992.
14) Incorporated by reference to Exhibit 10.21 filed with National Education
Corporation's Quarterly Report on Form 10-Q for the quarter ended March
31, 1995.
15) Incorporated by reference to Exhibit 10.8 filed with Amendment No. 1 to
Steck-Vaughn Publishing Corporation's Registration Statement on Form S-1,
(No. 33-62334), filed June 17, 1993.
16) Incorporated by reference to Exhibit 10.23 filed with National Education
Corporation's Quarterly Report on Form 10-Q for the quarter ended June
30, 1994, filed August 11, 1994.
17) Incorporated by reference to Exhibit 10.9 filed with Amendment No. 1 to
Steck-Vaughn Publishing Corporation's Registration Statement on Form S-1
(No. 33-62334), filed June 17, 1993.
18) Incorporated by reference to Exhibit 10.18 filed with National Education
Corporation's Annual Report on Form 10-K for the year ended December 13,
1994, filed March 31, 1995.
19) Incorporated by reference to Exhibit 10.22 filed with National Education
Corporation's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1995, filed on November 9, 1995.
20) Incorporated by reference to Exhibit 10.18 filed with National Education
Corporation's Annual Report on Form 10-K for the year ended December 31,
1995, filed March 19, 1996.
21) 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.
<PAGE>
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
22) Incorporated by reference to Exhibit 10.22 filed with National Education
Corporation's Annual Report on Form 10-K for the year ended December 31,
1995, filed March 19, 1996.
23) Incorporated by reference to Exhibit 10.23 filed with National Education
Corporation's Annual Report on Form 10-K for the year ended December 31,
1995, filed March 19, 1996.
24) Incorporated by reference to Exhibit 10.24 filed with National Education
Corporation's Annual Report on Form 10-K for the year ended December 31,
1995, filed March 19, 1996.
25) Incorporated by reference to Exhibit 10.23 filed with National Education
Corporation's Quarterly Report on Form 10-Q for the first quarter ended
September 30, 1995, filed November 9, 1995.
26) Incorporated by reference to Exhibit 10.26 filed with National Education
Corporation's Annual Report on Form 10-K for the year ended December 31,
1995, filed March 19, 1996.
27) Filed herewith.
</FN>
</TABLE>
EXHIBIT 10.23
SECOND RENEWAL AND EXTENSION AGREEMENT
WHEREAS, National Education Corporation ("Borrower") executed a Revolving
Line of Credit Note (the "Note") dated February 28, 1995, payable to the order
of Steck-Vaughn Publishing Corporation ("Lender"), in the original principal
sum of $10,000,000.00;
WHEREAS, the indebtedness evidenced by the Note, as renewed, modified and
extended, is secured by an Intercreditor Pledge Agreement Pledge and Security
Agreement (the "Security Agreement") dated January 19, 1996 between Borrower,
as Pledgor, and BZW Division of Barclays Bank PLC, as collateral agent,
covering, among other collateral, all of the issued and outstanding shares of
capital stock at any time owned by Borrower of Lender;
WHEREAS, Borrower and Lender have heretofore renewed, modified and
extended the Note pursuant to a Renewal and Extension Agreement (the "First
Renewal") dated as of December 31, 1995 between Borrower and Lender;
WHEREAS, Borrower has requested Lender to again renew and extend the term
of the Note;
NOW, THEREFORE, Borrower and Lender agree that:
1. Effective from and after February 1, 1996, the maximum principal
amount that may be drawn by Borrower and that may be outstanding
at any time under the Note, as renewed, modified and extended,
is $5,000,000.
2. The Event of Default stated in paragraph number 5 on page 4 of the
Note is hereby amended in its entirety to hereafter read as follows,
to wit:
Any "Event of Default" as defined in that certain
Credit Agreement (the "Credit Agreement") dated
January 19, 1996 among NEC, the several lenders from
time to time parties thereto and BZW Division of
Barclays Bank PLC, as Agent, has occurred and is
continuing.
The Events of Default stated in paragraphs 1, 2, 3, 4, 6, 7, and 8 on
pages 3 and 4 of the Note shall remain as stated in the Note.
3. After the effective date hereof, the Note shall be due and
payable as follows, to wit:
Interest only shall be due and payable monthly as it accrues on
the first day of each month beginning April 1, 1996 and
continuing on the first day of each month thereafter until
June 30, 1996 when the entire balance of unpaid principal and
accrued, unpaid interest shall be due and payable in full. Each
installment shall be applied first to the payment of accrued
interest payable on the unpaid principal balance, with the
remainder being applied to the reduction of principal.
4. The principal balance of the Note from time to time remaining
unpaid shall continue to bear interest at the rate of interest
applicable thereto as set forth in the Note, provided that the
interest payable shall not exceed the maximum amount that may be
lawfully charged.
After default or maturity, principal and past-due interest shall
bear interest at the rate of interest applicable thereto as set
forth in the Note, provided that the interest payable shall not
exceed the maximum amount that may be lawfully charged.
5. All agreements between Borrower and Lender, whether now existing
or hereafter arising and whether written or oral, are hereby
limited so that in no contingency, whether by reason of demand
for payment or acceleration of the maturity of the Note, as
renewed, modified and extended, or otherwise, shall the interest
contracted for, charged or received by Lender exceed the maximum
amount permissible under applicable law. If, from any
circumstance whatsoever, interest would otherwise be payable to
Lender in excess of the maximum lawful amount, the interest
payable to Lender shall be reduced to the maximum amount
permitted under applicable law; and if from any circumstance
Lender shall ever receive anything of value deemed interest by
applicable law in excess of the maximum lawful amount, an amount
equal to any excessive interest shall be applied to the
reduction of the principal of the Note, as renewed, modified and
extended, and not to the payment of interest, or if such
excessive interest exceeds the unpaid balance of principal of
the Note, as renewed, modified and extended, such excess shall
be refunded to Borrower. All interest paid or agreed to be paid
to the holder of the Note, as herein renewed, modified and
extended, shall, to the extent permitted by applicable law, be
amortized, prorated, allocated, and spread so that the interest
thereon shall not exceed the maximum amount permitted by
applicable law. This paragraph shall control all agreements
between Borrower and Lender.
6. Borrower hereby renews the Note and promises to pay to the order
of Lender at its offices at 1025 Northern Boulevard, Roslyn, New
York (or such other place of payment as the Lender shall notify
Borrower) the principal sum thereof as may be advanced and
remains unpaid, with interest as specified in the Note, as
renewed, modified and extended, and to perform all of Borrower's
obligations under the Note, the Security Agreement, and any
other documents pertaining thereto (the "Other Documents").
7. Borrower covenants and warrants that the Note, the Security
Agreement and the Other Documents are not in default after
giving effect to the extension, modification and renewal herein
granted; there are no defenses, counterclaims or offsets to the
Note, the Security Agreement or the Other Documents; that the
Note and Security Agreement, as renewed, modified and extended,
are in full force and effect, and that the Security Agreement
shall continue to secure payment of the indebtedness evidenced
by the Note, as renewed, modified and extended.
8. Borrower further covenants and warrants to Lender that the
execution and delivery of this Second Renewal and Extension
Agreement by Borrower will not be in contravention of or cause a
default under any agreement to which Borrower is a party.
9. The Note, as renewed, modified and extended, shall be construed
in accordance with the laws of the State of New York and the
laws of the United States applicable to transactions in the
State of New York.
10. The Note, the Security Agreement and the Other Documents shall
remain in full force and effect as renewed, modified and
extended by the First Renewal and by this Second Renewal and
Extension Agreement.
11. This Second Renewal and Extension Agreement may be executed in
duplicate originals and each duplicate shall have the same force
and effect as an original.
<PAGE>
EXECUTED to be effective as of March 31, 1996.
"BORROWER"
NATIONAL EDUCATION CORPORATION
By:/s/
_______________________________________
Name: Keith K. Ogata
Title: Vice President, Chief Financial
Officer and Treasurer
"LENDER"
STECK-VAUGHN PUBLISHING CORPORATION
By:/s/
______________________________________
Name: Floyd D. Rogers
Title: Vice President and Chief Financial
Officer
<PAGE>
SECOND AMENDMENT TO
STOCK OPTION AGREEMENT
This Second Amendment to Stock Option Agreement is made and entered into
by and between National Education Corporation, a Delaware Corporation
("Company") and Steck-Vaughn Publishing Corporation ("Optionee") as of March
31, 1996.
Recitals
1. Company and Optionee entered into that certain Stock Option Agreement
(the "Stock Option Agreement") dated as of February 28, 1995 pursuant to which
the Company granted Optionee a stock option to purchase from the Company
290,000 shares of the stock of Optionee owned by the Company.
2. The Stock Option Agreement has heretofore been amended by that
certain First Amendment to Stock Option Agreement (the "First Amendment") dated
as of December 31, 1995.
3. Company and Optionee desire to again amend the Stock Option Agreement
to extend certain dates and to amend certain other matters contained therein.
Agreement
Now, Therefore, for $10.00 and other good and valuable consideration, the
receipt and adequacy of which is hereby acknowledged by the Company and
Optionee hereby agree as follows, to wit:
1. Section 2 of the Stock Option Agreement is hereby amended in its
entirety to hereafter read as follows, to wit:
2. Term of Option
Unless earlier exercised pursuant to Section 3 of this
Agreement, the Option shall terminate on, and shall not be
exercisable after the earlier of (a) June 30, 1997, or (b) the date,
if any, the Option is terminated pursuant to Section 8 below.
2. Subsection 3.1 of the Stock Option Agreement is hereby amended in its
entirety to hereafter read as follows, to wit:
3.1 Exercisability
This Option may only be exercised, in whole or in part, once at
any time after the earlier of (i) August 31, 1996 or (ii) any time
one or more Events of Default (which have not been cured within any
applicable cure period) have occurred under and as defined in that
certain Revolving Line of Credit Note dated February 28, 1995 in the
original principal amount of $10,000,000.00 executed by the Company
and payable to the order of Optionee as renewed, modified and
extended by that certain Renewal and Extension Agreement (the "First
Renewal") dated as of December 31, 1995 between the Company and
Optionee and that Second Renewal and Extension Agreement (the "Second
Renewal") dated as of March 31, 1996 between the Company and Optionee
(said Revolving Line of Credit Note as so renewed, modified and
extended by said First Renewal and Second Renewal being herein
referred to as the "Note"), until the expiration of the term of the
Option as provided in Section 2 hereof. For purposes hereof, a
business day shall mean any day which is not a Saturday, Sunday or
federal legal holiday.
3. Section 8 of the Stock Option Agreement is hereby amended in its
entirety to hereafter read as follows, to wit:
8. Redemption
At any time on or after the Credit Line Termination Date (hereafter
defined) and provided that the Option has not theretofore been exercised,
the Company may redeem the Option upon written notice of such redemption
and payment of the Redemption Price (hereafter defined) by the Company to
Optionee. Upon the written notice of such redemption and payment of the
Redemption Price by the Company to Optionee on or after the Credit Line
Termination Date, the Option, to the extent not theretofore exercised,
shall terminate for all purposes and shall not be of any further force and
effect; provided that such termination shall not impair or affect
Optionee's rights with respect to Shares previously exercised pursuant to
the Option or Shares previously acquired by Optionee pursuant to the
Option. The "Redemption Price" shall mean the greater of (i) the Yield
Amount (hereafter defined) plus the Adjustment Amount (hereafter defined)
or (ii) $900,000 plus, if the Redemption Price is paid by the Company to
Optionee after March 31, 1996, an amount equal to $1,250 per day for each
day after March 31, 1996 until and including the earlier of (x) June 30,
1996 or (y) the date of payment of the Redemption Price by the Company to
Optionee. The "Yield Amount" shall mean an amount equal to (i) twenty-
five percent (25%) per annum on the principal balance from time to time
outstanding under the Note from the Grant Date to and including the Credit
Line Termination Date; less (ii) all interest which at any time has
accrued under the Note from the Grant Date to and including the Credit
Line Termination Date. The "Adjustment Amount" shall mean an amount equal
to twenty-five percent (25%) per annum on the Yield Amount from the Credit
Line Termination Date to and including the date of payment of the
Redemption Price by the Company to Optionee. For purposes of this
Section 8, the Credit Line Termination Date means (i) June 30, 1996, if
the indebtedness evidenced by the Note is paid in full on such date and
the Company has not prior to June 30, 1996 agreed by a written notice
delivered to Optionee that the revolving line of credit available under
and evidenced by the Note has been terminated, (ii) the date on which the
indebtedness evidenced by the Note is fully paid, if the indebtedness
evidenced by the Note is not fully paid on June 30, 1996, or (iii) the
date on which both the indebtedness evidenced by the Note has been fully
paid and the Company has agreed by a written notice delivered to Optionee
that the revolving line of credit available under and evidenced by the
Note has been terminated, if the Company has agreed by a written notice
delivered to Optionee that the revolving line of credit available under
and evidenced by the Note is terminated prior to June 30, 1996. The
Redemption Price may be paid by the Company to Optionee, at the Company's
option, in either or a combination of (i) cash, or (ii) shares of
Optionee's common stock owned by the Company having a fair market value
equal to the Redemption Price (or such balance thereof not otherwise paid
in cash) based upon the close price for shares of Optionee's common stock
on the NASDAQ National Market on the most recent day that Optionee's
shares of common stock were traded on the NASDAQ National Market prior to
the date of full payment of the Redemption Price by the Company to
Optionee, provided that such shares of Optionee's common stock paid in
payment of the Redemption Price are paid and delivered by the Company to
Optionee free and clear of all liens and encumbrances. In the event
Optionee's common stock is no longer traded on the NASDAQ National Market,
then the fair market value of Optionee's common stock for purposes of
determining payment of the Redemption Price shall be determined on such
other basis as the Company and Optionee shall mutually agree. The
Redemption Price may be prepaid by the Company to Optionee in such
proportions and at such times as the Company may elect provided that the
Option shall not be redeemed until the Redemption Price is fully paid and
the other terms of this Section 8 are complied with by the Company.
Notwithstanding anything contained in this Section 8 to the contrary, and
unless Optionee otherwise agrees in writing, the Company shall have no
right to redeem and terminate the Option pursuant to this Section 8 at
anytime any one or more Events of Default (as defined in the Note) exists
and is continuing. Nothing contained in this Agreement (i) shall be
construed to extend or to commit to extend the revolving line of credit
available under the Note or the maturity of the Note past June 30, 1996;
or (ii) impair or affect Optionee's rights and remedies with respect to
any collateral securing the indebtedness evidenced by the Note. The
redemption of the Option pursuant to this Section 8 may be made after
notice of exercise of the Option has been given by the Optionee to the
Company provided that written notice of such redemption and payment of the
Redemption Price is made by the Company to Optionee prior to the Exercise
Date specified in Optionee's notice of exercise of the Option to be given
to the Company pursuant to Section 3.2.
4. THIS SECOND AMENDMENT TO STOCK OPTION AGREEMENT SHALL BE GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK.
5. The Company covenants and warrants to Optionee that the execution and
delivery of this Second Amendment to Stock Option Agreement by the Company is
not in contravention of and will not cause a default under any agreement to
which the Company is a party.
6. To the extent of any conflict between the terms of this Second
Amendment to Stock Option Agreement and the First Amendment, the terms and
provisions of this Second Amendment to Stock Option Agreement shall govern and
control.
7. Except as amended hereby and by the First Amendment, the Stock Option
Agreement shall remain in full force in effect in accordance with its terms.
IN WITNESS WHEREOF, the parties have entered into this Second Amendment to
Stock Option Agreement as of the date first above written.
"COMPANY" "OPTIONEE"
NATIONAL EDUCATION CORPORATION STECK-VAUGHN PUBLISHING CORPORATION
By: /s/ By: /s/
_____________________________ ___________________________
Name: Keith K. Ogata Name: Floyd D. Rogers
Title: Vice President, Chief Financial Title: Vice President and Chief
Officer and Treasurer Financial Officer
EXHIBIT 10.26
WAIVER AND FIRST AMENDMENT, dated as of April 9, 1996, to the CREDIT
AGREEMENT, dated as of January 19, 1996 (as the same may be amended,
supplemented or otherwise modified from time to time, the "Credit Agreement"),
by and among NATIONAL EDUCATION CORPORATION, a Delaware corporation (the
"Borrower"), the financial institutions parties thereto (the "Lenders") and BZW
Division of Barclays Bank PLC as agent for the Lenders (in such capacity, the
"Agent").
W I T N E S S E T H:
WHEREAS, the Borrower has requested the Lenders to amend and waive
certain provisions of the Credit Agreement upon the terms and conditions set
forth herein;
NOW THEREFORE, in consideration of the premises and mutual covenants
contained herein, the undersigned hereby agree as follows:
1. Defined Terms. Terms defined in the Credit Agreement and used
herein shall have the meanings given to them in the Credit Agreement.
2. Amendment to Credit Agreement. Schedule 8.2 of the Credit
Agreement is hereby amended by (i) deleting items 1 and 2 of Schedule 8.2 and
(ii) inserting the following in lieu thereof:
"1. Revolving Credit Facility from Steck-Vaughn Publishing
Corporation as Lender to National Education Corporation as Borrower dated March
1, 1995, in the maximum principal amount of $5 million secured by a pledge of
the Steck-Vaughn Publishing Corporation common stock owned by National
Education Corporation.
2. Revolving Credit Facility from NationsBank as Lender to
Steck-Vaughn Publishing Corporation as Borrower dated February 28, 1995, in the
maximum principal amount of $15,000,000 the first $5 million of which is
unsecured but borrowings in excess of $5 million are secured by a pledge of the
Steck-Vaughn accounts receivables and inventories."
3. Waivers to Credit Agreement. (a) The undersigned Lenders hereby
waive the provisions of subsection 8.2(b) of the Credit Agreement to the extent
and only to the extent that such subsection would be violated by the failure of
~e Borrower to repay the intercompany loan from SV to the Borrower by March 31,
1996; provided, however that such repayment is made by June 30, 1996.
(b) The undersigned Lenders hereby waive the provisions of
subsection 8.10(c) of the Credit Agreement to the extent and only to the extent
that such subsection would be violated by the failure of the Borrower to have
positive consolidated income for the two most recently completed fiscal
quarters prior to making its acquisition of Edunetics.
7. Effective Date. This Waiver and First Amendment shall become
effective on the date hereof (the "Effective Date").
8. Representations and Warranties. The Borrower hereby represents
and warrants to the Lenders that each of the representations and warranties
made by the Borrower in the Loan Documents are true and correct on and as of
the Effective Date, after giving effect to the effectiveness of this Waiver and
First Amendment, as if made on and as of the Effective Date, except to the
extent such representations and warranties expressly relate to an earlier date.
9. Payment of Expenses. The Borrower agrees to reimburse the Agent
for all of its reasonable costs and expenses incurred in connection with the
preparation, execution and delivery of this Waiver and First Amendment and any
other documents prepared in connection herewith and the transactions
contemplated hereby, including without limitation the reasonable fees and
disbursements of counsel to the Agent.
10. No Other Amendments; Confirmation. Except as expressly amended
hereby, the provisions of the Credit Agreement and each of the other Loan
Documents are and shall remain in full force and effect.
11. Governing Law. This Waiver and First Amendment and the rights
and obligations of the parties hereto shall be governed by, and construed and
interpreted in accordance with, the laws of the State of New York.
12. Counterparts. This Waiver and First Amendment may be executed by
one or more of the parties hereto on any number of separate counterparts, and
all of said counterparts taken together shall be deemed to constitute one and
the same instrument. This Waiver and First Amendment may be delivered by
facsimile transmission of the relevant signature pages hereof.
13. Guarantors' Consent. By signing below, each Guarantor party to
the Global Security Agreement consents to the execution and delivery of this
Waiver and First Amendment and reaffirms its respective obligations under the
Global Security Agreement.
IN WITNESS WHEREOF, the undersigned have caused this Waiver and First
Amendment to be executed and delivered by their duly authorized officers as of
the date first above written.
NATIONAL EDUCATION CORPORATION
By: /s/
_________________________
Name: Keith K. Ogata
Title: Vice President, Chief Financial Officer
and Treasurer
<PAGE>
BZW DIVISION OF BARCLAYS BANK PLC,
as Agent and as a Lender
By: /s/
____________________________
Name:
Title:
ICS LEARNING SYSTEMS, INC.
By: /s/
______________________________
Name: Keith K. Ogata
Title: Vice President, Chief Financial Officer
and Treasurer
INTERNATIONAL CORRESPONDENCE SCHOOLS, INC.
By: /s/
______________________________________________
Name: Keith K. Ogata
Title: Vice President, Chief Financial Officer
and Treasurer
ICS INTANGIBLES HOLDING COMPANY
By: /s/
_____________________________________
Name: Keith K. Ogata
Title: Vice President, Chief Financial Officer
and Treasurer
<PAGE>
NETG HOLDING, INC.
By: /s/
________________________________
Name: Keith K. Ogata
Title: Vice President, Chief Financial Officer
and Treasurer
NATIONAL EDUCATION TRAINING GROUP, INC.
By: /s/
_______________________________
Name: Keith K. Ogata
Title: Vice President, Chief Financial Officer
and Treasurer
NATIONAL EDUCATION INTERNATIONAL CORP.
By: /s/
______________________________
Name: Keith K. Ogata
Title: Vice President, Chief Financial Officer
and Treasurer
EXHIBIT 10.27
LOAN AGREEMENT
THIS LOAN AGREEMENT (this "Agreement") is made and entered into as of
___________, 1996, by and between STECK-VAUGHN COMPANY (the "Borrower"), a
Delaware corporation, and NATIONSBANK OF TEXAS, N.A. ("Lender"), a national
banking association, who agree as follows:
1. Definitions.
Unless a particular word or phrase is otherwise defined or the context
otherwise requires, each of the following-listed terms, as used in this
Agreement, has the meaning indicated below (such meaning to be applicable to
both the singular and plural forms of such term):
Each of the terms Accounts, Account Debtor, Equipment, Inventory and
General Intangibles shall have the respective meanings assigned to that term in
the Texas Uniform Commercial Code - Secured Transactions in force on the date
of this Agreement.
Advance shall mean an advance of funds by Lender, pursuant to this
Agreement or one of the other Loan Documents.
Affiliate shall mean any Person controlling, controlled by or under common
control with any other Person. For purposes of this definition, "control"
(including "controlled by" and "under common control with") means the
possession, directly or indirectly, of the power to direct or cause the
direction of the management and policies of such Person, whether through the
ownership of voting securities or otherwise. If any Person shall own, directly
or indirectly, twenty percent (20%) or more of the indicia of equity rights
(whether outstanding capital stock or otherwise) of another Person, such Person
shall be deemed to be an Affiliate.
Annual Audited Financial Statements shall mean the annual financial
statements of a Person, including all notes thereto, which statements shall
include a balance sheet as of the end of that Person's fiscal year and an
income statement and a statement of cash flow for such fiscal year, all setting
forth in comparative form the corresponding figures from the previous fiscal
year, all prepared in conformity with Generally Accepted Accounting Principles
and accompanied by a report and opinion of independent certified public
accountants satisfactory to Lender, which shall state that such financial
statements, in the opinion of such accountants, present fairly the financial
position of such Person as of the date thereof, and the results of that
Person's operations for the period covered thereby, in conformity with
Generally Accepted Accounting Principles.
Borrowing Base shall mean, as of any particular time, an amount equal to
the sum of (i) 85.0% of the Eligible Accounts, plus (ii) 50.0% of the value (as
carried on Borrower's books) of the Eligible Inventory.
Borrowing Base Report shall mean a report, in substantially the form of
Exhibit "A," attached hereto, duly completed and signed by the chief financial
officer or treasurer of Borrower.
Business Day shall mean a day when Lender is open for business in Austin,
Texas.
Business Entity shall mean corporations, partnerships, joint ventures,
joint stock associations, business trusts and other business entities.
Chapter One shall mean Chapter One of the Texas Credit Code, as in effect
on the date of this Agreement.
Code shall mean the Internal Revenue Code of 1986, as amended, as now or
hereafter in effect, together with all regulations, rulings and interpretations
thereof or thereunder by the Internal Revenue Service.
Collateral shall mean all accounts, inventory and proceeds now or
hereafter subject to the Security Agreement, or intended so to be.
Commitments shall mean the commitments to lend funds under Article 2 of
this Agreement.
Contract Rate has the meaning designated in Section 3.1.
Current Accounts Receivable shall mean all Accounts that, as of the date
of any determination of Current Accounts Receivable: (a) are, or were, due and
payable not more than ninety (90) days from the date of the invoice or
agreement evidencing same; (b) have been billed within thirty (30) days after
the shipment of the goods or the providing of services giving rise to such
Accounts; (c) were billed not more than ninety-one (91) days before such date
of determination; (d) arise from the performance of services by the obligee of
the Account which have been fully performed, or from the absolute sale and
delivery of goods, subject to normal return policies, by the obligee of the
Account in which such obligee had the sole and complete ownership; (e) are not
subject to set-off, counterclaim, defense, allowance or adjustment (other than
discounts for prompt payment shown on the invoice) or to dispute, objection or
complaint by the Account Debtor concerning its liability on the Account;
(f) arose in the ordinary course of business of the obligee thereon; and
(g) are owed by an Account Debtor that is not bankrupt or insolvent.
Current Credit Limit has the meaning designated in Section 2.1.2.
Debt to EBITDA Ratio shall mean, as of the end of any Person's fiscal
year, the ratio of (i) such Person's EBITDA for that year, to (ii) the unpaid,
principal balance of all Indebtedness (other than Subordinated Debt) for
borrowed money, and all lease obligations, owed by such Person, at the end of
such fiscal year.
EBITDA shall mean Net Income, plus (a) depreciation, depletion,
obsolescence and amortization of Property determined in accordance with
Generally Accepted Accounting Principles, plus (b) changes in deferred taxes,
reserves and other non-cash charges deducted from receipts in accordance with
Generally Accepted Accounting Principles in determining Net Income, plus (c)
interest, plus (d) income tax.
Eligible Account Debtor shall mean an Account Debtor who is neither (i) an
Affiliate of Borrower, nor (ii) an Account Debtor with whom Borrower has
suspended doing business.
Eligible Accounts shall mean all Current Accounts Receivable that are owed
to Borrower, by an Eligible Account Debtor, and in which Lender either (i)
holds a first-priority, perfected security interest, or (ii) would hold a
first-priority, perfected security interest if the Security Effective Date had
occurred and Lender had properly filed the Financing Statements.
<PAGE>
Eligible Inventory shall mean all Inventory that consists of finished
goods produced by Borrower and owned and held by Borrower for sale, and all
unused paper owned by Borrower and intended for use in producing such finished
goods, in which Lender either (i) holds a first-priority, perfected security
interest, or (ii) would hold a first-priority, perfected security interest if
the Security Effective Date had occurred and Lender had properly filed the
Financing Statements.
ERISA shall mean the Employee Retirement Income Security Act of 1974, as
amended from time to time, and all rules, regulations, rulings and
interpretations adopted by the Internal Revenue Service or the Department of
Labor thereunder.
Event of Default shall mean any of the events specified as an Event of
Default in Section 8 of this Loan Agreement; provided there has been satisfied
any requirement in connection with such event for the giving of notice, or the
lapse of time, or the happening of any further condition, event or act, and
Default shall mean any of such events, whether or not any such requirement has
been satisfied.
Financing Statements shall mean all such Uniform Commercial Code financing
statements as Lender shall require, in Proper Form, duly executed by Borrower
or others to give notice of and to perfect or continue perfection of Lender's
security interest in all Collateral.
Generally Accepted Accounting Principles shall mean, as to a particular
Person, such accounting practice as, in the opinion of the independent
accountants of recognized standing regularly retained by such Person and
acceptable to Lender, conforms at the time to generally accepted accounting
Principles, consistently applied. Generally accepted accounting principles
means those principles and practices (a) which are recognized as such by the
Financial Accounting Standards Board, (b) which are applied for all periods
after the date hereof in a manner consistent with the manner in which such
principles and practices were applied to the most recent financial statements
of the relevant Person furnished to Lender, and (c) which are consistently
applied for all periods after the date hereof so as to reflect properly the
financial condition, and results of operations and changes in cash flow, of
such Person. If any change in any accounting principle or practice is required
by the Financial Accounting Standards Board in order for such principle or
practice to continue as a Generally Accepted Accounting Principle or practice,
all reports and financial statements required hereunder may be prepared in
accordance with such change only after written notice of such change is given
to Lender.
Governmental Authority shall mean the United States of America, any State
of the United States and any political subdivision of any of the foregoing, and
any agency, department, commission, board, bureau, court, other tribunal having
jurisdiction over Lender, or Borrower, or any of their respective Properties.
Guaranty Agreement shall mean that certain Guaranty Agreement dated of
even date with this Agreement and signed by Guarantor, by which Guarantor
guarantees payment of all Indebtedness now or hereafter evidenced by any one
(1) or more of the Notes.
Guarantor shall mean Steck-Vaughn Publishing Corporation, a Delaware
corporation that owns 100% of the equity interests in the Borrower.
<PAGE>
Hazardous Materials shall mean (i) any "hazardous waste" as defined by the
Resource Conservation and Recovery Act of 1976 (42 U.S.C. Section 6901 et
seq.), as amended from time to time, and regulations promulgated thereunder;
(ii) any "hazardous substance" as defined by the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (42 U.S.C. Section 9601 et
seq.) ("CERCLA"), as amended from time to time, and regulations promulgated
thereunder; (iii) asbestos; (iv) polychlorinated biphenyls; (v) any substance
the presence of which on any of Borrower's Properties is prohibited by any
Governmental Authority; and (vi) any other substance which by any governmental
requirement requires special handling in its collection, storage, treatment or
disposal.
Hazardous Materials Contamination shall mean the contamination (whether
presently existing or hereafter occurring) of the improvements, facilities,
soil, ground water, air or other elements on, or of, any of Borrower's
Properties by Hazardous Materials, or the contamination of the buildings,
facilities, soil, ground water, air or other elements on, or of, any other
property as a result of Hazardous Materials at any time (whether before or
after the date of the Deed of Trust) emanating from any of Borrowers'
Properties.
Highest Lawful Rate shall mean the maximum nonusurious rate of interest
permitted to be charged, contracted for, received or collected by applicable
federal or Texas law (whichever shall permit the higher lawful rate) from time
to time in effect. At all times, if any, as Chapter One shall establish the
Highest Lawful Rate, the Highest Lawful Rate shall be the "indicated rate
ceiling" (as defined in Chapter One) from time to time in effect.
Indebtedness shall mean and include all items which in accordance with
Generally Accepted Accounting Principles would be included on the liability
side of a balance sheet on the date as of which Indebtedness is to be
determined (excluding capital stock, surplus, surplus reserves and deferred
credits); provided, that such term shall not mean or include any Indebtedness
in respect of which monies sufficient to pay and discharge the same in full
(either on the expressed date of maturity thereof or on such earlier date as
such Indebtedness may be duly called for redemption and payment) have been
deposited with a depository, agency or trustee acceptable to Lender in trust
for the payment thereof.
Investment shall mean the purchase or other acquisition of any securities
or Indebtedness of, or the making of any loan, advance, transfer of Property or
capital contribution to, or the incurring of any liability, contingent or
otherwise, in respect of the Indebtedness of, any Person.
Legal Requirement shall mean any law, statute, ordinance, decree,
requirement, order, judgment, rule, regulation (or interpretation of any of the
foregoing) of, and the terms of any license or permit issued by, any
Governmental Authority.
Lending Limit shall mean the limit imposed by one or more Legal
Requirements on the liability of Borrower to Lender.
Lien shall mean any security interest, pledge, lien or restriction of any
kind, whether based on common law, constitutional provision, statute or
contract, to secure performance of any obligation.
<PAGE>
Loan Documents shall mean this Agreement, the Notes, the Guaranty
Agreement, all Security Documents, all instruments, certificates and agreements
now or hereafter executed or delivered to Lender pursuant to any of the
foregoing, and all amendments, modifications, renewals, extensions, increases
and rearrangements of, and substitutions for, any of the foregoing.
Loans shall mean the loans described in Article 2 of this Agreement. Loan
shall mean any of the Loans.
NEC means National Education Corporation, a Delaware corporation.
Net Income shall mean gross revenues and other proper income credits, less
all proper income charges (including taxes), all determined in accordance with
Generally Accepted Accounting Principles; provided, that there shall not be
included in such revenues (i) any income representing the excess of equity in
any Subsidiary at the date of acquisition over the investment in such
Subsidiary, (ii) any interest in the undistributed earnings of any Person which
is not a Subsidiary, (iii) any earnings of any Subsidiary for any period prior
to the date such Subsidiary was acquired, (iv) any gains resulting from the
write-up of assets, (v) any proceeds of any life insurance policy, or (vi) any
gain which is classified as "extraordinary" in accordance with Generally
Accepted Accounting Principles.
Notes shall mean the notes described in Article 2 of this Agreement,
together with all renewals, amendments, modifications, extensions and
rearrangements of, and substitutions for, any of such notes. Note shall mean
any of the Notes.
Officer's Certificate shall mean a certificate signed in the name of the
relevant Business Entity by either its President, one of its Vice Presidents,
its Treasurer, its Secretary or one of its Assistant Treasurers or Assistant
Secretaries, or any of its General Partners.
Opinion Letter shall mean the opinion letter of counsel for Borrower, in
Proper Form.
Organizational Documents shall mean, with respect to a corporation, the
certificate of incorporation, articles of incorporation and bylaws of such
corporation; with respect to a partnership, the partnership agreement
establishing such partnership; and with respect to a trust, the written
instrument establishing such trust; in each case including any and all
modifications thereof.
Parties shall mean all Persons other than Lender executing any Loan
Document.
Past Due Rate shall mean the lesser of (i) the Highest Lawful Rate, or
(ii) the Prime Rate plus three percent (3.0%).
Permitted Investments shall mean all investments allowed by the Borrower's
current investment policy, a copy of which has been provided to Lender.
Person shall mean any individual, Business Entity, trust, unincorporated
organization, Governmental Authority or any other form of entity.
Plan shall mean any plan subject to Title IV of ERISA and maintained for
employees of Borrower or of any member of a "controlled group of corporations",
as such term is defined in the Code, of which Borrower, or any of its
Subsidiaries, is a part, or any such plan to which Borrower, or any of its
Subsidiaries, is required to contribute on behalf of its employees.
Pre-Tax Income shall mean Net Income plus federal income taxes, state
income taxes and international income taxes.
Prime Rate shall mean the varying rate so designated by Lender, and
established by Lender, from time to time as one of Lender's general reference
rates for calculating interest. The Prime Rate is a reference rate and is not
necessarily the lowest rate actually charged to any customer. Lender may make
commercial loans or other loans at rates of interest at, above or below the
Prime Rate.
Proper Form shall mean in form and substance reasonably satisfactory to
Lender.
Property shall mean any interest in any kind of property or asset, whether
real, personal or mixed, tangible or intangible.
Quarterly Unaudited Financial Statements shall mean the quarterly
financial statements of a Person, including all notes thereto, which statements
shall include a balance sheet as of the end of such quarter and an income
statement and a statement of cash flow for such fiscal quarter, and for the
fiscal year to date, subject to normal year-end adjustments, all setting forth
in comparative form the corresponding figures for the corresponding fiscal
quarter of the preceding year, prepared in accordance with Generally Accepted
Accounting Principles and certified by the president, treasurer or chief
financial officer of such Person as being true and correct and fairly
reflecting the financial position of such Person as of the date thereof and the
results of its operations for the period covered thereby, subject to said
normal year-end adjustments.
Security Agreement shall mean the Security Agreement dated of even date
with this Agreement and signed by Borrower, covering Borrower's Accounts and
Inventory.
Security Documents shall mean this Agreement, the Security Agreement, and
any and all Financing Statements now or hereafter executed and delivered by any
Person (other than solely by Lender) in connection with, or as security for the
payment or performance of, the Notes or any Indebtedness created under this
Agreement.
Security Effective Date has the meaning designated in the Security
Agreement.
Subsidiary shall mean, as to Borrower, any Business Entity of which forty
percent (40%) or more of the indicia of equity rights (whether outstanding
capital stock or otherwise) is at the time directly or indirectly owned by
Borrower, or by one or more of its Subsidiaries.
Subordinated Debt shall mean Indebtedness that has been, pursuant to a
written agreement that is acceptable to Lender, subordinated by the owner, or
obligee, thereof, to Indebtedness owed, or to become owing, to Lender.
Tangible Net Worth shall mean total assets (valued at cost less normal
depreciation) except Investments that are not Permitted Investments, less
(1) all intangibles, (2) all liabilities, and (3) all Indebtedness and other
amounts owed by NEC, all determined in accordance with Generally Accepted
Accounting Principles. The term "intangibles" shall include, without
limitation, (i) deferred charges (other than deferred marketing expense),
(ii) the amount of any write-up in the book value of any assets contained in
any balance sheet resulting from revaluation thereof or any write-up in excess
of the cost of such assets acquired (other than any FASB 115 write-up of assets
to market value), and (iii) the aggregate of all amounts appearing on the
assets side of any such balance sheet for franchises, licenses, permits,
patents, patent applications, copyrights, trademarks, trade names, goodwill,
experimental or organizational expenses and other like intangibles; except that
"intangibles" shall not include prepaid items. The term "liabilities" shall
include, without limitation, (i) Indebtedness secured by Liens on Property of
the Person with respect to which Tangible Net Worth is being computed whether
or not such Person is liable for the payment thereof, (ii) deferred
liabilities, and (iii) obligations under leases which have been capitalized.
$15,000,000.00 Note has the meaning designated in Section 2.1.
The following terms shall have the respective meanings ascribed to them in
the Texas Business and Commerce Code as enacted and in force in the State of
Texas on the date hereof:
accessions, continuation statement, fixtures, proceeds, security
interest and security agreement.
2. The Loans.
2.1 The $15,000,000.00 Revolving Loan.
2.1.1 Borrower has signed, and delivered to Lender, a Revolving
Promissory Note (the "$15,000,000.00 Note") in the stated principal amount of
$15,000,000.00 dated of even date herewith and made payable to the order of
Lender. Lender shall, subject to the terms and conditions of this Agreement,
make a Revolving Loan to Borrower that will create indebtedness evidenced by
the $15,000,000.00 Note. That Revolving Loan will be made by the making of one
or more Advances. Lender's agreement to make such Revolving Loan establishes a
$15,000,000.00 line of credit (the "$15,000,000.00 Line of Credit"); and each
Advance made under the $15,000,000.00 Line of Credit shall, at the time such
Advance is made, create principal indebtedness evidenced by the $15,000,000.00
Note, in the amount of that Advance.
2.1.2 Lender shall have no obligation to make any Advance under the
$15,000,000.00 Line of Credit on or after June 10, 1998. In addition, Lender
shall have no obligation to make an Advance under the $15,000,000.00 Line of
Credit if making that Advance would cause the unpaid principal balance of the
$15,000,000.00 Note to exceed the Current Credit Limit. As of any particular
date, and until June 10, 1997, the Current Credit Limit shall equal the lesser
of (i) $15,000,000.00, or (ii) the Borrowing Base. As of any particular date
beginning on June 10, 1997, and continuing until June 10, 1998, the Current
Credit Limit shall equal the lesser of (i) the amount by which $15,000,000.00
exceeds the unpaid principal balance of the First Term Note, or (ii) the
Borrowing Base. Borrower shall not, at any time, allow the unpaid principal
balance of the $15,000,000.00 Note to exceed the Current Credit Limit.
Borrower shall not at any time allow the sum of the unpaid principal balances
of the First Term Note and the Second Term Note to exceed an amount equal to
the Borrowing Base.
2.1.3 Within sixty (60) days after Lender receives Borrower's Annual
Audited Financial Statements for Borrower's 1995 fiscal year, Lender will give
Borrower notice of Lender's intentions regarding renewal and extension of the
$15,000,000.00 Line of Credit. However, Lender shall not be obligated to renew
or extend the $15,000,000.00 Line of Credit on the same terms or on any other
terms. If Lender fails to give such notice, Borrower's sole remedy shall be to
receive such a notice promptly after Borrower's request therefor.
<PAGE>
2.1.4 Beginning on the date of this Agreement and continuing until
June 10, 1998, a commitment fee shall accrue daily with respect to the unused
portion of the $15,000,000.00 Line of Credit. The amount of that fee that
shall accrue each day shall equal the product of (i) 1/360 times (ii) .0025
times (iii) the amount by which a certain difference exceeds the outstanding,
unpaid principal balance of the $15,000,000.00 Note, on such day; such certain
difference being the difference produced by subtracting the unpaid, principal
balance of the First Term Note from $15,000,000.00. On each date when a
payment is due under the $15,000,000.00 Note (or would be due if any accrued
interest were owing thereunder), Borrower shall pay to Lender the accrued,
unpaid portion of such commitment fee.
2.1.5 If Borrower has not previously paid an initial commitment fee
of $18,750.00 to Lender, in consideration of Lender's agreement to make the
Loans, then Borrower shall promptly pay such initial commitment fee, in cash,
to Lender.
2.2 The Term Loans.
2.2.1 Subject to the terms and conditions hereof, Lender shall make,
and Borrower shall accept, the First Term Loan on June 10, 1997. The First
Term Loan shall be in an amount equal to the lesser of (i) the unpaid,
principal balance of the $15,000,000.00 Note on June 10, 1997, or (ii) the
Borrowing Base on June 10, 1997. The First Term Loan shall be made by
Borrower's execution and delivery to Lender, and Lender's acceptance of, a
Promissory Note (the "First Term Note") in the form attached hereto as Exhibit
"B"; and, the delivery and acceptance of the First Term Note shall be in
renewal and extension of unpaid principal indebtedness evidenced by the
$15,000,000.00 Note immediately before the execution and delivery of the First
Term Note. The stated principal amount of the First Term Note shall be the
amount of the First Term Loan.
2.2.2 Subject to the terms and conditions hereof, Lender shall make,
and Borrower shall accept, the Second Term Loan on June 10, 1998. The Second
Term Loan shall be in an amount equal to the lesser of (i) the unpaid,
principal balance of the $15,000,000.00 Note on June 10, 1998, or (ii) the
amount by which the Borrowing Base exceeds the unpaid balance of the First Term
Note on June 10, 1998. The Second Term Loan shall be made by Borrower's
execution and delivery to Lender, and Lender's acceptance of, a Promissory Note
(the "Second Term Note") in the form attached hereto as Exhibit "C"; and, the
delivery and acceptance of the Second Term Note shall be in renewal and
extension of unpaid principal indebtedness evidenced by the $15,000,000.00 Note
immediately before the execution and delivery of the Second Term Note. The
stated principal amount of the Second Term Note shall be the amount of the
Second Term Loan.
2.3 Prepayments. Borrower may prepay any and all of the indebtedness
evidenced by one or more of the Notes, in whole or in part, if: (i) Borrower
simultaneously pays all interest that has accrued on any principal indebtedness
that is prepaid; (ii) Borrower gives notice of the proposed prepayment, to
Lender, in the manner specified in Section 9.2, at least three (3) Business
Days before the Business Day of the proposed prepayment; (iii) each partial
prepayment is to be applied to principal installments, if any, in the inverse
order of maturity; and (iv) any prepayment is made within either a Prime
Interest Period or the last three (3) Business Days of a LIBO Interest Period.
3. Pre-Maturity Interest Rate.
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3.1 Rate Options. The Contract Rate during each Interest Period shall be
determined in accordance with the provisions of this Article 3. At any time
that is at least three (3) Business Days, but not more than five (5) Business
Days, before the beginning of an Interest Period, Borrower may exercise an
option (the "Rate Option") to designate a LIBO Rate for that Interest Period.
Borrower may exercise the Rate Option by either (i) giving written notice of
such exercise to Lender, which notice shall identify the first day of such
Interest Period and the length of such Interest Period (which length must be
either one month, two months, three months or six months), or (ii) giving
notice to Lender in any other manner acceptable to Lender. If the Rate Option
is so exercised, then a LIBO Interest Period of the length specified in that
notice shall begin on the date specified in that notice. For each LIBO
Interest Period (i.e., an Interest Period with respect to which a Rate Option
has been exercised), the LIBO Rate shall be:
(i) Lender's 30-Day LIBO Rate plus the Additional Percentage, if
that LIBO Interest Period is one month;
(ii) Lender's 60-Day LIBO Rate plus the Additional Percentage, if
that LIBO Interest Period is two months;
(iii) Lender's 90-Day LIBO Rate plus the Additional Percentage, if
that LIBO Interest Period is three months; and
(iv) Lender's 180-day LIBO Rate plus the Additional Percentage, if
that LIBO Interest Period is six months.
For each Prime Interest Period, the Contract Rate shall be the Prime-Based
Rate.
3.2 Definitions. Each of the following-stated terms has the meaning
indicated:
(a) "Interest Period" means either a LIBO Interest Period or a Prime
Interest Period.
(b) "LIBO Interest Period" means a period beginning on the
commencement date specified in a notice that is given to exercise a Rate
Option and ending (i) immediately before the numerically corresponding day
in the first, second, third or sixth calendar month after the month that
includes such commencement date, or (ii) if such first, second, third or
sixth calendar month has no such numerically corresponding day, then at
the end of the last day of such month.
(c) "Prime Interest Period" means any period of one day, or two or
more consecutive days, for which no Rate Option has been exercised.
(d) Each of the terms "30-Day LIBO Rate, "60-Day LIBO Rate," "90-Day
LIBO Rate," and "180-Day LIBO Rate" means the rate so designated by Lender
and established by Lender from time to time with reference to the rate(s)
at which deposits in U.S. Dollars are offered to Lender in the interbank
eurodollar market, for periods of 30 days, 60 days, 90 days and 180 days,
respectively; and those rates may not be the lowest rates charged by
Lender.
(e) The Additional Percentage shall be 1.50% unless adjusted in
accordance with this Paragraph (e). If, before Borrower's Annual Audited
Financial Statements for 1996 are available, Borrower advises Lender that,
in Borrower's opinion, Borrower's operating income (determined in
accordance with Generally Accepted Accounting Principles) for 1996 will be
at least $14,000,000.00, then the Additional Percentage shall be adjusted
to 1.30% effective as of the first day of Borrower's 1997 fiscal year;
provided, however, that if Borrower's Annual Audited Financial Statements
for 1996 show that such operating income was not at least $14,000,000.00,
then such adjustment in the Additional Percentage shall be of no effect,
so that the Additional Percentage for 1997 shall be 1.50%. If, before
Borrower's Annual Audited Financial Statements for 1997 are available,
Borrower advises Lender that, in Borrower's opinion, Borrower's operating
income for 1997 will be at least $17,000,000.00, then the Additional
Percentage shall be adjusted to 1.25% effective as of the first day of
Borrower's 1998 fiscal year; provided, however, that if Borrower's Annual
Audited Financial Statements for 1997 show that such operating income was
not at least $17,000,000.00, then such adjustment in the Additional
Percentage shall be of no effect, so that the Additional Percentage for
1998 and each year thereafter shall be 1.50%. If Borrower's operating
income for 1997 is at least $17,000,000.00, then the Additional Percentage
shall be 1.25% thereafter until the date immediately following Borrower's
first fiscal year, if any, in which its operating income is less than
$17,000,000.00; and, on such date, the Additional Percentage shall return
to 1.50% and remain at 1.50% at all times thereafter. Any calculation of
accrued interest based on an Additional Percentage that is less than 1.50%
shall be provisional unless and until a determination is made from
Borrower's Annual Audited Financial Statements that the Additional
Percentage was appropriately adjusted.
(f) The "Prime-Based Rate" shall be the Prime Rate, except that at
any time when the Additional Percentage is less than 1.50%, the Prime-
Based Rate shall be the difference produced by subtracting 0.25% from the
Prime Rate.
3.3 Special Provisions Regarding the Contract Rate. If Lender determines
(which determination shall be presumed correct absent evidence of error):
(i) Unavailability. At the beginning of any LIBO Interest Period, that
by reason of any one (1) or more circumstances arising on or after
the date of this Agreement, dollar deposits in an amount
substantially equal to the unpaid balance of the Loans (and for a
period substantially equal to the LIBO Interest Period) are not
generally available in the interbank eurodollar market, or adequate
and fair means do not exist for ascertaining the LIBO-Based Rate,
then the Contract Rate during that Interest Period shall equal the
Prime-Based Rate until Lender notifies Borrower that such
circumstances no longer exist.
(ii) Illegality. At any time, that the initiation, or continued use, of
the LIBO-Based Rate as a basis for determining the Contract Rate has
become unlawful under Lender's good faith interpretation of any law,
governmental rule, regulation, guideline or order (or would conflict
with any such rule, regulation, guideline or order not having the
force of law), or has become impractical as a result of a contingency
occurring on or after the date of this Agreement which materially and
adversely affects the interbank eurodollar market, then the Contract
Rate shall thereafter equal the Prime-Based Rate.
4. Conditions.
4.1 All Advances. Lender's obligation to make any Advance is subject to
the accuracy of all Borrower's representations and warranties when made and on
the date of such Advance, to Borrower's performance of its obligations under
the Loan Documents, and to satisfaction of the following additional conditions:
(a) Lender shall have received the following, all of which shall be duly
executed and in Proper Form: (1) the signed Note that will evidence
indebtedness created by such Advance; (2) the Guaranty Agreement and such other
documents as Lender may reasonably require; and (3) if the Security Effective
Date has occurred, evidence satisfactory to Lender as to the perfection and
first-priority of the security interests granted by the Security Documents;
(b) no Default or Event of Default shall have occurred and be continuing;
(c) making such Advance shall not be prohibited by, or subject Lender to any
penalty or onerous condition under, any Legal Requirement, including but not
limited to, any Lending Limit; and (d) Borrower shall have paid all expenses of
the type described in Section 9.8 hereof through the date of such Advance.
4.2 First Advance. In addition to the matters described in Section 4.1
hereof, Lender's obligation to make the first Advance is subject to Lender's
receipt of each of the following, in Proper Form: (a) the signed $15,000,000.00
Note; (b) a Certificate of Corporate Resolution executed by the Secretary and
the President of Borrower dated as of the date hereof; (c) a certificate from
the Secretary of State or other appropriate public official of Delaware as to
Borrower's continued existence and good standing; (d) a certificate from the
appropriate public official of the State of Texas as to Borrower's due
qualification and good standing; (e) the Security Documents; (f) the Opinion
Letter; and (g) policies or certificates of insurance addressed to Lender
reflecting the insurance required by Section 6.9 hereof; and to the further
condition that, at the time of the first Advance, all legal matters incident to
the transactions herein contemplated shall be satisfactory to counsel for
Lender.
4.3 Term Loans. In addition to the matters described in Sections 4.1 and
4.2 hereof, Lender's obligation to make each of the First Term Loan and the
Second Term Loan is subject to Lender's receipt, in Proper Form, of the signed
First Term Note and the signed Second Term Note, respectively.
5. Representations and Warranties. To induce Lender to enter into this
Agreement and to make the Loans, Borrower represents and warrants to Lender, as
of the date hereof, as follows:
5.1 Organization. Borrower is duly organized, validly existing and in
good standing under the laws of the State of Delaware; has all power and
authority to conduct its business as presently conducted; and is duly qualified
to do business, and in good standing, in the State of Texas.
5.2 Financial Statements. Borrower's financial statements and
Guarantor's financial statements that have been delivered to Lender fairly
present, in accordance with Generally Accepted Accounting Principles, the
financial condition and the results of operations of Borrower as at the dates
and for the periods indicated. Since the date of the most-recent of such
financial statements, (i) no material adverse change has occurred in the
assets, liabilities, financial condition, business or affairs of Borrower, (ii)
Borrower has not become subject to any instrument or agreement materially and
adversely affecting its financial condition, business or affairs, and (iii)
Borrower has not engaged in any transaction outside the ordinary course of
Borrower's business, as that business was conducted before such date, that
materially and adversely affected its financial condition, business or affairs.
5.3 Enforceable Obligations; Authorization. The Loan Documents are
legal, valid and binding obligations of the Parties, enforceable in accordance
with their respective terms, except as may be limited by bankruptcy, insolvency
and other similar laws affecting creditors' rights generally and by general
equitable principles. The execution, delivery and performance of the Loan
Documents have been duly authorized by all necessary action of each of the
Parties; are within the power and authority of each of the Parties; do not and
will not contravene or violate any Legal Requirement or the Organizational
Documents of any Party; to the best of Borrower's knowledge do not and will not
result in the breach of, or constitute a default under, any agreement or
instrument by which any Party or any of its Property may be bound or affected;
and do not and will not result in the creation of any Lien upon any Property of
any Party except as expressly contemplated therein. All necessary permits,
registrations and consents for such making and performance have been obtained.
Except as otherwise expressly stated in the Security Documents, the Liens of
the Security Documents will constitute valid, perfected, first-priority Liens
in the Property described therein.
5.4 Other Debt. Borrower is not in default in the payment of any
Indebtedness or under any mortgage, deed of trust, security agreement, lease or
other agreement to which it is a party. Except as set forth in Borrower's
financial statements delivered to Lender, or as otherwise previously disclosed
in writing to Lender, Borrower has no Indebtedness for borrowed money.
5.5 Litigation. Except as heretofore disclosed to Lender in writing,
there is no litigation or administrative proceeding pending or, to the
knowledge of Borrower, threatened against, nor any outstanding judgment, order
or decree affecting, Borrower or any of its Properties before or by any
Governmental Authority. Borrower is not is in default with respect to any
judgment, order or decree of any Governmental Authority in any manner, or to
any extent, that materially and adversely affects its financial condition,
business or affairs.
5.6 Title. Borrower has good and marketable title to the Collateral,
free and clear of all Liens other than those permitted by Section 7.1.
5.7 Taxes. Borrower has filed all tax returns required to have been
filed and paid all taxes due, except those for which extensions have been
obtained and those which are being contested in good faith and reserves deemed
adequate by Lender have been established therefor. Borrower is not aware of
any pending investigation by any taxing authority which in the event of an
adverse determination would have a material, adverse impact on Borrower's
financial condition or business prospects.
5.8 Subsidiaries. Borrower has no Subsidiaries.
5.9 Representations by Others. All written statements made by or on
behalf of Borrower, in connection with any Loan Document shall not be untrue or
incorrect in any material respect.
5.10 Investment Company Act Not Applicable. Neither Borrower or any of
its Subsidiaries is an "investment company," or a company "controlled" by an
"investment company," within the meaning of the Investment Company Act of 1940,
as amended.
5.11 Public Utility Holding Company Act Not Applicable. Neither 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 an
affiliate of a "subsidiary company" of a "holding company," as such terms are
defined in the Public Utility Holding Company Act of 1935, as amended.
5.12 Regulations G, T, U and X. None of the proceeds of any Loan will be
used for the purpose of purchasing or carrying, directly or indirectly, any
"margin stock" within the meaning of Regulation U of the Board of Governors of
the Federal Reserve System ("margin stock") or to extend credit to others for
the purpose of purchasing or carrying any margin stock or for any other purpose
which would constitute this transaction a "purpose credit" within the meaning
of said Regulation U, as now in effect or as the same may hereafter be in
effect. Neither Borrower nor any of its Subsidiaries will take or permit any
action which would involve Lender in a violation of Regulation G, Regulation T,
Regulation U, Regulation X or any other regulation of the Board of Governors of
the Federal Reserve System or a violation of the Securities Exchange Act of
1934, in each case as now or hereafter in effect.
5.13 ERISA. No Reportable Event (as defined in Section 4043(b) of ERISA)
has occurred with respect to any Plan. Each Plan complies with all applicable
provisions of ERISA, and Borrower and each of its Subsidiaries have filed all
reports required by ERISA and the Code to be filed with respect to each Plan.
Borrower has no knowledge of any event which could result in a liability of
Borrower or any of its Subsidiaries to the Pension Benefit Guaranty
Corporation. Borrower and its Subsidiaries have met all requirements with
respect to funding the Plans imposed by ERISA or the Code. Since the effective
date of Title IV of ERISA there have not been any nor are there now existing
any events or conditions that would permit any Plan to be terminated under
circumstances which would cause the lien provided under Section 4068 of ERISA
to attach to any Property of Borrower or any of its Subsidiaries. The value of
the Plans' benefits guaranteed under Title IV of ERISA on the date hereof does
not exceed the value of such Plans' assets allocable to such benefits as of the
date of this Agreement and shall not be permitted to do so hereafter.
5.14 No Financing of Corporate Takeovers. None of the proceeds of any
Loan will be used to acquire any security in any transaction which is subject
to Section 13 or 14 of the Securities Exchange Act of 1934, as amended.
5.15 Franchises, Co-licenses, etc. To the best of Borrower's knowledge,
Borrower owns or has obtained all the material governmental permits,
certificates of authority, leases, patents, trademarks, service marks, trade
names, copyrights, franchises and licenses, and rights with respect thereto,
required or necessary in connection with the conduct of its business as
presently conducted.
5.16 Survival of Representations, Etc. All representations and warranties
made by Borrower hereunder shall survive the delivery of the Notes to Lender
and the making of the Loans hereunder, and no investigation at any time made by
or on behalf of Lender shall diminish Lender's rights to rely thereon. All
statements contained in any certificate or other written instrument delivered
by Borrower or by any Person authorized by Borrower under or pursuant to this
Agreement or in connection with the transactions contemplated hereby shall not
be untrue or incorrect in any material respect.
6. Affirmative Covenants.
Until (i) the termination of this Agreement, (ii) payment in full of the
Notes, and (iii) performance of all obligations of Borrower under the Loan
Documents, Borrower shall do, and if necessary cause to be done, each and all
of the following:
6.1 Taxes, Existence, Regulations, Property, Etc. At all times (a) pay
before delinquency all taxes and governmental charges of every kind upon it or
against its income, profits or Property, unless and only to the extent that the
same are contested in good faith, with reserves deemed adequate by Lender
established therefor; (b) do all things necessary to preserve its corporate
existence, qualifications, rights and franchises in all states where such
qualification is necessary; (c) comply with all applicable Legal Requirements
in respect of the conduct of its business and the ownership of its Property;
(d) cause its Property to be protected, maintained and kept in good repair; and
(e) make such replacements and additions to its Property as are reasonably
necessary to conduct its business.
6.2 Financial Statements and Information. Furnish to Lender: (a) as soon
as available and in any event within 120 days after the end of each fiscal year
of Borrower, consolidated Annual Audited Financial Statements of Guarantor and
Borrower, for such fiscal year; (b) as soon as available and in any event
within 45 days after the end of each of the first three (3) quarters of each
fiscal year of Borrower, consolidated Quarterly Unaudited Financial Statements
of Guarantor and Borrower for such quarter; (c) concurrently with the financial
statements provided for in Subsections (a) and (b) hereof, such schedules,
computations and other information, in reasonable detail, as may be requested
by Lender to demonstrate compliance with the covenants set forth herein or
reflecting any non-compliance therewith as of the applicable date, all
certified as true, correct and complete by the President or principal financial
officer of Borrower, and an Officer's Certificate, in the form of Exhibit "D,"
signed by the President or principal financial officer of Borrower; (d) as soon
as available, and in any event within 21 days after the end of each month, a
Borrowing Base Report, a report showing a detailed aging of the Borrower's
Accounts, and a report showing an accounting and valuation of Borrower's
Inventory, all dated as of the end of such month and signed by Borrower in
Proper Form; (e) as soon as available and in any event within 120 days after
the end of each of NEC's fiscal years, Annual Audited Financial Statements of
NEC for such fiscal year; and (f) such other information relating to the
financial condition and affairs of Guarantor and Borrower as from time to time
may be requested by Lender.
6.3 Debt to EBITDA Ratio. Cause Guarantor to maintain a Debt to EBITDA
Ratio that does not exceed 2.0 at and as of the end of each of Guarantor's
fiscal years.
6.4 Tangible Net Worth. Cause Guarantor to maintain a Tangible Net Worth
in an amount of $30,000,000.00, or more, at and as of the end of each of
Guarantor's quarter-annual accounting periods, beginning with such accounting
period that ends on December 31, 1996.
6.5 Inspection. Permit Lender to inspect its Property, examine its
files, books and records, make and keep copies thereof, and discuss its affairs
with its officers and accountants, all at such times and intervals, and to such
extent, as Lender reasonably desires.
6.6 Further Assurances. Promptly execute and deliver any and all other
and further instruments which may be requested by Lender to cure any defect in
the execution and delivery of any Loan Document or more fully to describe
particular aspects of Borrower's agreements set forth in the Loan Documents or
so intended to be.
6.7 Books and Records. Maintain its books of record and account in
accordance with Generally Accepted Accounting Principles.
6.8 Insurance. Maintain insurance with such insurers, on such of its
Properties, in such amounts and against such risks as is reasonably
satisfactory to Lender, and furnish Lender satisfactory evidence thereof
promptly upon request. These insurance provisions are cumulative of the
insurance provisions of the Security Documents. Upon request, Borrower shall
cause Lender to be named as a beneficiary, loss payee as to hazard insurance
and/or additional insured as to liability insurance (as required by Lender) of
such insurance and shall provide Lender with copies of the policies of
insurance and a certificate of the insurer that the insurance required by this
Section 6.9 may not be canceled, reduced or affected in any manner without
thirty (30) days' prior written notice to Lender.
6.9 Notice of Certain Matters. Notify Lender immediately upon acquiring
knowledge of the occurrence of any of the following: the institution or
threatened institution of any lawsuit or administrative proceeding that could
reasonably be expected to materially and adversely affect Borrower's financial
condition, business or affairs; the occurrence of any material adverse change
in the assets, liabilities, financial condition, business or affairs of
Borrower; or the occurrence of any Event of Default or any Default. Borrower
will notify Lender in writing at least thirty (30) Business Days before the
date that Borrower changes its name, the location of its chief executive office
or principal place of business, or the place where it keeps its books and
records.
6.10 ERISA. At all times:
(a) Maintain and keep in full force and effect each Plan;
(b) Make contributions to each Plan in a timely manner and in
an amount sufficient to comply with the minimum funding standards
requirements of ERISA;
(c) Immediately upon acquiring knowledge of any Reportable
Event or of any "prohibited transaction," as such term is defined in
the Code, in connection with any Plan, furnish Lender a statement
executed by the president or chief financial officer of Borrower
setting forth the details thereof and the action which Borrower
proposes to take with respect thereto and, when known, any action
taken by the Internal Revenue Service with respect thereto;
(d) Notify Lender promptly upon receipt by Borrower or any of
its Subsidiaries of any notice of the institution of any proceedings
or other actions which may result in the termination of any Plan and
furnish to Lender copies of such notice;
(e) Acquire and maintain in amounts satisfactory to Lender from
either the Pension Benefit Guaranty Corporation or authorized private
insurers, when available, the contingent employer liability coverage
insurance required under ERISA;
(f) If requested by Lender, furnish Lender with copies of the
annual report for each Plan filed with the Internal Revenue Service
not later than ten (10) days after such report has been filed; and
(g) If requested by Lender, furnish Lender with copies of any
request for waiver of the funding standards or extension of the
amortization periods required by Sections 303 and 304 of ERISA or
Section 412 of the Code promptly after the request is submitted to
the Secretary of the Treasury, the Department of Labor or the
Internal Revenue Service, as the case may be.
6.11 Indebtedness. Pay timely all Indebtedness incurred by it and perform
all covenants, and satisfy all conditions, connected therewith.
6.<D Hazardous Materials. Borrower shall defend, indemnify and hold
harmless Lender from any and all liabilities (including strict liability),
actions, demands, penalties, losses, costs or expenses (including, without
limitation, reasonable attorneys' fees and remedial costs), suits, costs of any
settlement or judgment and claims of any and every kind whatsoever which may
now or in the future (whether before or after the release of any applicable
Security Documents) be paid, incurred or suffered by or asserted against,
Lender by any person or entity or governmental agency for, with respect to, or
as a direct or indirect result of, the placement on or under, or the escape,
seepage, leakage, spillage, discharge, emission, discharging or release from
any of Borrower's Properties of any Hazardous Materials or any Hazardous
Materials Contamination or arise out of or result from the environmental
condition of any of Borrower's Properties or the applicability of any
governmental requirement relating to Hazardous Materials (including, without
limitation, CERCLA or any so-called federal, state or local "Superfund" or
"Superlien" laws, statute, law, ordinance, code, rule, regulation, order or
decree), where such Hazardous Materials or Hazardous Materials Contamination
were caused by or within the control of Borrower. The representations,
covenants and warranties contained in this Section 6.12, 7.7 shall survive the
release of any applicable Liens held by Lender.
7. Negative Covenants.
Until (i) the termination of this Agreement, (ii) payment in full of the
Notes, and (iii) performance of all obligations of Borrower to Lender under the
Loan Documents, Borrower shall not do any of the following:
7.1 Liens. Create or suffer to exist any Lien upon any inventory or
accounts now owned or hereafter acquired by Debtor; or in any manner directly
or indirectly sell, assign, pledge or otherwise transfer any of such inventory
or accounts; provided, however, that Borrower may create or suffer to exist:
(a) artisans' or mechanics' Liens arising in the ordinary course of business,
and Liens for taxes, but only to the extent that payment thereof shall not be
due; (b) Liens in favor of Lender; and (c) purchase money security interests
taken or retained to secure payment of all or part of Borrower's purchase price
for the Property subject to such security interests or Indebtedness incurred by
Borrower, to enable Borrower to purchase the Property subject to such security
interests; and, provided further, that Borrower may sell inventory in the
ordinary course of Borrower's business.
7.2 Contingent Liabilities. Directly or indirectly guarantee the
performance or payment of, or purchase or agree to purchase, or assume or
contingently agree to become or be secondarily liable in respect of, any
obligation or liability of any other Person except for the endorsement of
checks or other negotiable instruments in the ordinary course of business,
Indebtedness owed to Lender, and obligations and liabilities of Borrower's
Subsidiary.
7.3 Liquidations and Dispositions. In any single transaction or series
of transactions, directly or indirectly: (a) liquidate or dissolve; or
(b) sell, convey or lease substantially all of its assets.
7.4 Distributions. At any time, make any distribution of any Property,
other than cash dividends, to any of its stockholders.
7.5 Nature of Business. Change the nature of its business, or enter into
any business which is substantially different from the business in which it is
presently engaged.
7.6 Books and Records. Change the method by which it maintains its books
and records.
7.7 Hazardous Materials. Cause or permit any Hazardous Materials to be
placed, held, used, located or disposed of on, under or at any of its
Properties or any part thereof by any Person, or cause or permit any part of
any of its Properties to be used as a manufacturing, storage or dump site for
Hazardous Materials, or cause or suffer any liens to be recorded against any of
its Properties as a consequence of, or in any way related to, the presence,
remediation or disposal of Hazardous Materials in or about any of its
Properties, including any so-called state, federal or local "Superfund" lien
relating to such matters; provided, however, that this Section 6.12, 7.7 shall
not prohibit Borrower from engaging in any activity in the ordinary course of
Borrower's business.
7.8 Extensions of Credit. Make any loan or advance to any individual,
partnership, corporation or other entity except (i) loans to NEC or Guarantor,
and (ii) other loans that, in the aggregate, never have an unpaid principal
balance in excess of $500,000.00.
7.9 Borrowings. Create, incur, assume or become liable in any manner for
any Indebtedness in excess of an aggregate amount of $1,000,000.00, except for
(i) normal trade debts incurred in the ordinary course of Borrower's business,
(ii) existing indebtedness disclosed to Lender in writing and acknowledged by
Lender before the date of this Agreement, (iii) Indebtedness owed to Lender,
and (iv) Indebtedness incurred by Borrower to acquire, or in the acquisition
of, other business entities or operations, as long as the sum of the aggregate
outstanding balance of such "acquisition" Indebtedness plus the aggregate
outstanding balance owing under the Notes does not exceed $15,000,000.00.
8. Events of Default and Remedies.
8.1 Events of Default. Each of the following-described events, subject
to Section 8.4, shall be an Event of Default:
(a) Borrower fails to pay any Indebtedness evidenced by any of
the Notes, or any other amount owed under the Loan Documents, as and
when due; or
(b) Borrower or Guarantor fails to pay at maturity, or within
any applicable period of grace, any principal or interest on any
other obligation owed to Lender, or suffers to exist any circumstance
under which Lender may declare such obligation due before its stated
maturity; or Borrower fails to perform any covenant (other than any
covenant contained in Sections ?, 6.3 and ? hereof) contained in any
agreement made for Lender's benefit; or Borrower defaults under, or
violates any material Legal Requirement in a way, or to an extent,
that materially and adversely affects Borrower's financial
conditions; or
(c) Any representation or warranty made by Borrower in any of
the Loan Documents proves to have been incorrect, false or misleading
in any material respect when made; or
(d) Borrower's failure to be in compliance with any covenant
contained in Sections ? and ? hereof continues for a period of ten
(10) days after Lender gives written notice of that failure to
Borrower; or
(e) A final judgment, or judgments in the aggregate, for the
payment of money that would, if paid, cause Borrower to be in
violation of the covenant contained in Section ? hereof is rendered
against Borrower and the same shall remain undischarged for a period
of 30 days during which execution shall not be effectively stayed; or
(f) Borrower or Guarantor claims that at any time after the
Security Effective Date Lender does not, or will not, have a valid,
first-priority Lien as provided in the Loan Documents, on any
Collateral purportedly provided by Borrower, or that either this
Agreement or any one or more of the Notes is not a valid and binding
obligation of Borrower, or that the Guaranty Agreement is not a valid
and binding obligation of Guarantor; or
(g) Borrower sells, encumbers, or abandons (except as otherwise
expressly permitted by the Loan Documents) any of the Property now or
hereafter subject to any of the Security Documents; or any levy,
seizure or attachment is made thereof or thereon; or
(h) Any order is entered in any proceeding against Borrower or
Guarantor decreeing the dissolution, liquidation or split-up of
Borrower or Guarantor, and such order remains in effect for 10 days;
or
(i) Borrower or Guarantor makes an assignment for the benefit
of creditors, becomes insolvent, fails generally to pay its debts as
they become due, petitions or applies to any tribunal for the
appointment of a trustee, custodian, receiver, (or other similar
official) of, or for, Borrower or Guarantor or of all or any
substantial part of the assets of Borrower or Guarantor or commences
a voluntary case or any other proceedings relating to Borrower or
Guarantor under any bankruptcy, reorganization, compromise
arrangement, insolvency, readjustment of debt, dissolution or
liquidation or similar law (herein called the "bankruptcy law") of
any jurisdiction; or
(j) Any petition or application is filed, or any such
proceedings are commenced, against Borrower or Guarantor under the
bankruptcy law of any jurisdiction, and Borrower or Guarantor by any
act or omission indicates its approval, consent, or acquiescence, or
an order for relief is entered in an involuntary case under the
federal bankruptcy laws as now or hereafter constituted, or an order,
judgment or decree is entered appointing any trustee, custodian,
receiver, liquidator, or similar official for Borrower or Guarantor
or any substantial part of the assets of either of them or
adjudicating Borrower or Guarantor bankrupt or insolvent, or
approving the petition in any such proceedings, and such order,
judgment, or decree remains in effect for ninety (90) days; or
(k) Borrower or Guarantor conceals, removes, or permits to be
concealed or removed, any part of its Property, with intent to
hinder, delay or defraud its creditors or any of them, or makes or
suffers a transfer of any of its Property which may be fraudulent
under any bankruptcy, fraudulent conveyance or similar law; or shall
have made any transfer of its Property to or for the benefit of a
creditor at a time when other creditors similarly situated have not
been paid; or
(l) Borrower fails to be in compliance with the covenant in Section
6.4 hereof; or
(m) Any court finds or rules that at any time after the Security
Effective Date Lender does not, or will not, have a valid, first-priority
Lien as provided in the Loan Documents, on any Collateral purportedly
provided by Borrower and Borrower fails to provide Lender with such a
valid, first-priority Lien within thirty (30) days thereafter; or
(n) The liquidation or dissolution of Guarantor, or Guarantor's
sale, conveyance or lease of substantially all of its assets.
If an Event of Default occurs, then Lender shall have the right, subject to
Section 8.4 below, to do any or all of the following: (1) declare all, or any
part, of all Indebtedness evidenced by any of the Notes to be, and thereupon
all the same shall forthwith become, immediately due and payable; (2) terminate
all Commitments; and (3) exercise any and all other rights pursuant to the Loan
Documents.
8.2 Other Remedies. In addition to and cumulative of any rights or
remedies provided in Section 8.1 hereof, if any one or more Events of Default
shall have occurred, Lender may proceed to protect and enforce its rights
hereunder by any appropriate proceedings, and the Liens evidenced by the
Security Documents shall be subject to foreclosure in any commercially
reasonable manner. Lender may also proceed to enforce the specific performance
of any covenant contained in any of the Loan Documents, to enforce the payment
of the Notes, and to enforce any other legal or equitable right provided under
any of the Loan Documents or otherwise existing under any law.
8.3 Remedies Cumulative. No remedy, right or power conferred upon Lender
is intended to be exclusive of any other remedy, right or power given hereunder
or now or hereafter existing at law, in equity, or otherwise, and all such
remedies, rights and powers shall be cumulative.
8.4 Notice and Right to Cure. Any provisions (other than the last
sentence of this Section 8.4) herein to the contrary notwithstanding, Lender
shall not, as the result of any Curable Event of Default, exercise any remedy
provided in any of the Loan Documents unless Lender has previously given
written notice of that Curable Event of Default to Borrower and that Curable
Event of Default has continued for a certain period (the "Cure Period") after
such written notice was so given. With respect to each Curable Event of
Default that is a failure to pay, or a default in paying, any amount of money,
the Cure Period shall be ten (10) days; and with respect to all other Curable
Events of Default, the Cure Period shall be thirty (30) days. As used herein,
"Curable Event of Default" means any Event of Default except any event
described in Subsections (d), (e), (f), (i), (j), (k), (l), or (m) of Section
8.1. In no event shall Lender have any obligation to advance any funds to
Borrower, at a time when an Event of Default or a Default exists.
9. Miscellaneous.
9.1 No Waiver. Neither Lender's failure to exercise, nor its delay in
exercising, any power or right under the other Loan Documents shall operate as
a waiver thereof. Neither any single or partial exercise of any such right or
power, nor any abandonment or discontinuance of steps to enforce such a right
or power, shall preclude any other exercise thereof or of any other right or
power. No course of dealing between Borrower and Lender shall operate as a
waiver of any right of Lender. No modification or waiver of any provision of
any Loan Document, nor any consent to any departure therefrom, shall be
effective unless the same shall be in writing and signed by the person against
whom enforcement thereof is sought, and then such waiver or consent shall be
effective only in the specific instance for which given.
9.2 Notices. All notices under the Loan Documents shall be in writing
and either (i) personally delivered against receipt therefor, (ii) sent by
overnight courier against receipt therefor, or (iii) mailed by registered or
certified United States mail, return receipt requested, addressed as follows:
<PAGE>
(a) If to Borrower:
Steck-Vaughn Company
8701 North MoPac, Suite 200
Austin, Texas 78759
Attention: Vice President, Finance; with a copy to:
National Education Corporation
2601 Main Street
Irvine, California 92714
Attention: General Counsel
(b) If to Lender:
NationsBank of Texas, N.A.
P.O. Box 908
Austin, Texas 78781-0908
(Attention: Ms. Sylvia H. Maggio);
or to such other address of a party hereto as that party may designate by
notice hereunder. Notices shall be deemed to have been given when personally
delivered or, if mailed, on the next Business Day after mailing.
9.3 Governing Law. Each Loan Document shall be governed by and construed
in accordance with the laws of the State of Texas and the United States of
America. Any legal proceeding against Lender arising out of, or in connection
with, any of the Loan Documents shall be brought in the District Courts of
Travis County, Texas, or in the United States District Court for the Western
District of Texas, Austin Division.
9.4 Survival; Parties Bound. All representations, warranties, covenants
and agreements made by or on behalf of Borrower in connection herewith shall
survive the execution and delivery of the Loan Documents, shall not be affected
by any investigation made by any Person, shall bind Borrower and its successors
and assigns, and shall inure to the benefit of Lender and its successors and
assigns. Lender's agreement to make Loans to Borrower shall not inure to the
benefit of any successor or assign of Borrower. The term of this Agreement
shall be until the final maturity of all the Notes and the payment of all
amounts due under the Loan Documents, whereupon it shall terminate; provided,
however, that if Borrower pays all amounts owing under the Loan Documents and
agrees in writing that Lender has no further obligations under the Loan
Documents, then this Agreement shall terminate.
9.5 Counterparts. This Agreement may be executed in several identical
counterparts, and by the parties hereto on separate counterparts; and each
counterpart, when so executed and delivered, shall constitute an original
instrument. All such separate counterparts shall constitute but one and the
same instrument.
9.6 Usury Not Intended; Refund of Any Excess Payments. It is the intent
of the parties in the execution and performance of this Agreement to contract
in strict compliance with the usury laws of the State of Texas and the United
States of America from time to time in effect. In furtherance thereof, Lender
and Borrower stipulate and agree that none of the terms and provisions
contained in the Loan Documents shall ever be construed to create a contract to
pay for the use, forbearance or detention of money, interest at a rate in
excess of the Highest Lawful Rate, and that for purposes hereof "interest"
shall include the aggregate of all charges which constitute interest under such
laws and are contracted for, reserved, taken, charged or received under the
Loan Documents. In determining whether or not the interest paid or payable,
under any specific contingency, exceeds the Highest Lawful Rate, Borrower and
Lender shall, to the maximum extent permitted under applicable law, (a) treat
all Loans as but a single extension of credit (and Borrower and Lender agree
that such is the case and that provision herein for multiple Loans and Notes is
for convenience only), (b) characterize any nonprincipal payment as an expense,
fee or premium rather than as interest, (c) exclude voluntary prepayments and
the effects thereof, and (d) "spread" the total amount of interest throughout
the entire contemplated term of the Loans. The provisions of this paragraph
shall control over all other provisions of the Loan Documents which may be in
apparent conflict herewith.
9.7 Captions. The headings and captions appearing in the Loan Documents
have been included solely for convenience and shall not be considered in
construing the Loan Documents.
9.8 Expenses. Any provision to the contrary notwithstanding, and whether
or not the transactions contemplated by this Agreement shall be consummated,
Borrower shall pay on demand all out-of-pocket expenses (including, without
limitation, the fees and expenses of counsel for Lender) in connection with the
negotiation, preparation, execution, filing, recording, refiling, re-recording,
modification, supplementing and waiver of the Loan Documents and the making,
servicing and collection of the Loans. Borrower's obligations under this and
the following section shall survive the termination of this Agreement and the
payment of the Notes.
9.9 Indemnification. Borrower shall indemnify, defend and hold Lender
harmless from and against any and all loss, liability, obligation, damage,
penalty, judgment, claim, deficiency and expense (including interest,
penalties, attorneys' fees and amounts paid in settlement) to which Lender may
become subject arising out of or based upon the Loan Documents or any Loan,
except for Lender's failure to perform its obligations under the Loan Documents
or any Legal Requirements.
9.10 Entire Agreement. The Loan Documents embody the entire agreement
between Borrower and Lender and supersede all prior proposals, agreements and
understandings relating to the subject matter hereof. Each of Lender and
Borrower certifies that it is relying on no representation, warranty, covenant
or agreement except for those set forth in the Loan Documents.
9.11 Severability. If any provision of any Loan Documents shall be
invalid, illegal or unenforceable in any respect under any applicable law, the
validity, legality and enforceability of the remaining provisions shall not be
affected or impaired thereby.
9.12 Sale or Assignment. Lender reserves the right, in its sole
discretion, without notice to Borrower, to sell participations in all or any
part of any Loan as long as Lender remains the "lead bank."
9.13 Loan Agreement Controls. If there are any conflicts or
inconsistencies among this Agreement and any of the other Loan Documents, this
Agreement shall prevail and control.
9.14 Commitment. Lender has no commitment to lend sums to Borrower other
than as specifically set forth herein.
9.15 Arbitration.
(a) Basic Requirements. Any controversy or claim between or among
any of the Parties and Lender, including, but not limited to, any claim
arising out of or relating to this Agreement or any related agreements or
instruments and any claim based on or arising from any alleged tort, shall
be determined by binding arbitration in accordance with the Federal
Arbitration Act (or if not applicable, the applicable state law), the
Rules of Practice and Procedure for the Arbitration of Commercial Disputes
of Judicial Arbitration and Mediation Services, Inc. (J.A.M.S.) and the
"Special Rules" set forth below. In the event of any inconsistency, the
Special Rules shall control. Judgment upon any arbitration award may be
entered in any court having jurisdiction. Any one or more of the Parties,
and/or Lender, may bring an action, including a summary or expedited
proceeding, to compel arbitration of any controversy or claim to which
this Agreement applies, in any court having jurisdiction over such action.
(b) Special Rules. The arbitration shall be (i) conducted in the
city of Borrower's domicile at the time of this Agreement's execution, and
(ii) administered by J.A.M.S., who will appoint an arbitrator. If
J.A.M.S. is unable or legally precluded from administering the
arbitration, then the American Arbitration Association will serve. All
arbitration hearings will be commenced within ninety (90) days of the
demand for arbitration; and, the arbitrator shall, only upon a showing of
cause, be permitted to extend the commencement of such hearing for no more
than an additional sixty (60) days.
(c) Reservation of Rights. Nothing in this Agreement shall be
deemed to (i) limit the applicability of any otherwise applicable statutes
of limitation or any waivers contained in this Agreement; or (ii) be a
waiver by Lender of the protection afforded to it by 12 U.S.C Paragraph 91
or any substantially equivalent state law; or (iii) limit the right of
Lender (a) to exercise self help remedies as permitted by the Texas
Uniform Commercial Code - Secured Transactions, or (b) to foreclosure of
any lien or security interest against the Collateral, or (c) to obtain
from a court provisional or ancillary remedies such as (but not limited
to) injunctive relief, writ of possession, or the appointment of a
receiver. Lender may exercise such self help rights, cause a foreclosure
of any such lien or security interest, or obtain any such provisional or
ancillary remedies before, during, or after the pendency of any
arbitration proceeding brought pursuant to this Agreement. Neither
Lender's exercise of self help remedies, nor Lender's institution or
maintenance of an action for foreclosure or any such provisional or
ancillary remedies, shall constitute a waiver of the right of any of the
Parties, or Lender, to compel arbitration of the merits of the controversy
or claim occasioning resort to such exercise, institution or maintenance.
9.16 Waiver of Offset Rights. Lender shall have no right to offset any of
Borrower's funds or moneys on deposit with Lender against any of Borrower's
liabilities or obligations under the Loan Documents; provided, however that
this Section 9.16 shall not impair or diminish any security interest granted by
Borrower or Lender's rights to enforce any such security interest.
THIS WRITTEN AGREEMENT REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES
AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date set forth above.
BORROWER: LENDER:
STECK-VAUGHN COMPANY NATIONSBANK OF TEXAS, N.A.
(a Delaware corporation) (a national banking association)
By: /s/ By: /s/
_____________________ ________________________
Print Name: Floyd D. Rogers Print Name: Sylvia H. Maggio
Title: Vice President, Finance Title: Vice President
and Treasurer
**EXHIBITS INTENTIONALLY OMITTED; FURNISHED UPON REQUEST.
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,
______________________
1996 1995
______________________
<S> <C> <C>
NET INCOME (LOSS) $ 665 $ (6,157)
======================
COMMON STOCK:
Shares outstanding from beginning of period 35,137 29,578
Pro rata shares:
Stock options exercised 24 --
Assumed exercise of stock options, using treasury stock
method 1,104 54
______________________
Weighted average number of shares outstanding 36,265 29,632
======================
EARNINGS (LOSS) PER SHARE $ .02 $ (.21)
======================
</TABLE>
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,
______________________
1996 1995
______________________
<S> <C> <C>
NET INCOME (LOSS) $ 665 $ (6,157)
Add back senior debenture interest, net of applicable taxes -- 300
Add back junior debenture interest, net of applicable taxes 570 570
______________________
NET INCOME (LOSS) FOR FULLY DILUTED COMPUTATION $ 1,235 $ (5,287)
======================
COMMON STOCK:
Shares outstanding from beginning of period 35,137 29,578
Stock options exercised 24 --
Assumed exercise of stock options, using treasury stock method 1,236 54
Assumed conversion of senior subordinated debentures,
from the beginning of the period -- 5,000
Assumed conversion of junior subordinated debentures,
from the beginning of the period 2,300 2,300
______________________
Weighted average number of shares outstanding 38,697 36,932
======================
FULLY DILUTED EARNINGS (LOSS) PER SHARE $ .02 $ (.21)
======================
</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 From 10-Q for the quarter ended March 31,
1996, 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-31-1995
<PERIOD-START> JAN-01-1996
<PERIOD-END> MAR-31-1996
<CASH> 19,437
<SECURITIES> 1,503
<RECEIVABLES> 34,528
<ALLOWANCES> 2,481
<INVENTORY> 33,771
<CURRENT-ASSETS> 120,354
<PP&E> 55,797
<DEPRECIATION> 31,166
<TOTAL-ASSETS> 188,871
<CURRENT-LIABILITIES> 77,129
<BONDS> 73,925
<COMMON> 2,166
0
0
<OTHER-SE> 6,951
<TOTAL-LIABILITY-AND-EQUITY> 188,871
<SALES> 59,369
<TOTAL-REVENUES> 59,369
<CGS> 21,367
<TOTAL-COSTS> 56,758
<OTHER-EXPENSES> 1,670
<LOSS-PROVISION> (50)
<INTEREST-EXPENSE> 2,021
<INCOME-PRETAX> 941
<INCOME-TAX> 141
<INCOME-CONTINUING> 665
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 665
<EPS-PRIMARY> .02
<EPS-DILUTED> .02
</TABLE>
