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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON D.C. 20549
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FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
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(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1995
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ______________ to __________________
Commission file number 1-6981
NATIONAL EDUCATION CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 95-2774428
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(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
18400 VON KARMAN AVENUE
IRVINE, CALIFORNIA 92715
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (714) 474-9400
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
Common Stock, New York Stock Exchange
$.01 par value Pacific Stock Exchange
6 1/2% Convertible Subordinated New York Stock ExchangE
Debentures Due 2011 Pacific Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
None
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Indicate by check mark whether the registrant: (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
--- ---
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [X]
The aggregate market value of the registrant's voting stock held by
nonaffiliates of the registrant as of February 29, 1996, based on the closing
price for such Common Stock on the New York Stock Exchange on such date, was
$323,042,522.
The number of shares of registrant's Common Stock outstanding as of
February 29, 1996, was 35,166,818.
DOCUMENTS INCORPORATED BY REFERENCE
Part III incorporates information by reference from material that will
be filed with the Securities and Exchange Commission within 120 days of
registrant's fiscal year end (December 31, 1995), as part of a Proxy Statement
for the registrant's Annual Meeting of Stockholders.
Cover Page 2
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PART I
ITEM 1. BUSINESS.
National Education Corporation (the "Company") provides training and
educational services and products to individuals, educational institutions,
businesses and governments. The Company was originally incorporated in
California in 1954 and reincorporated in Delaware in 1972. The Company's
business is conducted primarily through three operating entities: ICS Learning
Systems, Inc. ("ICS"), which offers distance education in vocational, academic
and professional studies to consumers and companies throughout the world;
Steck-Vaughn Publishing Corporation ("Steck-Vaughn"), one of the largest
publishers of supplemental educational materials; and National Education
Training Group, Inc. ("NETG"), one of the largest providers of interactive
multimedia products to train information technology professionals and end users
of technology.
COMPANY RESULTS AND DEVELOPMENTS IN 1995
The following provides a brief discussion of the Company's significant
developments in 1995. A more detailed discussion of each of the Company's
primary operating entities appears later in this Item 1; a more detailed
description of the Company's results of operations appears in Item 7,
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," starting on page 15 below.
Year End 1995. For 1995, the Company reported revenues of $258.6
million, which were 7.0% higher than revenues of $241.6 million in 1994. The
revenue increase is due to revenue growth at ICS and Steck-Vaughn, partially
offset by a reduction in revenue at NETG. For 1995, the Company recorded a net
loss of $87.2 million, principally due to $81.7 million of unusual items related
to restructure charges, write-downs of intangible assets at NETG, write-off of
computer course hardware and related costs at ICS, settlement of litigation at
Steck-Vaughn and severance payment to the Company's former Chief Executive
Officer. These unusual charges were partially offset by an unusual credit for
payment received to settle litigation at NETG. Excluding the unusual items, the
net loss for 1995 would have been $5.5 million, compared with a net loss from
continuing operations of $14.1 million for 1994. Overall, the Company recorded a
net loss of $63.5 million in 1994, which included charges related to the
adoption in 1994 by the Company of AICPA Statement of Position 93-7 (discussed
in the next paragraph), and a $40.0 million charge recorded in the second
quarter of 1994 to write-down the assets of National Education Centers, Inc.
("Education Centers") and provide for estimated costs of closing and
teaching-out certain Education Centers' schools in connection with
discontinuance of the Company's Education Centers operations. Please see
"Discussion of Additional Business Factors--Discontinued Operations: Education
Centers" on page 10 below for more information.
In December 1993, the Accounting Standards Executive Committee of the
American Institute of Certified Public Accountants issued Statement of Position
No. 93-7, "Reporting on Advertising Costs" (the "SOP"). The SOP generally
requires advertising costs, other than direct response advertising, to be
expensed as incurred. The SOP is effective for financial statements for fiscal
years beginning after December 15, 1994, but may be adopted early. In the fourth
quarter of 1994, the Company adopted the SOP, effective January 1, 1994.
Adoption of the SOP caused the Company to expense all of ICS' advertising,
selling and promotion costs as they were incurred in 1994, rather than deferring
and amortizing all such costs as in prior periods. In addition, SOP transition
rules required amortization during 1994 of $19.8 million worth of advertising,
selling and promotion costs that had been deferred from periods prior to
December 31, 1993. For more information on adoption by ICS of the SOP, please
see Item 7, "Management's Discussion and Analysis of Financial Condition and
Results of Operations," beginning on page 15 below, and Note 1 to the Company's
Consolidated Financial Statements, beginning on page F-6 below. Adoption of the
SOP did not have a material effect on the Company's other operations.
ICS Learning Systems, Inc. In 1995, ICS achieved a 16.4% increase in
revenues, from $122.8 million to $143.0 million in 1995. These results were
directly related to a 19,064, or 5.1%, increase in enrollments worldwide,
revenue recognition from the 19.6% growth in enrollments in 1994 and a 15.4%
growth in revenue from ICS' MicroMash subsidiary, which markets Computer Based
Training ("CBT") products to the professional market. The average total
contract price for an ICS student increased during 1995 as a result of more
enrollments in the higher
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priced Personal Computer ("PC") courses and other related courses. Revenue per
enrollment also increased as a result of the higher average contract price.
Operating income increased from a loss in 1994 of $3.9 million to income of $7.6
million. The 1994 loss included $19.8 million amortization of prior period
deferred marketing costs pursuant to SOP 93-7 and the 1995 results included $1.5
million of this amortization. Also, the 1995 results included a $4.5 million
unusual item write-off of course computer hardware and related costs. Excluding
the amortization impact and the unusual item, the operating income was $13.6
million (9.5% operating income margin) and $15.9 million (13.0% operating income
margin) for 1995 and 1994, respectively.
In 1995, ICS' U.S. operation saw PC courses and related training
courses continue as the fastest growing product line with a 17.4% increase over
1994, while enrollments in ICS' High School equivalency course were up 15.2% and
enrollments in ICS' Center for Degree Studies were up 9.2%. All other courses
generating an 8.1% increase in enrollments over 1994. On a worldwide basis, more
than 65,000 students enrolled in ICS High school Diploma programs, and more than
44,000 students enrolled in ICS Associate Degree Programs. In 1995, ICS
introduced the following new products: Dental Assistant, Drafting with Auto CAD,
Electronic Bookkeeping, Home Schooling Teaching Guide, and print and on-line
versions of an Internet Guide.
Based on statistics compiled by the Distance Education and Training
Council ("DETC"), the accrediting body of independent study schools recognized
by the U.S. Department of Education, ICS continues as the industry leader in
generating enrollments. A consulting firm retained by ICS has analyzed the Adult
Education market in the U.S. and concludes that ICS has a 48% market share of
the self-study vocational market. Worldwide, ICS enrolled over 390,000 new
students in 1995.
Steck-Vaughn Publishing Corporation. Revenues increased in 1995, led by
strong performances from its elementary and high school ("El/Hi") and library
product lines. Revenues from the El/Hi market, which were up 10.7% over 1994,
were bolstered by strong sales from basic skills products in spelling, math, and
reading. Steck- Vaughn's testing and assessment products also boosted sales,
enhanced by the Berrent Publications product line purchased in November 1994.
Library revenues, which were up 16.3% over 1994, were enhanced by sales of new
titles, as well as sales from Steck-Vaughn's exclusive distribution agreements
with Larousse Kingfisher Chambers, Inc. and Abdo & Daughters. Revenues from the
adult market were down 2.0% with funding in this market segment continuing to
experience federal budget constraints, reducing the funding for adult education.
Steck-Vaughn's operating income for 1995 was $9.5 million compared to
operating income of $10.5 million in 1994. The decrease in operating income is
due entirely to the unusual item charge of $970,000 for settlement of
litigation. In addition, in 1995 Steck-Vaughn changed its method of accounting
for inventories from the last-in, first-out method to the first-in, first-out
method, to provide a better means of matching current costs with current
revenues, as Steck-Vaughn aggressively pursues its plan to reduce its current
operating inventory levels while increasing inventory turnover. The Company's
financial statements of all prior years have been restated to apply this method
retroactively, which increased Steck-Vaughn's operating income by $1.3 million
and $754,000 for 1995 and 1994, respectively. Excluding the unusual item,
operating income was flat compared to 1994 as income from increased revenues was
offset by higher product development costs and amortization of intangibles and
increased general and administrative costs.
In 1995, Steck-Vaughn augmented its product lines and marketing
channels with a number of acquisitions and distribution agreements through the
following transaction: (i) in September, Steck-Vaughn entered into an agreement
to be the exclusive distributor for Abdo & Daughters, a small publisher of a
variety of high interest/low reading ability books for grades K-8, adding 300
titles complementing and enhancing Steck-Vaughn's current Raintree/Steck-Vaughn
collection of titles; (ii) in October, Steck-Vaughn acquired substantially all
of the assets of Educational Development Laboratories, Inc. ("EDL"), expanding
Steck-Vaughn's breadth of product for the adult market; and (iii) in December,
Steck-Vaughn acquired substantially all of the assets of Summit Learning, Inc.
("Summit"), a well-established direct response marketing company aimed at
classroom teachers and other key site- based decision makers, and focused on
sales of math and science manipulative and kit-based products.
National Education Training Group, Inc. NETG's operating loss for 1995
reflects a $30.6 million write- off of excess facility costs, severance payments
for workforce reductions, balance sheet writedown of inventory and
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fixed assets, and other related restructuring charges. In addition, NETG wrote
off $47.5 million of goodwill, based on the Company's determination as to the
recoverability of such goodwill. These adjustments to cost structure enabled
NETG to show significant improvement in operating results for the third and
fourth quarters of 1995.
NETG's revenue for the year 1995 was $54.3 million compared to $61.9
million for the previous year. Eliminating the operating results of Spectrum, a
division of NETG that was discontinued in 1995, NETG's 1995 revenue decreased
$4.0 million from 1994 or 7.0%. NETG domestic revenues declined $10.4 million to
$26.1 million, due to a decrease in customer renewals and the absence of
significant new customers in the domestic operations. Such decrease is
attributable in part to the absence of a full line of client/server training
products that is now in such demand in the multimedia training market; NETG is
addressing that absence in 1996 by introducing over 100 new client/server
training products. Revenue in 1995 from NETG's international operations grew by
$6.5 million.
In December 1995, NETG received net proceeds of $3.5 million on the
resolution of a dispute with a third party author; NETG used the proceeds of the
resolution to undertake additional investment in product development. The
settlement proceeds are recorded as an unusual item of income, while the
additional product development investment is recorded as product development
expense.
FINANCIAL INFORMATION FOR INDUSTRY SEGMENTS
Revenues and operating income (loss) by industry segment for the
Company's continuing operations for the past three years are as follows (for
more detailed information, please see Note 15 to Consolidated Financial
Statements, beginning on page F-22 below):
<TABLE>
<CAPTION>
NET REVENUES: (dollars in thousands) 1995 1994 1993
--------- --------- ---------
<S> <C> <C> <C>
ICS $ 143,021 $ 122,815 $ 101,319
Steck-Vaughn 58,226 53,608 53,156
NETG 54,350 61,937 68,259
Other 3,001 3,254 1,438
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TOTAL NET REVENUES $ 258,598 $ 241,614 $ 224,172
================== ========= ========= =========
OPERATING INCOME (LOSS):
ICS operating income before
amortization of prior period deferred
marketing and unusual items $ 13,628 $ 15,909 $ 21,368
Amortization of prior period
deferred marketing (1,470) (19,836) --
Unusual Items (4,549) -- --
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ICS 7,609 (3,927) 21,368
Steck-Vaughn before unusual items 10,469 10,459 13,074
Unusual Items (970) -- --
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Steck-Vaughn 9,499 10,459 13,074
NETG operating loss before
unusual items (15,375) (13,993) (25,950)
Unusual items (74,567) -- (9,232)
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NETG (89,942) (13,993) (35,182)
Other 764 (50) (657)
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TOTAL SEGMENT OPERATING LOSS $ (72,070) $ (7,511) $ (1,397)
============================ ========= ========= =========
</TABLE>
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DESCRIPTION OF BUSINESS BY INDUSTRY SEGMENTS
ICS LEARNING SYSTEMS, INC.
ICS Learning Systems, Inc. provides distance education in vocational,
academic and professional studies to consumers and companies under the following
names: ICS Learning Systems, English Language Institute, International
Correspondence Schools, North American Correspondence Schools, and the ICS
Center for Degree Studies (collectively referred to as "ICS"). ICS offers more
than 50 independent study courses in the U.S. and more than 100 courses abroad
in disciplines ranging from high school completion requirements to occupational
training. In addition, ICS offers associate technology degree programs in
business and engineering. All of ICS' independent study courses in the U.S. are
accredited by the Distance Education and Training Council ("DETC"), the
accrediting body for independent study schools recognized by the U.S. Department
of Education. ICS also offers over 1,000 training products and 10,000 hours of
training to industrial clients under the name "ICS Business and Industrial
Training".
In addition, with the acquisition of MicroMash in 1994, ICS established
a presence in the large and diverse field of professional and continuing
education. MicroMash offers over 70 professional exam and continuing
professional education products to the financial and accounting industries, and
currently is expanding its product offerings to the legal and other professional
fields.
Curricula and Product Development. Curricula are carefully designed to
reflect the most important trends in employment opportunities, consumer
interest, professional development and industrial training needs. New courses
introduced during 1995 include Dental Assistant, Electronic Bookkeeping,
Drafting with Auto CAD, Home Schooling Teachers Guide, and print and on-line
versions of an Internet Guide.
Accreditation and Course Recognition. Most ICS courses are approved for
veterans benefits and for DANTES (Defense Activity for Non-Traditional Education
Support). Programs offered through the ICS Center for Degree Studies are
approved for college credit by PONSI (Program on Non-Collegiate Sponsored
Instruction), which is administered by the American Council on Education. ICS is
accredited by the Accrediting Commission of the DETC. The DETC is listed by the
U.S. Department of Education as a nationally recognized accrediting agency and
is a recognized member of the Commission on Recognition of Postsecondary
Accreditation.
ICS recognizes the value of utilizing technology to deliver products
and services to its students. In June 1995, ICS launched its WorldWide Web site
on the Internet at: "http://www.icslearn.com". Prospective and current ICS
students can visit the ICS electronic campus for course descriptions and
information, faculty profiles and a free ICS "Learning Styles Assessment."
Through the Internet site, customers can contact ICS' international locations,
E-mail for customer service, participate in student-to-instructor discussions,
enroll on-line and download product demonstrations.
In September 1995, ICS' U.S. operations decided to cease offering
computer hardware as part of its PC courses and other related courses. ICS based
this decision on factors including the lack of profitability on these courses as
a result of including PC hardware with the courses. ICS will continue to develop
and market an aggressive product line for PC skills training, but will do so
without supplying the personal computer as part of the course.
Traditionally, ICS distance education courses have been structured
around "graded lessons" in which the student receives one section of
instructional material at a time, which must be completed before proceeding to
the next section. Courses are designed to be completed by the typical student in
periods ranging from six to twenty-four months, depending on the course
selected. A computerized student information/testing system permits students,
through touch-tone telephones or voice response, to obtain immediate testing and
feedback on test results. Over 95% of the 2 million exams graded by ICS during
1995 were graded electronically by either the information/testing system via
telephone or by electronic scanner. With improved technology, the cost of
grading an exam is at an all-time low while the speed of correcting an exam and
turnaround to the student have never been faster. ICS utilizes a voice-activated
computer record access system that allows students to obtain key information
from their
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records, twenty-four hours a day, without operator assistance.
Tuition for ICS' distance education courses currently ranges from
approximately $400 to $1,000 per course, which, in many cases, includes
auxiliary equipment for the courses. Certain ICS programs, including those
leading to associates' degrees, require the student to enroll in and complete
more than one course. Students generally pay a portion of the tuition upon
enrollment and the balance on a monthly basis. Although many ICS students
complete their entire distance education course, students have certain rights to
cancel courses in progress and, in some cases, may be entitled to refunds of
tuition paid for future lessons or for cancellation of amounts that have not yet
been paid for future lessons. ICS' accounting treatment recognizes independent
study contract revenues when cash is received, but only to the extent that such
cash can be retained under existing refund policies of the DETC or applicable
law. ICS is working to enhance its customer service and reduce its attrition
rates so that a high percentage of its students will complete their courses. ICS
is not dependent on student financial aid under federal government programs.
ICS has established telesales departments for its U.S. operations and
in its major foreign operations, by which in-bound telephone inquiries are
answered by ICS telesales representatives. These telesales professionals seek to
enroll students over the telephone without needing to send the customer ICS'
traditional sales literature. During 1995, ICS' U.S. operations expanded its
telemarketing center, which provides current and prospective students the
opportunity to dial directly to ICS for more information or to enroll. As a
result, conversion of inquiries to sales improved by 14.4%, and contributed to
the 11.0% increase in enrollments from 1994 to 1995.
In 1995, ICS' Business and Industrial Training Division expanded its
marketing efforts by creating an in-house telesales organization. The Division's
catalog of 1,200 products resides on a computer data base, giving each sales
representative the ability to create quickly custom curricula for ICS clients.
In addition, in 1995, the Division dramatically increased the revenue it
generates from corporate tuition assistance programs ("TAP") through development
of new marketing materials and expansion of the sales force committed to the TAP
market.
ICS' subsidiary, MicroMash, develops and markets educational and
training products and exam preparatory courses for professionals. Prior to 1995,
MicroMash primarily served the needs of accounting and financial professionals
(CPAs, CMAs, CIAs, CFPs) in both business and government. MicroMash expanded its
product line in 1995 through the following activities: (i) MicroMash launched
nineteen new continuing professional education ("CPE") products; (ii) MicroMash
created and marketed a computer-based review for the Special Examination for
Enrolled Agents for practice in front of the U.S. Internal Revenue Service;
and (iii) MicroMash entered the legal field with the introduction of the
computer-based MicroMash/Nord Bar Review for the Multistate Bar Examination and
various print-based review packages for fifteen state bar examinations. In
addition, MicroMash received continuing legal education ("CLE") approval for
several of its computer-based products.
MicroMash CPE products are recognized by the National Association of
State Boards of Accountancy, The Institute of Certified Management Accountants,
The Institute of Internal Auditors, The International Board of Standards and
Practices for Certified Financial Planners, Inc., and the Internal Revenue
Service, among others. MicroMash CLE is recognized by various state legal
professional licensing boards.
Advertising and Marketing. ICS markets its independent study courses
throughout its U.S. and international operations utilizing direct response
advertising through print, television media and direct mail marketing. ICS also
offers courses in many English speaking countries throughout the world; in 1995,
ICS enrolled students from more than 150 different countries. Telemarketing also
is used in the U.S., Canada, the United Kingdom and Australia. ICS has over 200
telesales representatives who speak directly to prospective students about
enrolling in courses.
Competition. The distance education and training industry is highly
competitive. ICS faces direct competition from U.S.-based and foreign
independent study providers and indirect competition from community colleges,
vocational and technical schools, two-year colleges and universities, and, to a
lesser extent, governmental entities and other "distance learning" companies and
schools, including electronic universities. In recent years,
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technological changes have increased the variety of choices available to
students in selecting the type of education and the manner in which it is
delivered, thereby increasing the entities with which ICS competes for student
enrollments. ICS believes that the principal competitive factors in its industry
are breadth and quality of course offerings, price and quality of customer
services. Overall, the Company believes that ICS competes favorably on the basis
of these factors.
STECK-VAUGHN PUBLISHING CORPORATION
Steck-Vaughn is one of the country's largest publishers of supplemental
educational materials, offering educators a broad range of quality products that
address educational needs from early childhood through adulthood. The term
"supplemental materials" generally refers to softcover, curriculum-based books,
workbooks and other support materials that are used in conjunction with or
instead of traditional hardcover "basal" textbooks. Steck- Vaughn also publishes
reference and nonfiction products for acquisition by school and public
libraries, as well for purchase by the general public through bookstores.
In July 1993, Steck-Vaughn completed an initial public offering of
2,668,000 shares of its common stock, which represented approximately 18.3% of
Steck-Vaughn's stock, the remainder of which is held by the Company. During
1994, Steck-Vaughn announced a program to repurchase from the public market up
to 500,000 shares of its common stock; through 1995, Steck-Vaughn has
repurchased 255,200 shares, effectively raising the Company's ownership of
Steck-Vaughn's common stock from 81.7% as of the public offering to 83.1%.
Product Development and Acquisition. Steck-Vaughn continually
evaluates, updates and adds to its product lines through internal development of
new educational materials, performance of development contracts by outside
authors, production of revised and supplementary materials based on existing
products, and acquisitions of educational materials from authors and publishers.
In 1994, Steck-Vaughn produced and released more than 250 new and revised
products.
In 1995, Steck-Vaughn augmented its product lines with a number of
acquisitions and distribution agreements. In September, Steck-Vaughn entered
into an agreement to be the exclusive distributor for Abdo & Daughters, a small
publisher of a variety of high interest/low reading ability books for grades
K-8. Abdo & Daughters' collection of approximately 300 titles complements and
enhances the current Raintree/Steck-Vaughn collection of titles. The titles
include a 54-book animal series as well as many biographies and social studies
topics, including a series on the Holocaust and a complete series on
environmental studies. In addition, in October, Steck- Vaughn acquired
substantially all of the assets of Educational Development Laboratories, Inc.
("EDL"), which further expands Steck-Vaughn's breadth of product for the adult
market. The EDL product line combines time-tested highly researched
instructional techniques with computer technology in order to deliver
developmental reading programs in an easy-to-administer and user-friendly
format.
The electronic media segment of the school market is one of the most
rapidly expanding segments. To gain entrance to this market, Steck-Vaughn
entered into a letter of intent in December 1995, and definitive stock purchase
agreement in March 1996, to acquire Edunetics, Ltd. ("Edunetics"), which
develops, markets and sells computer-based (including multimedia) products for
teaching curriculum in the kindergarten through grade 12 market. Edunetics'
offerings include instructional management products that allow teachers, parents
and students to monitor progress as the computer-based products are accessed and
utilized. While consummation of the acquisition depends on satisfaction of a
number of conditions by both parties, Steck-Vaughn and Edunetics hope to
complete the transaction by the end of second quarter 1996.
Sales and Marketing. Steck-Vaughn markets its products through multiple
distribution channels, including its national sales and telesales organization.
Additionally, Steck-Vaughn markets and sells its products through a distributor
organization that services public libraries, trade outlets and other
nontraditional school markets. Steck- Vaughn has begun to establish a presence
in foreign markets where English language curriculum and library products are in
demand. Steck-Vaughn's customer service group emphasizes prompt and accurate
delivery of published materials.
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During 1995, the instructional materials marketplace continued its
trend toward site-based selling, as more personnel at the school and faculty
level participated in the buying decisions for educational materials. While
site- based selling is a relative strength of Steck-Vaughn, site-based selling
requires a greater number of sales calls per revenue dollar, resulting in
increased selling costs.
In response to the increased participation of teachers in buying
decisions, Steck-Vaughn acquired substantially all of the assets of Summit
Learning, Inc. ("Summit") in December 1995. Summit is a well established direct
response marketing company aimed at classroom teachers and other key site-based
decision makers. Summit's products, historically, have been focused on math and
science manipulative and kit-based products. Additionally, Summit mails its
Young Explorers catalog to the home market which provides Steck-Vaughn access to
parents.
Competition. Many companies, large and small, compete with Steck-Vaughn
in the educational publishing field. No single company is dominant in the
industry segments for which Steck-Vaughn publishes. Steck-Vaughn believes that
the principal competitive factors in its industry are breadth and quality of
product offerings, price, channels of distribution, quality of support services
and market responsiveness. Overall, the Company believes that Steck-Vaughn
competes favorably on the basis of these factors, and that growth has occurred
due to new products and increased sales and market penetration.
NATIONAL EDUCATION TRAINING GROUP, INC.
Established in the late 1960s, the Company's NETG subsidiary develops,
markets and distributes interactive multimedia products to train information
technology professionals and end users of technology. Headquartered in
Naperville, Illinois, NETG offers multimedia training solutions to help
organizations worldwide maximize their performance and their investments in
people and technology.
Under the leadership of its new President and Chief Executive Officer,
Chuck Moran, who joined NETG in May 1995, NETG underwent substantial change in
1995. NETG initiatives in 1995 included, among others, the following: (i) the
restructure of its operations by downsizing office and warehouse space in the
U.S. and in Europe and reducing its worldwide workforce; (ii) the development of
new products through an agreement with a third-party to develop exclusively for
NETG, with over 100 new client/server training products to be released in 1996;
and (iii) the development of new relationships with computer software and
hardware companies, including Microsoft and, in early 1996, Novell, which allows
NETG to provide courses for and participate in those companies' certification
programs.
Products. NETG's current line of over 600 training products addresses
all audience levels, providing an analytical perspective as well as practical
skills and knowledge in information technology (client/server and mainframe),
desktop computing, and management and professional development. NETG's products
are delivered on various forms of technology-based media, including video,
diskette and CD-ROM, and NETG's computer-based products may be run in various
operating environments, including personal computer, mainframe computer and
local area networks. Many of NETG's products provide multimedia training that
combines data, text, audio, video, animation and graphics with computer
technology. In addition, many NETG products use NETG's proprietary SKILL
BUILDER(R) technology, which provides interactive courseware aimed at making the
learning experience acceptable and relevant, focusing the user on what he or she
needs to learn, and not what he or she already knows.
The NETG course library is divided into four primary areas: Desktop
Computing, Client/Server, Enterprise Systems (Mainframe) and Management and
Professional Development. Desktop Computing courses including courses on
personal computer operating systems (such as DOS, Microsoft Windows 3.x and 95,
and Apple Macintosh), word processing applications (such as WordPerfect and
Microsoft Word) and spreadsheet applications (such as Microsoft Excel and Lotus
1-2-3). Client/Server courses cover such areas as networking and communications,
Novell NetWare, and Microsoft Windows development and support. Enterprise
Systems (Mainframe) courses focus on mainframe operating environments and
software. Management and Professional Development courses cover such topics as
total quality management, interpersonal skills and customer service.
In 1995, NETG introduced a number of courses to train individuals in
new and updated technologies. For
- 7 -
<PAGE> 10
example, through NETG's relationship with Microsoft, NETG introduced a number of
courses in Microsoft Windows 95 curriculum simultaneously with the release by
Microsoft of Windows 95.
Product Development. Historically, NETG has offered courses developed
internally or acquired or licensed from various third-party product developers
who were experts in their respective fields. Although the courses acquired
through these methods were of high-quality, the many different developers
created courses with different structures and styles. NETG strives to provide
total training solutions to its customers; accordingly, a customer who licensed
a number of NETG offerings may have received courses developed by a number of
different developers (including NETG and its outside developers). In order to
provide consistent course structure and style to customers who depend on NETG
for training, NETG has refocused its development efforts so that, for 1996, over
200 NETG courses to be introduced during the year will have been developed
internally or by one principal third-party course developer under the direction
of NETG's internal product development organization, as compared to 1995 when
NETG introduced only 32 courses that were developed internally. This will allow
NETG to maintain high-quality products, but with a consistent structure and
style to facilitate each user's ability to train in multiple subjects supported
by NETG.
In addition, to address the 1995 decline in customer renewals and
significant new customers, NETG is focusing its 1996 development efforts on
increasing its offerings in certification-focused, client/server computing, with
over 100 client/server courses scheduled for introduction in 1996. New products
include courses for client/server training for high demand products developed by
such companies as Microsoft, Novell, Oracle and SAP. Also, throughout 1995, and
again in 1996, in the ordinary course of business, NETG has removed and will
remove from its product offerings courses that no longer reflect current
technology or training methods.
In 1995, NETG entered into an agreement with Microsoft Corporation to
develop interactive technology- based training products for computer
professionals seeking to become certified specialists for a variety of Microsoft
products. The courses support the Microsoft Certified Systems Engineer and
Microsoft Certified Solution Developer credentials. Also, in early 1996, NETG
entered into an arrangement with Novell to develop multimedia training
curriculum for Novell's Certified NetWare Engineer certification programs. NETG
will design, develop and market self-study training courseware for Novell's
NetWare network operating system and GroupWise messaging software, which courses
will be certified by Novell as Novell Authorized Education products. NETG's
relationships with companies such as Microsoft and Novell allow NETG to better
access the large market of consumers and entities who use products produced by
those companies, and allow NETG to introduce training courses concurrently with
the release of new products.
In 1995, NETG discontinued the operations of its Spectrum subsidiary,
which developed custom training courses for businesses. Without Spectrum, NETG
can focus development efforts on courses that may be marketed, licensed and
distributed to a broad range of individuals and businesses, rather than
incurring development expense for custom courses licensed and used by only one
business.
International Operations. NETG maintains its international headquarters
in London, England. NETG's direct sales and marketing operations employ 150
persons, with 110 of those in England and the remainder in other European
countries. NETG has product development centers in Germany, South Africa, India
and Japan. In addition, NETG maintains an international network of distributors
and agents in many other countries, including in a majority of the countries in
the Middle East, each of the Scandinavian countries, many countries in Asia and
Africa, Australia and New Zealand.
NETG Sales Organization and Distribution Channels. NETG's revenues are
generated primarily by its field sales force that focuses on large business and
government organizations. Customers license NETG's products and libraries under
agreements that, depending on the customer's needs, provide access to all or
part of NETG's product lines on a limited or unlimited basis. In 1995, NETG
initiated a distribution strategy focused on the channel of Microsoft-authorized
education centers; in 1996, that channel will be expanded to include
Novell-authorized education centers.
NETG's customers are supported by NETG's Customer Assistance, located
in Naperville, Illinois, which
- 8 -
<PAGE> 11
provides customers with toll-free order processing during business hours, and
twenty-four hour, seven day per week technical assistance. Support analysts
provide answers to software and hardware questions and assistance in the
installation and ongoing use of courseware products. In addition, NETG has
established a LAN-based call tracking and reporting system that allows support
analysts to electronically track customer inquiries, problems and solutions for
faster response time to customers.
Also in 1995, NETG launched its worldwide web storefront, located at
"http://www.netg.com," which includes a catalog of over 600 training products
and multimedia course demonstrations. The catalog includes course descriptions,
objectives, learning times, prerequisites, media choices and pricing.
Competition. According to International Data Corp., in 1995 the total
information technology training market worldwide was $12.8 billion. Eighty
percent of that (more than $10 billion) is spent on overhead and internal
training staff salaries. The remaining 20% ($2.8 billion) is divided into five
outside expenditures categories of which approximately $.5 billion is computer
based and multimedia materials, where NETG directly competes. NETG is one of the
largest interactive multimedia training companies in this highly fragmented and
competitive market.
NETG competes in the training market on the factors of timeliness of
new courses, instructional effectiveness, development alliances with key
technology vendors (e.g. Microsoft, Novell), breadth of subject matter and
delivery media, price and solution-oriented customer support. Overall, the
Company believes that NETG is competitive on the basis of these factors. Other
suppliers of media-based training with which NETG competes include CBT Systems,
J3 Learning, DPEC, SRA (a division of McGraw Hill, Inc.) and, to a limited
extent, hardware and software manufacturers.
FINANCIAL INFORMATION ON THE COMPANY'S FOREIGN OPERATIONS
The following table shows consolidated net revenues of the Company in
foreign countries for 1995, 1994 and 1993 (for more detailed information, please
see Note 15 to Consolidated Financial Statements beginning on page F-22 below).
These revenues are derived principally from the foreign operations of ICS and
NETG:
<TABLE>
<CAPTION>
(Dollars in thousands) 1995 1994 1993
---- ---- ----
<S> <C> <C> <C>
Net revenues outside the
United States $65,231 $55,990 $58,642
Percent of consolidated
net revenues 25.2% 23.2% 26.2%
</TABLE>
Consolidated operating results are reported in U.S. dollars. Because
the foreign subsidiaries of the Company conduct operations in the currencies of
the countries in which they are based, all financial statements of the foreign
subsidiaries must be translated into U.S. dollars. As the value of the U.S.
dollar increases or decreases relative to these foreign currencies, the U.S.
dollar value of items on the financial statements of the foreign subsidiaries is
reduced or increased, respectively. Therefore, changes in dollar sales of the
foreign subsidiaries from year to year are not necessarily indicative of changes
in actual revenues recorded in local currency.
The Company's ability to continue operations outside of the Unites
States or maintain the profitability of such operations is to some extent
subject to control and regulation by the U.S. government and foreign
governments. The Company's foreign operations are primarily located in the
United Kingdom, Canada, Australia and Germany, which historically have
controlled and regulated businesses in the same manner as the U.S..
- 9 -
<PAGE> 12
DISCUSSION OF ADDITIONAL BUSINESS FACTORS
RESEARCH AND DEVELOPMENT
The amount spent during 1995, 1994 and 1993 on Company-sponsored
research and development activities was approximately $23 million, $20 million
and $22 million, respectively. In 1995, the Company continued to invest in
research and development to ensure new product availability for future revenue
generation. The Company spends substantial sums primarily in the development of
new products at NETG and Steck-Vaughn, and curricula for ICS.
SEASONALITY OF THE BUSINESS
Steck-Vaughn's sales are higher in the third quarter of the year due to
its customers purchasing products in anticipation of classes commencing in the
fall. ICS' business is moderately seasonal with more students studying during
the latter part of the year. NETG's business is seasonal due to the sales cycle
from a disproportionate number of long-term, large contracts for NETG's products
and services that are renewed in the fourth quarter of the year. There is no
customer to whom sales are made in an amount that exceeds two percent or more of
the Company's consolidated annual net revenues.
ADDITIONAL INFORMATION
Unearned future tuition revenue for ICS, which represents amounts
estimated to be recognized as revenue in subsequent years as services and
courseware are provided, is described in Note 12 to Consolidated Financial
Statements on page F-19 below.
Financial information for industry segments is described in Note 15 to
Consolidated Financial Statements on page F-22 below.
Compliance with federal, state or local provisions concerning the
discharge of materials into the environment or otherwise relating to the
protection of the environment had no material effect in 1995 on the Company's
capital expenditures, earnings or competitive position.
The Company employed approximately 2,000 persons worldwide as of
February 29, 1996.
DISCONTINUED OPERATIONS: EDUCATION CENTERS
Historically, in addition to ICS, Steck-Vaughn and NETG, the Company
has conducted business through Education Centers. Education Centers had been one
of the largest operators of private postsecondary schools in the U.S.; however,
in 1993, it became more difficult for students at a number of locations,
especially in urban areas, to obtain access to federally guaranteed student
loans. Certain provisions of the Higher Education Act of 1992, as well as the
Omnibus Budget Reconciliation Act, caused some lenders to terminate
participation in federally guaranteed student loan programs. These difficulties
prompted Education Centers to restructure its operations. Anticipating that
decreased access to funding would result in further operating losses in some of
its schools for the year ending December 31, 1993 and future years, in 1993
Education Centers elected to cease new student enrollments at 15 of its 48
schools (two of which later began again taking new enrollments). In 1994
Education Centers elected to cease new student enrollments at an additional 6
schools. Thereafter, in 1994, the Company determined to discontinue Education
Centers' operations, and immediately pursue a strategy to sell off or otherwise
dispose of Education Centers' operations.
The Company's consolidated statement of operations for 1994 included a
second quarter $40.0 million charge to write-down Education Centers' assets, to
provide for estimated gains/losses on the sale of certain Education Centers'
schools, and to provide for the estimated costs of closing and teaching-out
certain Education Centers' schools. In addition, in 1994, the Company recorded a
$9.4 million operating loss from Education Centers' discontinued operations. In
1995, Education Centers consummated seven separate transactions, ranging
- 10 -
<PAGE> 13
from the sale of one school to the sale of sixteen schools, such that, as of
December 31, 1995, Education Centers had disposed of substantially all of its
operations. For further information, please see Item 7, "Management's Discussion
and Analysis of Financial Condition and Results of Operations," starting on page
15 below.
EXECUTIVE OFFICERS OF THE COMPANY
The following table provides information regarding executive officers
of the Company, including their ages as of February 29, 1996:
Name, Age and Title: Five-Year Business Experience:
David C. Jones (74) Chairman of the Board since July 1989. Acting
Chairman of the Board Chief Executive Officer from July 1989 to
April 1990. Consultant and lecturer since
July 1982. Chairman of the Joint Chiefs of
Staff from June 1978 through June 1982.
Member of the Board of Advisors for SRA
International, Inc., an information
technology company. Chairman of the Board of
Advisors of the National Civilian Community
Corps.
Sam Yau (47) President, Chief Executive Officer and a
President and Chief Director of the Company since May 1995. Chief
Executive Officer Operating Officer of Advacare, Inc., a
medical management company, from May 1993 to
November 1994. Senior Vice President of
Finance and Administration for Archive
Corporation (now part of Seagate
Technologies, Inc.), a computer storage
(tape) company, from May 1987 to May 1993.
Director of Steck-Vaughn Publishing
Corporation and Milcom International, Inc.
Philip C. Maynard (41) Vice President, Secretary and General Counsel
Vice President, Secretary and since February 1994. General Counsel of
General Counsel Orchids Paper Products Company from February
1993 through January 1994. Chief Executive
Officer and Director of McClellan Development
from April 1989 to May 1992; Principal and
Director until February 1993. General Partner
of Urland, Morello, Dunn & Maynard law
practice from February 1985 to April 1989.
Keith K. Ogata (41) Vice President, Chief Financial Officer and
Vice President, Chief Treasurer since April 1991. Vice President
Financial Officer and and Treasurer from April 1989 to April 1991.
Treasurer Treasurer since January 1987.
ITEM 2. PROPERTIES.
(a) The Company's corporate headquarters are located in leased
facilities aggregating 40,000 square feet in Irvine, California, which lease
expires in May 1996; the Company is relocating to 18,000 square feet of leased
facilities also in Irvine, California, effective April 1996.
(b) The Company owns real property in Scranton, Pennsylvania, for the
principal offices of ICS. This building consists of 120,000 square feet of space
on 14.3 acres of land.
(c) The Company owns an 82,000 square foot building on approximately 31
acres of land in Ransom, Pennsylvania for an ICS warehouse.
(d) The Company owns the land and building serving as the warehouse for
Steck-Vaughn Company. The building, located in Austin, Texas on approximately 13
acres of land, contains 101,000 square feet of space.
- 11 -
<PAGE> 14
(e) The Company has approximately 34 leases for its operating units and
offices, including the following: NETG's headquarters in Naperville, Illinois -
approximately 72,000 square feet; and Steck-Vaughn's headquarters in Austin,
Texas - approximately 31,000 square feet.
Overall, the Company's properties are suitable and adequate for the
Company's needs.
ITEM 3. LEGAL PROCEEDINGS.
In the ordinary course of business, the Company is generally subject to
claims, complaints and legal actions. The litigation process is inherently
uncertain and it is possible that the resolution of such matters might have a
material adverse effect upon the financial position of the Company. However, in
the opinion of management, such matters are not expected to have a material
adverse effect on the financial position of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
No matters were submitted to a vote of the Company's stockholders
during the fourth quarter of 1995.
PART II
ITEM 5. MARKET FOR THE COMPANY'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
The Company's Common Stock is listed on the New York Stock Exchange and
the Pacific Stock Exchange. The high and low market prices for the Company's
stock during each quarter for the last two years are as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
High Low High Low
---- --- ---- ---
<S> <C> <C> <C> <C>
First Quarter $ 4 5/8 $ 2 1/2 $ 7 3/8 $ 6
Second Quarter 5 3/4 3 1/8 6 5/8 4 7/8
Third Quarter 8 3/8 4 7/8 5 3/4 4 7/8
Fourth Quarter 8 3/4 6 3/8 5 1/8 3 3/4
</TABLE>
The number of stockholders of record of the Company's Common Stock as
of February 29, 1996 was 2,552. The number of record holders is based upon the
actual number of holders registered on the stock transfer books for the Company
at such date and does not include holders of shares in "street names" or
persons, partnerships, associations, corporations or other entities identified
in security position listings maintained by depository trust companies.
No cash or stock dividends have been declared or paid on the Company's
Common Stock during 1995 or 1994. The Company has no present intent to pay cash
dividends; in addition, the Company's Credit Agreement with its lending
institutions restricts the payment of cash dividends.
- 12 -
<PAGE> 15
Item 6. Selected Financial Data
National Education Corporation and Subsidiaries
FIVE YEAR FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(amounts in thousands, except per share amounts) 1995 1994 1993 1992 1991
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET REVENUES $ 258,598 $ 241,614 $ 224,172 $ 218,269 $ 233,670
--------------------------------------------------------------
Income (loss) before amortization of acquired intangible assets,
amortization of prior period deferred marketing, unusual items,
nonoperating items, gain on sale of stock, income tax provision
(benefit) and minority interest $ 4,456 $ 7,567 $ 1,544 $ 4,190 $ 16,797
Amortization of acquired intangible assets 1,602 1,824 4,605 5,936 6,253
Amortization of prior period deferred marketing 1,470 19,836 -- -- --
Unusual items, net* 81,730 -- 9,232 2,506 --
Other nonoperating expenses, net 5,722 2,610 3,025 5,141 8,627
Gain on sale of stock -- (3,247) (21,120) -- --
Income tax provision (benefit) -- (555) (4,889) (3,109) 2,415
Minority interest 1,155 1,192 599 -- --
--------------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (87,223) (14,093) 10,092 (6,284) (498)
Income (loss) from discontinued operations -- (9,420) (19,757) 6,799 5,988
Loss on disposal of discontinued operations -- (40,032) -- -- --
--------------------------------------------------------------
NET INCOME (LOSS) $ (87,223) $ (63,545) $ (9,665) $ 515 $ 5,490
--------------------------------------------------------------
EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS:
Primary earnings (loss) per share $ (2.73) $ (.48) $ .34 $ (.21) $ (.02)
--------------------------------------------------------------
Fully diluted earnings (loss) per share $ (2.73) $ (.48) $ .32 $ (.21) $ (.02)
--------------------------------------------------------------
EARNINGS (LOSS) PER SHARE $ (2.73) $ (2.14) $ (.32) $ .02 $ .18
--------------------------------------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Primary 31,893 29,640 29,855 30,296 30,116
Fully diluted 38,025 36,940 34,855 37,596 36,818
SELECTED FINANCIAL INFORMATION
Cash and investment securities $ 23,868 $ 28,130 $ 54,846 $ 59,464 $ 23,250
Total assets 185,262 270,245 325,005 334,881 331,612
Capital expenditures, including capital leases 7,781 8,442 8,503 6,784 3,419
Total debt 78,671 90,290 80,657 82,128 80,839
Stockholders' equity 7,481 73,016 136,233 151,930 153,456
Total debt-equity ratio 10.5-1 1.2-1 .6-1 .5-1 .5-1
--------------------------------------------------------------
</TABLE>
*See Notes to Consolidated Financial Statements for discussion of the
unusual items, acquisitions and discontinued operations.
Effective January 1, 1994, the Company changed its method of accounting for
advertising and other deferred marketing costs. See Note 1 to Consolidated
Financial Statements for further discussion.
No cash dividends were declared in any of the above periods.
- 13 -
<PAGE> 16
Item 6. Selected Financial Data
National Education Corporation and Subsidiaries
Effective in the fourth quarter of 1995, the Company changed its method of
accounting for inventory at Steck-Vaughn from LIFO to FIFO. The effect of the
accounting change for 1995 was to decrease net loss by $1,102,000 or $.03 per
share. The effects of this change, which was accounted for by retroactively
restating prior period financial statements, were as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
(amounts in thousands, except per share amounts) 1994 1993 1992 1991
- ---------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Adjustment to net income $380 $(46) $-- $131
Adjustment to earnings (loss) per share .01 -- -- --
</TABLE>
The net income effect for 1993 includes a reduction of the gain on sale of
Steck-Vaughn stock of $140,000.
- 14 -
<PAGE> 17
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations
National Education Corporation and Subsidiaries
This Management's Discussion and Analysis contains condensed consolidated
statements of operations followed by financial data on the operating results of
the major segments of business. Following a summary discussion of the
consolidated results of operations are financial data by operating segment and a
discussion of the results of each operating segment.
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------------------
(dollars in thousands) 1995 1994 1993
------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET REVENUES:
ICS Learning Systems $ 143,021 $ 122,815 $ 101,319
Steck-Vaughn Publishing 58,226 53,608 53,156
NETG 54,350 61,937 68,259
Other 3,001 3,254 1,438
-------------------------------------
TOTAL NET REVENUES $ 258,598 $ 241,614 $ 224,172
-------------------------------------
OPERATING INCOME (LOSS):
ICS Learning Systems before amortization and unusual
items $ 13,628 $ 15,909 $ 21,368
Amortization of prior period deferred marketing (1,470) (19,836) --
-------------------------------------
ICS Learning Systems before unusual items 12,158 (3,927) 21,368
Unusual items (4,549) -- --
-------------------------------------
ICS Learning Systems 7,609 (3,927) 21,368
Steck-Vaughn Publishing before unusual items 10,469 10,459 13,074
Unusual items (970) -- --
-------------------------------------
Steck-Vaughn Publishing 9,499 10,459 13,074
-------------------------------------
NETG before unusual items (15,375) (13,993) (25,950)
Unusual items (74,567) -- (9,232)
-------------------------------------
NETG (89,942) (13,993) (35,182)
Other 764 (50) (657)
-------------------------------------
TOTAL SEGMENT OPERATING LOSS (72,070) (7,511) (1,397)
General corporate expenses (6,632) (6,582) (10,896)
Interest expense (8,650) (6,336) (5,723)
Investment income 2,621 3,234 2,560
Unusual items (1,644) -- --
Other income, net 307 3,739 21,258
-------------------------------------
INCOME (LOSS) BEFORE TAX BENEFIT, MINORITY INTEREST AND
DISCONTINUED OPERATIONS (86,068) (13,456) 5,802
Tax benefit -- (555) (4,889)
-------------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST AND DISCONTINUED
OPERATIONS (86,068) (12,901) 10,691
Minority interest 1,155 1,192 599
-------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (87,223) (14,093) 10,092
Discontinued operations -- (49,452) (19,757)
-------------------------------------
NET LOSS $ (87,223) $ (63,545) $ (9,665)
-------------------------------------
</TABLE>
- 15 -
<PAGE> 18
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
National Education Corporation and Subsidiaries
DETAILED SEGMENT OPERATING RESULTS:
<TABLE>
<CAPTION>
(dollars in thousands) Year Ended December 31, 1995
- -----------------------------------------------------------------------------------------------------------------
ICS Steck-
Learning Vaughn
Total Systems Publishing NETG Other
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET REVENUES $ 258,598 $ 143,021 $ 58,226 $ 54,350 $ 3,001
COSTS AND EXPENSES:
Contract course materials and service costs 73,003 51,667 -- 19,691 1,645
Publishing costs and materials 14,867 -- 14,867 -- --
Product development 23,026 3,632 8,901 10,493 --
Selling and promotion 111,112 63,770 18,738 28,165 439
General and administrative 25,502 10,210 4,451 10,707 134
Amortization of prior period deferred
marketing 1,470 1,470 -- -- --
Amortization of acquired intangible assets 1,602 114 800 669 19
Unusual items 80,086 4,549 970 74,567 --
--------- --------- --------- --------- ---------
SEGMENT OPERATING INCOME (LOSS) $ (72,070) $ 7,609 $ 9,499 $ (89,942) $ 764
--------- --------- --------- --------- ---------
</TABLE>
<TABLE>
<CAPTION>
(dollars in thousands) Year Ended December 31, 1994
- ------------------------------------------------------------------------------------------------------------------
ICS Steck-
Learning Vaughn
Total Systems Publishing NETG Other
----------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET REVENUES $ 241,614 $ 122,815 $ 53,608 $ 61,937 $ 3,254
COSTS AND EXPENSES:
Contract course materials and service costs 60,428 36,708 -- 21,429 2,291
Publishing costs and materials 13,595 -- 13,595 -- --
Product development 19,934 3,556 7,627 8,751 --
Selling and promotion 111,058 59,592 17,472 33,627 367
General and administrative 22,450 6,962 4,069 10,786 633
Amortization of prior period deferred
marketing 19,836 19,836 -- -- --
Amortization of acquired intangible assets 1,824 88 386 1,337 13
----------------------------------------------------------------
SEGMENT OPERATING INCOME (LOSS) $ (7,511) $ (3,927) $ 10,459 $ (13,993) $ (50)
----------------------------------------------------------------
</TABLE>
- 16 -
<PAGE> 19
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
National Education Corporation and Subsidiaries
<TABLE>
<CAPTION>
(dollars in thousands) Year Ended December 31, 1993
- -----------------------------------------------------------------------------------------------------------------
ICS Steck-
Learning Vaughn
Total Systems Publishing NETG Other
---------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET REVENUES $ 224,172 $ 101,319 $ 53,156 $ 68,259 $ 1,438
COSTS AND EXPENSES:
Contract course materials and service costs 57,332 29,675 -- 26,895 762
Publishing costs and materials 12,721 -- 12,721 -- --
Product development 22,328 2,006 6,723 13,599 --
Selling and promotion 93,046 41,989 16,279 34,250 528
General and administrative 26,305 6,248 4,144 15,121 792
Amortization of acquired intangible assets 4,605 33 215 4,344 13
Unusual items 9,232 -- -- 9,232 --
---------------------------------------------------------------
SEGMENT OPERATING INCOME (LOSS) $ (1,397) $ 21,368 $ 13,074 $ (35,182) $ (657)
---------------------------------------------------------------
</TABLE>
CONSOLIDATED RESULTS OF OPERATIONS:
Revenues of $258,598,000 for the year ended December 31, 1995 were $16,984,000
or 7.0% higher than revenues of $241,614,000 in the prior year. The increase is
due to revenue growth at the ICS Learning Systems and Steck-Vaughn segments
partially offset by a reduction in the NETG segment. For the year ended December
31, 1995, the Company recorded a net loss of $87,223,000 or $2.73 per share
principally due to $81,730,000 of unusual items related to restructure charges
and write-downs of intangible assets at NETG; severance payment to the former
CEO at Corporate; write-off of computer course hardware and related costs at
ICS; and settlement of litigation at Steck-Vaughn. These unusual charges were
partially offset by an unusual credit for payment received to settle litigation
at NETG. This compares with a loss from continuing operations of $14,093,000 or
$.48 per share for the year ended December 31, 1994. The 1994 results of
operations were restated to reflect a change at Steck-Vaughn from the LIFO to
the FIFO method of accounting for inventories. This change decreased the net
loss by $1,102,000 or $.03 per share and $380,000 or $.01 per share for 1995 and
1994, respectively. Excluding the impact of unusual items in 1995 and the
amortization of prior period deferred marketing as a result of the adoption of
the SOP in 1994 as discussed below results in net loss of $5,493,000 ($.17 per
share) and income from continuing operations of $5,743,000 ($.16 per share on a
fully diluted basis) for the years ended December 31, 1995 and 1994,
respectively.
The 1994 results were unfavorably impacted by the adoption of AICPA Statement of
Position No. 93-7 ("SOP"), "Reporting on Advertising Costs". The SOP generally
requires advertising costs, other than direct-response advertising, to be
expensed as incurred. In the fourth quarter of 1994, the Company adopted the SOP
at its ICS Learning Systems subsidiary effective January 1, 1994. In adopting
the SOP in 1994, ICS' total advertising, selling and promotion costs were
expensed as incurred rather than deferred and amortized as in prior periods.
Furthermore, the transition rules of the SOP required amortization of the
deferred balances existing as of the beginning of the year in accordance with
the Company's previous accounting policy. The SOP does not permit restatement of
prior periods. The effect of the transition rules is to reflect as an expense in
the year of adoption (1994) both the current year's advertising, selling and
promotion costs, and the amortization of balances deferred as of the beginning
of the year. Adoption of the SOP in 1994 resulted in a charge of $27,410,000
($21,181,000 after tax or $.72 per share). The charge consists of two
components. First, a charge of $19,836,000 resulted from the amortization of the
deferred marketing balance as of December 31, 1993 into 1994. Second, a charge
of $7,574,000 resulted from increased
- 17 -
<PAGE> 20
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
National Education Corporation and Subsidiaries
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED:)
selling and promotion spending above the amortization that would have been
expensed in accordance with the Company's previous accounting policy. For
comparative purposes only, assuming the Company had adopted the SOP effective
January 1, 1993, income before taxes would have decreased $3,411,000 ($2,251,000
after tax or $.08 per share) in 1993. The Company's advertising and promotion
expenses, excluding the amortization of prior period deferred marketing, were
$59,073,000, $56,301,000 and $44,032,000 for the years ended December 31, 1995,
1994 and 1993, respectively.
The 1994 results were also negatively impacted by a $40,032,000 charge ($1.35
per share) related to the planned disposition of the Education Centers
subsidiary. Effective June 30, 1994, the Company adopted a plan to dispose of
the Education Centers subsidiary. The charge was to write-down assets, provide
for estimated gains/losses on the sale of certain schools and to provide for the
estimated costs of closing and teaching-out certain schools. The revenues and
expenses of the Education Centers have been netted out and segregated as
discontinued operations in the statements of operations for 1994 and prior. In
1995, the Company substantially completed the sale, closure and teach-out of the
schools within the estimated loss amount previously provided in the financial
statements.
General corporate expenses of $6,632,000 were essentially flat with the prior
year. Investment income decreased $613,000 and interest expense increased
$2,314,000 as the Company sold investments and increased borrowings to meet cash
needs.
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 shares of the Company's common stock. As a
result of this conversion, interest expense will be lower in future periods by
$2,000,000 on an annual basis; however, the additional shares outstanding will
have a potential dilutive impact on earnings per share. The conversion was
actually anti-dilutive for the fourth quarter of 1995. If the conversion had not
occurred loss per share for the fourth quarter would have been $.11 compared to
the reported loss per share of $.08, and the loss per share for the full year
would have been $2.89 compared to the $2.73 reported.
The Company's businesses tend to be seasonal in nature with most of the revenue
historically being recognized in the latter half of the year. Accordingly,
commencing in 1995, a portion of the selling and marketing costs incurred during
interim periods is capitalized and fully amortized within the calendar year to
better match the expenses with when the revenue is recognized. The quarterly
results of operations for 1995 presented in Note 16 of the Notes to Consolidated
Financial Statements were restated to reflect the interim deferral of these
costs. Accounting principles, however, do not permit restated quarterly results
of operations for 1994.
- 18 -
<PAGE> 21
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
National Education Corporation and Subsidiaries
ICS LEARNING SYSTEMS:
Set forth below are key indices which aid in understanding the results of
operations of ICS Learning Systems.
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
(dollars in thousands) 1995 1994 1993
----------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Traditional Distance Education - Domestic $ 85,224 $ 69,464 $ 55,455
Traditional Distance Education - International 43,983 40,868 39,523
Industrial and Business 7,963 7,414 6,341
MicroMash 5,851 5,069 --
--------------------------------
Total Revenues $143,021 $122,815 $101,319
--------------------------------
Traditional Business:
New Enrollments:
Domestic 276,727 249,273 187,780
International 115,226 123,616 124,003
--------------------------------
Total New Enrollments 391,953 372,889 311,783
--------------------------------
Gross Enrollment Value (GEV):
Domestic $180,102 $143,959 $130,240
International 75,707 68,981 68,272
--------------------------------
Total GEV $255,809 $212,940 $198,512
--------------------------------
Selling and Promotion Spending:
Domestic $ 41,001 $ 36,287 $ 26,735
International 17,312 15,860 14,027
--------------------------------
Total Selling and Promotion Spending $ 58,313 $ 52,147 $ 40,762
--------------------------------
Unearned Gross Future Tuition Revenue $153,489 $163,050 $126,167
--------------------------------
</TABLE>
ICS - 1995 COMPARED TO 1994:
Revenue for 1995 of $143,021,000 increased $20,206,000 or 16.5% compared to
$122,815,000 in the prior year. Revenue increased in all areas with most of the
increase in the traditional domestic operations. Traditional domestic revenue
increased $15,760,000 or 22.7%. This increase in traditional domestic revenue
was due to approximately 61,000 more students carried in from the prior year
plus a domestic enrollment increase of 27,454 students (an 11.0% increase). The
increased revenue is due to more enrollments through increased telesales
efforts, as well as higher selling and promotion expense which yielded more
enrollments. Telesales have proven to be a very cost effective marketing method
resulting in a higher conversion rate of inquiries to enrollments and typically
resulting in more tuition down payment than other marketing methods. Industrial
and Business revenue increased $549,000 or 7.4%. MicroMash revenues grew
$782,000 or 15.4% due to overall business growth.
International revenue of $43,983,000 increased $3,115,000 or 7.6%. The increase
in international revenue was due primarily to stronger enrollments in Canada
(4.2% increase) and International Mail Sales (IMS - 7.7% increase), better
collections in Australia/New Zealand and higher per unit course revenue as a
result of a higher mix of PC based course sales. Overall international
enrollments were down 6.8% due primarily to 14.8% fewer enrollments in the U.K.
- 19 -
<PAGE> 22
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
National Education Corporation and Subsidiaries
ICS - 1995 COMPARED TO 1994 (CONTINUED:)
Operating income increased from a loss in 1994 of $3,927,000 to income of
$7,609,000. The 1994 loss included $19,836,000 amortization of prior period
deferred marketing costs pursuant to SOP 93-7 and the 1995 results included
$1,470,000 of this amortization. Also, the 1995 results included a $4,549,000
unusual item write-off of course computer hardware and related costs. Excluding
the amortization impact and the unusual item, the operating income was
$13,628,000 (9.5% operating income margin) and $15,909,000 (13.0% operating
income margin) for 1995 and 1994, respectively. This decrease in operating
income and margin is due primarily to higher contract course materials and
service costs of $14,959,000 (representing an erosion in operating margin of 6.2
percentage points) and increased general and administrative expenses of
$3,248,000 (representing an erosion in operating margin of 1.4 percentage
points). Despite the increase in selling and promotion expenses of $4,178,000,
these expenses as a percentage of revenues improved 3.9 percentage points.
The increase in course service costs is due to increased enrollments and a
higher mix of computer training courses which included computer hardware. Course
service costs also increased due to higher servicing/distribution costs in an
effort to provide better customer service. The increase in selling and
promotional expense is principally due to increased telesales and advertising
and promotional spending, which resulted in 19,064 more enrollments, $42,869,000
increase in gross enrollment value and $20,206,000 more revenue.
The increase in general and administrative expense is mostly due to higher
outside service charges for the mainframe computer usage, increased computer
programming costs to convert and integrate new information systems and lower
1994 expenses resulting from favorable insurance loss experience.
Prior to September 15, 1995, ICS offered computer courses which included the
sale to the student of a computer which, after shipment, was recorded as an
asset and amortized over the projected twelve month period of the remaining
course payments. Subsequent to September 15, 1995, the Company changed the
manner in which computer training courses were marketed, no longer including the
computer hardware with such courses. In the fourth quarter of 1995, the Company
reviewed the realizability of the carrying value of the computer and related
assets and determined that a portion of the capitalized balance for computers
related to enrollments for which there was no further revenue to be recognized.
As a result, the Company recorded a write-down of the unamortized balance of
computers and other related costs of $4,549,000 ($.14 per share), which is
reflected as an unusual item. In addition, the Company reduced the period over
which the computers are amortized to six months.
Domestic gross enrollment value increased $36,143,000 or 25.1% due to the
increase in new enrollments and a higher value per course due to the higher
priced computer courses prior to September 15, 1995. International gross
enrollment value increased $6,726,000 or 9.8% due to the increased enrollments
in Canada and IMS and the change in mix to higher priced PC courses. Unearned
future tuition revenue decreased $9,561,000 or 5.9% principally because
effective September 15, 1995, the Company unbundled sales of computer hardware
from the computer courses and lowered the price of the course to reflect the
elimination of the computer from the course. Following this unbundling,
enrollments in computer courses dropped in the fourth quarter. Based upon
previous experience, approximately 45% of the unearned future tuition revenue
was ultimately recognized into revenue.
- 20 -
<PAGE> 23
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
National Education Corporation and Subsidiaries
STECK-VAUGHN PUBLISHING - 1995 COMPARED TO 1994:
<TABLE>
<CAPTION>
Year Ended December 31,
-------------------------
(dollars in thousands) 1995 1994 1993
--------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Elementary/High School $34,971 $31,578 $29,377
Adult Education 12,677 12,934 13,817
Library 10,578 9,096 9,962
------- ------- -------
Total Revenues $58,226 $53,608 $53,156
------- ------- -------
</TABLE>
Revenues of $58,226,000 increased $4,618,000 or 8.6% from revenues of
$53,608,000 in the prior year. Revenue growth was supported by general price
increases of 10.1% and 5.7% effective September 1, 1995 and 1994, respectively.
Operating income for 1995 was $9,499,000 compared to operating income of
$10,459,000 in 1994. The decrease in operating income is due entirely to the
unusual item charge of $970,000 or $.03 per share for settlement of litigation.
Excluding this unusual item, operating income for 1995 would have been
$10,469,000 (18.0% operating income margin) as compared to $10,459,000 (19.5%
operating income margin) in 1994.
Revenue growth stemmed from the elementary and library markets. The
elementary/high school market, up $3,393,000 or 10.7% was bolstered by strong
sales from basic skills products in spelling, math and reading. The Company's
testing and assessment products also boosted sales, enhanced by the Berrent
Publications product line purchased in November 1994.
Library sales of $10,578,000, up 16.3%, were stimulated by the Company's strong
list of new titles, as well as new exclusive distribution agreements with
Larouse Kingfisher Chambers, Inc. and Abdo & Daughters. Adult sales were down
$257,000 or 2.0% due to continued federal budget constraints reducing the
funding for adult education. The Company purchased the product line of
Educational Development Laboratories, Inc. (EDL) in October 1995 to strengthen
its adult product offerings.
Publishing costs and materials of $14,867,000 increased $1,272,000 or 9.4%, but
remained relatively constant as a percentage of revenues. Manufacturing costs
rose due to the increased cost of paper and the increased sales of library
titles to wholesalers at their typical discounted prices. The Company's price
increase offset much of the increase in paper cost. Royalty expense declined as
a percentage of revenues due to the acquisition of product lines with lower
royalty costs and the addition of the new library lines through distribution
arrangements rather than internal development.
In 1995, Steck-Vaughn changed its method of accounting for inventories from the
last-in, first-out (LIFO) method to the first-in, first-out (FIFO) method. The
new method was adopted to provide a better means of matching current costs with
current revenues, as the company aggressively pursues its plan to reduce its
current operating inventory levels while increasing inventory turnover. In
addition, commencing in late 1995 and continuing into 1996, paper prices
declined. Management expects this trend to continue. The financial statements of
all prior years have been restated to apply the method retroactively. The effect
of this change was to increase Steck-Vaughn's 1994 operating income by
$1,326,000 and $754,000 for 1995 and 1994, respectively.
Product development expense of $8,901,000 increased $1,274,000 or 16.7% as the
Company continued to augment its product offerings with new and revised titles.
Of particular interest is the revision of two major series scheduled for release
in 1996: the 53-volume Portrait of America series and the 24-volume Raintree
Illustrated Science Encyclopedia. The acquisitions of Berrent Publications and
EDL, whose separate development offices were retained, also contributed to the
increase.
- 21 -
<PAGE> 24
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
National Education Corporation and Subsidiaries
STECK-VAUGHN PUBLISHING - 1995 COMPARED TO 1994 (CONTINUED:)
Selling and promotion expense of $18,738,000 increased $1,266,000 or 7.2%, but
as a percentage of revenues was down slightly. In nominal terms, expenses rose
due to increased commissions on the higher sales volume. Partially offsetting
the increased costs were some cost reductions achieved through a slight
reduction in the field sales force and an 18% reduction in the telemarketing
sales force.
General and administrative costs were higher due to increased headcount,
enhancement of MIS capabilities and nonrecurring insurance credits in 1994.
Amortization of acquired intangible assets increased as a result of the three
acquisitions made in the last fourteen months.
NETG:
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
(dollars in thousands) 1995 1994 1993
-------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Domestic $26,129 $36,564 $39,144
Spectrum 1,618 5,247 5,266
International 26,603 20,126 23,849
-----------------------------
Total Revenues $54,350 $61,937 $68,259
-----------------------------
</TABLE>
NETG - 1995 COMPARED TO 1994:
Revenues for NETG were $54,350,000, a decrease of $7,587,000 or 12.2% from the
$61,937,000 in 1994. Domestic revenues of $26,129,000 decreased $10,435,000 or
28.5% from the prior year due to decrease in customer renewals and the absence
of significant new customers. The decrease in customer renewals and significant
new customers in the domestic operation is due in part to the absence of a full
line of client/server training products that is now in such demand in the
multimedia training marketplace. During 1995, NETG introduced 32 internally
developed products in the marketplace, most of which were in the desktop
computer training area. In order to stem the revenue decline and grow the
business in the future, NETG will introduce approximately 200 internally
developed training courses in 1996, of which approximately 110 will be in the
client/server training area.
Spectrum revenue for 1995 was $1,618,000, or $3,629,000 lower than in 1994
because the Company began the process to discontinue Spectrum's product line in
June 1995.
International revenue of $26,603,000 increased $6,477,000 or 32.2% from the
prior year primarily in the U.K. and Germany. The increase in the U.K. was due
to increased renewals and new business in 1995. The improved results were
attributable to an experienced management team together with effective sales and
marketing strategies implemented in 1994, particularly in Product License and
Consulting/Multimedia products. The increase in revenues in Germany is mostly
due to increased training revenue in SAP R/3 products, as well as increased
revenue due to a program whereby the government subsidizes certain private
sector training.
Operating loss of NETG increased from $13,993,000 in 1994 to $89,942,000 in 1995
due primarily to net unusual items of $74,567,000 related to the restructuring
of NETG ($30,604,000), write-off of goodwill ($47,509,000) and an unusual credit
($3,546,000) which resulted from a favorable legal arbitration award.
- 22 -
<PAGE> 25
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
National Education Corporation and Subsidiaries
NETG - 1995 COMPARED TO 1994 (CONTINUED:)
Course service costs of $19,691,000 were $1,738,000 or 8.1% lower than the prior
year. This is due to the lower volume of domestic business, as well as the
savings from the reorganization of the business, offset partially by an increase
in instructor led training costs as a result of the revenue growth in that area
and an increase in material costs and royalty costs due to revenue growth in the
International market. Also the provision for doubtful accounts increased by
$1,300,000 in International operations.
Product development costs of $10,493,000 increased $1,742,000 or 19.9% due to an
increase in product development of client/server training courses, of which
$3,500,000 was expensed in December of 1995 as part of the project to produce
approximately 110 client/server products to be delivered in the last half of
1996. This increase was partially offset by headcount and related savings due to
the restructuring, as well as discontinuance of the Spectrum products.
Selling and promotion expense of $28,165,000 decreased $5,462,000 or 16.2% due
to lower headcount, fewer sales offices, reduced promotional spending and lower
commission expense due to the lower revenue and the restructuring in June 1995.
The decrease was partially offset by increased costs in international and
distributor channels due to the higher revenue levels.
General and administrative expenses of $10,707,000 were $79,000 or 0.7% lower
than in 1994. Amortization of acquired intangible assets was $668,000 or 50.0%
lower than the prior year as the intangible assets were written-off in June 1995
as further explained below.
In 1995, NETG recorded $74,567,000 of net unusual item charges which are
explained below. NETG experienced significant operating losses over the past
several years in an environment of substantial changes in training related to
information systems and technology. As a result of continuing losses through 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. Consequently, the Company resolved
to significantly lower the overall cost structure while focusing on specific
training areas to permit NETG to return to profitability. 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 a
nonrecurring 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. These restructure actions are
expected to reduce annual operating expenses by $15,000,000.
In the second quarter of 1995, as a result of the changes at NETG, the Company
revised NETG's financial projections. Based upon this estimate of the future
results of operations, the estimated net cash flows over the remaining life of
NETG's intangible assets (goodwill) are less than the net book value of the
goodwill at June 30, 1995 and under the provisions of Financial Accounting
Standard No. 121 "Accounting for the Impairment of Long-Lived Assets", the
Company estimated the fair value of its investment in NETG by discounting
estimated future net cash flows at a rate commensurate with the related risk.
Based upon this analysis, management believes NETG to have only a nominal fair
value such that the goodwill balance of $42,719,000 ($1.34 per share) related to
the Company's 1986 acquisition of what is now NETG was written-off during the
second quarter.
- 23 -
<PAGE> 26
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
National Education Corporation and Subsidiaries
NETG - 1995 COMPARED TO 1994 (CONTINUED:)
Additionally, in the second quarter, the Company discontinued the operations of
Spectrum, a subsidiary of NETG which provided primarily custom developed
training to businesses. As a result, the Company recorded the assets and
liabilities of Spectrum at their fair value and recorded a write-off of goodwill
in the amount of $4,790,000 ($.15 per share) during the second quarter.
Spectrum's operating losses before amortization of intangibles and unusual
items, were $1,433,000 and $1,125,000 for 1995 and 1994, respectively.
During the fourth quarter of 1995, a legal dispute with a third-party author for
NETG was settled in the Company's favor. The Company recorded a gain to the
extent payment was received. A portion of the settlement in the amount of
$1,343,000 is held in escrow pending the outcome of various legal issues. The
gain was partially offset with other minor legal settlements which involved
parties related to the third party author resulting in a net unusual credit of
$3,546,000.
OTHER:
Revenues from National Education International (NEI) which provides training
services to foreign governments primarily in the Middle East, of $3,001,000 were
up slightly from the prior year. This increase was more than offset by a
$327,000 decrease in other revenue from 1994 due to revenues from the investment
in an entity which was sold in 1994.
During the second quarter of 1995, an unusual charge was recorded in the amount
of $1,644,000 ($.05 per share) at NEC Corporate primarily for severance related
payments to the former chief executive officer and corporate expenses related to
the restructuring of NETG.
Operating results of ICS and NETG foreign operations by geographic region
experienced similar changes in revenues and income as previously discussed.
Foreign currency gains of $307,000 were recorded during 1995 compared to gains
of $492,000 in 1994. The current year currency gains primarily resulted from the
rise in the exchange rates of the British pound and the German mark and their
effect on the U.S. dollar denominated current intercompany balances at NETG-U.K.
and NETG-Germany payable to the U.S. operations.
1994 COMPARED TO 1993:
CONSOLIDATED RESULTS OF OPERATIONS:
Revenues of $241,614,000 for the year ended December 31, 1994 were $17,442,000
or 7.8% higher than revenues of $224,172,000 in the prior year. Loss from
continuing operations was $14,093,000 or $.48 loss per fully diluted share
compared to income from continuing operations of $10,092,000 or $.32 per fully
diluted share in 1993. Net loss of $63,545,000 or $2.14 loss per share compared
to net loss of $9,665,000 or $.32 loss per share in 1993.
The 1994 results were restated to reflect Steck-Vaughn changing from the LIFO to
the FIFO basis of accounting for inventories. This change decreased net loss by
$380,000 ($.01 per share) in 1994 and increased net loss by $46,000 ($.00 per
share) in 1993. The 1994 results were negatively impacted by the adoption of the
SOP discussed earlier. The SOP did not allow the restatement of the 1993
results. The 1994 results were also unfavorably impacted by the $40,032,000
charge ($1.35 per share) related to the discontinuance of the Education Centers
subsidiary referred to earlier.
- 24 -
<PAGE> 27
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
National Education Corporation and Subsidiaries
CONSOLIDATED RESULTS OF OPERATIONS (CONTINUED:)
Increased revenues from continuing operations related to ICS, Steck-Vaughn and
National Education International were partially offset by reduced revenues at
NETG. The decline in income from continuing operations of $24,185,000 was due to
the 1994 adoption of the SOP discussed above, and a nonrecurring 1993 after tax
gain of $21,120,000 ($.71 per share) resulting from an initial public offering
of 2,668,000 shares of Steck-Vaughn Publishing Corporation common stock
partially offset by the 1993 unusual charge of $9,232,000 ($6,558,000 after tax
or $.22 loss per share) recorded at NETG for the write-down of certain acquired
intangible assets. Excluding the effects of the net unusual items, income from
continuing operations in 1994 was favorably impacted by reduced operating losses
at NETG and a gain on sale of a partnership interest of a start-up operation in
the amount of $3,247,000 ($2,143,000 after tax or $.07 per share). The net loss
was primarily related to the loss from discontinued operations and the loss on
disposal of discontinued operations of the Education Centers totaling
$49,452,000 in 1994. The loss from discontinued operations decreased from the
prior year due to the nonrecurring unusual charge of $23,626,000 ($16,363,000
after tax or $.55 loss per share) resulting from a restructuring charge for the
write-down of certain assets and the estimated costs of closing the 14 schools
announced in the third quarter of 1993.
ICS LEARNING SYSTEMS:
ICS Learning Systems revenues of $122,815,000 increased $21,496,000 or 21.2%
from revenues of $101,319,000 in 1993. Operating loss of $3,927,000 decreased
$25,295,000 from operating income of $21,368,000 in the prior year solely due to
the change in accounting for advertising, selling and promotion costs required
by the SOP as discussed earlier. The revenues at ICS increased primarily due to
strong revenue performance at the domestic operation. The international
operations experienced a slight increase in revenues. Domestic revenues grew
significantly due to a 32.7% increase in enrollments, revenues from MicroMash,
and increases in Business and Industrial Division revenues. The significant
domestic enrollment increase primarily resulted from the success of the expanded
telesales efforts, which have produced a higher conversion of leads to
enrollments and tuition down payments upon enrollment than that experienced in
the prior year. In addition, a shift in product mix towards higher priced
computer related courses contributed to the revenue growth. During the first
quarter, ICS acquired MicroMash, a leading provider of computer based
interactive courses for accounting professionals and students. Through this
acquisition, which contributed $5,069,000 to revenue in 1994, ICS is
strategically positioned to aggressively pursue the continuing professional
education marketplace. Business and Industrial Division revenues grew during the
year as a result of further selling penetration of the existing marketplace. The
revenue increase at the international operation primarily resulted from higher
revenues at the Australia/New Zealand, Canada and International Mail Sales (IMS)
operations. The combined Australia/New Zealand operation experienced strong
enrollment growth of 17.9% as a result of the successful telesales efforts which
increased conversion of leads to enrollments. The higher revenues at Canada and
IMS primarily resulted from increased student payments partially reduced by a
decrease in Canada's enrollments.
The United Kingdom experienced lower revenues due to lower student payments
despite flat enrollments as compared to the prior year.
As a result of the increased traditional business selling and promotion spending
of $11,385,000 in 1994 over 1993, revenues increased $21,496,000 and unearned
future tuition revenue on student contracts at ICS increased $36,883,000 or
29.2% to $163,050,000. As required by the SOP, expensing these costs as incurred
fully burdens the current year with expenses that benefit future years with the
related revenue stream. Higher course service costs at the domestic operation
were primarily related to the significant volume increases and changes in
product mix towards a higher percentage of lower margin computer related
courses. General and administrative costs were higher during the year primarily
due to costs associated with MicroMash and the initial costs to convert and
integrate new information systems. These costs were partially offset by lower
insurance costs related to favorable loss experience.
- 25 -
<PAGE> 28
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
National Education Corporation and Subsidiaries
STECK VAUGHN PUBLISHING:
Steck-Vaughn Publishing Corporation revenues of $53,608,000 were $452,000 or .9%
higher than revenues of $53,156,000 in the prior year. Operating income of
$10,459,000 decreased $2,615,000 or 20.0% as compared to operating income of
$13,074,000 in 1993. The 1994 and 1993 results were restated to reflect a change
from the LIFO to the FIFO method of accounting for inventories. This change
increased operating income by $754,000 and $144,000 in 1994 and 1993,
respectively.
The slight increase in revenue was attributable to a general price increase of
6.7% and a modest increase in sales of the elementary school product line which
benefited from growth primarily in the Math, Reading, and Science products and a
full year of Magnetic Way product sales. The adult education product line
experienced a decrease in revenues due to a reduction in software sales of GED
products, new competition for GED products and tight funding in the adult
education sector. In addition, a decline in sales of mature library products was
not entirely offset by sales of newer products, resulting in lower library
revenues. Several factors contributed to these results. Selling conditions in
early 1994 were hampered by adverse winter weather conditions which affected the
midwest, mid-Atlantic and northeast regions of the United States.
Additionally, the sales force expansion and related reorganization effective
January 1994, resulted in longer than anticipated assimilation and reduced sales
productivity. Finally, a continuing trend towards site-based selling, which is a
competitive strength of Steck-Vaughn, is driving the decision making process
down to the faculty level requiring a greater number of sales calls per revenue
dollar, resulting in an increase in selling costs.
Operating income decreased significantly during 1994 primarily due to an
increase in publishing costs, product development expenses, and selling and
promotion costs. Higher publishing costs primarily resulted from the higher
distributor and Magnetic Way sales which have lower profit margins and resulted
in a slight increase in publishing costs as a percentage of revenues. Publishing
costs and materials, which include product development and product acquisition
expenses, increased over the prior year due to Steck-Vaughn's commitment to
develop new and revised products and to acquire certain library products to
position Steck-Vaughn for growth in the supplemental educational marketplace. By
continuing to expand its product offerings, Steck-Vaughn expects to continue to
capitalize on the anticipated increasing demand for supplemental educational,
library and adult education products despite severe budgetary pressure on
schools located in certain geographic areas of the country. Selling and
promotion costs increased during the year due to the expansion of the sales
organization during January 1994. The expansion and related reorganization
resulted in the segmentation of the sales force into two groups. One group
focuses on the elementary, junior high and library marketplaces while the other
group focuses on the high school and adult education marketplaces. This
segmentation positions Steck-Vaughn to maximize the opportunities of their
rapidly expanding product offerings and to respond to additional requirements
resulting from the trend towards site-based selling. General and administrative
expenses decreased in 1994 primarily due to lower insurance expenses caused by
favorable loss experience and reduced management incentive compensation
expenses.
NETG:
NETG revenues of $61,937,000 decreased $6,322,000 or 9.3% from revenues of
$68,259,000 in the prior year. Operating losses of $13,993,000 decreased
$11,957,000 from losses before unusual items of $25,950,000 in the prior year.
During the third quarter of 1993, NETG recorded an unusual charge of $9,232,000
which resulted from the write-down of certain acquired intangible assets. The
decrease in revenues at the domestic and international operations primarily
resulted from lower contract backlog at the beginning of 1994 as compared to
1993 and slightly
- 26 -
<PAGE> 29
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
National Education Corporation and Subsidiaries
NETG (CONTINUED:)
lower volume of new orders in the domestic operation. In addition, the decrease
in revenues was partially attributable to the introduction in the third quarter
of a new product licensing agreement, called Multimedia Licensing Agreement
(MLA), which simplifies the customers' ability to acquire NETG products;
however, unlike sales contracts used in prior years, the MLA does not require
upfront commitments to acquire product upon the signing of a contract. As the
number of customers signing MLAs increases, new orders will become less
meaningful as a key indicator of future revenue activity. New orders increased
in the international operation due to increased new business activity in the
United Kingdom operation; however, decreasing contract backlog, which more than
offset the new orders business, and the sale of NETG-Canada in 1993 resulted in
reduced revenues in the international operation. During December 1993, NETG sold
certain assets and liabilities of NETG-Canada to SHL Systemhouse, Inc. at
approximately book value.
Operating losses before unusual items decreased significantly in the domestic
operation during 1994 primarily due to reductions in product development costs,
general and administrative expenses and amortization of acquired intangible
assets. Reengineering the processes in product development and focusing the 1994
development efforts to concentrate in areas such as multimedia end user desktop
computing and client/server computing resulted in a 35.6% reduction in product
development expenses. The decrease in general and administrative expenses
primarily resulted from lower employee headcount and favorable loss experience
which resulted in lower insurance expenses partially offset by higher consulting
costs. Amortization of acquired intangible assets decreased in 1994 due to the
write-down of certain acquired intangible assets in 1993 which was recorded as
an unusual charge of $9,232,000. Despite slightly lower selling and promotion
expenses, these expenses increased as a percentage of revenue during 1994
primarily as a result of the revenue decline.
CORPORATE AND OTHER:
National Education International (NEI) revenues of $2,927,000 increased
$1,675,000 or 133.8% above the prior year revenues of $1,252,000. Operating
income of $958,000 increased $742,000 over the prior year income of $216,000.
The higher revenue and operating income levels are attributable to multi-year
training contracts with Egypt and Kuwait, which span from one to four years in
duration.
In December 1994, the Company sold its interest in a start-up partnership
venture previously entered into for the development of an automated enrollment
and financial aid application process. As a result of the sale, which was
accounted for as a sale of stock, the Company recorded a gain on sale of
$3,247,000 ($2,143,000 after tax or $.07 per share).
General corporate expenses of $6,582,000 decreased $4,314,000 or 39.6% from
expenses of $10,896,000 in the prior year. The decrease in corporate expenses
primarily resulted from a one-time contract settlement charge in 1993, favorable
loss experience which resulted in lower insurance expenses, reduced outside
consulting costs primarily from the company-wide financial reengineering effort
and other cost reductions.
Operating results of ICS and NETG foreign operations by geographic region
experienced similar changes in revenues and income as previously discussed.
Foreign currency gains of $492,000 were recorded during 1994 compared to losses
of $243,000 in 1993. The current year currency gains primarily resulted from the
rise in the exchange rates of the British pound and the German mark and their
effect on the U.S. dollar denominated current intercompany balances at NETG-U.K.
and NETG-Germany payable to the U.S. operations.
- 27 -
<PAGE> 30
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
National Education Corporation and Subsidiaries
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity are cash, investment securities and
cash provided from operations. At December 31, 1995, the Company had $23,868,000
in cash and investment securities, of which $11,790,000 was held in the account
of Steck-Vaughn.
As of December 31, 1995, the Company had a revolving bank credit agreement in
the amount of $10,000,000, all of which was outstanding. In January 1996, the
Company terminated the bank credit agreement in the amount of $10,000,000 and
entered into a two-year, $20,000,000 revolving credit agreement with a bank. The
revolving credit, which is secured by stock of certain principal subsidiaries
and certain assets, will initially provide for borrowing at the bank's base rate
plus 1.75% or, at the Company's option, at LIBOR plus 3%, with
borrowing rate decreases subject to certain financial performance measures. The
revolving credit agreement provides for the intercompany agreement between the
Company and Steck-Vaughn in the amount of $10,000,000 which expires March 31,
1996. Effective February 1, 1996, the Company reduced the amount of the
intercompany agreement to $5,000,000. The agreement provides that any borrowing
by the Company will bear interest at LIBOR plus 2%, and will be secured
by the Company's holdings of Steck-Vaughn stock. Steck-Vaughn also received an
option to repurchase from the Company up to 290,000 shares of Steck-Vaughn stock
held by the Company, at $6.50 per share. The option becomes exercisable one year
after grant, expires March 31, 1997, and may be redeemed by the Company prior to
exercise or expiration for the greater of $75,000 per month ($37,500 effective
February 1, 1996) or the amount necessary to increase to 25% the
annualized yield to Steck-Vaughn on all amounts borrowed by the Company under
the intercompany loan agreement. At December 31, 1995, $4,000,000 was
outstanding under the intercompany agreement and was eliminated in
consolidation.
Steck-Vaughn has a revolving bank credit agreement in the amount of $10,000,000
with a maturity of June 10, 1997. The agreement provides for borrowings at prime
or, at Steck-Vaughn's option, LIBOR plus 1.5%. The bank credit agreement
replaced Steck-Vaughn's borrowing ability from the Company pursuant to an
intercompany agreement. No amounts were outstanding under the bank credit
facility in 1994 or 1995. Annual commitment fees of .25% are paid on the unused
line of credit.
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.
During 1994, the Company adopted a plan to dispose of its Education Centers
subsidiary. As a result, the Company recorded a charge of $40,032,000 to
write-down assets to estimated net realizable value and provide for estimated
costs of disposing of the operation. As of December 31, 1995, substantially all
of the operations and schools were sold, closed or terminated.
Subsequent to December 31, 1995, the Company entered into a definitive agreement
to acquire all of the stock of Edunetics, Ltd., an Israeli corporation engaged
in the development of educational software, for cash consideration of
$12,000,000. The closing remains subject to certain conditions including
approval by the shareholders of Edunetics and receipt of certain regulatory
approvals under Israeli law.
The Company expects that cash, marketable securities, the bank credit
facilities, cash provided from operations, the intercompany credit agreement
with Steck-Vaughn, which under certain conditions may be extended, 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
Edunetics, Ltd. At closing, the purchase price for Edunetics, Ltd. will be
funded by cash on hand and advances under the Steck-Vaughn revolving bank credit
agreement.
- 28 -
<PAGE> 31
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
National Education Corporation and Subsidiaries
LIQUIDITY AND CAPITAL RESOURCES (CONTINUED)
Net cash outflow from operating activities of $11,000 in 1995 improved
$1,418,000 from the negative cash outflow of $1,429,000 reported in 1994. The
improvements in working capital items such as receivables, accounts payable,
accrued expenses, and accrued and deferred income taxes were partially offset by
increases of inventories, primarily at Steck-Vaughn and decreases of deferred
contract revenues, primarily at NETG due to the reduced level of contract and
revenue activity.
In addition, net cash flows for 1995 were further impacted by acquisitions of
Summit Learning, Inc. and EDL in the amount of $3,260,000. The cash outflow of
$2,337,000 at the Education Centers improved $18,748,000 from the cash outflow
of $21,085,000 in 1994. The improved cash flow at these discontinued operations
resulted from the proceeds from the sale of schools of $10,647,000 and the
significant reductions in Education Centers' headquarters expenses.
The Company accounts for income taxes under Statement of Financial Accounting
Standards No. 109, Accounting for Income Taxes (FAS 109). FAS 109 requires the
recognition of deferred tax liabilities and assets for the expected future tax
consequences of temporary differences between the financial statement and tax
basis of assets and liabilities. As of December 31, 1995, the Company had a
gross deferred tax asset of $84,488,000 (see Notes to Consolidated Financial
Statements). A significant portion of the deferred tax asset is comprised of
U.S. federal and international net operating loss carryforwards. At December 31,
1995, the Company had available federal consolidated net operating loss
carryforwards of $108,000,000 (exclusive of certain "SRLY" losses) expiring
through 2010. In addition, the Company had federal SRLY loss carryforwards
totaling $17,400,000 ($5,918,000 deferred tax asset) expiring in years 1998
through 2010 that may only be used to offset income generated by the particular
entities that generated the losses.
FAS 109 requires that the Company record a valuation allowance when it is "more
likely than not that some portion of the deferred tax asset will not be
realized". As a result of the Company's significant losses in recent years, the
Company has recorded a valuation allowance of $50,952,000, including full
allowance against the 1995 losses and the SRLY loss carryforwards.
The ultimate realization of deferred tax assets, net of the valuation allowance,
of $33,536,000 depends on the Company's ability to generate sufficient taxable
income in the future. A portion of this asset will be realized through the
reversal of taxable temporary differences totaling $11,661,000 reflected as
deferred tax liabilities in the financial statements. The improving operating
income throughout the last two quarters in 1995 and into 1996, together with the
reversal of taxable temporary differences, provides the basis for management's
conclusion that it is more likely than not that the Company will generate
sufficient taxable income to realize the net deferred tax asset.
The effect of inflation had little impact on the Company in 1995.
- 29 -
<PAGE> 32
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements at December 31, 1995
and 1994, and for each of the three years in the period ended December 31, 1995,
and the Report of Price Waterhouse LLP, Independent Accountants, are included in
this Annual Report on Form 10-K on pages F-1 through F-26 below.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
The Company has no information to report in response to this item.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY.
(a) The information required by Item 10 with respect to the directors
of the Company is incorporated herein by reference from material that will be
filed with the Securities and Exchange Commission within 120 days of the
Company's fiscal year end (December 31, 1995) as part of a Proxy Statement for
the Company's Annual Meeting of Stockholders.
(b) The information required by Item 10 with respect to executive
officers of the Company is furnished in a separate item captioned "Executive
Officers of the Company" and included in Part I of this Annual Report on Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated herein by reference
from material that will be filed with the Securities and Exchange Commission
within 120 days of the Company's fiscal year end (December 31, 1995) as part of
a Proxy Statement for the Company's Annual Meeting of Stockholders.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated herein by reference
from material that will be filed with the Securities and Exchange Commission
within 120 days of the Company's fiscal year end (December 31, 1995) as part of
a Proxy Statement for the Company's Annual Meeting of Stockholders.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated herein by reference
from material that will be filed with the Securities and Exchange Commission
within 120 days of the Company's fiscal year end (December 31, 1995) as part of
a Proxy Statement for the Company's Annual Meeting of Stockholders.
- 30 -
<PAGE> 33
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) The following documents are filed as
part of this report:
<TABLE>
<CAPTION>
Page Number
-----------
<S> <C>
(1) Financial Statements:
Report of Independent Accountants........................... F-1
Consolidated Statements of Operations for each of the
three years in the period ended December 31, 1995......... F-2
Consolidated Balance Sheets at December 31, 1995 and 1994... F-3
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 1995......... F-4
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended December 31, 1995.. F-5
Notes to Consolidated Financial Statements.................. F-6
(2) Financial Statement Schedules: **
II Valuation and Qualifying Accounts............. F-26
</TABLE>
** Schedules numbered in accordance with Rule 5.04 of
Regulation S-X. All other financial statement schedules
are omitted because they are not applicable or the
required information is shown in the financial statements
or notes thereto.
(3) Exhibits: Management contracts and compensatory plans and
arrangements required to be filed as an exhibit to this Annual
Report on Form 10-K are denoted with an "**" after the Exhibit
number.
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------- ------------
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the National Education
Corporation (23).............................................................
3.2 By-Laws of National Education Corporation, as amended (1).................... *
10.1 ** National Education Corporation Retirement Plan (Restated as of
January 1, 1989 and as Amended through January 1, 1992) (2).................. *
10.2 ** Advanced Systems, Incorporated 1984 Stock Option and Stock
Appreciation Rights Plan (3)................................................. *
10.3 ** 1986 Stock Option and Incentive Plan, as amended (4)......................... *
10.4 ** Amended and Restated 1990 Stock Option and Incentive Plan (5)................ *
10.5 ** Amended and Restated 1991 Directors' Stock Option and Award Plan (6)......... *
</TABLE>
- 31 -
<PAGE> 34
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------- ------------
<S> <C> <C>
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) (7)................... *
10.7 Addendum No. 1 to Rights Agreement, dated August 5, 1991 (8)................. *
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 (9)................................................... *
10.9 Tripartite Agreement Dated as of May 31, 1990, among National
Education Corporation, Continental Bank as Resigning Trustee, and IBJ
Schroder Bank & Trust Company as Successor Trustee (10)...................... *
10.10 ** National Education Corporation Supplemental Executive Retirement Plan,
as amended (11).............................................................. *
10.11 ** Supplemental Benefit Plan for Non-Employee Directors (12) ................... *
10.12 ** Executive Employment Agreement between National Education Corporation
and Sam Yau (13)............................................................. *
10.13 Intercompany Agreement Between National Education Corporation and
Steck-Vaughn Publishing Corporation dated June 30, 1993 (the "Intercompany
Agreement") (14)............................................................. *
10.14 First Amendment to Intercompany Agreement, dated June 10, 1994 (15).......... *
10.15 Tax Sharing Agreement Between National Education Corporation and Its
Direct and Indirect Corporate Subsidiaries dated January 1, 1993 (16)........ *
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) (17) ....................................................... *
10.17 First Amendment and Limited Waiver to Credit Agreement, dated
July 31, 1995 (18)........................................................... *
10.18 Second Amendment to Credit Agreement, dated December 21, 1995 (23)...........
10.19 $10,000,000 Credit Agreement between Steck-Vaughn Company and
NationsBank of Texas, dated as of June 10, 1994 (19)......................... *
10.20 Amendment of Loan Agreement between NationsBank of Texas, N.A. and
Steck-Vaughn Company, dated September 29, 1995 (20).......................... *
10.21 Revolving Line of Credit Note and Option Agreement between National
Education Corporation and Steck-Vaughn Publishing Corporation, dated
February 28, 1995 (21)....................................................... *
</TABLE>
- 32 -
<PAGE> 35
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------- ----------- ------------
<S> <C> <C>
10.22 Renewal and Extension Agreement between National Education Corporation and
Steck-Vaughn Publishing Corporation, effective December 31, 1995 (23)........
10.23 First Amendment to Stock Option Agreement between National Education
Corporation and Steck-Vaughn Publishing Corporation, effective December 31,
1995 (23)....................................................................
10.24 Letter Amendment to Stock Option Agreement between National Education
Corporation and Steck-Vaughn Publishing Corporation, dated February 1,
1996 (23)....................................................................
10.25 Debenture Conversion Agreement among National Education Corporation
and the Holders identified therein, dated August 31, 1995 (22)............... *
10.26 Credit Agreement among National Education Corporation, certain banks and
BZW Division of Barclays Bank PLC, as Agent, dated January 19, 1996
(Confidential treatment under Rule 24b-2 has been requested for portions
of this exhibit) (23)........................................................
11.1 Calculation of Primary Earnings Per Share (23)...............................
11.2 Calculation of Fully Diluted Earnings Per Share (23).........................
18 Letter from Price Waterhouse LLP regarding change in accounting
principles (23) .............................................................
21 Subsidiaries of National Education Corporation (23)..........................
23 Consent of Price Waterhouse LLP (23).........................................
27.1 Financial Data Schedule (23)
</TABLE>
- ------------------
* incorporated by reference from a previously filed document
** denotes management contract or compensatory plan or arrangement
(1) 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.
(2) 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.
(3) 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.
(4) 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.
(5) 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.
- 33 -
<PAGE> 36
(6) 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.
(7) 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.
(8) 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.
(9) 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.
(10) 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.
(11) 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.
(12) 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.
(13) 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.
(14) 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.
(15) 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.
(16) 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.
(17) 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, 1994, filed March 31, 1995.
(18) 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 November 9, 1995.
(19) Incorporated by reference to Exhibit 10.14 filed with
Steck-Vaughn Publishing Corporation's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994, filed August 11, 1994.
(20) Incorporated by reference to Exhibit 10.24 filed with National
Education Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995, filed November 9, 1995.
(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.
(22) Incorporated by reference to Exhibit 10.23 filed with National
Education Corporation's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1995, filed November 9, 1995.
(23) Filed herewith.
(b) No reports on Form 8-K were filed during the fourth quarter of 1995.
- 34 -
<PAGE> 37
(c) The exhibits required by this Item are listed under Item 14(a)(3) above.
(d) The consolidated financial statements required by this Item are listed\
under Item 14(a)(2).
- 35 -
<PAGE> 38
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
NATIONAL EDUCATION CORPORATION Date
By /s/ SAM YAU March 14, 1996
---------------
Sam Yau
President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Company and in the capacities and on the dates indicated.
Date
By /s/ SAM YAU March 14, 1996
---------------
Sam Yau
Director, President and Chief
Executive Officer
(Principal Executive Officer)
By /s/ KEITH K. OGATA March 14, 1996
---------------------------
Keith K. Ogata, Vice President,
Chief Financial Officer and
Treasurer (Principal Financial
Officer)
By /s/ GLEN E. MEDWID March 14, 1996
--------------------
Glen E. Medwid, Corporate
Controller (Principal
Accounting Officer)
- 36 -
<PAGE> 39
Date
By: /s/ RICHARD C. BLUM March 11, 1996
----------------------------
Richard C. Blum, Director
By: /s/ DAVID BONDERMAN March 11, 1996
----------------------------
David Bonderman, Director
By: /s/ DAVID R. DUKES March 13, 1996
---------------------------
David R. Dukes, Director
By: /s/ LEONARD W. JAFFE March 11, 1996
----------------------------
Leonard W. Jaffe, Director
By: /s/ DAVID C. JONES March 11, 1996
-----------------------------
David C. Jones, Director
By: /s/ MICHAEL R. KLEIN March 12, 1996
----------------------------
Michael R. Klein, Director
By: /s/ PAUL B. MACCREADY March 9, 1996
----------------------------
Paul B. MacCready, Director
By: /s/ FREDERIC V. MALEK March 9, 1996
---------------------------
Frederic V. Malek, Director
By: /s/ JOHN J. MCNAUGHTON March 11, 1996
----------------------------
John J. McNaughton, Director
By: /s/ WILLIAM D. WALSH March 9, 1996
----------------------------
William D. Walsh, Director
- 37 -
<PAGE> 40
NATIONAL EDUCATION CORPORATION
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders
of National Education Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) and (2) on page 31 present fairly, in all material
respects, the financial position of National Education Corporation and its
subsidiaries at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
As discussed in Note 1 to the consolidated financial statements, the Company
changed its method of accounting for advertising costs in 1994, changed its
method of accounting for inventory cost in 1995 and changed its method of
accounting for the impairment of long-lived and intangible assets in 1995.
Price Waterhouse LLP
Costa Mesa, California
February 5, 1996, except as to Note 4, which is as of March 1, 1996
F-1
<PAGE> 41
National Education Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------
As As
Restated Restated
(Note 1) (Note 1)
(amounts in thousands, except per share amounts) 1995 1994 1993
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TUITION AND CONTRACT REVENUES $200,372 $188,006 $171,016
PUBLISHING REVENUES 58,226 53,608 53,156
-------------------------------
NET REVENUES 258,598 241,614 224,172
COSTS AND EXPENSES:
Contract course materials and service costs 73,003 60,428 57,332
Publishing costs and materials 14,867 13,595 12,721
Product development 23,026 19,934 22,328
Selling and promotion 111,112 111,058 93,046
General and administrative 32,134 29,032 37,201
Amortization of acquired intangible assets 1,602 1,824 4,605
Amortization of prior period deferred marketing 1,470 19,836 --
Unusual items, net 81,730 -- 9,232
Interest expense 8,650 6,336 5,723
Investment income (2,621) (3,234) (2,560)
Other income (307) (492) (138)
Gain on sale of stock -- (3,247) (21,120)
-------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT), MINORITY
INTEREST AND DISCONTINUED OPERATIONS (86,068) (13,456) 5,802
Income tax benefit -- (555) (4,889)
-------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST AND DISCONTINUED
OPERATIONS (86,068) (12,901) 10,691
Minority interest in consolidated subsidiary 1,155 1,192 599
-------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (87,223) (14,093) 10,092
Loss from discontinued operations -- (9,420) (19,757)
Loss on disposal of discontinued operations -- (40,032) --
-------------------------------
NET LOSS $(87,223) $(63,545) $ (9,665)
-------------------------------
EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS:
Primary earnings (loss) per share $ (2.73) $ (.48) $ .34
-------------------------------
Fully diluted earnings (loss) per share $ (2.73) $ (.48) $ .32
-------------------------------
EARNINGS (LOSS) PER SHARE $ (2.73) $ (2.14) $ (.32)
-------------------------------
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Primary shares 31,893 29,640 29,855
Fully diluted shares 38,025 36,940 34,855
-------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE> 42
National Education Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
----------------------
(dollars in thousands) 1995 1994
- -----------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 22,120 $ 17,297
Investment securities 1,748 10,833
Receivables, net of allowance of $2,742 and $2,787 36,397 45,438
Inventories and supplies 31,847 25,695
Net assets held for disposition -- 25,867
Income tax receivable 9,313 9,313
Other current assets 13,440 17,695
---------------------
Total current assets 114,865 152,138
Land, buildings, and equipment, net 24,028 25,404
Acquired intangible assets, net 13,428 52,691
Deferred income taxes 24,768 28,482
Other assets 8,173 11,530
---------------------
$ 185,262 $270,245
---------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 6,072 $ 7,771
Accrued expenses 29,022 29,328
Accrued short-term restructuring charges 8,246 --
Accrued salaries and wages 5,627 5,448
Accrued disposition costs -- 25,116
Deferred contract revenues 7,421 11,905
Current portion of long-term debt and short-term borrowings 12,338 6,407
Accrued and deferred income taxes 14,446 11,281
---------------------
Total current liabilities 83,172 97,256
---------------------
LIABILITIES PAYABLE AFTER ONE YEAR
Long-term debt, less current portion 8,839 6,389
Senior subordinated convertible debentures -- 20,000
Convertible subordinated debentures 57,494 57,494
Accrued long-term restructuring charges 10,089 --
Other noncurrent liabilities 8,683 7,667
---------------------
85,105 91,550
---------------------
MINORITY INTEREST IN EQUITY OF CONSOLIDATED SUBSIDIARY 9,504 8,423
---------------------
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value; 5,000,000 shares
authorized and unissued -- --
Common stock, $.01 par value; 50,000,000 shares
authorized; 35,820,468 and 30,275,381 shares issued 2,166 2,110
Additional paid-in capital 155,100 133,043
Accumulated deficit (136,484) (49,261)
Unrealized gain (loss) on available-for-sale securities, net of tax 10 (21)
Cumulative foreign exchange translation adjustment (7,005) (7,947)
Notes receivable under stock option plans (1,398) --
---------------------
12,389 77,924
Less common stock in treasury (4,908) (4,908)
---------------------
Total stockholders' equity 7,481 73,016
---------------------
$ 185,262 $270,245
---------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 43
National Education Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------
(dollars in thousands) 1995 1994 1993
-----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(87,223) $(63,545) $ (9,665)
Adjustments to reconcile net loss to net cash provided by
(used for) operating activities:
Loss from discontinued operations -- 9,420 19,757
Income tax benefits on discontinued operations -- 1,008 8,769
Loss on disposal of discontinued operations -- 40,032 --
Depreciation and amortization 5,587 5,610 7,390
Amortization of acquired intangible assets 1,602 1,824 4,605
Amortization of prior period deferred marketing 1,470 19,836 --
Provision for doubtful accounts 1,642 250 1,777
Gain on sale of stock -- (3,247) (21,120)
Gain on sale of land, buildings and equipment -- -- (381)
Write-off of acquired intangible assets 47,509 -- 9,232
Write-off of course computer hardware costs 4,549 -- --
(Gain) loss on foreign currency exchange (299) (492) 243
Change in assets and liabilities:
Receivables, net 8,142 (187) 13,669
Inventories and supplies (4,586) (353) 281
Deferred marketing expenses 287 270 (3,605)
Accounts payable and accrued expenses (520) (10,840) 4,121
Accrued restructuring reserve 25,695 -- --
Accrued and deferred income taxes 802 (4,457) (16,746)
Deferred contract revenues (4,534) 1,170 (5,469)
Other (134) 2,272 (4,535)
---------------------------------
Net cash from operating activities (11) (1,429) 8,323
---------------------------------
CASH FLOWS FOR INVESTING ACTIVITIES:
Additions to land, buildings and equipment (4,527) (6,788) (8,503)
Dispositions of land, buildings and equipment (63) (171) 260
Proceeds from sales of investment securities 9,327 10,680 3,310
Purchases of investment securities (189) (5,249) (8,615)
Acquisition of business, net of cash acquired (3,260) (6,430) (5,417)
Discontinued operations (2,337) (21,085) (22,815)
---------------------------------
Net cash for investing activities (1,049) (29,043) (41,780)
---------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt -- 4,036 --
Reductions in long-term debt (1,709) (703) (654)
Net proceeds from Steck-Vaughn Publishing Corporation public
stock offering -- -- 28,701
Changes in short-term borrowings 4,961 5,305 --
Minority interest in equity of consolidated subsidiary 1,081 242 599
Common stock, stock options and related tax benefits 573 783 360
Payments received on notes receivable under stock option
plans -- -- 107
Purchase of common stock for treasury -- (53) (4,685)
---------------------------------
Net cash from financing activities 4,906 9,610 24,428
---------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 977 (387) (894)
---------------------------------
NET CHANGE IN CASH AND EQUIVALENTS 4,823 (21,249) (9,923)
CASH AND EQUIVALENTS AT THE BEGINNING OF THE YEAR 17,297 38,546 48,469
---------------------------------
CASH AND EQUIVALENTS AT THE END OF THE YEAR $ 22,120 $ 17,297 $ 38,546
---------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 44
National Education Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1995 1994 1993
--------------------------------------------------------------------
(amounts in thousands) Shares Amount Shares Amount Shares Amount
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
COMMON STOCK AND PAID-IN CAPITAL
Balance at beginning of year 30,275 $ 135,153 30,093 $134,370 30,018 $134,010
Stock options and related tax
benefits 95 423 182 783 75 360
Restricted stock 444 1,548 -- -- -- --
Conversion of debentures 5,021 20,142 -- -- -- --
--------------------------------------------------------------------
Balance at end of year 35,835 $ 157,266 30,275 $135,153 30,093 $134,370
--------------------------------------------------------------------
RETAINED EARNINGS (DEFICIT)
Balance at beginning of year as
reported $ -- $ -- $ 23,300
Adjustment for change in valuation
of inventories -- -- 649
Balance at beginning of year as
restated (49,261) 14,284 23,949
Net loss, as restated (87,223) (63,545) (9,665)
--------------------------------------------------------------------
Balance at end of year $(136,484) $(49,261) $ 14,284
--------------------------------------------------------------------
TREASURY STOCK
Balance at beginning of year 697 $ (4,908) 689 $ (4,855) 50 $ (170)
Purchase of common stock for
treasury -- -- 8 (53) 639 (4,685)
--------------------------------------------------------------------
Balance at end of year 697 $ (4,908) 697 $ (4,908) 689 $ (4,855)
--------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 45
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF BUSINESS
National Education Corporation (the "Company", a Delaware Corporation) provides
training and educational services and products to individuals, businesses and
governments. The Company's current business is conducted primarily through three
operating entities. ICS Learning Systems, Inc. ("ICS") offers to individuals
distance education opportunities such as, associate degree programs, training in
paraprofessional and occupational fields, high school diploma programs and
courses for personal achievement, as well as, computer-based, interactive
courses for accounting and legal professionals and students. ICS also offers
training opportunities to business and government. Steck-Vaughn Publishing
Corporation ("Steck-Vaughn") is one of the largest publishers of printed and
multimedia supplemental educational materials sold to individuals, elementary
and secondary schools, and libraries. National Education Training Group, Inc.
("NETG") is a provider of multimedia products to educate and train corporate and
government employees, with specific emphasis on information systems training.
See Note 15 for a summary of industry segment data and locations where the
company conducts business. Historically, the Company also conducted business
through a fourth operating entity, National Education Centers, Inc. ("Education
Centers"); however, in 1994 those operations were reclassified as discontinued
operations as the Company pursued a strategy to sell off or otherwise dispose of
Education Centers' operations as further explained in Note 3.
PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company and
all subsidiaries. All material intercompany accounts and transactions are
eliminated in consolidation. Certain prior year amounts have been reclassified
to conform with 1995 presentation.
USE OF ESTIMATES IN THE PREPARATION OF FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
ACCOUNTING CHANGE
In the fourth quarter of 1995, the Company changed its method of accounting for
inventory at Steck-Vaughn from last-in, first out (LIFO), to first-in, first-out
(FIFO). This change reduced net loss by $1,102,000 or $.03 per share in 1995.
This change has been applied to prior years by retroactively restating the
financial statements and, accordingly, the amounts for 1994 and 1993, and the
interim periods presented in Note 16, were restated. The effect of the change in
accounting principle was to reduce the net loss by $380,000 ($754,000 pretax) or
$.01 earnings per share and to increase the net loss by $46,000 ($144,000
pretax) or $.00 earnings per share for 1994 and 1993, respectively. The effect
of this restatement was to increase retained earnings as of January 1, 1993 by
$649,000. This accounting change also reduced goodwill in 1994 by $12,000 and,
in 1993, reduced the gain on sale of Steck-Vaughn stock by $140,000 and
increased minority interest by this amount.
This change was made because management believes the FIFO method better reflects
the matching of current costs with the related revenue due to continued
aggressive steps to reduce inventories and anticipated declines in paper prices
at Steck-Vaughn.
F-6
<PAGE> 46
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REVENUE RECOGNITION
ICS tuition revenues are recognized when cash is received, but only to the
extent such cash is earned and can be retained by the Company. Cash received in
excess of revenue recognized is recorded as deferred contract revenues.
Generally, the Company follows the guidelines of the Distance Education Training
Council in determining retention rights. Steck-Vaughn revenues are recognized
upon shipment of product. NETG revenues are recognized upon shipment of
courseware.
SELLING AND PROMOTION COSTS
The Company accounts for its advertising costs pursuant to Statement of Position
No. 93-7 ("SOP"), "Reporting on Advertising Costs" issued by the Accounting
Standards Executive Committee of the American Institute of Certified Public
Accountants (AICPA). The SOP generally requires advertising costs, other than
direct-response advertising, to be expensed as incurred. In the fourth quarter
of 1994, the Company adopted the SOP effective January 1, 1994. In adopting the
SOP in 1994, ICS' total advertising, selling and promotion costs were expensed
as incurred in 1994 rather than deferred and amortized as in prior periods.
Adoption of the SOP in 1994 resulted in a charge of $27,410,000 ($21,181,000
after tax or $.72 per share). The charge consists of two components. First, a
charge of $19,836,000 results from the amortization of the deferred marketing
balance as of December 31, 1993 into 1994. Second, a charge of $7,574,000
results from increased selling and promotion spending above the amortization
that would have been expensed in accordance with the Company's previous
accounting policy. The remaining deferred marketing balance of $1,470,000 at
December 31, 1994 was amortized in the first and second quarters of 1995.
Adoption of the SOP did not have a material impact on the Company's other
operations. The Company's advertising and promotion expenses, excluding the
amortization of prior period deferred marketing, were $59,073,000, $56,301,000
and $44,032,000 for the years ended December 31, 1995, 1994 and 1993,
respectively.
Selling and marketing expenses are expensed within the calendar year except for
sales commissions on training contracts sold at NETG and development of product
catalogs at Steck-Vaughn. Sales commissions on training contracts sold are
deferred and amortized to expense as contract revenues are recognized. The costs
of product catalogs are capitalized and expensed when the catalogs are
distributed. In interim periods, a portion of selling and marketing expenses is
deferred and fully amortized in subsequent interim periods within the calendar
year to better match the expenses with revenues due to the seasonal nature of
the revenue and spending.
COURSE SERVICE AND PRODUCT DEVELOPMENT COSTS
Course service costs and product development costs are expensed as incurred.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach which
requires the recognition of deferred tax liabilities and assets for the expected
future tax consequences of temporary differences between the financial statement
and tax bases of assets and liabilities at the applicable enacted tax rates.
F-7
<PAGE> 47
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
EARNINGS (LOSS) PER SHARE
Primary earnings (loss) per share are computed based on the weighted average
number of common shares outstanding during the respective periods, including
dilutive stock options. Fully diluted earnings per share for 1993 are computed
based on the assumption that the senior convertible debentures had been
converted to common stock, with a corresponding increase in net income to
reflect a reduction in related interest expense, less applicable taxes. For 1995
and 1994 fully diluted and primary earnings per share are the same as inclusion
of the debentures would be anti-dilutive.
Effective September 11, 1995, the holders of $20,000,000 of the Company's senior
subordinated convertible debentures converted such debentures, including
interest at 10%, into 5,021,000 shares of the Company's common stock. The
conversion had an anti-dilutive effect on loss per share for the fourth quarter
of 1995. If the conversion had not occurred, loss per share for the fourth
quarter would have been $.11 compared to the reported loss per share of $.08,
and the loss per share for the full year would have been $2.89 compared to the
$2.73 reported.
APB 15 requires the presentation of supplementary earnings per share data to
reflect the conversion as if it had occurred at the beginning of each period
presented below. The following supplementary presentation reflects the reduction
of interest expense, less applicable taxes, and an increase in the number of
shares outstanding.
<TABLE>
<CAPTION>
(amounts in thousands, except per share amounts) 1995 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings (loss) per share from continuing operations $ (2.44) $ (.38) $ .32
Loss per share (2.44) (1.80) (.25)
--------------------------------------
Weighted average number of shares outstanding 35,373 34,640 34,855
</TABLE>
INVESTMENT SECURITIES
The Company's debt and equity securities are considered as either
held-to-maturity or available-for-sale. Held-to-maturity securities represent
those securities that the Company has both the intent and ability to hold to
maturity and are carried at amortized cost. Available-for-sale securities
represent those securities that do not meet the classification of
held-to-maturity, are not actively traded and are carried at fair value.
Unrealized gains and losses on these securities are excluded from earnings and
are reported as a separate component of stockholders' equity, net of applicable
taxes, until realized.
INVENTORIES AND SUPPLIES
Inventories, primarily consisting of course materials and supplies, are stated
at the lower of first-in, first-out cost or market.
LAND, BUILDINGS AND EQUIPMENT
Land, buildings and equipment are stated at cost and are depreciated principally
using the straight-line method over the estimated useful lives of the various
classes of property.
ACQUIRED INTANGIBLE ASSETS
Acquired intangible assets representing the excess of cost over the fair value
of acquired net assets purchased by the Company in conjunction with various
acquisitions are amortized ratably over lives which do not exceed forty years.
All other acquired intangible assets are amortized ratably over various useful
lives which do not exceed ten years.
F-8
<PAGE> 48
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
IMPAIRMENT OF LONG LIVED ASSETS
The Company has adopted the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets" (FAS
121). Prior to January 1, 1995, the Company reviewed the recoverability of its
long-lived assets and intangible assets by comparing projected related cash
flows on an undiscounted basis to the net book value of the assets. In the event
the recoverability of the assets was impaired, the Company would have measured
the impairment by comparing projected operating income and related cash flows on
an undiscounted basis to the net book value of the assets. Under the provisions
of FAS 121, the Company will continue to review the recoverability of long-lived
assets and intangible assets by comparing cash flows on an undiscounted basis to
the net book value of the assets. In the event the projected undiscounted cash
flows are less than the net book value of the assets, the carrying value of the
assets will be written-down to their fair value, less cost to sell. In addition,
FAS 121 requires that assets to be disposed of be measured at the lower of cost
or fair value, less cost to sell. Adopting FAS 121 had no effect on the
Company's financial statements except for the write-off of goodwill as described
further in Note 4.
DEFERRED CONTRACT REVENUES
Deferred contract revenues represent the portion of training contract payments
and student tuition received in advance of services being performed.
MINORITY INTEREST
Minority interest in equity of consolidated subsidiary represents the minority
stockholders' proportionate share of the equity of Steck-Vaughn. During 1994 and
1995, Steck-Vaughn repurchased 230,200 and 25,000 shares, respectively, of its
outstanding common stock which effectively increased the Company's ownership
interest to 83.0% and 83.1%, respectively.
FOREIGN CURRENCY TRANSLATION
Assets and liabilities of international subsidiaries have been translated at
current exchange rates. Revenues, expenses and cash flows have been translated
at average rates of exchange in effect during the year. Resulting cumulative
foreign exchange translation adjustments have been recorded as a separate
component of stockholders' equity. Also included in this component of
stockholders' equity are exchange gains and losses on hedges of foreign
intercompany accounts of a long-term nature. Gains and losses on foreign
currency transactions are recorded to other income and expense.
NEW ACCOUNTING PRONOUNCEMENTS
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation", which
establishes a fair value based method of accounting for stock-based compensation
plans. The statement allows companies to continue to use the intrinsic value
based approach, supplemented by footnote disclosure of the pro forma net income
and earnings per share of the fair value based approach. The Company intends to
follow this latter method and, as a result, adoption of this pronouncement in
1996 will have no effect on the Company's financial statements.
NOTE 2 - BUSINESS COMBINATIONS
The Company, through Steck-Vaughn, purchased substantially all of the assets of
the following entities on the dates set forth as follows: Summit Learning, Inc.
(Summit), a direct response marketer of educational products (December 1995),
Educational Development Laboratories, Inc. (EDL) a developer and publisher of
reading and writing instructional material based in both software and print
products (October 1995) and Berrent Publications,
F-9
<PAGE> 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - BUSINESS COMBINATIONS (CONTINUED:)
Inc. (Berrent) a publisher of test preparation and assessment materials
(November 1994). During the first quarter of 1994, the Company, through ICS,
purchased the stock of M-Mash, Inc. (MicroMash), a leading provider of
computer-based, interactive courses for accounting professionals and students.
In April 1993, Steck-Vaughn purchased certain assets of Creative Edge, Inc.
(Magnetic Way product line), a provider of educational products and materials
for the elementary and secondary school marketplace. All five transactions were
accounted for as purchases and the operating results were included in the
Company's consolidated financial statements since the dates of acquisition. The
net assets and operating results of the purchased entities were not material to
the consolidated financial statements of the Company.
NOTE 3 - BUSINESS DISPOSITIONS
In June 1994, the Company adopted a plan to discontinue the operation of its
Education Centers subsidiary. As a result, the Company recorded a second quarter
charge of $40,032,000 ($1.35 per share) to write-down assets to estimated net
realizable value and provide for estimated costs of disposing of the operation.
No tax benefits were provided on this charge.
Of the 29 remaining Education Centers schools as of December 31, 1994, the
Company in 1995 transferred students at one of its schools to a nearby
competitor for the purposes of completing their courses, and substantially
completed the disposition of the remaining schools as of December 31, 1995.
As of December 31, 1995, the remaining assets and liabilities include accrued
expenses for outstanding litigation and regulatory matters, and obligations to
maintain and service future financial aid and accounting matters as required by
the Department of Education. These outstanding obligations are offset by certain
notes receivable from buyers in connection with the sale of schools. The net
amount of these assets and liabilities is not material to the consolidated
financial statements of the Company.
The Education Centers' negative cash flow of $2,337,000 in 1995 improved
$18,748,000 from the prior year due primarily to proceeds from the sale of
schools of $10,647,000 and significant reductions of Education Centers'
headquarters expenses.
Results of operations for the Education Centers which are being accounted for as
discontinued operations in the results of operations were as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1994 1993
- --------------------------------------------------------------------------------
<S> <C> <C>
Net Revenues $ 97,138 $131,713
Loss before income tax benefit (10,428) (28,526)
Income tax benefit (1,008) (8,769)
Loss from discontinued operations (9,420) (19,757)
Primary loss per share (.32) (.66)
Loss on disposal of discontinued operations (40,032) -
Loss per share (1.35) -
</TABLE>
In December 1994, the Company sold its interest in a partnership venture whose
purpose was to develop an automated enrollment and financial aid application
process. As a result of the sale, the Company recorded a gain on sale of
$3,247,000 ($2,143,000 after tax or $.07 per share).
F-10
<PAGE> 50
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - UNUSUAL ITEMS
Unusual items, net, consist of the following items:
<TABLE>
<CAPTION>
(dollars in thousands) 1995 1993
- -----------------------------------------------------------------------------
<S> <C> <C>
Write-off of intangible assets $47,509 $ 9,232
Restructuring charges 32,248 --
Write-off of course computer hardware costs 4,549 --
Litigation settlements, net (2,576) --
----------------------
$81,730 $ 9,232
----------------------
</TABLE>
No tax benefits were reflected for the 1995 unusual items.
WRITE-OFF OF INTANGIBLE ASSETS
NETG experienced significant operating losses over the past several years in an
environment of substantial changes in training related to information systems
and technology. Due to the many outstanding opportunities in the training
marketplace, especially in information technology, the Company remained
optimistic over the past periods about future sales and earnings, such that
through the first quarter of 1995, management's best estimates of the future
results of NETG's operations supported the recoverability of recorded goodwill
balances. However, given continuing losses through 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.
As a result, the Company implemented a reorganization and downsizing of NETG's
operations in the second quarter of 1995. In addition, certain product lines
were discontinued and the subsidiary reorganized its sales and marketing effort
to enhance its channels of distribution which, among other things, resulted in
the restructuring described below. As a result of these changes, in the second
quarter of 1995 the Company revised NETG's financial projections, consistent
with management's best estimate of future results of operations. Based upon this
estimate of the future results of operations, the estimated net cash flows over
the remaining life of NETG's intangible assets (goodwill) were less than the net
book value of the goodwill at June 30, 1995. Under the provisions of FAS 121,
the Company estimated the fair value of its investment in NETG by discounting
estimated future net cash flows at a rate commensurate with the related risk.
Based upon this analysis, management believes NETG to have only a nominal fair
value such that the goodwill balance of $42,719,000 related to the Company's
1986 acquisition of what is now NETG was written-off (resulting in a loss of
$1.34 per share) during the second quarter of 1995.
Additionally, in connection with the above restructuring of NETG during the
second quarter of 1995, the Company discontinued the operations of Spectrum, a
subsidiary of NETG which provided primarily custom developed training to
businesses. As a result, the Company recorded the assets and liabilities of
Spectrum at their fair value and recorded a write-off of goodwill in the amount
of $4,790,000 ($.15 per share) during the second quarter. The goodwill was
related to an acquisition made by Spectrum prior to 1988. Spectrum's revenue and
operating loss before amortization of intangibles and unusual items were as
follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1995 1994
- -----------------------------------------------------------------------------
<S> <C> <C>
Revenues $ 1,618 $ 5,247
Operating loss before amortization
of intangibles and unusual items $ (1,433) $ (1,125)
</TABLE>
F-11
<PAGE> 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WRITE-OFF OF INTANGIBLE ASSETS (continued:)
The 1993 unusual item represented a third quarter charge of $9,232,000
($6,558,000 after tax or $.22 per share) related to the write-down of certain
acquired intangible assets of NETG.
RESTRUCTURING CHARGES
As a result of continued losses at NETG, the Company resolved to significantly
lower the overall cost structure while focusing on specific training areas to
permit NETG to return to profitability. Accordingly, the Company approved a
restructuring plan for NETG in June 1995 which resulted in a nonrecurring charge
of $28,652,000 ($.90 per share). Additionally, in December 1995, NETG recorded a
restructure charge of $1,952,000 ($.06 per share) to reorganize its operations
in Germany. These 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. The following summarizes these charges, the
related write-offs and cash paid in connection with the restructuring.
<TABLE>
<CAPTION>
Severance Excess Fixed Assets
(dollars in thousands) Payments Facilities and Inventory Other Total
- ---------------------- --------- ---------- -------------- ----- -----
<S> <C> <C> <C> <C> <C>
1995 restructuring $ 4,706 $ 16,480 $ 4,020 $ 5,398 $ 30,604
charges
Noncash write-off -- -- (3,758) (3,521) (7,279)
Cash (paid) received (2,095) (1,923) 13 (1,606) (5,611)
--------- --------- ---------- --------- ---------
Accrued restructuring at
December 31, 1995 $ 2,611 $ 14,557 $ 275 $ 271 $ 17,714
========= ========= ========== ========= =========
</TABLE>
Amounts related to severance covered approximately 110 employees involved
primarily in sales and marketing, distribution and other administrative
functions at NETG's domestic and European locations. Amounts related to
facilities reflect the cost of leases for excess space arising from the
consolidation of space within the subsidiary's U.S. headquarters and the
subsidiary's European offices. The noncurrent portion of the restructuring
charges relates primarily to leases on unutilized space which will require
payments through 2004.
Additionally, during the second quarter, an unusual charge was recorded in the
amount of $1,644,000 ($.05 per share) at NEC Corporate primarily for severance
related payments to the former chief executive officer and corporate expenses
related to the restructuring of NETG. The cumulative cash paid in connection
with this charge was $911,000 and noncash write-offs were $112,000.
WRITE-OFF OF COURSE COMPUTER HARDWARE AND RELATED COSTS
Prior to September 15, 1995, ICS offered computer courses which included the
sale of computers to students which, after shipment, were recorded as assets and
amortized over the projected twelve month period of the remaining course
payments. Subsequent to September 15, 1995, the Company changed the manner in
which computers were marketed, no longer including the computer hardware with
such courses. In the fourth quarter of 1995, the Company reviewed the
realizability of the carrying value of the computer and related assets and
determined that a portion of the capitalized balance for computers related to
enrollments for which there was no further revenue to be recognized. As a
result, the Company recorded a write-down of the unamortized balance of
computers and other related costs of $4,549,000 ($.14 per share). In addition,
the Company reduced the period over which the computers are amortized to six
months.
F-12
<PAGE> 52
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
LITIGATION SETTLEMENTS, NET
During the fourth quarter of 1995, a legal dispute with a third-party author for
NETG was settled in the Company's favor. The Company recorded a gain to the
extent payment was received. A portion of the settlement in the amount of
$1,343,000 is held in escrow pending the outcome of various legal issues. The
gain was partially offset with other minor legal settlements which involved
parties related to the third party author resulting in a net unusual credit of
approximately $3,546,000 or $.11 per share.
In March 1996, the Company settled a lawsuit at Steck-Vaughn brought by a
product development company in 1995. Settlement costs and legal expenses
associated with the lawsuit totaled $970,000 or $.03 per share and were included
in the results of operations for the year ended December 31, 1995.
NOTE 5 - PUBLIC OFFERING OF SUBSIDIARY COMMON STOCK
During the third quarter of 1993, Steck-Vaughn Publishing Corporation completed
an initial public offering of 2,668,000 shares of its common stock at $12.00 per
share. The offering resulted in proceeds of $29,775,000 of which $20,000,000
were remitted to the Company as payment for a previously declared dividend. The
proceeds were reduced by expenses of $1,074,000 which were incurred in
connection with the offering, of which $393,000 was paid to Richard C. Blum and
Associates (RCBA). The Chairman of the Board of RCBA is Richard C. Blum, a
director of the Company. The completion of the offering decreased the Company's
ownership of Steck-Vaughn from 100% to 81.7% at the date of the offering. As a
result of the offering, the Company recorded a gain of $21,120,000 or $.71 per
share (after restatement for the inventory accounting change at Steck-Vaughn)
which is included in the results of operations for the year ended December 31,
1993. The gain was nontaxable and deferred tax expense was not provided for on
this gain given the Company's ability and intent to indefinitely postpone the
payment of tax in the future.
NOTE 6 - INCOME TAXES
Income (loss) before tax from continuing operations was taxed under the
following jurisdictions:
<TABLE>
<CAPTION>
(dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $(75,881) $ (5,307) $ 4,339
Foreign (10,187) (8,149) 1,463
---------------------------------
Total $(86,068) $(13,456) $ 5,802
---------------------------------
</TABLE>
Taxes (benefits) on income from continuing operations were provided as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT:
State $ 500 $ 1,110 $ 1,999
Foreign 1,837 1,457 1,883
--------------------------------
Total current provision 2,337 2,567 3,882
--------------------------------
DEFERRED:
Federal (2,469) 220 (6,184)
Foreign 132 (3,498) (2,680)
--------------------------------
Total deferred provision (benefit) (2,337) (3,278) (8,864)
--------------------------------
CURRENT TAX BENEFITS NOT TREATED AS A REDUCTION OF
INCOME TAX EXPENSE RESULTING FROM:
Exercise of stock options -- 156 93
--------------------------------
Total income tax provision (benefit) $ -- $ (555) $ (4,889)
--------------------------------
</TABLE>
F-13
<PAGE> 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES (CONTINUED)
Deferred tax liabilities and assets reflected in the balance sheet as of
December 31, 1995 and December 31, 1994 are comprised of the following:
<TABLE>
<CAPTION>
(dollars in thousands) 1995 1994
- -----------------------------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Revenue recognition differences $ 1,416 $ 3,948
Advertising/commissions 2,393 3,244
Prepaid expenses 6,351 6,386
Other 1,501 3,720
----------------------
Gross Deferred Tax Liabilities $ 11,661 $ 17,298
----------------------
DEFERRED TAX ASSETS:
Property, plant and equipment $ 5,590 $ 3,269
Inventories 5,804 6,374
Revenue recognition differences 3,001 4,007
Allowance for doubtful accounts 1,449 3,532
Restructuring reserve 6,478 889
Loss carryforwards 48,607 35,939
Credit carryforwards 4,276 4,673
Loss on discontinued operations 106 8,500
Other 9,177 5,702
----------------------
Gross Deferred Tax Assets 84,488 72,885
Deferred tax assets valuation allowance (50,952) (30,613)
----------------------
Deferred Tax Assets, Net of Valuation Allowance $ 33,536 $ 42,272
----------------------
</TABLE>
The Company has recorded a valuation allowance in the amount set forth in the
above table for certain deductible temporary differences for which it is likely,
at this time, that the Company will not receive future tax benefit. The 1995
income tax provision includes an increase in the valuation allowance for
deferred tax assets of $20,339,000. The valuation reserve increase primarily
relates to current year losses and restructuring reserves for which no tax
benefits have been provided. Realization of the remaining deferred tax assets is
dependent on generating sufficient future taxable income. Although realization
is not assured, management believes it is more likely than not that the
remaining deferred tax assets will be realized. The amount of the deferred tax
asset considered realizable, however, could be reduced in the near term if
estimates of future taxable income are reduced.
At December 31, 1995, the Company had federal net operating loss carryforwards
of approximately $108,000,000 expiring through 2010. In addition, the Company
had available $1,275,000 of alternative minimum tax credit carryforwards, with
no expiration date, which may be utilized to offset future regular tax
liabilities. If certain substantial changes in the Company's ownership should
occur, there could be an annual limitation on the amount of carryforwards
available for utilization. The Company also has available federal net operating
loss carryforwards of approximately $13,200,000 at Spectrum, a subsidiary of
NETG, expiring through 2003. This amount may be utilized to offset Spectrum's
future taxable income.
During 1995, the Company tentatively agreed to a settlement with the Internal
Revenue Service regarding its 1985 through 1988 income tax audits. As a result
of this settlement, the Company will receive approximately $9,313,000, in tax
refunds and interest. The benefit for this refund, and the related receivable,
were recorded in a prior year.
F-14
<PAGE> 54
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INCOME TAXES (CONTINUED)
A reconciliation of the income tax provision (benefit) with the amount computed
by applying the federal statutory tax rate to pretax income from continuing
operations is as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1995 1994 1993
- -------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax (benefit) computed at statutory rate $(29,263) $(4,575) $ 1,973
State taxes, net of federal benefit 330 733 1,319
Effect of foreign operations 5,432 354 (1,580)
Dividend income and municipal interest exclusion (89) (332) (436)
Losses not benefited 5,742 -- --
Amortization of excess of costs over acquired net
assets 121 218 164
Write-off of certain intangibles 16,153 -- --
Gain on public stock offering of subsidiary -- -- (7,228)
Other, net 1,574 3,047 899
------------------------------------
Total income tax provision (benefit) $ -- $ (555) $ (4,889)
------------------------------------
</TABLE>
Provision has not been made for U.S. or additional foreign taxes on the
undistributed earnings of the Company's foreign subsidiaries. Those earnings are
expected to be reinvested in the foreign operations. Such earnings would become
subject to additional U.S. and foreign taxes if remitted as dividends. It is not
practicable to estimate the amount of additional tax that might be payable on
the foreign earnings; however, the Company believes that U.S. foreign tax
credits would for the most part eliminate any additional U.S. tax.
NOTE 7 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of the investment securities are as
follows:
<TABLE>
<CAPTION>
December 31, 1995
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
(dollars in thousands) Cost Gain Loss Value
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity:
Taxable municipal funds $ 1,000 $ -- $ -- $ 1,000
-------------------------------------- ------------
Total held-to-maturity 1,000 -- -- 1,000
-------------------------------------- ------------
Available-for-sale:
Corporate income funds 1,042 52 -- 1,094
Preferred stock 689 -- (35) 654
-------------------------------------- ------------
Total available-for-sale 1,731 52 (35) 1,748
-------------------------------------- ------------
2,731 52 (35) 2,748
Less cash equivalents (1,000) -- -- (1,000)
-------------------------------------- ------------
Total investment securities $ 1,731 $ 52 $ (35) $ 1,748
-------------------------------------- ------------
</TABLE>
F-15
<PAGE> 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - INVESTMENT SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1994
---------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
(dollars in thousands) Cost Gain Loss Value
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Held-to-maturity:
Banking certificates $ 3,236 $ - $ - $ 3,236
Tax exempt municipal bond funds 12,700 - - 12,700
---------------------------------------------------
Total held-to-maturity 15,936 - - 15,936
---------------------------------------------------
Available-for-sale:
Corporate income funds 1,170 6 - 1,176
Preferred stock 1,262 52 (93) 1,221
---------------------------------------------------
Total available-for-sale 2,432 58 (93) 2,397
---------------------------------------------------
18,368 58 (93) 18,333
Less cash equivalents (7,500) - - (7,500)
---------------------------------------------------
Total investment securities $ 10,868 $ 58 $ (93) $ 10,833
---------------------------------------------------
</TABLE>
Investments in debt securities classified as held-to-maturity at December 31,
1995, have various maturity dates which do not exceed one year.
Using the specific identification method, realized gains and losses on the
available-for-sale investment securities are as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1995 1994 1993
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Realized gains $ 18 $ 1,616 $ 135
Realized losses 5 387 226
</TABLE>
NOTE 8 - LAND, BUILDINGS AND EQUIPMENT
<TABLE>
<CAPTION>
(dollars in thousands) Depreciable Lives 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land -- $ 1,289 $ 1,289
Buildings and improvements Not to exceed 40 years 10,414 8,910
Leaseholds and improvements Life of lease 3,327 7,852
Machinery and equipment Not to exceed 10 years 28,636 52,321
Furniture and fixtures Not to exceed 10 years 12,354 18,272
-------------------------
56,020 88,644
Less accumulated depreciation and (31,992) (63,240)
amortization
-------------------------
Total $ 24,028 $ 25,404
-------------------------
</TABLE>
Machinery and equipment and furniture and fixtures under capital leases were
$4,908,000 and $2,460,000 with related accumulated depreciation and amortization
of $201,000 and $593,000 at December 31, 1995 and 1994, respectively.
F-16
<PAGE> 56
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - ACQUIRED INTANGIBLE ASSETS
<TABLE>
<CAPTION>
(dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Product and text materials, courseware, etc. $ 13,758 $ 55,898
Rental contracts -- 20,559
Excess of cost over net assets of businesses 6,560 59,268
acquired
Other acquired intangible assets 6,443 5,971
-------------------------
26,761 141,696
Less accumulated amortization (13,333) (89,005)
-------------------------
Total $ 13,428 $ 52,691
=========================
</TABLE>
See Note 4 for a discussion of the write-offs of certain intangible assets in
1995.
NOTE 10 - DEBT
<TABLE>
<CAPTION>
(dollars in thousands) 1995 1994
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-term bank borrowings $10,000 $ 5,000
--------------------------
Long-term debt:
Mortgage and installment notes, maturing on various
dates through 2004, with interest from 6.0% to 8.9% $ 7,144 $ 5,946
Capital lease obligations 4,033 1,850
--------------------------
11,177 7,796
Less current portion of long-term debt (2,338) (1,407)
--------------------------
Total long-term debt $ 8,839 $ 6,389
--------------------------
Senior subordinated convertible debentures $ -- $20,000
--------------------------
Convertible subordinated debentures $57,494 $57,494
--------------------------
</TABLE>
As of December 31, 1995, the Company had a revolving bank credit agreement in
the amount of $10,000,000, of which $10,000,000 was outstanding. The credit
agreement initially provided borrowings at prime plus 1 percent or, at the
Company's option, at LIBOR plus 2 percent, with incremental borrowing rate
increases at June 30 and September 30, 1995. Commitment fees were paid on the
unused line of credit. The weighted average interest rates for the short-term
bank borrowings were 8.7% and 6.3% for 1995 and 1994, respectively. The average
borrowings were $9,510,000 and $3,956,000 during the years ended December 31,
1995 and 1994, respectively.
Effective January 19, 1995, the Company entered into a $20 million revolving
credit agreement with another bank and repaid the aforementioned $10 million
revolving credit borrowings. Under the new agreement, which expires January 19,
1998, the Company can borrow at the bank's base rate plus 1.75%, or at the LIBOR
rate plus 3.0%. The base rate is the higher of the bank's prime rate and .5%
above the Federal Funds Rate. This credit facility is secured by stock of
certain principal subsidiaries and certain assets of NEC. This revolving credit
is subject to certain restrictions on dividend payments, indebtedness and other
covenants including financial performance and condition.
Steck-Vaughn has a revolving bank credit agreement in the amount of $10,000,000
with a maturity of June 10, 1997. The agreement provides for borrowings at prime
or, at Steck-Vaughn's option, LIBOR plus 1.5%. The bank credit agreement
replaced Steck-Vaughn's borrowing ability from the Company pursuant to an
intercompany agreement. No amounts were outstanding under the bank credit
facility in 1994 or 1995. Annual commitment fees of .25% are paid on the unused
line of credit.
F-17
<PAGE> 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 10 - DEBT (CONTINUED)
Effective February 28, 1995, the Company and Steck-Vaughn entered into an
intercompany revolving loan agreement under which the Company could borrow up to
$10,000,000 through December 31, 1995. At December 31, 1995, $4,000,000 was
outstanding and was eliminated in consolidation in the accompanying balance
sheet. Subsequent to year end this credit facility was reduced to $5,000,000
with an expiration date of March 31, 1996. This agreement provides that any
borrowing by the Company will bear interest at LIBOR plus 2 percent, and will be
secured by the Company's holdings of Steck-Vaughn stock. Steck-Vaughn also
received an option to repurchase from the Company up to 290,000 shares of
Steck-Vaughn stock held by the Company, at $6.50 per share. This option becomes
exercisable one year after grant, expires March 31, 1997, and may be redeemed by
the Company prior to exercise or expiration for the greater of $75,000 per month
($37,500 per month effective February 1, 1996) or the amount necessary to
increase to 25 percent the annualized yield to Steck-Vaughn on all amounts
borrowed by the Company under the revolving loan agreement. The Company has paid
the redemption price through December 31, 1995.
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 shares of the Company's common stock. The
debentures had been issued to certain entities affiliated with Richard C. Blum &
Associates, L.P. (RCBA), who maintained discretionary investment control over
these entities. The Chairman of the Board of RCBA is Richard C. Blum, a director
of the Company.
At December 31, 1995, the Company had outstanding $57,494,000 of 6.5%
convertible subordinated debentures due May 14, 2011, which are convertible at
any time prior to maturity into common stock at $25.00 per share. The debentures
are redeemable at the option of the Company, in whole or in part, at 100.65% of
the principal amount through May 14, 1996, and thereafter at 100%. The
debentures are subject to an annual sinking fund requirement beginning May 15,
1997 sufficient to retire 70% of the aggregate principal amount of the
debentures prior to maturity. Based on the December 31, 1995 closing price of
the Company's convertible subordinated debentures as traded on the New York
Stock Exchange of $70.00, the fair value of the convertible subordinated
debentures is $40,246,000.
Mortgage notes aggregating $5,141,000 at December 31, 1995 were collateralized
by certain real and personal property having a net book value of $8,378,000. At
December 31, 1995, the fair value of the mortgage notes approximated their
carrying value.
Aggregate maturities of long-term debt, including the annual sinking fund
principal requirement of $2,875,000 for the subordinated debentures, in each of
the following years are: 1997 - $7,072,000, 1998 - $4,243,000, 1999 - $3,497,000
and 2000 - $3,154,000.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Aggregate commitments at December 31, 1995 under noncancelable operating leases
for land, buildings and equipment are as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
- ---------------------------------------------------------------------
<S> <C>
FISCAL YEAR:
1996 $ 6,342
1997 5,454
1998 4,811
1999 3,747
2000 2,932
2001 and thereafter 23,889
-----------
Total $47,175
-----------
</TABLE>
F-18
<PAGE> 58
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 11 - COMMITMENTS AND CONTINGENCIES (CONTINUED)
Some of the leases contain renewal options, escalation clauses and requirements
that the Company pay taxes, insurance and maintenance costs. Total rent expense
aggregated $7,820,000, $10,841,000 and $11,695,000 for years ended December 31,
1995, 1994, and 1993, respectively.
At December 31, 1995, there were no material commitments outstanding for capital
expenditures.
In the ordinary course of business, the Company is generally subject to claims,
complaints and legal actions. The litigation process is inherently uncertain and
it is possible that the resolution of such matters might have a material adverse
effect upon the financial position of the Company. However, in the opinion of
management, such matters are not expected to have a material adverse effect on
the financial position of the Company.
NOTE 12 - UNEARNED FUTURE TUITION REVENUE
Unearned future tuition revenue on student contracts at ICS Learning Systems
totaled $153,489,000 and $163,050,000 at December 31, 1995 and 1994,
respectively. Based upon previous experience, approximately 45% of the unearned
future tuition revenue was ultimately recognized into revenue. Unearned future
tuition revenue will be included in revenues in future years when services and
courseware are provided as described in Note 1.
NOTE 13 - STOCKHOLDERS' EQUITY
The Company has stock option plans that authorize the granting of options to key
employees and directors to purchase common stock subject to certain conditions,
such as continued employment. Options are generally granted at the fair market
value of the Company's common stock at the date of grant, vest and become
exercisable prorata over the four years following the date of grant, and expire
in ten years.
Changes during the years ended December 31, 1995, 1994 and 1993 under the plans
were as follows:
<TABLE>
<CAPTION>
Average
Number Exercise Total
(amounts in thousands, except per share amounts) of Price Option
Shares Per Share Value
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance, December 31, 1992 1,281 $ 5.69 $7,286
Granted 392 5.86 2,296
Canceled (306) 6.68 (2,044)
Exercised (75) 3.55 (266)
--------------------------------
Balance, December 31, 1993 1,292 5.63 7,272
Granted 407 6.28 2,557
Canceled (163) 7.29 (1,188)
Exercised (182) 3.44 (627)
--------------------------------
Balance, December 31, 1994 1,354 5.92 8,014
Granted 2,800 3.62 10,132
Canceled (395) 6.55 (2,587)
Exercised (538) 3.66 (1,972)
--------------------------------
Balance, December 31, 1995 3,221 $ 4.22 $13,587
--------------------------------
</TABLE>
F-19
<PAGE> 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCKHOLDERS' EQUITY (CONTINUED)
During 1995, the Company made loans to three executive officers and two
subsidiary presidents to enable them to purchase 410,000 shares of stock
pursuant to the 1990 stock option plan, as amended. These loans bear interest at
rates from 6.8% to 7.1% and are payable in full upon the earlier of 90 days
following the date of termination or May 1, 2001. These loans are with recourse
and are secured by the shares of stock purchased by the officers. These loans
are reflected as a reduction in equity in the accompanying balance sheet. In
1995, the Company granted to the new CEO options to purchase 500,000 shares of
stock at $3.00 per share, the fair value at date of grant. The option vests
monthly in pro rata increments over 36 months beginning June 1995, and remains
exercisable through March 17, 2005. The new CEO was also granted options to
purchase another 600,000 shares of stock at $3.00 per share, the fair value at
date of grant. These options vest on an accelerated basis if the price of the
Company's stock reaches and maintains certain price levels; otherwise, these
options fully vest no later than November 2004 and remain exercisable for six
months thereafter.
Common shares reserved for future grants under the above option plans totaled
737,000 and 1,018,000 at December 31, 1995 and 1994, respectively. Of the
3,221,000 shares previously granted and outstanding at December 31, 1995,
1,123,000 shares were vested and exercisable at prices ranging from $3.00 to
$12.92 per share.
There are no charges to income in connection with the issuance of options. Upon
exercise, proceeds from the sale of shares under the stock options plans are
credited to common stock and additional paid-in capital.
In October 1986, the Company declared a dividend of one preferred stock purchase
right for each share of common stock. Under certain conditions, each right may
be exercised to purchase one-hundredth of a share of a new series of
participating junior preferred stock at a purchase price of $75.00, subject to
adjustment.
The rights may be exercised only after a public announcement that a person has
acquired or obtained the right to acquire 20% or more of the Company's
outstanding common stock, or after commencement or public announcement of an
offer for 30% or more of the Company's outstanding common stock. The rights,
which do not have voting rights, may be redeemed by the Company at a price of
$.05 per right within ten days after the announcement that a person has acquired
20% or more of the outstanding common stock of the Company and the redemption
period may be extended under certain circumstances. In the event that the
Company is acquired in a merger or other business combination transaction,
provision shall be made so that each holder of a right shall have the right to
receive that number of shares of common stock of the surviving company which at
the time of the transaction would have a market value of two times the exercise
price of the right.
NOTE 14 - STATEMENTS OF CASH FLOWS
For purposes of presenting the Consolidated Statements of Cash Flows, the
Company considers all highly liquid debt securities to be cash equivalents.
F-20
<PAGE> 60
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 14 - STATEMENTS OF CASH FLOWS (CONTINUED)
Supplementary information excluding Education Centers:
<TABLE>
<CAPTION>
(dollars in thousands) 1995 1994 1993
- ----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PAID DURING THE YEAR FOR:
Interest expense $ 9,304 $ 6,531 $ 5,806
Income taxes, net of refunds (75) 2,634 2,489
DETAIL OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Sale of land, building and equipment in exchange
for note receivable -- 583 --
Assets acquired through capital leases 3,254 1,654 --
Acquisition of businesses:
Working capital, other than cash (1,999) (1,291) (1,327)
Property, plant and equipment (161) (373) (152)
Other assets (4,311) (5,833) (3,938)
Liabilities assumed in acquisition 3,211 1,067 --
----------------------------------
Net cash used to acquire businesses (3,260) (6,430) (5,417)
Conversion of senior subordinated debentures and
related interest 20,142 -- --
into shares of common stock
Notes receivable under stock option plans 1,398 -- --
</TABLE>
F-21
<PAGE> 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - INDUSTRY SEGMENT DATA
Information about the Company's operations (excluding Education Centers except
for identifiable assets balances) in different industries is as follows:
<TABLE>
<CAPTION>
Restated
-------------------------
(dollars in thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET REVENUES:
ICS Learning Systems $143,021 $122,815 $101,319
Steck-Vaughn Publishing Corporation 58,226 53,608 53,156
National Education Training Group 54,350 61,937 68,259
Other 3,001 3,254 1,438
---------------------------------------
Total Net Revenues $258,598 $241,614 $224,172
---------------------------------------
OPERATING INCOME (LOSS):
ICS Learning Systems operating income before amortization of prior
period deferred marketing and unusual items $ 13,628 $ 15,909 $ 21,368
Amortization of prior period deferred marketing (1,470) (19,836) --
Unusual items (4,549) -- --
---------------------------------------
ICS Learning Systems 7,609 (3,927) 21,368
---------------------------------------
Steck-Vaughn Publishing Corporation operating income before
unusual items 10,469 10,459 13,074
Unusual items (970) -- --
---------------------------------------
Steck-Vaughn Publishing Corporation 9,499 10,459 13,074
---------------------------------------
National Education Training Group operating loss before unusual items (15,375) (13,993) (25,950)
Unusual items (74,567) -- (9,232)
---------------------------------------
National Education Training Group (89,942) (13,993) (35,182)
---------------------------------------
Other 764 (50) (657)
---------------------------------------
Total segment operating loss (72,070) (7,511) (1,397)
General corporate expenses (6,632) (6,582) (10,896)
Interest (expense) and investment income, net (6,029) (3,102) (3,163)
Other income 307 492 138
Unusual items (1,644) -- --
Gain on sale of stock -- 3,247 21,120
---------------------------------------
Income (Loss) Before Income Taxes (Benefit) and Minority Interest $(86,068) $(13,456) $ 5,802
---------------------------------------
IDENTIFIABLE ASSETS:
ICS Learning Systems $ 44,180 $ 48,194 $ 60,576
Steck-Vaughn Publishing Corporation 65,529 58,922 56,394
National Education Training Group 27,748 84,918 93,592
Education Centers -- -- 58,525
Other 1,298 1,756 795
---------------------------------------
Segments subtotal 138,755 193,790 269,882
Corporate assets 46,507 50,588 55,123
Education Centers assets held for disposition -- 25,867 --
---------------------------------------
Total Assets $185,262 $270,245 $325,005
---------------------------------------
TOTAL DEPRECIATION AND AMORTIZATION (INCLUDING AMORTIZATION OF PRIOR
PERIOD DEFERRED MARKETING):
ICS Learning Systems $ 3,196 $ 21,055 $ 920
Steck-Vaughn Publishing Corporation 2,001 1,564 1,157
National Education Training Group 2,857 3,999 9,315
Other 11 63 33
---------------------------------------
Total Segments $ 8,065 $ 26,681 $ 11,425
---------------------------------------
CAPITAL EXPENDITURES, INCLUDING CAPITAL LEASES:
ICS Learning Systems $ 5,510 $ 4,887 $ 2,209
Steck-Vaughn Publishing Corporation 939 890 2,804
National Education Training Group 1,118 1,929 2,591
Other 13 249 76
---------------------------------------
Total Segments $ 7,580 $ 7,955 $ 7,680
---------------------------------------
</TABLE>
F-22
<PAGE> 62
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - INDUSTRY SEGMENT DATA (CONTINUED)
The following table sets out the amount of consolidated net revenues, operating
income (loss) and identifiable assets by geographic area:
<TABLE>
<CAPTION>
Restated
-------------------------
(dollars in thousands) 1995 1994 1993
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET REVENUES:
United States $193,367 $185,624 $165,530
Europe 34,324 26,815 28,000
Canada 18,115 16,579 19,547
Other foreign 12,792 12,596 11,095
---------------------------------------
Total Net Revenues $258,598 $241,614 $224,172
---------------------------------------
OPERATING INCOME(LOSS):
United States operating income before amortization
of prior period deferred marketing and unusual
items $ 11,678 $ 13,016 $ 4,582
Amortization of prior period deferred marketing (1,164) (14,949) --
Unusual items (72,723) -- (9,232)
---------------------------------------
United States (62,209) (1,933) (4,650)
---------------------------------------
European operating loss before amortization of
prior period deferred marketing and unusual items (3,617) (4,029) (1,902)
Amortization of prior period deferred marketing -- (822) --
Unusual items (8,692) -- --
---------------------------------------
Europe (12,309) (4,851) (1,902)
---------------------------------------
Canada operating income before amortization of
prior period deferred marketing 99 258 2,032
Amortization of prior period deferred marketing (306) (3,456) --
---------------------------------------
Canada (207) (3,198) 2,032
---------------------------------------
Other foreign operating income before amortization
of prior period deferred marketing and unusual
items 2,970 3,080 3,123
Amortization of prior period deferred marketing -- (609) --
Unusual items (315) -- --
---------------------------------------
Other foreign 2,655 2,471 3,123
---------------------------------------
Total Segment Operating Loss $(72,070) $ (7,511) $ (1,397)
---------------------------------------
IDENTIFIABLE ASSETS:
United States $110,481 $163,640 $223,305
Europe 17,546 18,968 26,964
Canada 6,452 7,422 14,417
Other foreign 4,276 3,760 5,196
---------------------------------------
Total Segment Assets $138,755 $193,790 $269,882
---------------------------------------
</TABLE>
The Company's operations are conducted in the United States, Canada, United
Kingdom, Germany, Australia, New Zealand and Singapore.
Operating income by segment and geographic area includes net revenues less
operating expenses. The operating income (loss) by segment and geographic area
excludes general corporate expenses, net interest expense and income taxes.
Unusual items are more fully described in the Notes to the Consolidated
Financial Statements. Intersegment sales were immaterial for all years
presented. Identifiable assets are those assets used in the Company's operations
in each segment and geographic area and exclude corporate assets and Education
Centers assets held for disposition.
F-23
<PAGE> 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
The following table summarizes quarterly financial data for 1995 and 1994. The
1995 periods presented were restated to reflect deferring certain selling and
marketing costs incurred during interim periods and fully amortizing them within
the calendar year when the related revenue is recognized. SOP 93-7 does not
permit restatement of the periods for 1994. The 1994 results were restated to
reflect the change at Steck-Vaughn from the LIFO to the FIFO method of
accounting for inventory. The restated results together with a reconciliation to
the previously reported amounts are as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
(amounts in thousands, except per share amounts) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1995
NET REVENUES $ 55,959 $ 62,264 $ 72,029 $ 68,346
Income (loss) before amortization of acquired intangible
assets, amortization of prior period deferred
marketing, unusual items, nonoperating items, income
taxes (benefit) and minority interest (2,859) (3,599) 8,167 2,747
Amortization of acquired intangible assets 565 545 219 273
Amortization of prior period deferred marketing 1,311 159 -- --
Unusual items, net -- 77,805 -- 3,925
Other nonoperating expenses 1,332 1,567 1,496 1,327
Income taxes (benefit) -- -- -- --
Minority interest 90 350 625 90
---------------------------------------------
NET INCOME (LOSS) $ (6,157) $(84,025) $ 5,827 $ (2,868)
---------------------------------------------
Earnings (loss) per share $ (.21) $ (2.79) $ .18 $ (.08)
---------------------------------------------
Net income (loss) as previously reported $ (8,508) $(81,970) $ 2,395 $ 860
Adjustment for interim deferral of selling and promotion 6,884 (2,055) 1,502 (6,331)
expense
Tax impact of accounting change (4,533) -- 1,930 2,603
---------------------------------------------
Net Income (loss) as restated $ (6,157) $(84,025) $ 5,827 $ (2,868)
---------------------------------------------
</TABLE>
F-24
<PAGE> 64
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED) (CONTINUED)
<TABLE>
<CAPTION>
First Second Third Fourth
(amounts in thousands, except per share amounts) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1994
NET REVENUES $ 49,472 $ 58,337 $ 63,339 $ 70,466
Income (loss) before amortization of acquired
intangible assets, amortization of prior period
deferred marketing, nonoperating items, gain on
sale of stock, income taxes (benefit) and minority
interest (6,199) 2,826 1,805 9,135
Amortization of acquired intangible assets 426 427 530 441
Amortization of prior period deferred marketing 7,369 5,837 4,007 2,623
Other nonoperating (income) expenses 844 (87) 892 961
Gain on sale of stock -- -- -- (3,247)
Income taxes (benefit) (3,626) (299) (111) 3,481
Minority interest 129 384 601 78
---------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS (11,341) (3,436) (4,114) 4,798
Loss from discontinued operations (2,008) (7,412) -- --
Loss on disposal of discontinued operations -- (40,032) -- --
---------------------------------------------
NET INCOME (LOSS) $(13,349) $(50,880) $ (4,114) $ 4,798
---------------------------------------------
EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS $ (.38) $ (.12) $ (.14) $ .16
---------------------------------------------
EARNINGS (LOSS) PER SHARE $ (.45) $ (1.72) $ (.14) $ .16
---------------------------------------------
Net income (loss) as previously reported $(13,382) $(50,923) $ (4,148) $ 4,528
Adjustment to publishing costs and materials for
inventory accounting change 65 85 75 529
Impact of accounting change on minority interest (7) (9) (12) (52)
Tax impact of accounting change (25) (33) (29) (207)
---------------------------------------------
Net income (loss) as restated $(13,349) $(50,880) $ (4,114) $ 4,798
---------------------------------------------
</TABLE>
F-25
<PAGE> 65
National Education Corporation and Subsidiaries
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
(dollars in thousands)
<TABLE>
<CAPTION>
Balance at Charge/(Credit) Balance at
Beginning of to Costs and Deductions/ End of
Classification Period Expenses Other Period
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR END 1995:
Allowance for doubtful receivables $ 2,787 $ 1,642 $ (1,687) $ 2,742
Reserve for inventories 2,145 1,626 85 3,856
Accumulated amortization of
acquired intangible assets 89,005 1,602 (77,274) (A) 13,333
YEAR END 1994:
Allowance for doubtful receivables $10,437 $(1,304) $ (6,346) $ 2,787
Reserve for inventories 2,437 (98) (194) 2,145
Accumulated amortization of
acquired intangible assets 95,635 1,824 (8,454) (B) 89,005
YEAR END 1993: (C)
Allowance for doubtful receivables $10,119 $ 4,664 $ (4,346) $10,437
Reserve for inventories 1,982 391 64 2,437
Accumulated amortization of
acquired intangible assets 78,865 4,775 11,995 (D) 95,635
</TABLE>
A) This amount represents the write-off of intangible assets of NETG and
Spectrum, a subsidiary of NETG.
B) This amount primarily represents the Education Centers reclassification to
net assets held for disposition.
C) Balances have not been restated to exclude the discontinued Education
Centers.
D) This amount primarily represents the write-off of intangible assets for NETG
of $9,232,000 and the Education Centers of $2,766,000.
F-26
<PAGE> 66
EXHIBITS FILED HEREIN
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ----
<S> <C> <C>
3.1 Restated Certificate of Incorporation of the
National Education Corporation . . . . . . . . . . . . . . . . . . . .
10.18 Second Amendment to Credit Agreement, dated
December 21, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.22 Renewal and Extension Agreement between National
Education Corporation and Steck-Vaughn Publishing
Corporation, effective December 31, 1995 . . . . . . . . . . . . . . .
10.23 First Amendment to Stock Option Agreement between
National Education Corporation and Steck-Vaughn
Publishing Corporation, effective December
31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.24 Letter Amendment to Stock Option Agreement
between National Education Corporation and
Steck-Vaughn Publishing Corporation, dated
February 1, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . . .
10.26 Credit Agreement among National Education
Corporation, certain banks and BZW Division of
Barclays Bank PLC, as Agent, dated January
19, 1996 (Confidential treatment under
Rule 24b-2 has been requested for portions
of this exhibit) . . . . . . . . . . . . . . . . . . . . . . . . . . .
11.1 Calculation of Primary Earnings Per Share . . . . . . . . . . . . . . .
11.2 Calculation of Fully Diluted Earnings Per Share . . . . . . . . . . . .
18 Letter from Price Waterhouse LLP regarding change
in accounting principles (23) . . . . . . . . . . . . . . . . . . . . .
21 Subsidiaries of National Education Corporation . . . . . . . . . . . .
23 Consent of Price Waterhouse LLP . . . . . . . . . . . . . . . . . . . .
27.1 Financial Data Schedule . . . . . . . . . . . . . . . . . . . . . . . .
</TABLE>
<PAGE> 1
EXHIBIT 3.1
RESTATED CERTIFICATE OF INCORPORATION
OF
NATIONAL EDUCATION CORPORATION
NATIONAL EDUCATION CORPORATION, a corporation organized and
existing under the laws of the State of Delaware, originally incorporated on
March 6, 1972 under the name of National Systems Corporation, hereby certifies
that the following sets forth the complete Restated Certificate of
Incorporation.
1. The name of the Corporation is NATIONAL EDUCATION
CORPORATION.
2. The address of the registered office of the
Corporation in the State of Delaware is 1209 Orange Street, City of Wilmington,
County of New Castle. The name of the registered agent of the Corporation at
such address is The Corporation Trust Company.
3. The nature of the business or purposes to be
conducted by the Corporation is to engage in any lawful act or activity for
which corporations may be organized under the General Corporation Law of
Delaware.
4. The total number of shares of stock which the
Corporation shall have authority to issue is Fifty-Five Million (55,000,000)
consisting of two classes of shares designated respectively "Common Stock" and
"Preferred Stock", and referred to herein either as Common stock or Common
shares and Preferred stock or Preferred shares, respectively. The number of
shares of Common stock shall be Fifty Million (50,000,000) and shall have a par
1.
<PAGE> 2
value of $.01 per share, and the number of shares of Preferred stock shall be
Five Million (5,000,000) and shall have a par value of $.10 per share.
The Preferred shares may be issued from time to time in one or
more series. The Board of Directors is authorized to fix the number of shares
of any series of Preferred shares and to determine the designation of any such
series. The Board of Directors is also authorized to determine or alter the
rights, preferences, privileges, and restrictions granted to or imposed upon
any wholly unissued series of Preferred shares and, within the limits and
restrictions stated in any resolution or resolutions of the Board of Directors
originally fixing the number of shares constituting any series, to increase or
decrease (but not below the number of shares of such series then outstanding)
the number of shares of any such series subsequent to the issue of shares of
that series.
5. The names of the incorporators are omitted pursuant
to Section 245(c) of the Delaware General Corporation Law.
6. The Corporation is to have perpetual existence.
7. The properties, business and affairs of the
Corporation shall be managed and controlled by a Board of Directors of not less
than three (3) members. The number of directors which shall constitute the
whole Board shall be determined in the manner provided in the By-laws of the
Corporation.
The incorporators of this Corporation shall elect the first
Board of Directors and shall divide the Board into three classes as nearly
equal in number as possible, designated Class 1, Class 2 and Class 3. The term
of office of Class 1 directors shall expire at the next annual meeting of
stockholders; of Class 2 directors one (1) year thereafter; of Class 3
directors two (2) years thereafter. At each annual meeting of stockholders,
successors to the class of directors
2.
<PAGE> 3
whose terms of office expire in that year shall be elected to hold office for a
term of three (3) years. Each director shall hold office until his successor
is elected and qualified or until his earlier resignation or until his removal
in the manner provided in the By-laws of the Corporation.
8. A majority of the whole Board of Directors is
empowered to make, alter or repeal the By-laws of the Corporation. The
stockholders of the Corporation may adopt, amend or repeal By-laws of the
Corporation only by the affirmative vote of the holders of not less than
two-thirds of the issued and outstanding shares of stock of the Corporation.
9. Whenever a compromise or arrangement is proposed
between this Corporation and its creditors or any class of them and/or between
this Corporation and its stockholders or any class of them, any court of
equitable jurisdiction within the State of Delaware may, on the application in
a summary way of this Corporation or of any creditor or stockholder thereof, or
on the application of any receiver or receivers appointed for this Corporation
under the provisions of Section 291 of Title 8 of the Delaware Code, or on the
application of trustees in dissolution, or of any receiver or receivers
appointed for this Corporation under the provisions of Section 279 of Title 8
of the Delaware Code, order a meeting of the creditors or class of creditors,
and/or of the stockholders or class of stockholders of this Corporation, as the
case may be, to be summoned in such manner as the said court directs. If a
majority in number representing three-fourths in value of the creditors or
class of creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation, as consequence of such compromise or
arrangement and the said reorganization shall, if sanctioned by the court to
which the said application has been made, be binding on all the
3.
<PAGE> 4
creditors or class of creditors, and/or on all the stockholders or class of
stockholders of this Corporation, as the case may be, and also on this
Corporation.
10. Meetings of stockholders may be held within or
without the State of Delaware, as the By-laws may provide. The books of the
Corporation may be kept (subject to any provisions contained in the statutes)
outside the State of Delaware at such place or places as may be designed from
time to time by the Board of Directors or in the By-laws of the Corporation.
Elections of directors need not be by written ballot unless the By-laws of the
Corporation shall so provide.
Any action required or permitted to be taken by the
stockholders of the Corporation must be taken at an annual or special meeting
of stockholders and may not be taken by consent in writing.
11. 1. In addition to any voting and any other
requirements under Delaware law, this Certificate or the By-laws, the
affirmative vote of the holders of shares of capital stock of the Corporation
representing at least a majority of the Non-Affiliated Shares (as hereinafter
defined), shall be required for the adoption or authorization of a Business
Combination (as hereinafter defined) with any Dominant Stockholder (as
hereinafter defined). Such affirmative vote shall be required notwithstanding
the fact that no vote, or different voting classification, or a lesser
percentage, may be required by law or otherwise. The voting requirement set
forth above shall not be applicable if the definitive agreement or other
arrangements to effectuate a Business Combination with a Dominant Stockholder
are approved by a majority of the directors of the Corporation who were
directors prior to the time when such Dominant Stockholder became a Dominant
Stockholder and continue to be directors at the time the determination is made
(the "Continuing Directors"). Such determination shall be made by
4.
<PAGE> 5
a majority of the Continuing Directors even if such majority does not
constitute a quorum of the members of the Board of Directors then in office.
In addition, the voting requirement specified above shall not be applicable if
the cash, or fair market value of other consideration, to be received per share
by the holders of each class or series of capital stock of the Corporation in a
Business Combination with a Dominant Stockholder is not less than the highest
per share price (including brokerage commissions and/or soliciting dealers'
fees) paid by such Dominant Stockholder in acquiring any shares of such class
or series, respectively. For purposes of the foregoing, the fair market value
of "other consideration" and/or the highest per share price (unless all shares
were acquired by the Dominant Stockholder for cash) shall be conclusively
determined by an investment banking firm selected by a majority of the
Continuing Directors, if any. If there are no Continuing Directors at such
time, or if the Continuing Directors have not selected an investment banking
firm to make such determination, any determination of such fair market value or
highest price by the then existing Board of Directors or an investment banking
firm selected by them shall not give rise to any presumption that such
determination is correct and any stockholder wishing to do so may contest the
same.
The provisions of this Paragraph 11 shall also apply to a
Business Combination with any person (as hereinafter defined) which at any time
has been a Dominant Stockholder, notwithstanding the fact that such person is
no longer a Dominant Stockholder, if, at the time the definitive agreement or
other arrangements relating to a Business Combination with such person was
entered into, it was a Dominant Stockholder or if, as of the record date for
the determination of stockholders entitled to notice of and to vote on the
Business Combination, such person is an "affiliate" (as hereinafter defined) of
the Corporation or of a Dominant Stockholder.
5.
<PAGE> 6
2. For the purposes of this Paragraph 11, the
term "Dominant Stockholder" shall mean any corporation, person or other entity
(a "person") which beneficially owns, directly or indirectly, shares of capital
stock of the Corporation representing ten percent (10%) or more of all votes
entitled to be cast in elections of directors (considered for this purpose as
one class); (b) a person shall be deemed to "beneficially own" any shares of
capital stock of the Corporation (i) which it has the right to acquire, hold or
vote pursuant to any agreement, arrangement or undertaking or upon exercise of
conversion rights, warrants, options or otherwise, or (ii) which are
beneficially owned, directly or indirectly (including shares deemed owned
through application of the foregoing clause (i)), by any other person (A) with
which it or its "affiliate" or "associate" (as those terms are defined in Rule
12b-2 of the General Rules and Regulations under the Securities Exchange Act of
1934 as in effect on March 1, 1983) has any agreement, arrangement or
understanding for the purpose of acquiring, holding, voting or disposing of
shares of capital stock of the Corporation or (B) which is its "affiliate" or
"associate"; (c) the term "outstanding shares of any class of capital stock of
the Corporation" shall include shares deemed owned through the application of
the foregoing clauses (i) and (ii) but shall not include any other shares which
may be issuable pursuant to any agreement, arrangement or understanding or upon
exercise of conversion rights, warrants, options or otherwise; (d) the term
"Business Combination" shall include any merger or consolidation of the
Corporation with or into any other person, or the sale or lease (or series of
sales or leases) of all or a substantial portion of the assets (except assets
having a fair market value of less than $10,000,000) of the Corporation to any
other person, or any sale or lease (or series of sales or leases) by any person
to the Corporation or any subsidiary thereof, in exchange for securities of the
Corporation, of any assets (except assets having an aggregate fair market value
of less
6.
<PAGE> 7
than $10,000,000), or any reclassification or recapitalization of the
outstanding shares or issuance of additional shares of any class of capital
stock of the Corporation if the effect of such transaction is to increase the
relative voting power of any Dominant Stockholder; (e) the term "other
consideration to be received" shall mean, in the event of a Business
Combination in which the Corporation is the surviving corporation, capital
stock of the Corporation retained by its existing public stockholders and (f)
the term "Non-Affiliated Shares" shall mean all shares of capital stock of the
Corporation entitled to be cast in election of directors, considered for
purposes hereof as one class, which are not beneficially owned by the Dominant
Stockholder.
3. A majority of the Continuing Directors shall
have the power and duty, consistent with their fiduciary obligations, to
determine for the purposes of this Paragraph 11 on the basis of information
known to them whether (a) a person is a Dominant Stockholder, (b) any person is
an "affiliate" or "associate" (as defined above) of another, (c) any person has
an agreement, arrangement or understanding with another, or (d) the assets
being disposed of or acquired by the Corporation, or any subsidiary thereof,
either alone or in a related series of transactions, have an aggregate fair
market value of less then $10,000,000.
4. No amendment to the Certificate of
Incorporation of the Corporation shall amend, alter, change or repeal any of
the provisions of this Paragraph 11, unless the amendment effecting such
amendment, alteration, change or repeal shall receive the affirmative vote of
the holders of shares of capital stock of the Corporation representing
seventy-five percent (75%) of all votes entitled to be cast in elections of
directors, considered for the purposes of this Paragraph 11 as one class.
12. To the fullest extent permitted by the General
Corporation Law of the State of Delaware as the same exists or may hereafter be
amended, a director of the Corporation shall
7.
<PAGE> 8
not be liable to the Corporation or its stockholders for monetary damages for
breach of fiduciary duty as a director.
Any repeal or modification of this Article shall not result in
any liability for a director with respect to any action or omission occurring
prior to such repeal or modification.
This Restated Certificate of Incorporation has been duly
adopted in accordance with the provisions of Section 245 of the Delaware
General Corporation Law by approval of the Board of Directors of the
Corporation.
IN WITNESS WHEREOF, NATIONAL EDUCATION CORPORATION has caused
this Restated Certificate of Incorporation to be signed by its Vice President
and attested to by its Assistant Secretary as of the 30th day of April, 1987.
NATIONAL EDUCATION CORPORATION
BY:
----------------------------
Jeffrey A. Brill
Vice President
ATTEST:
- ------------------------------
Judy Bayersdorfer
Assistant Secretary
8.
<PAGE> 1
EXHIBIT 10.18
NATIONAL EDUCATION CORPORATION
SECOND AMENDMENT
TO CREDIT AGREEMENT
This SECOND AMENDMENT TO CREDIT AGREEMENT (this "Amendment")
is dated as of December 21, 1995 and entered into by and among National
Education Corporation, a Delaware corporation (the "Borrower"), the Bank listed
on the signature pages hereof (the "Bank"), and Bankers Trust Company, as agent
for the Bank (the "Agent") and, for purposes of Sections 3 and 4 hereof, the
Subsidiaries of the Borrower listed on the signature pages hereof, and is made
with reference to that certain Amended and Restated Credit Agreement dated as
of February 28, 1995 by and among the Borrower, the Bank and the Agent, as
amended by that certain First Amendment and Limited Waiver to Credit Agreement
dated as of August 4, 1995 (as so amended, the "Credit Agreement"). Capitalized
terms used herein without definition shall have the same meanings herein as set
forth in the Credit Agreement.
RECITALS
WHEREAS, the Borrower and the Bank have agreed, upon the terms
and conditions set forth herein, that the term of the Credit Agreement should
be extended from December 21, 1995 to January 16, 1996; and
WHEREAS, each of the Subsidiaries of the Borrower party to the
Subsidiary Guaranty ("Subsidiary Guarantors") or the Subordination Agreement
("Subordinated Subsidiaries") desires to acknowledge and consent to this
Amendment and to reaffirm the continuing effectiveness of the Subsidiary
Guaranty or the Subordination Agreement, as the case may be;
NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants and agreements set forth herein, the parties hereto agree as
follows:
SECTION 1. AMENDMENTS TO THE CREDIT AGREEMENT
1.1 AMENDMENT TO SECTION 1.01: DEFINED TERMS.
Section 1.01 of the Credit Agreement is hereby amended by
amending and restating the definition of "Termination Date" as follows:
1
<PAGE> 2
"'Termination Date' shall mean the earlier of (a) January 16,
1996 and (b) the date upon which the Revolving Loan Commitments are
terminated pursuant to subsection 4.06 or Section 9."
SECTION 2. CONDITIONS TO EFFECTIVENESS
The amendment to the Credit Agreement set forth in Section 1
hereof shall become effective as of the date hereof upon the Borrower's, the
Bank's, each Subsidiary Guarantor's and each Subordinated Subsidiary's
execution and delivery of counterparts hereof provided the Agent shall have
received the following, in each case in form and substance satisfactory to the
Agent:
(i) copies of resolutions of the Borrower, each Subsidiary
Guarantor and each Subordinated Subsidiary approving and authorizing
the execution and delivery of this Amendment by such Person and the
Borrower's performance of the Credit Agreement, as amended by this
Amendment, in each case certified by such Person's secretary or
assistant secretary as being in full force and effect and as
constituting all action by such Person with respect to this Amendment
and the extension of the term of the Credit Agreement contemplated
hereunder.
(ii) An allonge to the Note, substantially in the form of
Annex 1 to this Amendment, executed by the Borrower.
SECTION 3. REPRESENTATIONS AND WARRANTIES
In order to induce the Bank to enter into this Amendment and
to amend the provisions of the Credit Agreement in the manner provided herein,
the Borrower, and each Subsidiary party to the Subsidiary Guaranty and/or the
Subordination Agreement with respect to itself only, represents and warrants to
the Bank that the following statements are true, correct and complete:
A. CORPORATE POWER AND AUTHORITY. The Borrower has all
requisite corporate power and authority to enter into this Amendment and to
carry out the transactions contemplated by, and perform its obligations under,
the Credit Agreement as amended by this Amendment (the "Amended Agreement").
Each such Subsidiary has all requisite corporate power and authority to enter
into this Amendment and to be bound hereby.
B. AUTHORIZATION OF AGREEMENTS. The execution and
delivery of this Amendment by the Borrower and each such Subsidiary and the
performance of the Amended Agreement by the Borrower have been duly authorized
by all necessary corporate
2
<PAGE> 3
action by the Borrower and each such Subsidiary, as the case may be.
C. NO CONFLICT. The execution and delivery by the
Borrower and each such Subsidiary of this Amendment and the performance by the
Borrower of the Amended Agreement do not and will not (i) violate any provision
of any law, rule or regulation applicable to the Borrower or any of its
Subsidiaries, the Certificate of Incorporation or Bylaws of the Borrower or any
of its Subsidiaries or any order, judgment or decree of any court or other
agency of government binding on the Borrower or any of its Subsidiaries, (ii)
conflict with, result in a breach of or constitute (with due notice or lapse of
time or both) a default under, or require the consent of any Person under, any
mortgage, deed of trust, credit agreement, loan agreement or any other
agreement contract or instrument to which the Borrower or any of its
Subsidiaries is a party or by which it or any of its property or assets is
bound or to which it may be subject or (iii) result in or require the creation
or imposition of any Lien upon any of their properties or assets.
D. GOVERNMENTAL CONSENTS. The execution and delivery by
the Borrower and each such Subsidiary of this Amendment and the performance by
the Borrower of the Amended Agreement do not and will not require any
registration with, consent or approval of, or notice to, or other action to,
with or by, any Federal, state or other governmental authority or regulatory
body or other Person.
E. BINDING OBLIGATION. This Amendment and, in the case
of the Borrower, the Amended Agreement, are the legally valid and binding
obligation(s) of the Borrower and each such Subsidiary, enforceable against the
Borrower or such Subsidiary in accordance with its terms, except as enforcement
may be limited by bankruptcy, insolvency, reorganization, moratorium or other
similar laws relating to or limiting creditors' rights generally or by
equitable principles relating to enforceability.
F. INCORPORATION OF REPRESENTATIONS AND WARRANTIES FROM
CREDIT AGREEMENT. The representations and warranties contained in Section 6 of
the Credit Agreement are and will be true, correct and complete in all material
respects on and as of the date hereof to the same extent as though made on and
as of that date, except to the extent that such representations and warranties
specifically relate to an earlier date, in which case they are true, correct
and complete in all material respects as of such earlier date.
G. ABSENCE OF DEFAULT. Upon giving effect to this
Amendment, no event has occurred and is continuing or will result from the
consummation of the transactions contemplated by this
3
<PAGE> 4
Amendment which would constitute an Event of Default or a Default.
SECTION 4. ACKNOWLEDGEMENT AND CONSENT
Each of the undersigned Subsidiaries of the Borrower
acknowledges that it has reviewed the terms and provisions of the Credit
Agreement and this Amendment and consents to the amendment of the Credit
Agreement effected pursuant to this Amendment. Each of the undersigned
Subsidiary Guarantors hereby confirms that the Subsidiary Guaranty will
continue to guaranty to the fullest extent possible the payment and performance
of all Guarantied Obligations (as defined in~-the Subsidiary Guaranty),
including, without limitation, the payment and performance of all Obligations
of the Borrower now or hereafter existing under or in respect of the Amended
Agreement. Each of the undersigned Subordinated Subsidiaries hereby confirms
that the Subordination Agreement will continue to subordinate the Subordinated
Debt (as defined in the Subordination Agreement) to Senior Obligations (as
defined in the Subordination Agreement), including, without limitation, all
obligations of the Borrower now or hereafter existing to make payments under or
in respect of the Amended Agreement.
Each Subsidiary Guarantor acknowledges and agrees that the
Subsidiary Guaranty shall continue in full force and effect and that all of its
obligations thereunder shall be valid and enforceable and shall not be impaired
or affected by the execution or effectiveness of this Amendment. Each
Subsidiary Guarantor represents and warrants that all representations and
warranties contained in the Subsidiary Guaranty are true, correct and complete
in all material respects on and as of the date hereof to the same extent as
though made on and as of that date except to the extent that such
representations and warranties specifically relate to an earlier date, in which
case they are true, correct and complete in all material respects as of such
earlier date.
Each Subordinated Subsidiary acknowledges and agrees that the
Subordination Agreement shall continue in full force and effect and that all of
its obligations thereunder shall be valid and enforceable and shall not be
impaired or affected by the execution or effectiveness of this Amendment. Each
Subordinated Subsidiary represents and warrants that all representations and
warranties contained in the Subordination Agreement are true, correct and
complete in all material respects on and as of the date hereof to the same
extent as though made on and as of that date except to the extent that such
representations and warranties specifically relate to an earlier date, in which
case
4
<PAGE> 5
they are true, correct and complete in all material respects as of such earlier
date.
Each of the undersigned Subsidiaries of the Borrower
acknowledges and agrees that (i) notwithstanding the conditions to
effectiveness set forth in this Amendment, such
Subsidiary is not required by the terms of the Credit Agreement or any other
Credit Document to consent to the amendments to the Credit Agreement effected
pursuant to this Amendment and (ii) nothing in the Credit Agreement, this
Amendment or any other Credit Document shall be deemed to require the consent
of any such Subsidiary to any future amendments to the Credit Agreement.
SECTION 5. MISCELLANEOUS
A. REFERENCE TO AND EFFECT ON THE CREDIT AGREEMENT AND
THE OTHER CREDIT DOCUMENTS.
(i) On and after the date hereof, each reference
in the Credit Agreement to "this Agreement", "hereunder", "hereof",
"herein" or words of like import referring to the Credit Agreement,
and each reference in the other Credit Documents to the "Credit
Agreement", "thereunder", "thereof" or words of like import referring
to the Credit Agreement shall mean and be a reference to the Credit
Agreement as amended by this Amendment.
(ii) Except as specifically amended or modified by
this Amendment, the Credit Agreement and the other Credit Documents
shall remain in full force and effect and are hereby ratified and
confirmed.
(iii) The execution, delivery and performance of this
Amendment shall not, except as expressly provided herein, constitute a
waiver of any provision of, or operate as a waiver of any right, power
or remedy of the Agent or any Bank under, the Credit Agreement or any
of the other Credit Documents.
B. FEES AND EXPENSES. The Borrower acknowledges that all
costs, fees and expenses as described in subsection 11.01 of the Credit
Agreement incurred by the Agent and its counsel with respect to this Amendment
and the documents and transactions contemplated hereby shall be for the account
of the Borrower.
C. EXECUTION IN COUNTERPARTS. This Amendment may be
executed in any number of counterparts, and by different parties hereto in
separate counterparts, each of which when so executed and delivered shall be
deemed an original, but all such
5
<PAGE> 6
counterparts taken together shall constitute but one and the same instrument.
D. EFFECTIVENESS. This Amendment shall become effective
as of the date hereof upon the execution of a counterpart hereof by the
Borrower, each Subsidiary of the Borrower party to the Subsidiary Guaranty or
the Subordination Agreement and the Bank and the delivery of such counterparts
to the Agent; provided, however, that the amendment to the Credit Agreement
set forth in Section 1 this Amendment shall not be effective until the
conditions set forth in Section 2 of this Amendment are satisfied.
E. HEADINGS. Section and subsection headings in this
Amendment are included herein for convenience of reference only and shall not
constitute a part of this Amendment for any other purpose or be given any
substantive effect.
F. APPLICABLE LAW. THIS AMENDMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HERETO AND ALL OTHER ASPECTS HEREOF SHALL BE DEEMED
TO BE MADE UNDER, SHALL BE GOVERNED BY, AND SHALL BE CONSTRUED AND ENFORCED IN
ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF NEW YORK.
[Remainder of Page Intentionally Left Blank]
6
<PAGE> 7
IN WITNESS WHEREOF, the parties hereto have caused this
Amendment to be executed as of the date first above written by their respective
officers "hereunto duly authorized.
NATIONAL EDUCATION CORPORATION
By:
--------------------------------
Title:
-------------------------------
NETG HOLDING, INC.
NATIONAL EDUCATION TRAINING GROUP, INC.,
SPECTRUM INTERACTIVE
INCORPORATED
NATIONAL EDUCATION CENTERS, INC.
ICS LEARNING SYSTEMS, INC.
INTERNATIONAL CORRESPONDENCE
SCHOOLS, INC.,
AS THE SUBSIDIARY GUARANTORS
By:
--------------------------------
Title:
-------------------------------
NATIONAL EDUCATION INTERNATIONAL
CORP.
NATIONAL EDUCATION CREDIT
CORPORATION
NATIONAL EDUCATION FOREIGN SALES
CORP.
NATIONAL EDUCATION PAYROLL CORP.
NATIONAL EDUCATION CENTERS, INC.
ICS LEARNING SYSTEMS, INC.
NETG HOLDING, INC.,
AS THE SUBORDINATED SUBSIDIARIES
By:
--------------------------------
Title:
-------------------------------
S-1
<PAGE> 8
BANKERS TRUST COMPANY, AS THE
BANK AND AS THE AGENT
By:
--------------------------------
Title:
-------------------------------
<PAGE> 9
ALLONGE DATED DECEMBER 21, 1995
TO PROMISSORY NOTE DATED FEBRUARY 28, 1995
This Allonge amends, and is to be affixed to so as to become
part of, that certain Promissory Note dated February 28, 1995, in the principal
amount of $13,500,000, by the undersigned National Education Corporation, as
the Borrower, to Bankers Trust Company, as the Payee (the "Note").
The Note is hereby amended by deleting the date December 21,
1995, from the first paragraph thereof and substituting therefor the date
January 16, 1996.
In witness whereof, the Borrower and the Payee have caused
this Allonge to be executed and delivered by their duly authorized officers.
Dated: December 21, 1995
NATIONAL EDUCATION CORPORATION
By:
------------------------------
Title:
-----------------------------
BANKERS TRUST COMPANY
By:
------------------------------
Title:
-----------------------------
<PAGE> 1
EXHIBIT 10.22
RENEWAL AND EXTENSION AGREEMENT
WHEREAS, National Education Corporation ("Borrower") executed a
Revolving Line of Credit Note (the "Note") dated February 28, 1996, payable to
the order of Steck-Vaughn Publishing Corporation ("Lender"), in the original
principal sum of $10,000,000.00, secured by a Pledge and Security Agreement
(the "Security Agreement") of even date between Borrower, as pledger, and
Bankers Trust Company, 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 has requested Lender to extend the term of the Note;
NOW, THEREFORE, Borrower and Lender agree that:
1. 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 January 1, 1996 and
continuing on the first day of each month thereafter until
March 31, 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.
2. 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.
3. All agreements between Borrower and Lender, whether now
existing or hereafter arising and whether written or oral, are
hereby limited so that in no
<PAGE> 2
contingency, whether by reason of demand for payment or
acceleration of the maturity of the Note 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 and
not to the payment of interest, or if such excessive interest
exceeds the unpaid balance of principal of the Note such
excess shall be refunded to Borrower. All interest paid or
agreed to be paid to the holder of the Note 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.
4. 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 stated principal sum of the Note,
or so much thereof as may be advanced and remains unpaid, with
interest as specified in the Note, as renewed and extended by
this Renewal and Extension Agreement, and to perform all of
Borrower's obligations under the Note, the Security Agreement,
and any other documents pertaining thereto (the "Other
Documents").
5. Borrower covenants and warrants that the Note, the Security
Agreement and the Other Documents are not in default after
giving effect to the extension 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 and extended hereby, are in
full force and effect, and that the Security Agreement shall
continue to secure payment of the indebtedness evidenced by
the Note as herein and hereafter renewed and extended.
-2-
<PAGE> 3
6. Borrower further covenants and warrants to Lender that the
execution and delivery of this 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.
7. The Note, as renewed and extended by this Renewal and
Extension Agreement, 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.
8. The Note, the Security Agreement and the Other Documents shall
remain in full force and effect as renewed and extended by
this Renewal and Extension Agreement.
9. This Renewal and Extension Agreement may be executed in
duplicate originals and each duplicate shall have the same
force and effect as an original.
EXECUTED to be effective as of December 31, 1996.
"BORROWER"
NATIONAL EDUCATION CORPORATION
By:
------------------------------
Name:
------------------------
Title:
-----------------------
"LENDER"
STECK-VAUGHN PUBLISHING CORPORATION
By:
------------------------------
Name:
------------------------
Title:
-----------------------
-3-
<PAGE> 1
EXHIBIT 10.23
FIRST AMENDMENT TO
STOCK OPTION AGREEMENT
This First 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 December
31, 1995.
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. Company and Optionee desire to amend the Stock Option
Agreement to extend certain dates 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) March 31, 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) May 31, 1996 or (ii) any time one
or more Events of Default (which have not been cured within any
applicable cure
<PAGE> 2
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 dated as of December
31, 1995 between the Company and Optionee (said Resolving Line of
Credit Note as so renewed modified and extended by said Renewal and
Extension Agreement 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) $750,000 plus, if the Redemption Price is paid by the Company to
Optionee after December 31, 1995, an amount equal to $2,500 per day
for each day after December 31, 1995 until and including the earlier
of (x) March 31, 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 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
-2-
<PAGE> 3
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) March 31, 1996, if the indebtedness
evidenced by the Note is paid in full on such date and the Company has
not prior to March 31, 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 pai, if the indebtedness
evidenced by the Note is not fully paid on March 31, 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 March 31, 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. 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 March
31, 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
-3-
<PAGE> 4
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 FIRST 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 First 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. Except as amended hereby, 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 First Amendment
to Stock Option Agreement as of the date first above written.
"COMPANY" "OPTIONEE"
NATIONAL EDUCATION CORPORATION STECK-VAUGHN PUBLISHING
CORPORATION
By: By:
--------------------------- --------------------------
Name: Name:
-------------------- ---------------------
Title: Title:
-------------------- --------------------
-4-
<PAGE> 1
February 1, 1996 EXHIBIT 10.24
Steck-Vaughn Publishing Corporation
8701 North MoPac Expressway, Suite 200
Austin, Texas 78759
Attention: Mr. Floyd Rogers
Re: Revolving Line of Credit Note and Stock Option Agreement between
Steck-Vaughn Publishing Corporation and National Education
Corporation
Dear Floyd:
This letter is to confirm that, effective February 1, 1996, the
maximum principal sum available under that certain Revolving Line of Credit
Note dated February 28, 1995, made by National Education Corporation ("NEC") in
favor of Steck-Vaughn Publishing Corporation ("SVPC"), as renewed and extended
by that certain Renewal and Extension Agreement effective December 31, 1995,
between NEC and SVPC, is hereby reduced to Five Million Dollars ($5,000,000).
In consideration of the foregoing reduction, NEC and SVPC also confirm and
agree that, from and after February 1, 1996, the "per day" amount set forth in
Section 8 of that certain Stock Option Agreement dated February 28, 1995,
between NEC and SVPC, as amended by that certain First Amendment to Stock
Option Agreement dated December 31, 1995, between NEC and SVPC, shall be
reduced to One Thousand Two Hundred Fifty Dollars ($1,250) per day (from the
amount of $2,500 per day, which amount shall remain applicable for each day in
the one month period from and including January 1, 1996 through January 31,
1996).
Please confirm SVPC's agreement to the foregoing by countersigning the
enclosed copy of this letter, and returning such countersigned copy to my
attention.
Very truly yours,
Keith K. Ogata
Vice President, Chief Financial Officer
and Treasurer
AGREED EFFECTIVE FEBRUARY 1, 1996
STECK-VAUGHN PUBLISHING CORPORATION
By:
------------------------------
Floyd Rogers
Vice President and Chief Financial Officer
<PAGE> 1
* PORTIONS OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE COMMISSION IN
A REQUEST FOR CONFIDENTIAL TREATMENT. SEE PAGES 44-49.
EXHIBIT 10.26
CREDIT AGREEMENT, dated as of January 19, 1996, among NATIONAL
EDUCATION CORPORATION, a Delaware corporation (the "Borrower"), the several
banks and other financial institutions from time to time parties to this
Agreement (the "Lenders") and the Agent, as agent for the Lenders hereunder.
The parties hereto hereby agree as follows:
SECTION 1. DEFINITIONS
1.1 Defined Terms. As used in this Agreement, the following
terms shall have the following meanings:
"Affiliate": as to any Person, any other Person (other than a
Subsidiary) which, directly or indirectly, is in control of, is
controlled by, or is under common control with, such Person. For
purposes of this definition, "control" of a Person means the power,
directly or indirectly, either to (a) vote 10% or more of the
securities having ordinary voting power for the election of directors
of such Person or (b) direct or cause the direction of the management
and policies of such Person, whether by contract or otherwise.
"Agent": BZW Division of Barclays Bank PLC, together with its
affiliates, as the arranger of the Commitments and as the agent for
the Lenders under this Agreement and the other Loan Documents.
"Aggregate Outstanding Extensions of Credit": at any time of
determination thereof, the sum of (a) the unpaid principal amount of
Loans at such time, (b) the aggregate amount available to be drawn
under all Letters of Credit outstanding at such time and (c) the
aggregate unreimbursed amount at such time of all drawings under
Letters of Credit.
"Agreement": this Credit Agreement, as amended, supplemented
or otherwise modified from time to time.
"Applicable Margin": for each Type of Loan, the rate per
annum set forth under the relevant column heading below:
<TABLE>
<CAPTION>
Base Rate Eurodollar
Loans Loans
--------- ----------
<S> <C>
1.75% 3.0%;
</TABLE>
<PAGE> 2
2
provided, that commencing with the fiscal quarter ending June 30,
1996, the Applicable Margin shall be adjusted from time to time as
described below to the rate per annum set forth under the relevant
column heading below opposite the then applicable Coverage Ratio:
<TABLE>
<CAPTION>
Base Rate Eurodollar
Coverage Ratio Loans Loans
-------------- --------- ----------
<S> <C> <C>
Greater than or
equal to 7.0:1.0 .75% 2.0%
Greater than or equal 1.0% 2.25%
to 6.0:1.0 but less
than 7.0:1.0
Greater than or equal 1.25% 2.50%
to 5.0:1.0 but less
than 6.0:1.0
Greater than or equal 1.50% 2.75%
to 4.0 to 1.0 but
less than 5.0 to 1.0
Less than 4.0 to 1.0 1.75% 3.0%
</TABLE>
Any change in the Applicable Margin required hereunder shall
be deemed to occur on the earlier of (x) the later of (1) the date the Borrower
delivers to the Lenders its preliminary financial statements for the fiscal
quarter then most recently ended and (2) the date which is ten days after the
end of such fiscal quarter and (y) the date of delivery by the Borrower of the
financial statements for such quarter required pursuant to subsection 7.1(a) or
(b), provided, however, that if the Applicable Margin shall have been adjusted
based on the preliminary financial statements, and the financial statements for
such fiscal quarter delivered pursuant to subsection 7.1(a) or (b) show:
(A) a Coverage Ratio corresponding to an Applicable Margin
higher than the Applicable Margin as so adjusted, the
Applicable Margin shall be retroactively readjusted to the
date of delivery of such preliminary financial statements for
such fiscal quarter, and the Borrower shall pay the increased
interest resulting from such readjustment, with interest on
such increment at the Federal Funds Effective
<PAGE> 3
3
Rate, plus a charge (payable on the date of such readjustment)
of $150 for effecting such adjustment, or
(B) a Coverage Ratio corresponding to an Applicable Margin
lower than the Applicable Margin as so adjusted, the
Applicable Margin shall, on the date of delivery of such
financial statements, be adjusted prospectively to such lower
Applicable Margin.
"Assignee": as defined in subsection 11.6(c).
"Assignment of Life Insurance": the Assignment of Life
Insurance to be executed and delivered by the Borrower, substantially
in the form of Exhibit B, as the same may be amended, supplemented or
otherwise modified from time to time.
"Available Commitment": as to any Lender at any time, an
amount equal to the excess, if any, of (a) the amount of such Lender's
Commitment over (b) such Lender's Aggregate Outstanding Extensions of
Credit.
"Barclays": BZW Division of Barclays Bank PLC.
"Base Rate": for any day, the higher of (i) the rate of
interest publicly announced by Barclays in New York, New York from
time to time as its prime rate (the prime rate not being intended to
be the lowest rate of interest charged by Barclays in connection with
extensions of credit to debtors) and (ii) 1/2 of 1% above the Federal
Funds Rate for such day.
"Base Rate Loans": Loans the rate of interest applicable to
which is based upon the Base Rate.
"Borrowing Date": any Business Day specified in a notice
pursuant to subsection 2.2 as a date on which the Borrower requests
the Lenders to make Loans hereunder.
"Business": as defined in subsection 5.17(b).
"Business Day": a day other than a Saturday, Sunday or other
day on which commercial banks in New York City are authorized or
required by law to close.
"Capital Stock": any and all shares, interests,
participations or other equivalents (however designated) of capital
stock of a corporation, any and all equivalent ownership interests in
a Person (other than a corporation) and any and all warrants or
options to purchase any of the foregoing.
<PAGE> 4
4
"Cash Equivalents": (a) securities with maturities of one
year or less from the date of acquisition issued or fully guaranteed
or insured by the United States Government or any agency thereof, (b)
certificates of deposit and eurodollar time deposits with maturities
of one year or less from the date of acquisition and overnight bank
deposits of any Lender or of any commercial bank having capital and
surplus in excess of $500,000,000, (c) repurchase obligations of any
Lender or of any commercial bank satisfying the requirements of clause
(b) of this definition, having a term of not more than 30 days with
respect to securities issued or fully guaranteed or insured by the
United States Government, (d) commercial paper of a domestic issuer
rated at least A-2 by Standard and Poor's Ratings Group ("S&P") or P-2
by Moody's Investors Service, Inc. ("Moody's"), (e) securities with
maturities of one year or less from the date of acquisition issued or
fully guaranteed by any state, commonwealth or territory of the United
States, by any political subdivision or taxing authority of any such
state, commonwealth or territory or by any foreign government, the
securities of which state, commonwealth, territory, political
subdivision, taxing authority or foreign government (as the case may
be) are rated at least A by S&P or A by Moody's, (f) securities with
maturities of one year or less from the date of acquisition backed by
standby letters of credit issued by any Lender or any commercial bank
satisfying the requirements of clause (b) of this definition or (g)
shares of money market mutual or similar funds which invest
exclusively in assets satisfying the requirements of clauses (a)
through (f) of this definition.
"Closing Date": the date on which the conditions precedent
set forth in subsection 6.1 shall be satisfied.
"Code": the Internal Revenue Code of 1986, as amended from
time to time.
"Collateral": all assets of the Loan Parties, now owned or
hereinafter acquired, upon which a Lien is purported to be created by
any Security Document.
"Collateral Agent": BZW Division of Barclays Bank PLC acting
in the capacity of the Collateral Agent on behalf of the Lenders and
SV pursuant to the Intercreditor Agreements and shall include any
successor Collateral Agent appointed pursuant to this Agreement and
the Intercreditor Agreement.
"Commercial L/C's": a commercial documentary Letter of Credit
under which the Issuing Bank agrees to make payments in Dollars for
the account of the Borrower, in respect of obligations of the Borrower
in connection with the purchase of goods in the ordinary course of
business.
<PAGE> 5
5
"Commitment": as to any Lender, the obligation of such Lender
to make Extensions of Credit to the Borrower hereunder in an aggregate
outstanding principal amount and/or face amount at any one time
outstanding not to exceed the amount set forth opposite such Lender's
name on Schedule I, as such amount may be reduced from time to time in
accordance with the provisions of this Agreement. Commitment.
"Commitment Percentage": as to any Lender at any time, the
percentage which such Lender's Commitment then constitutes of the
aggregate Commitments (or, at any time after the Commitments shall
have expired or terminated, the percentage which the aggregate
outstanding amount of such Lender's Extensions of Credit constitutes
of the aggregate outstanding amount of all Extensions of Credit).
"Commitment Period": the period from and including the
Closing Date to but not including the Termination Date or such earlier
date on which the Commitments shall terminate as provided herein.
"Commonly Controlled Entity": an entity, whether or not
incorporated, which is under common control with the Borrower within
the meaning of Section 4001 of ERISA or is part of a group which
includes the Borrower and which is treated as a single employer under
Section 414 of the Code.
"Consolidated Current Assets": at a particular date, all
amounts which would, in conformity with GAAP, be included under
current assets on a consolidated balance sheet of the Borrower and its
Subsidiaries as at such date.
"Consolidated Current Liabilities": at a particular date, all
amounts which would, in conformity with GAAP, be included under
current liabilities on a consolidated balance sheet of the Borrower
and its Subsidiaries as at such date.
"Consolidated EBITDA": for any period, Consolidated Net
Income of the Borrower and its Subsidiaries for such period plus,
without duplication and to the extent reflected as a charge in the
statement of such Consolidated Net Income, the sum of (a) income tax
expense, (b) Consolidated Interest Expense, (c) depreciation and
amortization expense, (d) any extraordinary, unusual or non-recurring
losses (including, whether or not otherwise includable as a separate
item in the statement of such Consolidated Net Income, losses on the
sales of assets outside of the ordinary course of business) and (e)
other non-cash charges to Consolidated Net Income, minus, without
duplication and to the extent reflected as income in the statement of
such Consolidated Net Income, any extraordinary, unusual or
non-recurring gains (including, whether or not otherwise includable as
a separate item in the statement of such Consolidated Net Income,
gains on the sales of assets outside of the ordinary course of
business).
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6
"Consolidated Interest Expense": for any period, interest
expense of the Borrower and its Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP.
"Consolidated Lease Expense": for any period, the aggregate
amount of fixed and contingent rentals payable by the Borrower and its
Subsidiaries for such period with respect to leases of real and
personal property, determined in accordance with GAAP on a
consolidated basis.
"Consolidated Net Income": for any period, net after-tax
income of the Borrower and its Subsidiaries for such period determined
in accordance with GAAP on a consolidated basis.
"Consolidated Net Worth": at a particular date, all amounts
which would be included under shareholders' equity on a consolidated
balance sheet of the Borrower and its Subsidiaries determined on a
consolidated basis in accordance with GAAP as at such date.
"Consolidated Total Indebtedness": at a particular date, all
Indebtedness of the Borrower and its Subsidiaries as at such date on a
consolidated basis.
"Contractual Obligation": as to any Person, any provision of
any security issued by such Person or of any agreement, instrument or
other undertaking to which such Person is a party or by which it or
any of its property is bound.
"Coverage Ratio": as of any date of determination, the ratio
of Consolidated EBITDA for the 12-month period then ended minus Net
Capital Expenditures during such period to Consolidated Interest
Expense for such period.
"Default": any of the events specified in Section 9, whether
or not any requirement for the giving of notice, the lapse of time, or
both, or any other condition, has been satisfied.
"Dollars" and "$": dollars in lawful currency of the United
States of America.
"Domestic Subsidiary": any Subsidiary of the Borrower other
than a Foreign Subsidiary.
"Environmental Laws": any and all foreign, Federal, state,
local or municipal laws, rules, orders, regulations, statutes,
ordinances, codes, decrees, requirements of any Governmental Authority
or other Requirements of Law (including common law)
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regulating, relating to or imposing liability or standards of conduct
concerning protection of human health or the environment, as now or
may at any time hereafter be in effect.
"ERISA": the Employee Retirement Income Security Act of 1974,
as amended from time to time.
"Eurocurrency Reserve Requirements": for any day as applied
to a Eurodollar Loan, the aggregate (without duplication) of the rates
(expressed as a decimal fraction) of reserve requirements in effect on
such day (including, without limitation, basic, supplemental, marginal
and emergency reserves under any regulations of the Board of Governors
of the Federal Reserve System or other Governmental Authority having
jurisdiction with respect thereto) dealing with reserve requirements
prescribed for eurocurrency funding (currently referred to as
"Eurocurrency Liabilities" in Regulation D of such Board) maintained
by a member bank of such System.
"Eurodollar Base Rate": with respect to each day during each
Interest Period pertaining to a Eurodollar Loan, the rate per annum
equal to the rate at which Barclays is offered Dollar deposits at or
about 10:00 A.M., New York City time, two Business Days prior to the
beginning of such Interest Period in the interbank eurodollar market
where the eurodollar and foreign currency and exchange operations in
respect of its Eurodollar Loans are then being conducted for delivery
on the first day of such Interest Period for the number of days
comprised therein and in an amount comparable to the amount of its
Eurodollar Loan to be outstanding during such Interest Period.
"Eurodollar Loans": Loans the rate of interest applicable to
which is based upon the Eurodollar Rate.
"Eurodollar Rate": with respect to each day during each
Interest Period pertaining to a Eurodollar Loan, a rate per annum
determined for such day in accordance with the following formula
(rounded upward to the nearest 1/100th of 1%):
Eurodollar Base Rate
----------------------------------------
1.00 - Eurocurrency Reserve Requirements
"Eurodollar Tranche": the collective reference to Eurodollar
Loans the then current Interest Periods with respect to all of which
begin on the same date and end on the same later date (whether or not
such Eurodollar Loans shall originally have been made on the same
day).
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"Event of Default": any of the events specified in Section 9,
provided that any requirement for the giving of notice, the lapse of
time, or both, or any other condition, has been satisfied.
"Extension of Credit": the making of any Loan by any Lender
and the issuance of any Letter of Credit by the Issuing Bank.
"Federal Funds Effective Rate": for any day, the weighted
average of the rates on overnight Federal funds transactions with
members of the Federal Reserve System arranged by Federal funds
brokers, as published on the next succeeding Business Day by the
Federal Reserve Bank of New York, or, if such rate is not so published
for any day that is a Business Day, the average quotations, for the
day, of such transactions received by the Agent from three Federal
funds brokers of recognized standing selected by it.
"Financing Lease": any lease of property, real or personal,
the obligations of the lessee in respect of which are required in
accordance with GAAP to be capitalized on a balance sheet of the
lessee.
"Foreign Subsidiary": any Subsidiary of the Borrower which is
organized under the laws of any jurisdiction outside of the United
States of America.
"GAAP": generally accepted accounting principles in the
United States of America consistent with those utilized in preparing
the audited financial statements referred to in subsection 5.1.
"Global Security Agreement": the Guarantee and Collateral
Agreement to be executed and delivered by the Borrower and each Loan
Party, substantially in the form of Exhibit D, as the same may be
amended, supplemented or otherwise modified from time to time.
"Governmental Authority": any nation or government, any state
or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
"Guarantee Obligation": as to any Person (the "guaranteeing
person"), any obligation of (a) the guaranteeing person or (b) another
Person (including, without limitation, any bank under any letter of
credit) to induce the creation of which the guaranteeing person has
issued a reimbursement, counterindemnity or similar obligation, in
either case guaranteeing or in effect guaranteeing any Indebtedness,
leases, dividends or other obligations (the "primary obligations") of
any other third Person (the "primary obligor") in any manner, whether
directly or indirectly, including, without limitation, any obligation
of the guaranteeing person, whether or not contingent, (i) to purchase
any such primary
<PAGE> 9
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obligation or any property constituting direct or indirect security
therefor, (ii) to advance or supply funds (1) for the purchase or
payment of any such primary obligation or (2) to maintain working
capital or equity capital of the primary obligor or otherwise to
maintain the net worth or solvency of the primary obligor, (iii) to
purchase property, securities or services primarily for the purpose
of assuring the owner of any such primary obligation of the ability of
the primary obligor to make payment of such primary obligation or (iv)
otherwise to assure or hold harmless the owner of any such primary
obligation against loss in respect thereof;provided, however, that the
term Guarantee Obligation shall not include endorsements of
instruments for deposit or collection in the ordinary course of
business. The amount of any Guarantee Obligation of any guaranteeing
person shall be deemed to be the lower of (a) an amount equal to the
stated or determinable amount of the primary obligation in respect of
which such Guarantee Obligation is made and (b) the maximum amount for
which such guaranteeing person may be liable pursuant to the terms of
the instrument embodying such Guarantee Obligation, unless such
primary obligation and the maximum amount for which such guaranteeing
person may be liable are not stated or determinable, in which case
the amount of such Guarantee Obligation shall be such guaranteeing
person's maximum reasonably anticipated liability in respect thereof
as determined by the Borrower in good faith.
"Indebtedness": of any Person at any date, (a) all
indebtedness of such Person for borrowed money or for the deferred
purchase price of property or services (other than current trade
liabilities incurred in the ordinary course of business and payable in
accordance with customary practices), (b) any other indebtedness of
such Person which is evidenced by a note, bond, debenture or similar
instrument, (c) all obligations of such Person under Financing Leases,
(d) all obligations of such Person in respect of acceptances issued or
created for the account of such Person, (e) all obligations of such
Person in respect of letters of credit issued for the account of such
Person and (f) all liabilities secured by any Lien on any property
owned by such Person even though such Person has not assumed or
otherwise become liable for the payment thereof.
"Insolvency": with respect to any Multiemployer Plan, the
condition that such Plan is insolvent within the meaning of Section
4245 of ERISA.
"Insolvent": pertaining to a condition of Insolvency.
"Intercreditor Agreement": the Intercreditor Agreement, dated
as of January 19, 1996, by and among the Agent, SV and BZW Division of
Barclays Bank PLC, as Collateral Agent, substantially in the form of
Exhibit D.
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"Intercreditor Agreements": the collective reference to (i)
the Intercreditor Agreement and (ii) the Intercreditor Pledge
Agreement.
"Intercreditor Pledge Agreement": the Pledge and Security
Agreement, dated as of January 19, 1996 made by the Borrower in favor
of the Agent substantially in the form of Exhibit E.
"Interest Payment Date": (a) as to any Base Rate Loan, the
last day of each calendar month, (b) as to any Eurodollar Loan having
an Interest Period of three months or less, the last day of such
Interest Period, and (c) as to any Eurodollar Loan having an Interest
Period longer than three months, each day which is three months or a
whole multiple thereof, after the first day of such Interest Period
and the last day of such Interest Period.
"Interest Period": with respect to any Eurodollar Loan:
(i) initially, the period commencing on the
borrowing or conversion date, as the case may be, with respect
to such Eurodollar Loan and ending one, two, three or six
months thereafter, as selected by the Borrower in its notice
of borrowing or notice of conversion, as the case may be,
given with respect thereto; and
(ii) thereafter, each period commencing on the
last day of the next preceding Interest Period applicable to
such Eurodollar Loan and ending one, two, three or six months
thereafter, as selected by the Borrower by irrevocable notice
to the Agent not less than three Business Days prior to the
last day of the then current Interest Period with respect
thereto;
provided that, all of the foregoing provisions relating to Interest
Periods are subject to the following:
(1) if any Interest Period pertaining to a
Eurodollar Loan would otherwise end on a day that is not a
Business Day, such Interest Period shall be extended to the
next succeeding Business Day unless the result of such
extension would be to carry such Interest Period into another
calendar month in which event such Interest Period shall end
on the immediately preceding Business Day;
(2) any Interest Period that would otherwise extend
beyond the Termination Date shall end on the Termination Date;
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(3) any Interest Period pertaining to a Eurodollar
Loan that begins on the last Business Day of a calendar month
(or on a day for which there is no numerically corresponding
day in the calendar month at the end of such Interest Period)
shall end on the last Business Day of a calendar month; and
(4) the Borrower shall select Interest Periods so
as not to require a payment or prepayment of any Eurodollar
Loan during an Interest Period for such Loan.
"Issuing Bank": Barclays Bank PLC.
"L/C Application": as defined in Section 3.1.
"L/C Commitment": $3,000,000.
"L/C Obligations": the obligations of the Borrower to
reimburse the Issuing Bank for any payments made by the Issuing Bank
under any Letter of Credit.
"L/C Participating Interest": an undivided participating
interest in the face amount of each issued and outstanding Letter of
Credit and the L/C Application relating thereto.
"Letters of Credit": the collective reference to Commercial
L/C's and Standby L/C's issued pursuant to Section 3.1.
"Lien": any mortgage, pledge, hypothecation, assignment,
deposit arrangement, encumbrance, lien (statutory or other), charge or
other security interest or any preference, priority or other security
agreement or preferential arrangement of any kind or nature whatsoever
(including, without limitation, any conditional sale or other title
retention agreement and any Financing Lease having substantially the
same economic effect as any of the foregoing).
"Loan": any loan made by any Lender pursuant to this
Agreement.
"Loan Documents": this Agreement, any Notes, any L/C
Applications, the Intercreditor Agreement and the Security Documents.
"Loan Parties": the Borrower and each Subsidiary of the
Borrower which is a party to a Loan Document.
<PAGE> 12
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"Majority Lenders": at any time, Lenders the Commitment
Percentages of which aggregate more than 50%.
"Material Adverse Effect": a material adverse effect on (a)
the business, operations, property, condition (financial or otherwise)
or prospects of the Borrower and its Subsidiaries taken as a whole or
(b) the validity or enforceability of this or any of the other Loan
Documents or the rights or remedies of the Agent or the Lenders
hereunder or thereunder.
"Material Environmental Amount": an amount payable by the
Borrower and/or its Subsidiaries in excess of $1,000,000 for remedial
costs, compliance costs, compensatory damages, punitive damages,
fines, penalties or any combination thereof.
"Materials of Environmental Concern": any gasoline or
petroleum (including crude oil or any fraction thereof) or petroleum
products or any hazardous or toxic substances, materials or wastes,
defined or regulated as such in or under any Environmental Law,
including, without limitation, asbestos, polychlorinated biphenyls and
urea-formaldehyde insulation.
"Material Subsidiary": at any time, any Subsidiary (other
than SV) (a) the consolidated assets of which and its Subsidiaries
constitute at least 5% of the consolidated total assets of the
Borrower and its Subsidiaries as at the most recent fiscal-period-end
date for which financial statements shall have been delivered to the
Lenders pursuant to subsection 7.1 or (b) the consolidated total
revenues of which and its Subsidiaries constitute at least 5% of the
consolidated total revenues of the Borrower and its Subsidiaries for
the most recently ended period of four consecutive fiscal quarters for
which financial statements shall have been delivered to the Lenders
pursuant to subsection 7.1; in the case of any Person which becomes a
Subsidiary after the date hereof, the calculations described in this
definition shall be made on the assumption that such Person shall have
been a Subsidiary for all periods relevant to such calculations.
"Multiemployer Plan": a Plan which is a multiemployer plan as
defined in Section 4001(a)(3) of ERISA.
"Net Capital Expenditures": for any period of four
consecutive fiscal quarters, the excess, if any, of (a) the sum of
capital expenditures by the Borrower and its Subsidiaries during such
period over (b) the aggregate Net Cash Proceeds from the sale by the
Borrower and its Subsidiaries of capital assets during such period.
"Net Cash Proceeds": with respect to any sale of assets or
issuance of securities or incurrence by the Borrower or any of its
Subsidiaries of any Indebtedness for
<PAGE> 13
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borrowed money of the Borrower, an amount equal to the gross cash
proceeds of such sale, issuance or incurrence, net of the following
amounts: (i) reasonable attorneys' fees, accountants' fees,
brokerage, consultant and other customary fees, underwriting
commissions and other fees and expenses actually incurred in
connection with such sale, issuance or incurrence, (ii) taxes paid or
reasonably estimated to be payable as a result thereof, after taking
into account all available deductions and credits in connection with
such sale, (iii) appropriate amounts to be provided by the Borrower
or any of its Subsidiaries as a reserve in accordance with GAAP as in
effect from time to time, against any liabilities associated with such
sale and retained by the Borrower or such Subsidiary, as the case may
be, after such sale, and (iv) in the case of a sale or sale and
leaseback of or involving an asset subject to a Lien securing (a) any
Indebtedness, payments made and installment payments required to be
made to repay such Indebtedness, including payments in respect of
principal, interest and prepayment premiums and penalties to the
extent such amounts are not paid to the Borrower with respect to such
sale.
"Non-Excluded Taxes": as defined in subsection 4.10(a).
"Notes": the Revolving Credit Notes.
"Participant": as defined in subsection 11.6(b).
"PBGC": the Pension Benefit Guaranty Corporation established
pursuant to Subtitle A of Title IV of ERISA.
"Person": an individual, partnership, corporation, business
trust, joint stock company, trust, unincorporated association, joint
venture, Governmental Authority or other entity of whatever nature.
"Plan": at a particular time, any employee benefit plan which
is covered by ERISA and in respect of which the Borrower or a Commonly
Controlled Entity is (or, if such plan were terminated at such time,
would under Section 4069 of ERISA be deemed to be) an "employer" as
defined in Section 3(5) of ERISA.
"Properties": as defined in subsection 5.17(a).
"Reimbursement Obligation": the obligation of the Borrower to
reimburse the Issuing Bank pursuant to subsection 3.5(a) for amounts
drawn under Letters of Credit.
"Register": as defined in subsection 11.6(d).
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"Regulation U": Regulation U of the Board of Governors of the
Federal Reserve System as in effect from time to time.
"Reorganization": with respect to any Multiemployer Plan, the
condition that such plan is in reorganization within the meaning of
Section 4241 of ERISA.
"Reportable Event": any of the events set forth in Section
4043(c) of ERISA, other than those events as to which the thirty day
notice period is waived under subsections .13, .14, .16, .18, .19 or
.20 of PBGC Reg. Section 2615.
"Required Lenders": at any time, Lenders the Commitment
Percentages of which aggregate at least 66-2/3%.
"Requirement of Law": as to any Person, the Certificate of
Incorporation and By-Laws or other organizational or governing
documents of such Person, and any law, treaty, rule or regulation or
determination of an arbitrator or a court or other Governmental
Authority, in each case applicable to or binding upon such Person or
any of its property or to which such Person or any of its property is
subject.
"Responsible Officer": any of the chief executive officer and
the president of the Borrower or, with respect to financial matters,
the chief financial officer of the Borrower.
"Revolving Credit Loans": as defined in subsection 2.1(a).
"Revolving Credit Note": as defined in subsection 4.3(e).
"Security Documents": the collective reference to the Global
Security Agreement, the Assignment of Life Insurance, the
Intercreditor Pledge Agreement and all other security documents
hereafter delivered to the Agent granting a Lien on any asset or
assets of any Person to secure the obligations and liabilities of the
Borrower hereunder and under any of the other Loan Documents or to
secure any guarantee of any such obligations and liabilities.
"Single Employer Plan": any Plan which is covered by Title IV
of ERISA, but which is not a Multiemployer Plan.
"Solvent" and "Solvency": with respect to any Person on a
particular date, that on such date, (a) the fair value of the property
of such Person is greater than the total amount of liabilities,
including, without limitation, contingent liabilities, of such Person,
(b) the present fair salable value of the assets of such Person is not
less than the amount
<PAGE> 15
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that will be required to pay the probable liability of such Person
on its debts as they become absolute and matured, (c) such Person does
not intend to, and does not believe that it will, incur debts or
liabilities beyond such Person's ability to pay as such debts and
liabilities mature, and (d) such Person is not engaged in business or
a transaction, and is not about to engage in business or a
transaction, for which such Person's property would constitute an
unreasonably small capital.
"Standby L/C": an irrevocable letter of credit under which
the Issuing Bank agrees to make payments in Dollars for the account of
the Borrower, in respect of obligations of the Borrower incurred
pursuant to contracts made or performances undertaken or to be
undertaken by the Borrower or any of its Subsidiaries.
"Subsidiary": as to any Person, a corporation, partnership or
other entity of which shares of stock or other ownership interests
having ordinary voting power (other than stock or such other ownership
interests having such power only by reason of the happening of a
contingency) to elect a majority of the board of directors or other
managers of such corporation, partnership or other entity are at the
time owned, or the management of which is otherwise controlled,
directly or indirectly through one or more intermediaries, or both, by
such Person. Unless otherwise qualified, all references to a
"Subsidiary" or to "Subsidiaries" in this Agreement shall refer to a
Subsidiary or Subsidiaries of the Borrower.
"SV": Steck-Vaughn Publishing Corporation, a Delaware
corporation.
"SV Stock Option": the option granted by the Borrower to SV
to purchase 290,000 shares of SV's outstanding common stock from the
Borrower for an exercise price $6.50 per share, which option expires
on March 31, 1997.
"Termination Date": January 19, 1998.
"Transferee": as defined in subsection 11.6(f).
"Type": as to any Loan, its nature as a Base Rate Loan or a
Eurodollar Loan.
1.2 Other Definitional Provisions. (a) Unless otherwise
specified therein, all terms defined in this Agreement shall have the defined
meanings when used in any Notes or any certificate or other document made or
delivered pursuant hereto.
(b) As used herein and in any Notes, and any certificate or
other document made or delivered pursuant hereto, accounting terms relating to
the Borrower and its Subsidiaries not
<PAGE> 16
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defined in subsection 1.1 and accounting terms partly defined in subsection
1.1, to the extent not defined, shall have the respective meanings given to
them under GAAP.
(c) The words "hereof", "herein" and "hereunder" and words of
similar import when used in this Agreement shall refer to this Agreement as a
whole and not to any particular provisionof this Agreement, and Section,
subsection, Schedule and Exhibit references are to this Agreement unless
otherwise specified.
(d) The meanings given to terms defined herein shall be
equally applicable to both the singular and plural forms of such terms.
SECTION 2. AMOUNT AND TERMS OF COMMITMENTS
2.1 Revolving Credit Commitments. (a) Subject to the terms
and conditions hereof, each Lender severally agrees to make revolving credit
loans ("Revolving Credit Loans") to the Borrower from time to time during the
Commitment Period in an aggregate principal amount at any one time outstanding
which, when added to such Lender's Commitment Percentage of the then
outstanding L/C Obligations, does not exceed the amount of such Lender's
Commitment. During the Commitment Period the Borrower may use the Commitments
by borrowing, prepaying the Revolving Credit Loans in whole or in part, and
reborrowing, all in accordance with the terms and conditions hereof.
(b) The Revolving Credit Loans may from time to time be (i)
Eurodollar Loans, (ii) Base Rate Loans or (iii) a combination thereof, as
determined by the Borrower and notified to the Agent in accordance with
subsections 2.2 and 2.4, provided that no Revolving Credit Loan shall be made
as a Eurodollar Loan after the day that is one month or 30 days, respectively,
prior to the Termination Date.
2.2 Procedure for Revolving Credit Borrowing. The Borrower
may borrow under the Commitments during the Commitment Period on any Business
Day, provided that the Borrower shall give the Agent irrevocable notice (which
notice must be received by the Agent prior to 12:00 P.M., New York City time,
(a) three Business Days prior to the requested Borrowing Date, if all or any
part of the requested Revolving Credit Loans are to be initially Eurodollar
Loans, or (b) one Business Day prior to the requested Borrowing Date,
otherwise), specifying (i) the amount to be borrowed, (ii) the requested
Borrowing Date, (iii) whether the borrowing is to be of Eurodollar Loans, Base
Rate Loans or a combination thereof and (iv) if the borrowing is to be entirely
or partly of Eurodollar Loans, the respective amounts of each such Type of Loan
and the respective lengths of the initial Interest Periods therefor; provided,
further, that any borrowing made on the Closing Date shall be of Base Rate
Loans only and shall require only same day notice to the Agent. Each borrowing
of Eurodollar Loans under the
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Commitments shall be in an amountequal to $500,000 or a whole multiple of
$100,000 in excess thereof. Each borrowing of Base Rate Loans under the
Commitments shall be in an amount equal to $100,000 or a whole multiple
thereof. Upon receipt of any such notice from the Borrower, the Agent shall
promptly notify each Lender thereof. Each Lender will make the amount of its
pro rata share of each borrowing available to the Agent for the account of the
Borrower at the office of the Agent specified in subsection 11.2 prior to
11:00 A.M., New York City time, on the Borrowing Date requested by the Borrower
in funds immediately available to the Agent. Such borrowing will then be made
available to the Borrower by the Agent crediting the account of the Borrower
on the books of such office with the aggregate of the amounts made available to
the Agent by the Lenders and in like funds as received by the Agent.
2.3 Optional Prepayments. The Borrower may on the last day
of any Interest Period with respect thereto, in the case of Eurodollar Loans,
or at any time and from time to time, in the case of Base Rate Loans, prepay
the Loans, in whole or in part, without premium or penalty, upon at least one
Business Days' irrevocable notice to the Agent, specifying the date and amount
of prepayment and whether the prepayment is of Eurodollar Loans, Base Rate
Loans or a combination thereof, and, if of a combination thereof, the amount
allocable to each. Upon receipt of any such notice the Agent shall promptly
notify each Lender thereof. If any such notice is given, the amount specified
in such notice shall be due and payable on the date specified therein, together
with any amounts payable pursuant to subsection 4.11.
2.4 Mandatory Prepayments. If SV shall exercise its rights
under the SV Stock Option, the Borrower shall cause SV to make payment of the
purchase price directly to the Agent, which shall apply the amount so received
to prepay the Loans, and the Commitments shall be reduced by an amount equal to
the amount so prepaid. Any such prepayment shall be accompanied by payment of
accrued interest on the amount prepaid and any amounts payable pursuant to
subsection 4.11.
2.5 Conversion and Continuation Options. (a) The Borrower
may elect from time to time to convert Eurodollar Loans to Base Rate Loans by
giving the Agent at least two Business Days' prior irrevocable notice of such
election, provided that any such conversion of Eurodollar Loans may only be
made on the last day of an Interest Period with respect thereto. The Borrower
may elect from time to time to convert Base Rate Loans to Eurodollar Loans by
giving the Agent at least three Business Days' prior irrevocable notice of such
election. Any such noticeof conversion to Eurodollar Loans shall specify the
length of the initial Interest Period or Interest Periods therefor. Upon
receipt of any such notice the Agent shall promptly notify each Lender thereof.
All or any part of outstanding Eurodollar Loans or Base Rate Loans may be
converted as provided herein, provided that (i) no Loan may be converted into a
Eurodollar Loan when any Event of Default has occurred and is continuing and
the Agent has or the Required Lenders have determined that such a conversion is
not appropriate and (ii) no
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Loan may be converted into a Eurodollar Loan after the date that is one month
prior to the Termination Date.
(b) Any Eurodollar Loans may be continued as such upon the
expiration of the then current Interest Period with respect thereto by the
Borrower giving notice to the Agent, in accordance with the applicable
provisions of the term "Interest Period" set forth in subsection 1.1, of the
length of the next Interest Period to be applicable to such Loans, provided
that no Eurodollar Loan may be continued as such (i) when any Event of Default
has occurred and is continuing and the Agent has or the Required Lenders have
determined that such a continuation is not appropriate or (ii) after the date
that is one month prior to, the Termination Date and provided, further, that if
the Borrower shall fail to give such notice or if such continuation is not
permitted such Loans shall be automatically converted to Base Rate Loans on the
last day of such then expiring Interest Period.
2.6 Minimum Amounts and Maximum Number of Eurodollar
Tranches. All borrowings, conversions and continuations of Eurodollar Loans
hereunder and all selections of Interest Periods hereunder shall be in such
amounts and be made pursuant to such elections so that, after giving effect
thereto, the aggregate principal amount of the Loans comprising each Eurodollar
Tranche shall be equal to $500,000 or a whole multiple of $100,000 in excess
thereof and in no event shall there be more than ten Eurodollar Tranches
outstanding at any time.
SECTION 3. LETTERS OF CREDIT
3.1 L/C Commitment. (a) Subject to the terms and conditions
hereof, the Issuing Bank, in reliance on the agreements of the other Lenders
set forth in subsection 3.3, agrees to issue Letters of Credit for the account
of the Borrower on any Business Day during the Commitment Period in such form
as may be approved from time to time by the Issuing Bank; provided that the
Issuing Bank shall have no obligation to issue any Letter of Credit if, after
giving effect to such issuance, (1)the L/C Obligations would exceed the L/C
Commitment or (2) the Available Commitment would be less than zero.
3.2 Issuance of Letters of Credit. (a) The Borrower may
from time to time request the Issuing Bank to issue a Standby L/C or a
Commercial L/C for the account of the Borrower by delivering to the Issuing
Bank, with a copy to the Agent at its address specified in subsection 11.2, a
letter of credit application in the Issuing Bank's then customary form (an "L/C
Application") completed to the satisfaction of the Issuing Bank, together with
the proposed form of such Letter of Credit (which shall comply with the
applicable requirements of paragraph (b) below) and such other certificates,
documents and other papers and information as the Issuing Bank may reasonably
request.
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(b) Each Standby L/C and Commercial L/C issued hereunder
shall, among other things, (i) be denominated in Dollars, (ii) be in such form
requested by the Borrower from the Issuing Bank as shall be acceptable to the
Issuing Bank in its sole reasonable discretion, (iii) be subject to the Uniform
Customs and to the extent not inconsistent therewith, the laws of the State of
New York, and (iv) have an expiry date occurring not later than the earlier of
(A) one year after the date of issuance of such Letter of Credit and (B) the
Termination Date.
3.3 Participating Interests in Letters of Credit. The
Issuing Bank agrees to allot and does allot, to itself and each other Lender,
and each Lender severally and irrevocably agrees to take and does take in each
Standby L/C and Commercial L/C and the related L/C Application, an L/C
Participating Interest in a percentage equal to such Lender's Commitment
Percentage.
3.4 Procedure for Opening Letters of Credit. To the extent
the Agent has not previously notified the Banks, the Agent will notify each
Bank after the end of each calendar month of any L/C Applications received by
the Issuing Bank (and copied to the Agent) during such month. Upon receipt of
any L/C Application from the Borrower, the Issuing Bank will process such L/C
Application, and the other certificates, documents and other papers delivered
to it in connection therewith, in accordance with its customary procedures and,
subject to the terms and conditions hereof, shall promptly open such Letter of
Credit by issuing the original of such Letter of Credit to the beneficiary
thereof and by furnishing a copy thereof to the Borrower and, after the end of
the calendar month in which such Letter of Credit was opened, to the other
Banks, provided that no such Letter of Credit shall be issued if the proviso to
subsection 2.1(a) would be violated thereby or if after giving effect to
theissuance of any Letters of Credit the aggregate L/C Obligations would exceed
the L/C Commitment.
3.5 Payment in Respect of Letters of Credit. (a) The
Borrower agrees forthwith upon demand by the Issuing Bank and otherwise in
accordance with the terms of the L/C Application executed by the Borrower
relating thereto, (i) to reimburse the Issuing Bank for any payment made by the
Issuing Bank under any Letter of Credit issued for the Borrower's account
(which reimbursement may be made with the proceeds of Loans made in accordance
with the provisions of this Agreement) and (ii) to pay interest on any
unreimbursed portion of any such payment from the date of such payment until
reimbursement in full thereof at a rate per annum equal to (A) prior to the
date which is one Business Day after the day on which the Issuing Bank demands
reimbursement from the Borrower for such payment, the rate of interest that
would be in effect for Base Rate Loans at such time and (B) on such date and
thereafter, the rate of interest that would be in effect for overdue Base Rate
Loans at such time pursuant to subsection 4.4(c).
(b) In the event that the Issuing Bank makes a payment under
any Letter of Credit and is not reimbursed in full therefor, forthwith upon
demand of the Issuing Bank, and otherwise
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in accordance with the terms of the L/C Application relating to such Letter of
Credit, the Issuing Bank will promptly notify each other Lender. Forthwith
upon its receipt of any such notice, each other Lender will transfer to the
Issuing Bank, in immediately available funds, an amount equal to such other
Lender's Commitment Percentage of the L/C Obligation arising from such
unreimbursed payment.
(c) Whenever, at any time after the Issuing Bank has made a
payment under any Letter of Credit and has received from any other Lender such
other Lender's Commitment Percentage of the L/C Obligation arising therefrom,
the Issuing Bank receives any reimbursement on account of such L/C Obligation
or any payment of interest on account thereof, the Issuing Bank will distribute
to such other Lender its pro rata share thereof in like funds as received;
provided, however, that in the event that the receipt by the Issuing Bank of
such reimbursement or such payment of interest (as the case may be) is required
to be returned, such other Lender will return to the Issuing Bank any portion
thereof previously distributed by the Issuing Bank to it in like funds as such
reimbursement or payment is required to be returned by the Issuing Bank.
3.6 Letter of Credit Fees. (a) In lieu of any letter of
credit commissions and fees provided for in any L/C Application relating to
Letters of Credit (other than amendment and negotiation fees), the Borrower
agrees to pay to the Agent, (i) for the account of the Participating Banks
(including the Issuing Bank with respect to its own L/C Participating Interest
in any Letter of Credit issued by it), with respect to the undrawn face amount
of each Letter of Credit, a fee of 2.75% per annum from time to time; provided
that, when the Applicable Margin for Eurodollar Loans is equal to or less than
2.50%, the Letter of Credit Fee shall be equal to the Applicable Margin and
(ii) for the account of the Issuing Bank in respect thereof, a fee of 1/4 of 1%
per annum based on the undrawn face amount thereof from time to time, each such
fee to be payable quarterly in arrears, on the last day of March, June,
September and December. Fees will be based on the actual number of days
elapsed in a 360-day year.
3.7 Further Assurances. The Borrower hereby agrees, from
time to time, to do and perform any and all acts and to execute any and all
further instruments reasonably requested by the Issuing Bank more fully to
effect the purposes of this Agreement with respect to the issuance of Letters
of Credit hereunder.
3.8 Obligations Absolute. The payment obligations of the
Borrower under this Agreement with respect to the Letters of Credit shall be
unconditional and irrevocable and shall be paid strictly in accordance with the
terms of this Agreement under all circumstances, including, without limitation,
the following circumstances:
(a) the existence of any claim, set-off, defense or other
right which the Borrower or any of its Subsidiaries may have at any time
against any beneficiary, or any transferee, of any
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Letter of Credit (or any Persons for whom any such beneficiary or any such
transferee may be acting), the Issuing Bank in respect thereof, the Agent or
any Lender, or any other Person, whether in connection with this Agreement,
the Loan Documents, the transactions contemplated herein, or any unrelated
transaction;
(b) any statement or any other document presented under any
Letter of Credit proving to be forged, fraudulent or invalid or any statement
therein being untrue or inaccurate in any respect;
(c) payment by the Issuing Bank under any Letter of Credit
against presentation of a draft or certificate which does not comply with the
terms of such Letter of Credit or is insufficient in any respect, except where
such payment constitutes gross negligence or wilful misconduct on the part of
the Issuing Bank; or
(d) any other circumstances or happening whatsoever, whether
or not similar to any of the foregoing, except for any such circumstances or
happening constituting gross negligence or wilful misconduct on the part of the
Issuing Bank.
3.9 Assignments. No Lender's participation in any Letter of
Credit or any of its rights or duties hereunder shall be subdivided, assigned
or transferred (other than in connection with a transfer of part or all of such
Lender's Commitment in accordance with Section 11.6(c)) without the prior
written consent of the Issuing Bank. Such consent may be given or withheld
without the consent or agreement of any other Lenders. Notwithstanding the
foregoing, a Lender may subparticipate its L/C Participating Interest pursuant
to Section 11.6(b) without obtaining the prior written consent of the Issuing
Bank.
3.10 Participations. Each Lender's obligation to purchase
participating interests pursuant to Section 3.2 shall be absolute and
unconditional and shall not be affected by any circumstance, including, without
limitation, (i) any set-off, counterclaim, recoupment, defense or other right
which such Lender may have against the Issuing Bank, the Borrower or any other
Person for any reason whatsoever; (ii) the occurrence or continuance of an
Event of Default; (iii) any adverse change in the condition (financial or
otherwise) of the Borrower; (iv) any breach of this Agreement by the Borrower
or any other Lender; or (v) any other circumstance, happening or event
whatsoever, whether or not similar to any of the foregoing.
SECTION 4. GENERAL PROVISIONS
4.1 Fees. (a) The Borrower agrees to pay to the Agent for
the account of each Lender a commitment fee for the period from and including
the first day of the Commitment Period to the Termination Date, computed at the
rate of 3/8ths of 1% per annum on the average
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daily amount of the Available Commitment of such Lender during the period for
which payment is made, payable quarterly in arrears on the last day of each
March, June, September and December and on the Termination Date or such
earlier date as the Commitments shall terminate as providedherein, commencing
on the first of such dates to occur after the date hereof.
(b) The Borrower shall pay to the Agent the fees set forth in
the fee letter dated December 18, 1995 from the Agent to the Borrower.
4.2 Termination or Reduction of Commitments. The Borrower
shall have the right, upon not less than five Business Days' notice to the
Agent, to terminate the Commitments or, from time to time, to reduce the amount
of the Commitments. Any such reduction shall be in an amount equal to
$1,000,000 or a whole multiple of $500,000 thereof and shall reduce permanently
the Commitments then in effect. If, as a consequence of it having available
proceeds from the issuance subsequent to the date hereof of any Indebtedness to
a Lender other than Barclays Bank PLC, the Borrower terminates the Commitments
or reduces the Commitments by 66% or more, the Borrower shall pay to the Agent
for the account of each Lender a termination fee of (i) if such termination or
reduction occurs during the period from the Closing Date until the first
anniversary of the Closing Date, 2%, or (ii) if such termination or reduction
occurs during the period from the first anniversary of the Closing Date until
the Termination Date, 1%, of the aggregate amount of the Commitments terminated
or reduced.
4.3 Repayment of Loans; Evidence of Debt. (a) The Borrower
hereby unconditionally promises to pay to the Agent for the account of each
Lender the then unpaid principal amount of each Revolving Credit Loan of such
Lender on the Termination Date (or such earlier date on which the Revolving
Credit Loans become due and payable pursuant to Section 9). The Borrower
hereby further agrees to pay interest on the unpaid principal amount of the
Loans from time to time outstanding from the date thereof until payment in full
thereof at the rates per annum, and on the dates, set forth in subsection 4.4.
(b) Each Lender shall maintain in accordance with its usual
practice an account or accounts evidencing indebtedness of the Borrower to such
Lender resulting from each Loan of such Lender from time to time, including the
amounts of principal and interest payable and paid to such Lender from time to
time under this Agreement.
(c) The Agent shall maintain the Register pursuant to
subsection 11.6(d), and a subaccount therein for each Lender, in which shall be
recorded (i) the amount of each Revolving Credit Loan and Letter of Credit made
hereunder, the Type thereof andeach Interest Period applicable thereto, (ii)
the amount of any principal or interest due and payable or to become due and
payable from the Borrower to each Lender hereunder and (iii) both the amount of
any sum received by the Agent hereunder from the Borrower and each Lender's
share thereof.
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(d) The entries made in the Register and the accounts of each
Lender maintained pursuant to subsections 4.3(b) shall, to the extent permitted
by applicable law, be prima facie evidence of the existence and amounts of the
obligations of the Borrower therein recorded; provided, however, that the
failure of any Lender or the Agent to maintain the Register or any such
account, or any error therein, shall not in any manner affect the obligation of
the Borrower to repay (with applicable interest) the Loans made to such
Borrower by such Lender in accordance with the terms of this Agreement.
(e) The Borrower agrees that, upon the request to the Agent
by any Lender, the Borrower will execute and deliver to such Lender a
promissory note of the Borrower evidencing the Revolving Credit Loans of such
Lender, substantially in the form of Exhibit A with appropriate insertions as
to date and principal amount (a "Revolving Credit Note").
4.4 Interest Rates and Payment Dates. (a) Each Eurodollar
Loan shall bear interest for each day during each Interest Period with respect
thereto at a rate per annum equal to the Eurodollar Rate determined for such
day plus the Applicable Margin.
(b) Each Base Rate Loan shall bear interest at a rate per
annum equal to the Base Rate plus the Applicable Margin.
(c) If all or a portion of (i) any principal of any Loan,
(ii) any interest payable thereon, (iii) any commitment fee or (iv) any other
amount payable hereunder shall not be paid when due (whether at the stated
maturity, by acceleration or otherwise), the principal of the Loans and any
such overdue interest, commitment fee or other amount shall bear interest at a
rate per annum which is (x) in the case of principal, the rate that would
otherwise be applicable thereto pursuant to the foregoing provisions of this
subsection plus 2% or (y) in the case of any such overdue interest, commitment
fee or other amount, the rate described in paragraph (b) of this subsection
plus 2%, in each case from the date of such non-payment until such overdue
principal, interest, commitment fee or other amount is paid in full (as well
after as before judgment).
(d) Interest shall be payable in arrears on each Interest
Payment Date, provided that interest accruing pursuant to paragraph (c) of this
subsection shall be payable from time to time on demand.
4.5 Computation of Interest and Fees. (a) Commitment fees
and, whenever it is calculated on the basis of the Base Rate, interest shall be
calculated on the basis of a 365- (or 366-, as the case may be) day year for
the actual days elapsed; and, otherwise, interest shall be calculated on the
basis of a 360-day year for the actual days elapsed. The Agent shall as soon
as practicable notify the Borrower and the Lenders of each determination of a
Eurodollar Rate. Any change in the interest rate on a Loan resulting from a
change in the Base Rate or the
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Eurocurrency Reserve Requirements shall become effective as of the opening of
business on the day on which such change becomes effective. The Agent shall
as soon as practicable notify the Borrower and the Lenders of the effective
date and the amount of each such change in interest rate.
(b) Each determination of an interest rate by the Agent
pursuant to any provision of this Agreement shall be conclusive and binding on
the Borrower and the Lenders in the absence of manifest error. The Agent
shall, at the request of the Borrower, deliver to the Borrower a statement
showing the quotations used by the Agent in determining any interest rate
pursuant to subsection 4.4(a) or (c).
4.6 Inability to Determine Interest Rate. If prior to the
first day of any Interest Period:
(a) the Agent shall have determined (which determination
shall be conclusive and binding upon the Borrower) that, by reason of
circumstances affecting the relevant market, adequate and reasonable
means do not exist for ascertaining the Eurodollar Rate for such
Interest Period, or
(b) the Agent shall have received notice from the Majority
Lenders that the Eurodollar Rate determined or to be determined for
such Interest Period will not adequately and fairly reflect the cost
to such Lenders (as conclusively certified by such Lenders) of making
or maintaining their affected Loans during such Interest Period,
the Agent shall give telecopy or telephonic notice thereof to the Borrower and
the Lenders as soon as practicable thereafter. If such notice is given (x) any
Eurodollar Loans requested to bemade on the first day of such Interest Period
shall be made as Base Rate Loans, (y) any Loans that were to have been
converted on the first day of such Interest Period to Eurodollar Loans shall be
converted to or continued as Base Rate Loans and (z) any outstanding Eurodollar
Loans, shall be converted, on the first day of such Interest Period, to Base
Rate Loans. Until such notice has been withdrawn by the Agent, no further
Eurodollar Loans shall be made or continued as such, nor shall the Borrower
have the right to convert Loans to Eurodollar Loans.
4.7 Pro Rata Treatment and Payments. (a) Each borrowing by
the Borrower from the Lenders hereunder, each payment by the Borrower on
account of any commitment fee hereunder and any reduction of the Commitments of
the Lenders shall be made pro rata according to the respective Commitment
Percentages of the Lenders. Each payment (including each prepayment) by the
Borrower on account of principal of and interest on the Loans shall be made pro
rata according to the respective outstanding principal amounts of the Loans
then held by the Lenders. All payments (including prepayments) to be made by
the Borrower hereunder, whether on account of principal, interest, fees or
otherwise, shall be made without set off or
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counterclaim and shall be made prior to 12:00 Noon, New York City time, on
the due date thereof to the Agent, for the account of the Lenders, at the
Agent's office specified in subsection 11.2, in Dollars and in immediately
available funds. The Agent shall distribute such payments to the Lenders
promptly upon receipt in like funds as received. If any payment hereunder
becomes due and payable on a day other than a Business Day, such payment shall
be extended to the next succeeding Business Day, and, with respect to payments
of principal, interest thereon shall be payable at the then applicable rate
during such extension.
(b) Unless the Agent shall have been notified in writing by
any Lender prior to a borrowing that such Lender will not make the amount that
would constitute its Commitment Percentage of such borrowing available to the
Agent, the Agent may assume that such Lender is making such amount available to
the Agent, and the Agent may, in reliance upon such assumption, make available
to the Borrower a corresponding amount. If such amount is not made available
to the Agent by the required time on the Borrowing Date therefor, such Lender
shall pay to the Agent, on demand, such amount with interest thereon at a rate
equal to the daily average Federal Funds Effective Rate for the period until
such Lender makes such amount immediately available to the Agent. A
certificate of the Agent submitted to any Lender with respect to any amounts
owing under this subsection shall be conclusive in the absence of manifest
error. If such Lender'sCommitment Percentage of such borrowing is not made
available to the Agent by such Lender within three Business Days of such
Borrowing Date, the Agent shall also be entitled to recover such amount with
interest thereon at the rate per annum applicable to Base Rate Loans hereunder,
on demand, from the Borrower.
Nothing in this paragraph shall be deemed to relieve any
Lender from its obligations to make Loans to the Borrower pursuant to the terms
of this Agreement or to prejudice any rights that the Borrower may have against
any Lender in connection with any default by such Lender in its obligations
hereunder.
4.8 Illegality. Notwithstanding any other provision herein,
if the adoption of or any change in any Requirement of Law or in the
interpretation or application thereof shall make it unlawful for any Lender to
make or maintain Eurodollar Loans as contemplated by this Agreement, (a) the
commitment of such Lender hereunder to make Eurodollar Loans, continue
Eurodollar Loans as such and convert Base Rate Loans to Eurodollar Loans shall
forthwith be cancelled and (b) such Lender's Loans then outstanding as
Eurodollar Loans, if any, shall be converted automatically to Base Rate Loans
on the respective last days of the then current Interest Periods with respect
to such Loans or within such earlier period as required by law. If any such
conversion of a Eurodollar Loan occurs on a day which is not the last day of
the then current Interest Period with respect thereto, the Borrower shall pay
to such Lender such amounts, if any, as may be required pursuant to subsection
4.11.
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4.9 Requirements of Law. (a) If the adoption of or any
change in any Requirement of Law or in the interpretation or application
thereof or compliance by any Lender with any request or directive (whether or
not having the force of law) from any central bank or other Governmental
Authority made subsequent to the date hereof:
(i) shall subject any Lender to any tax of any kind
whatsoever with respect to this Agreement, any Note, any Letter of
Credit, any L/C Application or any Eurodollar Loan made by it, or
change the basis of taxation of payments to such Lender in respect
thereof (except for Non-Excluded Taxes covered by subsection 4.10 and
changes in the rate of tax on the overall net income of such Lender);
(ii) shall impose, modify or hold applicable any reserve,
special deposit, compulsory loan or similar requirement against assets
held by, deposits or other liabilities in or for the account of,
advances, loans or other extensions of credit by, or any other
acquisition of funds by, any office of such Lender which is not
otherwise included in the determination of the Eurodollar Rate
hereunder; or
(iii) shall impose on such Lender any other condition; and
the result of any of the foregoing is to increase the cost to such
Lender, by an amount which such Lender deems to be material, of
making, converting into, continuing or maintaining Eurodollar Loans or
issuing or participating in Letters of Credit or to reduce any amount
receivable hereunder in respect thereof, then, in any such case, the
Borrower shall promptly pay such Lender such additional amount or
amounts as will compensate such Lender for such increased cost or
reduced amount receivable.
(b) If any Lender shall have determined that the adoption of
or any change in any Requirement of Law regarding capital adequacy or in the
interpretation or application thereof or compliance by such Lender or any
corporation controlling such Lender with any request or directive regarding
capital adequacy (whether or not having the force of law) from any Governmental
Authority made subsequent to the date hereof shall have the effect of reducing
the rate of return on such Lender's or such corporation's capital as a
consequence of its obligations hereunder or under any Letter of Credit to a
level below that which such Lender or such corporation could have achieved but
for such adoption, change or compliance (taking into consideration such
Lender's or such corporation's policies with respect to capital adequacy) by an
amount deemed by such Lender to be material, then from time to time, the
Borrower shall promptly pay to such Lender such additional amount or amounts as
will compensate such Lender for such reduction.
(c) If any Lender becomes entitled to claim any additional
amounts pursuant to this subsection, it shall promptly notify the Borrower
(with a copy to the Agent) of the event by reason of which it has become so
entitled, provided that such Lender shall not be entitled to
<PAGE> 27
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claim any such additional amount that is due and payable in respect of any
date which is more than ninety days prior to the date upon which such Lender
shall so notify the Borrower thereof. A certificate as to any additional
amounts payable pursuant to this subsection submitted by such Lender to the
Borrower (with a copy to the Agent) shall be conclusive in the absence of
manifest error. The agreements in this subsection shall survive the
termination of this Agreementand the payment of the Loans and all other amounts
payable hereunder.
4.10 Taxes. (a) All payments made by the Borrower under
this Agreement and any Notes shall be made free and clear of, and without
deduction or withholding for or on account of, any present or future income,
stamp or other taxes, levies, imposts, duties, charges, fees, deductions or
withholdings, now or hereafter imposed, levied, collected, withheld or assessed
by any Governmental Authority, excluding net income taxes and franchise taxes
(imposed in lieu of net income taxes) imposed on the Agent or any Lender as a
result of a present or former connection between the Agent or such Lender and
the jurisdiction of the Governmental Authority imposing such tax or any
political subdivision or taxing authority thereof or therein (other than any
such connection arising solely from the Agent or such Lender having executed,
delivered or performed its obligations or received a payment under, or
enforced, this Agreement or any Note). If any such non- excluded taxes,
levies, imposts, duties, charges, fees deductions or withholdings
("Non-Excluded Taxes") are required to be withheld from any amounts payable to
the Agent or any Lender hereunder or under any Note, the amounts so payable to
the Agent or such Lender shall be increased to the extent necessary to yield to
the Agent or such Lender (after payment of all Non-Excluded Taxes) interest or
any such other amounts payable hereunder at the rates or in the amounts
specified in this Agreement, provided, however, that the Borrower shall not be
required to increase any such amounts payable to any Lender that is not
organized under the laws of the United States of America or a state thereof if
such Lender fails to comply with the requirements of paragraph (b) of this
subsection. Whenever any Non-Excluded Taxes are payable by the Borrower, as
promptly as possible thereafter the Borrower shall send to the Agent for its
own account or for the account of such Lender, as the case may be, a certified
copy of an original official receipt received by the Borrower showing payment
thereof. If the Borrower fails to pay any Non- Excluded Taxes when due to the
appropriate taxing authority or fails to remit to the Agent the required
receipts or other required documentary evidence, the Borrower shall indemnify
the Agent and the Lenders for any incremental taxes, interest or penalties that
may become payable by the Agent or any Lender as a result of any such failure.
The agreements in this subsection shall survive the termination of this
Agreement and the payment of the Loans and all other amounts payable hereunder.
(b) Each Lender that is not incorporated under the laws of
the United States of America or a state thereof shall:
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(i) deliver to the Borrower and the Agent (A) two duly
completed copies of United States Internal Revenue Service Form 1001
or 4224, or successor applicable form, as the case may be, and (B) an
Internal Revenue Service Form W-8 or W-9, or successor applicable
form, as the case may be;
(ii) deliver to the Borrower and the Agent two further
copies of any such form or certification on or before the date that
any such form or certification expires or becomes obsolete and after
the occurrence of any event requiring a change in the most recent form
previously delivered by it to the Borrower; and
(iii) obtain such extensions of time for filing and
complete such forms or certifications as may reasonably be requested
by the Borrower or the Agent;
unless in any such case an event (including, without limitation, any change in
treaty, law or regulation) has occurred prior to the date on which any such
delivery would otherwise be required which renders all such forms inapplicable
or which would prevent such Lender from duly completing and delivering any such
form with respect to it and such Lender so advises the Borrower and the Agent.
Such Lender shall certify (i) in the case of a Form 1001 or 4224, that it is
entitled to receive payments under this Agreement without deduction or
withholding of any United States federal income taxes and (ii) in the case of a
Form W-8 or W-9, that it is entitled to an exemption from United States backup
withholding tax. Each Person that shall become a Lender or a Participant
pursuant to subsection 11.6 shall, upon the effectiveness of the related
transfer, be required to provide all of the forms and statements required
pursuant to this subsection, provided that in the case of a Participant such
Participant shall furnish all such required forms and statements to the Lender
from which the related participation shall have been purchased.
4.11 Indemnity. The Borrower agrees to indemnify each Lender
and to hold each Lender harmless from any loss or expense which such Lender may
sustain or incur as a consequence of (a) default by the Borrower in making a
borrowing of, conversion into or continuation of Eurodollar Loans after the
Borrower has given a notice requesting the same in accordance with the
provisions of this Agreement, (b) default by the Borrower in making any
prepayment after the Borrower has given a notice thereof in accordance with the
provisions of this Agreement or (c) the making of a prepayment of Eurodollar
Loans on a day which is not the last day of an Interest Period with respect
thereto. Such indemnification may include an amount equal to the excess,if
any, of (i) the amount of interest which would have accrued on the amount so
prepaid, or not so borrowed, converted or continued, for the period from the
date of such prepayment or of such failure to borrow, convert or continue to
the last day of such Interest Period (or, in the case of a failure to borrow,
convert or continue, the Interest Period that would have commenced on the date
of such failure) in each case at the applicable rate of interest for such Loans
provided for herein (excluding, however, the Applicable Margin included
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therein, if any) over (ii) the amount of interest (as reasonably determined by
such Lender) which would have accrued to such Lender on such amount by placing
such amount on deposit for a comparable period with leading banks in the
interbank eurodollar market. This covenant shall survive the termination of
this Agreement and the payment of the Loans and all other amounts payable
hereunder.
4.12 Change of Lending Office. Each Lender agrees that if it
makes any demand for payment under subsection 4.9 or 4.10(a), or if any
adoption or change of the type described in subsection 4.8 shall occur with
respect to it, it will use reasonable efforts (consistent with its internal
policy and legal and regulatory restrictions and so long as such efforts would
not be disadvantageous to it, as determined in its sole discretion) to
designate a different lending office if the making of such a designation would
reduce or obviate the need for the Borrower to make payments under subsection
4.9 or 4.10(a), or would eliminate or reduce the effect of any adoption or
change described in subsection 4.8.
SECTION 5. REPRESENTATIONS AND WARRANTIES
To induce the Agent and the Lenders to enter into this
Agreement and to make the Loans and issue or participate in the Letters of
Credit, the Borrower hereby represents and warrants to the Agent and each
Lender that:
5.1 Financial Condition. (a) The consolidated balance sheet
of the Borrower and its consolidated Subsidiaries as at December 31, 1994 and
the related consolidated statements of income and of cash flows for the fiscal
year ended on such date, reported on by Price Waterhouse LLP, copies of which
have heretofore been furnished to each Lender, present fairly the consolidated
financial condition of the Borrower and its consolidated Subsidiaries as at
such date, and the consolidated results of their operations and their
consolidated cash flows for the fiscal year then ended; (b) the unaudited
consolidated balance sheet of the Borrower and its consolidated Subsidiariesas
at September 30, 1995 and the related unaudited consolidated statements of
income and of cash flows for the three-month and nine-month periods ending on
such date, certified by a Responsible Officer, copies of which have heretofore
been furnished to each Lender, are complete and correct and present fairly the
consolidated financial condition of the Borrower and its consolidated
Subsidiaries as at such date, and the consolidated results of their operations
and their consolidated cash flows for the three month period then ended
(subject to normal year-end adjustments). All such financial statements,
including the related schedules and notes thereto, have been prepared in
accordance with GAAP applied consistently throughout the periods involved
(except as approved by such accountants or Responsible Officer, as the case may
be, and as disclosed therein). Neither the Borrower nor any of its
consolidated Subsidiaries had, at the date of the most recent balance sheet
referred to above, any material Guarantee Obligation, contingent liability or
liability for taxes, or any long-term lease or unusual
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30
forward or long-term commitment, including, without limitation, any interest
rate or foreign currency swap or exchange transaction, which is not reflected
in the foregoing statements or in the notes thereto. During the period from
September 30, 1995 to and including the date hereof there has been no sale,
transfer or other disposition by the Borrower or any of its consolidated
Subsidiaries of any material part of its business or property (other than any
of the foregoing relating to any part of its business or property reflected as
discontinued operations on the Borrower's September 30, 1995 consolidated
balance sheet referenced to above) and no purchase or other acquisition of any
business or property (including any capital stock of any other Person) material
in relation to the consolidated financial condition of the Borrower and its
consolidated Subsidiaries at September 30, 1995.
5.2 No Change. (a) Since September 30, 1995 there has been
no development or event which has had or could reasonably be expected to have a
Material Adverse Effect, and (b) during the period from September 30, 1995 to
and including the date hereof no dividends or other distributions have been
declared, paid or made upon the Capital Stock of the Borrower nor has any of
the Capital Stock of the Borrower been redeemed, retired, purchased or
otherwise acquired for value by the Borrower or any of its Subsidiaries.
5.3 Corporate Existence; Compliance with Law. Each of the
Borrower and its Subsidiaries and each Loan Party (a) is duly organized,
validly existing and in good standing under the laws of the jurisdiction of its
organization, (b) has the corporatepower and authority, and the legal right, to
own and operate its property, to lease the property it operates as lessee and
to conduct the business in which it is currently engaged, (c) is duly qualified
as a foreign corporation and in good standing under the laws of each
jurisdiction where its ownership, lease or operation of property or the conduct
of its business requires such qualification and (d) is in compliance with all
Requirements of Law except to the extent that the failure to comply therewith
could not, in the aggregate, reasonably be expected to have a Material Adverse
Effect.
5.4 Corporate Power; Authorization; Enforceable Obligations.
The Borrower and each Loan Party has the corporate power and authority, and the
legal right, to make, deliver and perform the Loan Documents to which it is a
party and to borrow hereunder and has taken all necessary corporate action to
authorize, in the case of the Borrower, the borrowings on the terms and
conditions of this Agreement and any Notes and to authorize the execution,
delivery and performance of the Loan Documents to which it is a party. Except
for any filing or notice necessary to perfect any Lien executed by the Security
Documents, no consent or authorization of, filing with, notice to or other act
by or in respect of, any Governmental Authority or any other Person is required
in connection with the borrowings hereunder or with the execution, delivery,
performance, validity or enforceability of the Loan Documents to which the
Borrower or any Loan Party is a party. This Agreement has been, and each other
Loan Document to which it is a party will be, duly executed and delivered on
behalf of the Borrower and each Loan Party. This Agreement constitutes, and
each other Loan Document to which it is a party when
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executed and delivered will constitute, a legal, valid and binding obligation
of the Borrower and each Loan Party enforceable against it in accordance with
its terms, subject to the effects of bankruptcy, insolvency, fraudulent
conveyance, reorganization, moratorium and other similar laws relating to or
affecting creditors' rights generally, general equitable principles (whether
considered in a proceeding in equity or at law) and an implied covenant of
good faith and fair dealing.
5.5 No Legal Bar. The execution, delivery and performance of
the Loan Documents, the borrowings hereunder and the use of the proceeds
thereof will not violate any Requirement of Law or Contractual Obligation of
the Borrower or of any of its Subsidiaries and will not result in, or require,
the creation or imposition of any Lien on any of its or their respective
properties or revenues pursuant to any such Requirement of Law or Contractual
Obligation.
5.6 No Material Litigation. No litigation, investigation or
proceeding of or before any arbitrator or Governmental Authority is pending or,
to the knowledge of the Borrower, threatened by or against the Borrower or any
of its Subsidiaries or against any of its or their respective properties or
revenues (a) with respect to any of the Loan Documents or any of the
transactions contemplated hereby or thereby, or (b) which could reasonably be
expected to have a Material Adverse Effect.
5.7 No Default. Neither the Borrower nor any of its
Subsidiaries is in default under or with respect to any of its Contractual
Obligations in any respect which could reasonably be expected to have a
Material Adverse Effect. No Default or Event of Default has occurred and is
continuing.
5.8 Ownership of Property; Liens. Each of the Borrower and
its Subsidiaries has good record and marketable title in fee simple to, or a
valid leasehold interest in, all its real property, and good title to, or a
valid leasehold interest in, all its other property, and none of such property
is subject to any Lien except as permitted by subsection 8.3.
5.9 Intellectual Property. The Borrower and each of its
Subsidiaries owns, or is licensed to use, all trademarks, tradenames,
copyrights, technology, know-how and processes necessary for the conduct of its
business as currently conducted except for those the failure to own or license
which could not reasonably be expected to have a Material Adverse Effect (the
"Intellectual Property"). No claim has been asserted and is pending by any
Person challenging or questioning the use of any such Intellectual Property or
the validity or effectiveness of any such Intellectual Property, nor does the
Borrower know of any valid basis for any such claim. The use of such
Intellectual Property by the Borrower and its Subsidiaries does not infringe on
the rights of any Person, except for such claims and infringements that, in the
aggregate, could not reasonably be expected to have a Material Adverse Effect.
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5.10 No Burdensome Restrictions. No Requirement of Law or
Contractual Obligation of the Borrower or any of its Subsidiaries could
reasonably be expected to have a Material Adverse Effect.
5.11 Taxes. Each of the Borrower and its Subsidiaries has
filed or caused to be filed all tax returns which, to the knowledge of the
Borrower, are required to be filed and has paid all taxes shown to be due and
payable on said returns or on any assessments made against it or any of its
property and all othertaxes, fees or other charges imposed on it or any of its
property by any Governmental Authority (other than any the amount or validity
of which are currently being contested in good faith by appropriate proceedings
and with respect to which reserves in conformity with GAAP have been provided
on the books of the Borrower or its Subsidiaries, as the case may be); no tax
Lien has been filed, and, to the knowledge of the Borrower, no claim is being
asserted, with respect to any such tax, fee or other charge.
5.12 Federal Regulations. No part of the proceeds of any
Loans will be used for "purchasing" or "carrying" any "margin stock" within the
respective meanings of each of the quoted terms under Regulation G or
Regulation U of the Board of Governors of the Federal Reserve System as now and
from time to time hereafter in effect. If requested by any Lender or the
Agent, the Borrower will furnish to the Agent and each Lender a statement to
the foregoing effect in conformity with the requirements of FR Form G-1 or FR
Form U-1 referred to in said Regulation G or Regulation U, as the case may be.
5.13 ERISA. Neither a Reportable Event nor an "accumulated
funding deficiency" (within the meaning of Section 412 of the Code or Section
302 of ERISA) has occurred during the five-year period prior to the date on
which this representation is made or deemed made with respect to any Plan, and
each Plan has complied in all material respects with the applicable provisions
of ERISA and the Code. No termination of a Single Employer Plan has occurred,
and no Lien in favor of the PBGC or a Plan has arisen, during such five-year
period. The present value of all accrued benefits under each Single Employer
Plan (based on those assumptions used to fund such Plans) did not, as of the
last annual valuation date prior to the date on which this representation is
made or deemed made, exceed the value of the assets of such Plan allocable to
such accrued benefits. Neither the Borrower nor any Commonly Controlled Entity
has had a complete or partial withdrawal from any Multiemployer Plan, and
neither the Borrower nor any Commonly Controlled Entity would become subject to
any liability under ERISA if the Borrower or any such Commonly Controlled
Entity were to withdraw completely from all Multiemployer Plans as of the
valuation date most closely preceding the date on which this representation is
made or deemed made. No such Multiemployer Plan is in Reorganization or
Insolvent.
5.14 Investment Company Act; Other Regulations. The Borrower
is not an "investment company", or a company "controlled" by an "investment
company", within the
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meaning of the Investment Company Act of 1940, as amended. The Borrower is not
subject to regulation under any Federal or State statute or regulation (other
than Regulation X of the Board of Governors of the Federal Reserve System)
which limits its ability to incur Indebtedness.
5.15 Subsidiaries. The Subsidiaries of the Borrower listed
on Schedule 5.15 constitute all the Material Subsidiaries of the Borrower on
the date hereof.
5.16 Purpose of Loans. The proceeds of the Loans shall be
used by the Borrower for general corporate purposes in the ordinary course of
business and to refinance existing Indebtedness.
5.17 Environmental Matters.
(a) To the best knowledge of the Borrower, the facilities and
properties owned, leased or operated by the Borrower or any of its Subsidiaries
(the "Properties") do not contain, and have not previously contained, any
Materials of Environmental Concern in amounts or concentrations which (i)
constitute or constituted a violation of, or (ii) could reasonably be expected
to give rise to liability under, any Environmental Law except in either case
insofar as such violation or liability, or any aggregation thereof, is not
reasonably likely to result in the payment of a Material Environmental Amount.
(b) To the best knowledge of the Borrower, the Properties and
all operations at the Properties are in compliance, and have in the last five
years been in compliance, in all material respects with all applicable
Environmental Laws, and there is no contamination at, under or about the
Properties or violation of any Environmental Law with respect to the Properties
or the business operated by the Borrower or any of its Subsidiaries (the
"Business") which could materially interfere with the continued operation of
the Properties or materially impair the fair saleable value thereof.
(c) Neither the Borrower nor any of its Subsidiaries has
received any notice of violation, alleged violation, non-compliance, liability
or potential liability regarding environmental matters or compliance with
Environmental Laws with regard to any of the Properties or the Business, nor
does the Borrower have knowledge or reason to believe that any such notice will
be received or is being threatened except insofar as such notice or threatened
notice, or any aggregation thereof, does notinvolve a matter or matters that is
or are reasonably likely to result in the payment of a Material Environmental
Amount.
(d) To the best knowledge of the Borrower, Materials of
Environmental Concern have not been transported or disposed of from the
Properties in violation of, or in a manner or to a location which could
reasonably be expected to give rise to liability under, any Environmental Law,
nor have any Materials of Environmental Concern been generated, treated,
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stored or disposed of at, on or under any of the Properties in violation of,
or in a manner that could reasonably be expected to give rise to liability
under, any applicable Environmental Law except insofar as any such violation
or liability referred to in this paragraph, or any aggregation thereof, is
not reasonably likely to result in the payment of a Material Environmental
Amount.
(e) No judicial proceeding or governmental or administrative
action is pending or, to the knowledge of the Borrower, threatened, under any
Environmental Law to which the Borrower or any Subsidiary is or will be named
as a party with respect to the Properties or the Business, nor are there any
consent decrees or other decrees, consent orders, administrative orders or
other orders, or other administrative or judicial requirements outstanding
under any Environmental Law with respect to the Properties or the Business
except insofar as such proceeding, action, decree, order or other requirement,
or any aggregation thereof, is not reasonably likely to result in the payment
of a Material Environmental Amount.
(f) To the best knowledge of the Borrower, there has been no
release or threat of release of Materials of Environmental Concern at or from
the Properties, or arising from or related to the operations of the Borrower or
any Subsidiary in connection with the Properties or otherwise in connection
with the Business, in violation of or in amounts or in a manner that could
reasonably give rise to liability under Environmental Laws except insofar as
any such violation or liability referred to in this paragraph, or any
aggregation thereof, is not reasonably likely to result in the payment of a
Material Environmental Amount.
(g) To the best knowledge of the Borrower, each of the
representations and warranties set forth in subsections 5.17(a) through (f) is
true and correct with respect to each parcel of real property owned or operated
by the Borrower or any of its Subsidiaries (other than the Properties) except
to the extent that the facts and circumstances giving rise to any such
failureto be so true and correct is not reasonably likely to result in the
payment of a Material Environmental Amount.
5.18 Solvency. The Borrower is, and after giving effect to
the incurrence of all Indebtedness and obligations being incurred in connection
herewith and therewith will be, Solvent.
5.19 Material Leases. Set forth on Schedule 5.19 attached
hereto is a complete and correct list of all material leases to which the
Borrower or any of its Subsidiaries is a party.
5.20 Real Property. Set forth on Schedule 5.20 attached
hereto is a complete and correct list of all real property owned by the
Borrower or any of its Subsidiaries.
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SECTION 6. CONDITIONS PRECEDENT
6.1 Conditions to Initial Extension of Credit. The agreement
of each Lender to make the initial Extension of Credit requested to be made by
it is subject to the satisfaction, immediately prior to or concurrently with
the making of such Extension of Credit on the Closing Date, of the following
conditions precedent:
(a) Loan Documents. The Agent shall have received (i) this
Agreement, executed and delivered by a duly authorized officer of the
Borrower, with a counterpart for each Lender and (ii) the Global
Security Agreement, executed and delivered by a duly authorized
officer of each Material Subsidiary (other than any Foreign
Subsidiary), with a counterpart or a conformed copy for each Lender.
(b) Related Agreements. The Agent shall have received the
Revolving Line of Credit Note of the Borrower dated February 28, 1995
and the SV Stock Option documentation and all such documents or
instruments as may be reasonably requested by the Agent, including,
without limitation, a copy of any debt instrument, security agreement
or other material contract to which the Borrower, or its Subsidiaries
may be a party.
(c) Corporate Proceedings of the Borrower. The Agent shall
have received, with a counterpart for each Lender, a copy of the
resolutions, in form and substance satisfactory to the Agent, of the
Board of Directors of the Borrower authorizing (i) the execution,
delivery and performance of this Agreement and the other Loan
Documents to which it is a party, (ii) the borrowings contemplated
hereunder and (iii) the granting by it of the Liens created pursuant
to the Security Documents, certified by the Secretary or an Assistant
Secretary of the Borrower as of the Closing Date, which certificate
shall be in form and substance satisfactory to the Agent and shall
state that the resolutions thereby certified have not been amended,
modified, revoked or rescinded.
(d) Borrower Incumbency Certificate. The Agent shall have
received, with a counterpart for each Lender, a Certificate of the
Borrower, dated the Closing Date, as to the incumbency and signature
of the officers of the Borrower executing any Loan Document
satisfactory in form and substance to the Agent, executed by the
President or any Vice President and the Secretary or any Assistant
Secretary of the Borrower.
(e) Corporate Proceedings of Subsidiaries. The Agent shall
have received, with a counterpart for each Lender, a copy of the
resolutions, in form and substance satisfactory to the Agent, of the
Board of Directors of each Subsidiary of the Borrower which is a party
to a Loan Document authorizing (i) the execution, delivery and
performance of the Loan Documents to which it is a party and (ii) the
granting by it of
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the Liens created pursuant to the Security Documents to which it is a
party, certified by the Secretary or an Assistant Secretary of each
such Subsidiary as of the Closing Date, which certificate shall be
in form and substance satisfactory to the Agent and shall state that
the resolutions thereby certified have not been amended, modified,
revoked or rescinded.
(f) Subsidiary Incumbency Certificates. The Agent shall have
received, with a counterpart for each Lender, a certificate of each
Subsidiary of the Borrower which is a Loan Party, dated the Closing
Date, as to the incumbency and signature of the officers of such
Subsidiaries executing any Loan Document, satisfactory in form and
substance to the Agent, executed by the President or any Vice
President and the Secretary or any Assistant Secretary of each such
Subsidiary.
(g) Corporate Documents. The Agent shall have received, with
a counterpart for each Lender, true and complete copies of the
certificate of incorporation and by-laws of each Loan Party, certified
as of the Closing Date as complete and correct copies thereof by the
Secretary or an Assistant Secretary of such Loan Party.
(h) Fees. The Agent shall have received the fees to be
received on the Closing Date referred to in subsection 4.1.
(i) Legal Opinions. The Agent shall have received, with a
counterpart for each Lender, the following executed legal opinions:
(i) the executed legal opinion of Irell & Manella,
counsel to the Borrower and the other Loan Parties,
substantially in the form of Exhibit F;
(ii) the executed legal opinion of Philip C.
Maynard, general counsel of the Borrower, substantially in the
form of Exhibit G;
(iii) the executed legal opinion of Amster,
Rothstein & Ebenstein, intellectual property counsel,
substantially in the form of Exhibit H.
Each such legal opinion shall cover such other matters incident to the
transactions contemplated by this Agreement as the Agent may
reasonably require.
(j) Pledged Stock; Stock Powers. The Agent shall have
received the certificates representing the shares pledged pursuant to
the Global Security Agreement and the Intercreditor Pledge Agreement,
together with an undated stock power for each such certificate
executed in blank by a duly authorized officer of the pledgor thereof,
each endorsed in blank by a duly authorized officer of the pledgor
thereof.
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(k) Actions to Perfect Liens. The Agent shall have received
such duly executed financing statements on form UCC-1 as are necessary
or, in the opinion of the Agent, desirable to perfect the Liens
created by the Security Documents.
(l) Lien Searches. The Agent shall have received the results
of a recent search by a Person satisfactory to the Agent, of the
Uniform Commercial Code, judgment and tax lien filings which may have
been filed with respect to personal property of the Borrower and each
Material Subsidiary (other than Foreign Subsidiaries), and the results
of such search shall be satisfactory to the Agent.
(m) Insurance. The Agent shall have received evidence in
form and substance satisfactory to it that all of the requirements of
subsection 7.5 hereof and Section 5.2 of the Global Security Agreement
shall have been satisfied.
(n) Intercreditor Agreements. The Agent shall have received
the Intercreditor Agreements, each executed and delivered by duly
authorized officers of each party thereto.
(o) Acknowledgements and Consents. The Agent shall have
received an acknowledgement and consent, in the form attached to the
Global Security Agreement, executed and delivered by a duly authorized
officer of each issuer of stock pledged pursuant to the Global
Security Agreement.
6.2 Conditions to Each Extension of Credit. The agreement of
each Lender to make any Extension of Credit requested to be made by it on any
date (including, without limitation, its initial Extension of Credit) is
subject to the satisfaction of the following conditions precedent:
(a) Representations and Warranties. Each of the
representations and warranties made by the Borrower and each Loan
party in or pursuant to the Loan Documents shall be true and correct
in all material respects on and as of such date as if made on and as
of such date.
(b) No Default. No Default or Event of Default shall have
occurred and be continuing on such date or after giving effect to the
Extension of Credit requested to be made on such date.
(c) Additional Matters. All corporate and other proceedings,
and all documents, instruments and other legal matters in connection
with the transactions contemplated by this Agreement and the other
Loan Documents shall be satisfactory in form and substance to the
Agent, and the Agent shall have received such other documents and
legal opinions
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in respect of any aspect or consequence of the transactions
contemplated hereby or thereby as it shall reasonably request.
Each borrowing by the Borrower hereunder shall constitute a representation and
warranty by the Borrower as of the date thereof that the conditions contained
in this subsection have been satisfied.
SECTION 7. AFFIRMATIVE COVENANTS
The Borrower hereby agrees that, so long as the Commitments
remain in effect or any amount is owing to any Lender or the Agent hereunder or
under any other Loan Document, the Borrower shall and (except in the case of
delivery of financial information, reports and notices) shall cause each of its
Subsidiaries to:
7.1 Financial Statements. Furnish to each Lender:
(a) as soon as available, but in any event within 90 days
after the end of each fiscal year of the Borrower, a copy of the
consolidated balance sheet of the Borrower and its consolidated
Subsidiaries as at the end of such year and the related consolidated
statements of income and retained earnings and of cash flows for such
year, setting forth in each case in comparative form the figures for
the previous year, reported on without a "going concern" or like
qualification or exception, or qualification arising out of the scope
of the audit, by Price Waterhouse LLP or other independent certified
public accountants of nationally recognized standing; and
(b) as soon as available, but in any event not later than 45
days after the end of each of the first three quarterly periods of
each fiscal year of the Borrower, the unaudited consolidated balance
sheet of the Borrower and its consolidated Subsidiaries as at the end
of such quarter and the related unaudited consolidated statements of
income and of cash flows of the Borrower and its consolidated
Subsidiaries for such quarter and the portion of the fiscal year
through the end of such quarter, setting forth in each case in
comparative form the figures for the previous year, certified by a
Responsible Officer as being fairly stated in all material respects
(subject to normal year-end audit adjustments);
all such financial statements shall be complete and correct in all material
respects and shall be prepared in reasonable detail and in accordance with GAAP
applied consistently throughout the periods reflected therein and with prior
periods (except as approved by such accountants or officer, as the case may be,
and disclosed therein).
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7.2 Certificates; Other Information. Furnish to each Lender:
(a) concurrently with the delivery of the financial
statements referred to in subsection 7.1(a), a certificate of the
independent certified public accountants reporting on such financial
statements stating that in making the examination necessary therefor
no knowledge was obtained of any Default or Event of Default, except
as specified in such certificate;
(b) concurrently with the delivery of the financial
statements referred to in subsections 7.1(a) and (b), a certificate of
a Responsible Officer (i) stating that, to the best of such Officer's
knowledge, the Borrower during such period has observed or performed
all of its covenants and other agreements, and satisfied every
condition, contained in this Agreement and the other Loan Documents to
be observed, performed or satisfied by it, and that such Officer has
obtained no knowledge of any Default or Event of Default except as
specified in such certificate and (ii) showing in detail the figures
and calculations supporting such statement in respect of subsection
8.1 as of the end of each fiscal quarter and fiscal year and in
respect of subsections 8.7 and 8.9 as of the end of each fiscal year;
(c) not later than thirty days prior to the end of each
fiscal year of the Borrower, a copy of the projections by the Borrower
of the operating budget and cash flow budget of the Borrower and its
Subsidiaries for the succeeding fiscal year, such projections to be
accompanied by a certificate of a Responsible Officer to the effect
that such projections have been prepared on the basis of sound
financial planning practice and that such Officer has no reason to
believe they are incorrect or misleading in any material respect;
(d) within five days after the same are sent, copies of all
financial statements and reports which the Borrower sends to its
stockholders, and within five days after the same are filed, copies of
all financial statements and reports which the Borrower may make to,
or file with, the Securities and Exchange Commission or any successor
or analogous Governmental Authority; and
(e) promptly, such additional financial and other information
as any Lender may from time to time reasonably request.
7.3 Payment of Obligations. Pay, discharge or otherwise
satisfy at or before maturity or before they become delinquent, as the case may
be, all its obligations of whatever nature, except where the amount or validity
thereof is currently being contested in good faith by appropriate proceedings
and reserves in conformity with GAAP with respect thereto have been provided on
the books of the Borrower or its Subsidiaries, as the case may be.
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7.4 Conduct of Business and Maintenance of Existence.
Continue to engage in business of the same general type as now conducted by it
and preserve, renew and keep in full force and effect its corporate existence
and take all reasonable action to maintain all rights, privileges and
franchises necessary or desirable in the normal conduct of its business except
as otherwise permitted pursuant to subsection 8.5; comply with all Contractual
Obligations and Requirements of Law except to the extent that failure to comply
therewith could not, in the aggregate, be reasonably expected to have a
Material Adverse Effect.
7.5 Maintenance of Property; Insurance. Keep all property
useful and necessary in its business in good working order and condition;
maintain the insurance required pursuant to the Global Security Agreement on
the assets covered thereby and maintain with financially sound and reputable
insurance companies insurance on all its other property in at least such
amounts and against at least such risks (but including in any event public
liability, product liability and business interruption) as are usually insured
against in the same general area by companies engaged in the same or a similar
business; and furnish to each Lender at least annually, full information as to
the insurance carried.
7.6 Inspection of Property; Books and Records; Discussions.
Keep proper books of records and account in which full, true and correct
entries in conformity with GAAP and all Requirements of Law shall be made of
all dealings and transactions in relation to its business and activities; and
permit representatives of any Lender to visit and inspect any of its properties
and examine and make abstracts from any of its books and records at any
reasonable time upon reasonable prior notice and as often as may reasonably be
desired and to discuss the business, operations, properties and financial and
other condition of the Borrower and its Subsidiaries with officers and
employees of the Borrower and its Subsidiaries and with its independent
certified public accountants.
7.7 Notices. Promptly give notice to the Agent and each
Lender of:
(a) the occurrence of any Default or Event of Default;
(b) any (i) default or event of default under any Contractual
Obligation of the Borrower or any of its Subsidiaries or (ii)
litigation, investigation or proceeding which may exist at any time
between the Borrower or any of its Subsidiaries and any Governmental
Authority, which in either case, if not cured or if adversely
determined, as the case may be, could reasonably be expected to have a
Material Adverse Effect;
(c) any litigation or proceeding affecting the Borrower or
any of its Subsidiaries in which the amount involved is $1,000,000 or
more and not covered by insurance or in which injunctive or similar
relief is sought;
<PAGE> 41
41
(d) the following events, as soon as possible and in any
event within 30 days after the Borrower knows or has reason to know
thereof: (i) the occurrence or expected occurrence of any Reportable
Event with respect to any Plan, a failure to make any required
contribution to a Plan, the creation of any Lien in favor of the PBGC
or a Plan or any withdrawal from, or the termination, Reorganization
or Insolvency of, any Multiemployer Plan or (ii) the institution of
proceedings or the taking of any other action by the PBGC or the
Borrower or any Commonly Controlled Entity or any Multiemployer Plan
with respect to the withdrawal from, or the terminating,
Reorganization or Insolvency of, any Plan; and
(e) any material adverse change in the business, operations,
property, condition (financial or otherwise) or prospects of the
Borrower and its Subsidiaries taken as a whole.
Each notice pursuant to this subsection shall be accompanied by a statement of
a Responsible Officer setting forth details of the occurrence referred to
therein and stating what action the Borrower proposes to take with respect
thereto.
7.8 Environmental Laws. (a) Comply with, and ensure
compliance by all tenants and subtenants, if any, with, all applicable
Environmental Laws and obtain and comply in all material respects with and
maintain, and ensure that all tenants and subtenants obtain and comply in all
material respects withand maintain, any and all licenses, approvals,
notifications, registrations or permits required by applicable Environmental
Laws except to the extent that failure to do so could not be reasonably
expected to have a Material Adverse Effect.
(b) Conduct and complete all investigations, studies,
sampling and testing, and all remedial, removal and other actions required
under Environmental Laws and promptly comply in all material respects with all
lawful orders and directives of all Governmental Authorities regarding
Environmental Laws except to the extent that the same are being contested in
good faith by appropriate proceedings and the pendency of such proceedings
could not be reasonably expected to have a Material Adverse Effect.
7.9 Key Man Insurance. Within 90 days following the date
hereof (i) obtain key man life insurance on the life of Mr. Sam Yau in an
aggregate amount of $5,000,000 on terms satisfactory to the Agent and (ii)
deliver to the Agent, with a counterpart for each Lender, a duly executed copy
of the Assignment of Life Insurance, together with a satisfactory
acknowledgement by the relevant insurer of the Lien created thereby; and at all
times thereafter maintain such life insurance in full force and effect.
7.10 Further Assurances. Upon the request of the Agent,
promptly perform or cause to be performed any and all acts and execute or cause
to be executed any and all
<PAGE> 42
42
documents (including, without limitation, financing statements and continuation
statements) for filing under the provisions of the Uniform Commercial Code or
any other Requirement of Law which are necessary or advisable to maintain in
favor of the Agent, for the benefit of the Lenders, Liens on the Collateral
that are duly perfected in accordance with all applicable Requirements of Law.
Without limiting the generality of the foregoing, the Borrower shall, within
60 days following the Closing Date, take or cause to be taken all actions
necessary to cause a Lien on 65% of the Capital Stock of each of Intertext
Group Ltd. (England) and NETG Applied Learning, Ltd. (United Kingdom) to be
duly created and perfected in accordance with all applicable laws and a legal
opinion with respect thereto (in form and substance and from a firm,
satisfactory to the Agent) to be delivered to the Agent.
7.11 Additional Collateral. (a) With respect to any assets
acquired after the Closing Date by the Borrower or any of its Domestic
Subsidiaries which is a Material Subsidiary that are intended to be subject to
the Lien created by any of the Security Documents but which are not so subject
(other than (x) any assetsdescribed in paragraph (b) or (c) of this subsection
and (z) immaterial assets a Lien on which cannot be perfected by filing UCC-1
financing statements), promptly (and in any event within 30 days after the
acquisition thereof): (i) execute and deliver to the Agent such amendments to
the relevant Security Documents or such other documents as the Agent shall deem
necessary or advisable to grant to the Agent, for the benefit of the Lenders, a
Lien on such assets, (ii) take all actions deemed necessary or advisable by the
Agent to cause such Lien to be duly perfected in accordance with all applicable
Requirements of Law, including, without limitation, the filing of financing
statements in such jurisdictions as may be requested by the Agent, and (iii) if
reasonably requested by the Agent, deliver to the Agent legal opinions relating
to the matters described in clauses (i) and (ii) immediately preceding, which
opinions shall be in form and substance, and from counsel, reasonably
satisfactory to the Agent. Without limiting the generality of the foregoing,
the Borrower shall take or cause to be taken all actions necessary to cause the
representation set forth in Section 4.8(b) of the Global Security Agreement to
be true and correct at all times.
(b) With respect to any Person that, subsequent to the
Closing Date, becomes a Material Subsidiary (other than a Foreign Subsidiary),
promptly upon the request of the Agent: (i) become a party to the Global
Security Agreement to grant to the Agent, for the benefit of the Lenders, a
Lien on the Capital Stock of such Material Subsidiary which is owned by the
Borrower or any of its Subsidiaries, (ii) deliver to the Agent the certificates
representing such Capital Stock, together with undated stock powers executed
and delivered in blank by a duly authorized officer of the Borrower or such
Material Subsidiary, as the case may be, (iii) cause such new Material
Subsidiary (A) to become a party to the Global Security Agreement and (B) to
take all actions deemed necessary or advisable by the Agent to cause the Lien
created by the Global Security Agreement to be duly perfected in accordance
with all applicable Requirements of Law, including, without limitation, the
filing of financing statements in such jurisdictions as may be requested by the
Agent and (iv) if reasonably requested by the Agent, deliver to the
<PAGE> 43
43
Agent legal opinions relating to the matters described in clauses (i), (ii)
and (iii) immediately preceding, which opinions shall be in form and substance,
and from counsel, reasonably satisfactory to the Agent.
(c) With respect to any Person that, subsequent to the
Closing Date, becomes a Foreign Subsidiary which is a Material Subsidiary,
promptly upon the request of the Agent: (i) execute and deliver to the Agent a
new pledge agreement or suchamendments to the Global Security Agreement to
grant to the Agent, for the benefit of the Lenders, a Lien on the Capital Stock
of such Material Subsidiary which is owned by the Borrower or any of its
Subsidiaries (provided that in no event shall more than 65% of the Capital
Stock of any such Material Subsidiary be required to be so pledged), (ii)
deliver to the Agent any certificates representing such Capital Stock, together
with undated stock powers executed and delivered in blank by a duly authorized
officer of the Borrower or such Material Subsidiary, as the case may be, and
take or cause to be taken all such other actions under local law as may be
deemed necessary or advisable by Agent to perfect such Lien on such Capital
Stock and (iii) if reasonably requested by the Agent, deliver to the Agent
legal opinions relating to the matters described in clauses (i) and (ii)
immediately preceding, which opinions shall be in form and substance, and from
counsel, reasonably satisfactory to the Agent.
SECTION 8. NEGATIVE COVENANTS
The Borrower hereby agrees that, so long as the Commitments
remain in effect or any amount is owing to any Lender or the Agent hereunder or
under any other Loan Document, the Borrower shall not, and shall not permit any
of its Subsidiaries to, directly or indirectly:
8.1 Financial Condition Covenants.
(a) Maintenance of Current Ratio. Permit the ratio of
Consolidated Current Assets to Consolidated Current Liabilities as at the end
of any fiscal quarter to be less than 1.5:1.0.
<PAGE> 44
44
(b) Maintenance of Net Worth. Permit Consolidated Net Worth
at any time during any period set forth below to be less than the amount set
forth opposite such fiscal quarter below:
<TABLE>
<CAPTION>
Period Amount
------ ------
<S> <C>
First Quarter 1996 $ *
Second Quarter 1996 $ *
Third Quarter 1996 $ *
Fourth Quarter 1996 $ *
First Quarter 1997 $ *
Second Quarter 1997 $ *
Third Quarter 1997 $ *
Fourth Quarter 1997 $ * ;
</TABLE>
* OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE
COMMISSION IN A REQUEST FOR CONFIDENTIAL TREATMENT
provided, that in determining compliance with this covenant, the Consolidated
Net Worth of the Borrower and its Subsidiaries at any date shall be (a)
increased by an amount (not to exceed $500,000 in any fiscal year) equal to the
aggregate amount of translation losses from the beginning of such fiscal year
reflected on the consolidated balance sheet of the Borrower and its
Subsidiaries at such date and (b) decreased by an amount (not to exceed
$500,000 in any fiscal year) equal to the aggregate amount of translation gains
from the beginning of such fiscal year reflected on such consolidated balance
sheet.
(c) Consolidated Total Indebtedness to Consolidated EBITDA
Ratio. Permit the ratio of Consolidated Total Indebtedness at the end of any
fiscal quarter set forth below to Consolidated EBITDA for the period of four
consecutive fiscal quarters then ending to be greater than the ratio set forth
opposite such fiscal quarter below:
<TABLE>
<CAPTION>
Fiscal Quarter Ratio
-------------- -----
<S> <C>
First Quarter 1996 *
Second Quarter 1996 *
Third Quarter 1996 *
Fourth Quarter 1996 *
First Quarter 1997 *
Second Quarter 1997 *
</TABLE>
<PAGE> 45
45
<TABLE>
<S> <C>
Third Quarter 1997 *
Fourth Quarter 1997 *
</TABLE>
* OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE
COMMISSION IN A REQUEST FOR CONFIDENTIAL TREATMENT
provided, that for purposes of determining compliance with this covenant for
the end of the first fiscal quarter of 1996 only, Consolidated EBITDA for the
fourth fiscal quarter of 1995 shall be increased by $3,500,000 provided further
that all subsequent covenant calculations shall use consolidated EBITDA for the
fourth fiscal quarter of 1995 without such increase.
(d) Interest Coverage. Permit for any period of four
consecutive fiscal quarters ending at the end of any fiscal quarter set forth
below the ratio of (i) Consolidated EBITDA for such period minus Net Capital
Expenditures for such period to (ii) Consolidated Interest Expense for such
period to be less than the ratio set forth opposite such fiscal quarter below:
<TABLE>
<CAPTION>
Fiscal Quarter Ratio
-------------- -----
<S> <C>
First Quarter 1996 *
Second Quarter 1996 *
Third Quarter 1996 *
Fourth Quarter 1996 *
First Quarter 1997 *
Second Quarter 1997 *
Third Quarter 1997 *
Fourth Quarter 1997 *
</TABLE>
* OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, AND FILED SEPARATELY WITH THE
COMMISSION IN A REQUEST FOR CONFIDENTIAL TREATMENT
<PAGE> 46
46
provided, that for purposes of determining compliance with this covenant for
the end of the first fiscal quarter of 1996 only, Consolidated EBITDA for the
fourth fiscal quarter of 1995 shall be increased by $3,500,000 provided further
that all subsequent covenant calculations shall use consolidated EBITDA for the
fourth fiscal quarter of 1995 without such increase.
8.2 Limitation on Indebtedness. Create, incur, assume or
suffer to exist any Indebtedness, except:
(a) Indebtedness of the Borrower under this Agreement;
(b) Indebtedness of the Borrower to any Subsidiary (excluding
SV) and of any Subsidiary to the Borrower or any other Subsidiary
(excluding SV); provided, however, that the intercompany loan from SV
to the Borrower outstanding as of the Closing Date in the aggregate
principal amount of $10,000,000 shall be permitted on the condition
that it will be repaid in full by the Borrower and the commitment
thereunder will be terminated on or before March 31, 1996.
(c) Indebtedness outstanding on the date hereof and listed on
Schedule 8.2 and any refinancings refundings, renewals or extensions
thereof;
(d) Indebtedness of a corporation which becomes a Subsidiary
after the date hereof, provided that (i) such indebtedness existed at
the time such corporation became a Subsidiary and was not created in
anticipation thereof and (ii) immediately after giving effect to the
acquisition of such corporation by the Borrower no Default or Event of
Default shall have occurred and be continuing; and
(e) Indebtedness of the Borrower and any of its Subsidiaries
incurred to finance the acquisition of fixed or capital assets
(whether pursuant to a loan, a Financing Lease or otherwise) in the
ordinary course of business.
8.3 Limitation on Liens. Create, incur, assume or suffer to
exist any Lien upon any of its property, assets or revenues, whether now owned
or hereafter acquired, except for:
(a) Liens for taxes not yet due or which are being contested
in good faith by appropriate proceedings, provided that adequate
reserves with respect thereto are maintained on the books of the
Borrower or its Subsidiaries, as the case may be, in conformity with
GAAP (or, in the case of Foreign Subsidiaries, generally accepted
accounting principles in effect from time to time in their respective
jurisdictions of incorporation);
<PAGE> 47
47
(b) carriers', warehousemen's, mechanics', materialmen's,
repairmen's or other like Liens arising in the ordinary course of
business which are not overdue for a period of more than 60 days or
which are being contested in good faith by appropriate proceedings;
(c) pledges or deposits in connection with workers'
compensation, unemployment insurance and other social security
legislation and deposits securing liability to insurance carriers
under insurance or self-insurance arrangements;
(d) deposits to secure the performance of bids, trade
contracts (other than for borrowed money), leases, statutory
obligations, surety and appeal bonds, performance bonds and other
obligations of a like nature incurred in the ordinary course of
business;
(e) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business which, in the
aggregate, are not substantial in amount and which do not in any case
materially detract from the value of the property subject thereto or
materially interfere with the ordinary conduct of the business of the
Borrower or such Subsidiary;
(f) Liens in existence on the date hereof listed on Schedule
8.3, securing Indebtedness permitted by the proviso to subsection
8.2(b) and by subsection 8.2(c), provided that no such Lien is spread
to cover any additional property after the Closing Date and that the
amount of Indebtedness secured thereby is not increased;
(g) Liens created pursuant to the Security Documents; and
(h) Liens securing Indebtedness of the Borrower and its
Subsidiaries permitted by subsection 8.2(e) incurred to finance the
acquisition of fixed or capital assets, provided that (i) such Liens
shall be created substantially simultaneously with the acquisition of
such fixed or capital assets, (ii) such Liens do not at any time
encumber any property other than the property financed by such
Indebtedness, (iii) the amount of Indebtedness secured thereby is not
increased and (iv) the principal amount of Indebtedness secured by any
such Lien shall at no time exceed 100% of the fair value (as
determined in good faith by the board of directors of the Borrower) of
such property at the time it was acquired.
8.4 Limitation on Guarantee Obligations. Create, incur,
assume or suffer to exist any Guarantee Obligation except:
(a) the Letters of Credit
<PAGE> 48
48
(b) Guarantee Obligations in existence on the date hereof and
listed on Schedule 8.4;
8.5 Limitation on Fundamental Changes. Enter into any
merger, consolidation or amalgamation, or liquidate, wind up or dissolve itself
(or suffer any liquidation or dissolution), or convey, sell, lease, assign,
transfer or otherwise dispose of, all or substantially all of its property,
business or assets, or make any material change in its present method of
conducting business, except:
(a) any Subsidiary of the Borrower may be merged or
consolidated with or into the Borrower (provided that the Borrower
shall be the continuing or surviving corporation) or with or into any
one or more wholly owned Subsidiaries of the Borrower (provided that
the wholly owned Subsidiary or Subsidiaries shall be the continuing or
surviving corporation); and
(b) any wholly owned Subsidiary may sell, lease, transfer or
otherwise dispose of any or all of its assets (upon voluntary
liquidation or otherwise) to the Borrower or any other wholly owned
Subsidiary of the Borrower.
8.6 Limitation on Sale of Assets. Convey, sell, lease,
assign, transfer or otherwise dispose of any of its property, business or
assets (including, without limitation, receivables and leasehold interests),
whether now owned or hereafter acquired, or, in the case of any Subsidiary,
issue or sell any shares of such Subsidiary's Capital Stock to any Person other
than the Borrower or any wholly owned Subsidiary, except:
(a) the sale or other disposition of any property in the
ordinary course of business;
(b) the sale or discount without recourse of accounts
receivable arising in the ordinary course of business in connection
with the compromise or collection thereof; and
(c) issuances of options and/or shares pursuant to employee
stock option and incentive award plans; and
(d) as permitted by subsection 8.5(b).
8.7 Limitation on Leases. Permit Consolidated Lease Expense
for any fiscal year of the Borrower to exceed $12,000,000.
8.8 Limitation on Dividends. Declare or pay any dividend
(other than dividends payable solely in common stock of the Borrower) on, or
make any payment on account of, or
<PAGE> 49
49
set apart assets for a sinking or other analogous fund for, the purchase,
redemption, defeasance, retirement or other acquisition of, any shares of any
class of Capital Stock of the Borrower or any warrants or options to purchase
any such Capital Stock, whether now or hereafter outstanding, or make any other
distribution in respect thereof, either directly or indirectly, whether in
cash or property or in obligations of the Borrower or any Subsidiary.
8.9 Limitation on Capital Expenditures. Make or commit to
make (by way of the acquisition of securities of a Person or otherwise) any
expenditure in respect of the purchase or other acquisition of fixed or capital
assets (excluding any such asset acquired in connection with normal replacement
and maintenance programs properly charged to current operations) except for
expenditures in the ordinary course of business not exceeding (a) $14,000,000
in the aggregate during the Commitment Period for the Borrower and its
Subsidiaries or (b) $10,000,000 in the aggregate for the Borrower and its
Subsidiaries during any fiscal year of the Borrower.
8.10 Limitation on Investments, Loans and Advances. Make any
advance, loan, extension of credit or capital contribution to, or purchase any
stock, bonds, notes, debentures or other securities of or any assets
constituting a business unit of, or make any other investment in, any Person,
except:
(a) extensions of trade credit in the ordinary course of
business;
(b) investments in Cash Equivalents;
(c) acquisitions of Capital Stock or business units of other
Persons the aggregate consideration for which does not exceed $ *
provided that each such acquisition shall be subject to: (a)
Consolidated Net Income having been positive for the two most
recently completed fiscal quarters of the Borrower for which financial
statements shall have been delivered pursuant to subsection 7.1; (b)
delivery by the Borrower to each Lender of a certificate showing
compliance with the provisions of subsections 8.1, 8.7 and 8.9 after
giving pro-forma effect to such acquisition as of the date of the
Borrower's most recently available quarterly consolidated financial
statements; (c) the acquired Person or business unit are engaged in
the same general line of business as the Borrower and its Subsidiaries
as of the Closing Date; (d) the Agent having received at least 15
Business Days notice of Borrower's intention to make such acquisition;
(e) the Required Lenders having granted their approval thereof (which
approval shall not be unreasonably withheld) and (f) any Loans to
finance such acquisition being in compliance with Regulation U;
* OMITTED PURSUANT TO RULE 24B-2 UNDER THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED, AND FILED
<PAGE> 50
50
SEPARATELY WITH THE COMMISSION IN A REQUEST FOR CONFIDENTIAL
TREATMENT
(d) loans to employees, officers and directors in connection
with and within the scope of stock option or incentive award plans;
and
(e) loans and advances to employees of the Borrower or its
Subsidiaries for travel, entertainment and relocation expenses in the
ordinary course of business in an aggregate amount for the Borrower
and its Subsidiaries not to exceed $125,000 at any one time
outstanding;
(f) loans and investments by the Borrower to and in its
Subsidiaries (other than SV) and loans and investments by any
Subsidiary in the Borrower and any other Subsidiaries (other than SV);
(g) investments in preferred stock in accordance with the
investment policy guidelines attached hereto on Schedule 8.10, the
aggregate cost of which does not at any time exceed $3,000,000;and
(h) the intercompany loans from SV to the Borrower outstanding
at any time the aggregate principal amount of $10,000,000; provided,
that such loan will be repaid in full by the Borrower and the
commitment thereunder will be terminated on or before March 31, 1996.
8.11 Limitation on Transactions with Affiliates. Enter into
any transaction, including, without limitation, any purchase, sale, lease or
exchange of property or the rendering of any service, with any Affiliate unless
such transaction is (a) otherwise permitted under this Agreement, (b) in the
ordinary course of the Borrower's or such Subsidiary's business and (c) upon
fair and reasonable terms no less favorable to the Borrower or such Subsidiary,
as the case may be, than it would obtain in a comparable arm's length
transaction with a Person which is not an Affiliate.
8.12 Limitation on Changes in Fiscal Year. Permit the fiscal
year of the Borrower to end on a day other than December 31.
8.13 Limitation on Negative Pledge Clauses. Enter into with
any Person any agreement, other than (a) this Agreement, and (b) any industrial
revenue bonds, purchase money mortgages or Financing Leases permitted by this
Agreement (in which cases, any prohibition or limitation shall only be
effective against the assets financed thereby), which prohibits or limits
<PAGE> 51
51
the ability of the Borrower or any of its Subsidiaries to create, incur, assume
or suffer to exist any Lien upon any of its property, assets or revenues,
whether now owned or hereafter acquired.
8.14 Limitation on Lines of Business. Enter into any
business, either directly or through any Subsidiary, except for those
businesses in which the Borrower and its Subsidiaries are engaged on the date
of this Agreement or which are directly related thereto.
SECTION 9. EVENTS OF DEFAULT
If any of the following events shall occur and be continuing:
(a) The Borrower shall fail to pay any principal of any Loan
or Reimbursement Obligation when due in accordance with the terms
thereof or hereof; or the Borrower shall fail to pay any interest on
any Loan, or any other amount payable hereunder, within five days
after any such interest or other amount becomes due in accordance with
the terms thereof or hereof; or
(b) Any representation or warranty made or deemed made by the
Borrower or any other Loan Party herein or in any other Loan Document
or which is contained in any certificate, document or financial or
other statement furnished by it at any time under or in connection
with this Agreement or any such other Loan Document shall prove to
have been incorrect in any material respect on or as of the date made
or deemed made; or
(c) The Borrower or any other Loan Party shall default in the
observance or performance of any agreement contained in Section 8,
Section 5 of the Assignment of Life Insurance and Sections 5.6, 5.8(b)
and 5.9(a) of the Global Security Agreement; or
(d) The Borrower or any other Loan Party shall default in the
observance or performance of any other agreement contained in this
Agreement or any other Loan Document (other than as provided in
paragraphs (a) through (c) of this Section), and such default shall
continue unremedied for a period of 30 days; or
(e) The Borrower or any of its Subsidiaries shall (i) default
in any payment of principal of or interest of any Indebtedness (other
than the Loans) or in the payment of any Guarantee Obligation, beyond
the period of grace (not to exceed 30 days), if any, provided in the
instrument or agreement under which such Indebtedness or Guarantee
Obligation was created, if the aggregate amount of the Indebtedness
and/or Guarantee Obligations in respect of which such default or
defaults shall have occurred is at least $500,000; or (ii) default in
the observance or performance of any other agreement or condition
relating to any such Indebtedness or Guarantee Obligation or contained
in any
<PAGE> 52
52
instrument or agreement evidencing, securing or relating thereto, or
any other event shall occur or condition exist, the effect of which
default or other event or condition is to cause, or to permit the
holder or holders of such Indebtedness or beneficiary or beneficiaries
of such Guarantee Obligation (or a trustee or agent on behalf of such
holder or holders or beneficiary or beneficiaries) to cause, with the
giving of notice if required, such Indebtedness to become due prior
to its stated maturity or such Guarantee Obligation to become payable;
or
(f) (i) The Borrower or any of its Subsidiaries shall
commence any case, proceeding or other action (A) under any existing
or future law of any jurisdiction, domestic or foreign, relating to
bankruptcy, insolvency, reorganization or relief of debtors, seeking
to have an order for relief entered with respect to it, or seeking to
adjudicate it a bankrupt or insolvent, or seeking reorganization,
arrangement, adjustment, winding-up, liquidation, dissolution,
composition or other relief with respect to it or its debts, or (B)
seeking appointment of a receiver, trustee, custodian, conservator or
other similar official for it or for all or any substantial part of
its assets, or the Borrower or any of its Subsidiaries shall make a
general assignment for the benefit of its creditors; or (ii) there
shall be commenced against the Borrower or any of its Subsidiaries any
case, proceeding or other action of a nature referred to in clause (i)
above which (A) results in the entry of an order for relief or any
such adjudication or appointment or (B) remains undismissed,
undischarged or unbonded for a period of 60 days; or (iii) there shall
be commenced against the Borrower or any of its Subsidiaries any case,
proceeding or other action seeking issuance of a warrant of
attachment, execution, distraint or similar process against all or any
substantial part of its assets which results in the entry of an order
for any such relief which shall not have been vacated, discharged, or
stayed or bonded pending appeal within 60 days from the entry thereof;
or (iv) the Borrower or any of its Subsidiaries shall take any action
in furtherance of, or indicating its consent to, approval of, or
acquiescence in, any of the acts set forth in clause (i), (ii), or
(iii) above; or (v) the Borrower or any of its Subsidiaries shall
generally not, or shall be unable to, or shall admit in writing its
inability to, pay its debts as they become due; or
(g) (i) Any Person shall engage in any "prohibited
transaction" (as defined in Section 406 of ERISA or Section 4975 of
the Code) involving any Plan, (ii) any "accumulated funding
deficiency" (as defined in Section 302 of ERISA), whether or not
waived, shall exist with respect to any Plan or any Lien in favor of
the PBGC or a Plan shall arise on the assets of the Borrower or any
Commonly Controlled Entity, (iii) a Reportable Event shall occur with
respect to, or proceedings shall commence to have a trustee appointed,
or a trustee shall be appointed, to administer or to terminate, any
Single Employer Plan, which Reportable Event or commencement of
proceedings or appointment of a trustee is, in the reasonable opinion
of the Required Lenders, likely to result in the termination of such
Plan for purposes of Title IV of ERISA, (iv) any Single
<PAGE> 53
53
Employer Plan shall terminate for purposes of Title IV of ERISA, (v)
the Borrower or any Commonly Controlled Entity shall, or in the
reasonable opinion of the Required Lenders is likely to, incur any
liability in connection with a withdrawal from, or the Insolvency or
Reorganization of, a Multiemployer Plan or (vi) any other event or
condition shall occur or exist with respect to a Plan; and in each
case in clauses (i) through (vi) above, such event or condition,
together with all other such events or conditions, if any, could
reasonably be expected to have a Material Adverse Effect; or
(h) One or more judgments or decrees shall be entered against
the Borrower or any of its Subsidiaries involving in the aggregate a
liability (not paid or fully covered by insurance) of $500,000 or
more, and all such judgments or decrees shall not have been vacated,
discharged, stayed or bonded pending appeal within 60 days from the
entry thereof; or
(i) (i) Any of the Security Documents shall cease, for any
reason, to be in full force and effect, or the Borrower or any other
Loan Party which is a party to any of the Security Documents shall so
assert or (ii) the Lien created by any of the Security Documents shall
cease to be enforceable and of the same effect and priority purported
to be created thereby; or
(j) (i) Any Person or two or more Persons acting in concert
shall have acquired beneficial ownership (within the meaning of the
Rule 13d-3 under the Securities Exchange Act of 1934), directly or
indirectly, of securities of the Borrower representing 20% or more of
the combined voting power of all securities of the Borrower entitled
to vote in the election of directors, other than securities having
such power only by reason of the happening of a contingency (other
than Richard C. Blum Associates, Inc. and its Affiliates); or (ii)
during any period of up to 12 consecutive months, commencing before or
after the date of this Agreement, individuals who at the beginning of
such 12-month period were directors of the Borrower shall cease for
any reason to constitute a majority of the Board of Directors; or
(iii) any Person or two or more Persons acting in concert shall have
acquired by contract or otherwise, or shall have entered into a
contract or arrangement which upon consummation shall result in its or
their acquisition of or control over, securities of the Borrower
representing 20% or more of the combined voting power or all
securities of the Borrower entitled to vote in the election of the
directors, other than securities having such power only by reason of
the happening of a contingency;
then, and in any such event, (A) if such event is an Event of Default specified
in clause (i) or (ii) of paragraph (f) of this Section with respect to the
Borrower, automatically the Commitments shall immediately terminate and the
Loans hereunder (with accrued interest thereon) and all other amounts owing
under this Agreement (including without limitation, all amounts of L/C
Obligations, whether or not the beneficiaries of the then outstanding Letters
of Credit shall have
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54
presented the documents required thereunder) shall immediately become due and
payable, and (B) if such event is any other Event of Default, either or both
of the following actions may be taken: (i) with the consent of the Required
Lenders, the Agent may, or upon the request of the Required Lenders, the Agent
shall, by notice to the Borrower declare the Commitments to be terminated
forthwith, whereupon the Commitments shall immediately terminate; and (ii)
with the consent of the Required Lenders, the Agent may, or upon the request
of the Required Lenders, the Agent shall, by notice to the Borrower, declare
the Loans hereunder (with accrued interest thereon) and all other amounts
owing under this Agreement (including without limitation, all amounts of L/C
Obligations, whether or not the beneficiaries of the then outstanding Letters
of Credit shall have presented the documents required thereunder) to be due
and payable forthwith, whereupon the same shall immediately become due and
payable.
With respect to all Letters of Credit with respect to which
presentment for honor shall not have occurred at the time of an acceleration
pursuant to the preceding paragraph, the Borrower shall at such time deposit in
a cash collateral account opened by the Agent an amount equal to the aggregate
then undrawn and unexpired amount of such Letters of Credit. The Borrower
hereby grants to the Agent, for the benefit of the Issuing Bank and the L/C
Participants, a security interest in such cash collateral to secure all
obligations of the Borrower under this Agreement and the other Loan Documents.
Amounts held in such cash collateral account shall be applied by the Agent to
the payment of drafts drawn under such Letters of Credit, and the unused
portion thereof after all such Letters of Credit shall have expired or been
fully drawn upon, if any, shall be applied to repay other obligations of the
Borrower hereunder and under the Notes. After all such Letters of Credit shall
have expired or been fully drawn upon, all Reimbursement Obligations shall have
been satisfied and all other obligations of the Borrower hereunder and under
the Notes shall have been paid in full, the balance, if any, in such cash
collateral account shall be returned to the Borrower. The Borrower shall
execute and deliver to the Agent, for the account of the Issuing Bank and the
L/C Participants, such further documents and instruments as the Agentmay
request to evidence the creation and perfection of the within security interest
in such cash collateral account.
Except as expressly provided above in this Section,
presentment, demand, protest and all other notices of any kind are hereby
expressly waived.
SECTION 10. THE AGENT
10.1 Appointment. Each Lender hereby irrevocably designates
and appoints the Agent as the agent of such Lender under this Agreement and the
other Loan Documents, and each such Lender irrevocably authorizes the Agent, in
such capacity, to take such action on its behalf under the provisions of this
Agreement and the other Loan Documents and to exercise such powers and perform
such duties as are expressly delegated to the Agent by the terms of this
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55
Agreement and the other Loan Documents, together with such other powers as are
reasonably incidental thereto. Notwithstanding any provision to the contrary
elsewhere in this Agreement, the Agent shall not have any duties or
responsibilities, except those expressly set forth herein, or any fiduciary
relationship with any Lender, and no implied covenants, functions,
responsibilities, duties, obligations or liabilities shall be read into this
Agreement or any other Loan Document or otherwise exist against the Agent.
10.2 Delegation of Duties. The Agent may execute any of its
duties under this Agreement and the other Loan Documents by or through agents
or attorneys-in-fact and shall be entitled to advice of counsel concerning all
matters pertaining to such duties. The Agent shall not be responsible for the
negligence or misconduct of any agents or attorneys in-fact selected by it with
reasonable care.
10.3 Exculpatory Provisions. Neither the Agent nor any of
its officers, directors, employees, agents, attorneys-in-fact or Affiliates
shall be (i) liable for any action lawfully taken or omitted to be taken by it
or such Person under or in connection with this Agreement or any other Loan
Document (except for its or such Person's own gross negligence or willful
misconduct) or (ii) responsible in any manner to any of the Lenders for any
recitals, statements, representations or warranties made by the Borrower or any
officer thereof contained in this Agreement or any other Loan Document or in
any certificate, report, statement or other document referred to or provided
for in, or received by the Agent under or in connection with, this Agreement or
any other Loan Document or for the value,validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement or any other Loan Document or
for any failure of the Borrower to perform its obligations hereunder or
thereunder. The Agent shall not be under any obligation to any Lender to
ascertain or to inquire as to the observance or performance of any of the
agreements contained in, or conditions of, this Agreement or any other Loan
Document, or to inspect the properties, books or records of the Borrower.
10.4 Reliance by Agent. The Agent shall be entitled to rely,
and shall be fully protected in relying, upon any Note, writing, resolution,
notice, consent, certificate, affidavit, letter, telecopy, telex or teletype
message, statement, order or other document or conversation believed by it to
be genuine and correct and to have been signed, sent or made by the proper
Person or Persons and upon advice and statements of legal counsel (including,
without limitation, counsel to the Borrower), independent accountants and other
experts selected by the Agent. The Agent may deem and treat the payee of any
Note as the owner thereof for all purposes unless a written notice of
assignment, negotiation or transfer thereof shall have been filed with the
Agent. The Agent shall be fully justified in failing or refusing to take any
action under this Agreement or any other Loan Document unless it shall first
receive such advice or concurrence of the Required Lenders as it deems
appropriate or it shall first be indemnified to its satisfaction by the Lenders
against any and all liability and expense which may be incurred by it by reason
of taking or continuing to take any such action. The Agent shall in all cases
be fully protected
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56
in acting, or in refraining from acting, under this Agreement and the other
Loan Documents in accordance with a request of the Required Lenders, and such
request and any action taken or failure to act pursuant thereto shall be
binding upon all the Lenders and all future holders of the Loans.
10.5 Notice of Default. The Agent shall not be deemed to
have knowledge or notice of the occurrence of any Default or Event of Default
hereunder unless the Agent has received notice from a Lender or the Borrower
referring to this Agreement, describing such Default or Event of Default and
stating that such notice is a "notice of default". In the event that the Agent
receives such a notice, the Agent shall give notice thereof to the Lenders.
The Agent shall take such action with respect to such Default or Event of
Default as shall be reasonably directed by the Required Lenders; provided that
unless and until the Agent shall have received such directions, the Agent may
(but shall not be obligated to) take such action, or refrain from taking
suchaction, with respect to such Default or Event of Default as it shall deem
advisable in the best interests of the Lenders.
10.6 Non-Reliance on Agent and Other Lenders. Each Lender
expressly acknowledges that neither the Agent nor any of its officers,
directors, employees, agents, attorneys-in-fact or Affiliates has made any
representations or warranties to it and that no act by the Agent hereinafter
taken, including any review of the affairs of the Borrower, shall be deemed to
constitute any representation or warranty by the Agent to any Lender. Each
Lender represents to the Agent that it has, independently and without reliance
upon the Agent or any other Lender, and based on such documents and information
as it has deemed appropriate, made its own appraisal of and investigation into
the business, operations, property, financial and other condition and
creditworthiness of the Borrower and made its own decision to make its Loans
hereunder and enter into this Agreement. Each Lender also represents that it
will, independently and without reliance upon the Agent or any other Lender,
and based on such documents and information as it shall deem appropriate at the
time, continue to make its own credit analysis, appraisals and decisions in
taking or not taking action under this Agreement and the other Loan Documents,
and to make such investigation as it deems necessary to inform itself as to the
business, operations, property, financial and other condition and
creditworthiness of the Borrower. Except for notices, reports and other
documents expressly required to be furnished to the Lenders by the Agent
hereunder, the Agent shall not have any duty or responsibility to provide any
Lender with any credit or other information concerning the business,
operations, property, condition (financial or otherwise), prospects or
creditworthiness of the Borrower which may come into the possession of the
Agent or any of its officers, directors, employees, agents, attorneys-in-fact
or Affiliates.
10.7 Indemnification. The Lenders agree to indemnify the
Agent in its capacity as such (to the extent not reimbursed by the Borrower and
without limiting the obligation of the Borrower to do so), ratably according to
their respective Commitment Percentages in effect
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57
on the date on which indemnification is sought (or, if indemnification is
sought after the date upon which the Commitments shall have terminated and
the Loans shall have been paid in full, ratably in accordance with their
Commitment Percentages immediately prior to such date), from and against any
and all liabilities, obligations, losses, damages, penalties, actions,
judgments, suits, costs, expenses or disbursements of any kind whatsoever
which may at any time (including, without limitation, at any time following
the paymentof the Loans) be imposed on, incurred by or asserted against the
Agent in any way relating to or arising out of, the Commitments, this
Agreement, any of the other Loan Documents or any documents contemplated by
or referred to herein or therein or the transactions contemplated hereby or
thereby or any action taken or omitted by the Agent under or in connection
with any of the foregoing; provided that no Lender shall be liable for the
payment of any portion of such liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements
resulting solely from the Agent's gross negligence or willful misconduct. The
agreements in this subsection shall survive the payment of the Loans and all
other amounts payable hereunder.
10.8 Agent in Its Individual Capacity. The Agent and its
Affiliates may make loans to, accept deposits from and generally engage in any
kind of business with the Borrower as though the Agent were not the Agent
hereunder and under the other Loan Documents. With respect to the Loans made
by it, the Agent shall have the same rights and powers under this Agreement and
the other Loan Documents as any Lender and may exercise the same as though it
were not the Agent, and the terms "Lender" and "Lenders" shall include the
Agent in its individual capacity.
10.9 Successor Agent. The Agent may resign as Agent upon 10
days' notice to the Lenders. If the Agent shall resign as Agent under this
Agreement and the other Loan Documents, then the Required Lenders shall appoint
from among the Lenders a successor agent for the Lenders, which successor agent
shall be approved by the Borrower, whereupon such successor agent shall succeed
to the rights, powers and duties of the Agent, and the term "Agent" shall mean
such successor agent effective upon such appointment and approval, and the
former Agent's rights, powers and duties as Agent shall be terminated, without
any other or further act or deed on the part of such former Agent or any of the
parties to this Agreement or any holders of the Loans. After any retiring
Agent's resignation as Agent, the provisions of this Section 10 shall inure to
its benefit as to any actions taken or omitted to be taken by it while it was
Agent under this Agreement and the other Loan Documents.
10.10 Intercreditor Agreement, Intercreditor Pledge and
Collateral Agent. Each Lender hereby authorizes the Agent to enter into the
Intercreditor Agreement on behalf of and for the benefit of that Lender. Each
Lender hereby acknowledges and consents to and agrees to be bound by the terms
of the Intercreditor Agreement and hereby authorizes and empowers the Agent to
take all actions under, and to act on behalf of and forthe benefit of that
Lender for all purposes under, the Intercreditor Agreement. Each Lender hereby
authorizes the Collateral
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Agent to enter into the Intercreditor Pledge Agreement and acknowledges and
consents to the Intercreditor Pledge Agreement and agrees to be bound thereby
and hereby authorizes and empowers the Collateral Agent to act on behalf of
and for the benefit of that Lender for all purposes under the Intercreditor
Pledge Agreement; provided, however that the Agent shall not enter into or
consent to any amendment, modification, or waiver of any provisions contained
in the Intercreditor Agreement without the prior consent of the Lenders.
Each Lender agrees that no Lender shall have any right individually to realize
on the security granted by the Intercreditor Pledge Agreement, it being
understood and agreed that such rights and remedies may be exercised by the
Collateral Agent for the benefit of the Banks and Agent and the parties to
the Intercreditor agreement upon the terms of the Intercreditor Pledge
Agreement and the Intercreditor Agreement.
SECTION 11. MISCELLANEOUS
11.1 Amendments and Waivers. Neither this Agreement nor any
other Loan Document, nor any terms hereof or thereof may be amended,
supplemented or modified except in accordance with the provisions of this
subsection. The Required Lenders may, or, with the written consent of the
Required Lenders, the Agent may, from time to time, (a) enter into with the
Borrower written amendments, supplements or modifications hereto and to the
other Loan Documents for the purpose of adding any provisions to this Agreement
or the other Loan Documents or changing in any manner the rights of the Lenders
or of the Borrower hereunder or thereunder or (b) waive, on such terms and
conditions as the Required Lenders or the Agent, as the case may be, may
specify in such instrument, any of the requirements of this Agreement or the
other Loan Documents or any Default or Event of Default and its consequences;
provided, however, that no such waiver and no such amendment, supplement or
modification shall (i) reduce the amount or extend the scheduled date of
maturity of any Loan or of any installment thereof, or reduce the stated rate
of any interest or fee payable hereunder or extend the scheduled date of any
payment thereof or increase the amount or extend the expiration date of any
Lender's Commitment, in each case without the consent of each Lender affected
thereby, or (ii) amend, modify or waive any provision of this subsection or
reduce the percentage specified in the definition of Required Lenders or
Majority Lenders, or consent to the assignment or transfer by the Borrower of
any of its rights and obligations under this Agreement and the other Loan
Documents or release all or substantially all of theCollateral, in each case
without the written consent of all the Lenders, or (iii) amend, modify or waive
any provision of Section 10 without the written consent of the then Agent. Any
such waiver and any such amendment, supplement or modification shall apply
equally to each of the Lenders and shall be binding upon the Borrower, the
Lenders, the Agent and all future holders of the Loans. In the case of any
waiver, the Borrower, the Lenders and the Agent shall be restored to their
former positions and rights hereunder and under the other Loan Documents, and
any Default or Event of Default waived shall be deemed to be cured and not
continuing; no such waiver shall extend to any subsequent or other Default or
Event of Default or impair any right consequent thereon.
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11.2 Notices. All notices, requests and demands to or upon
the respective parties hereto to be effective shall be in writing (including by
facsimile transmission) and, unless otherwise expressly provided herein, shall
be deemed to have been duly given or made (a) in the case of delivery by hand,
when delivered, (b) in the case of delivery by mail, three days after being
deposited in the mails, postage prepaid, or (c) in the case of delivery by
facsimile transmission, when sent and receipt has been confirmed, addressed as
follows in the case of the Borrower and the Agent, and as set forth in Schedule
I in the case of the other parties hereto, or to such other address as may be
hereafter notified by the respective parties hereto:
The Borrower: National Education Corporation
18400 Von Karman Avenue
Irvine, California 92715-1594
Attention: Keith Ogata, Vice President, CFO & Treasurer
Fax: (714) 474-9488
The Agent: BZW Division of Barclays Bank PLC
222 Broadway
New York, New York 10038
Attention: John Giannone, Director
Fax: (212) 412-7511
provided that any notice, request or demand to or upon the Agent or the Lenders
pursuant to subsection 2.2, 2.3, 2.5, 4.2 or 4.6 shall not be effective until
received.
11.3 No Waiver; Cumulative Remedies. No failure to exercise
and no delay in exercising, on the part of the Agent or any Lender, any right,
remedy, power or privilege hereunder or under the other Loan Documents shall
operate as a waiver thereof;nor shall any single or partial exercise of any
right, remedy, power or privilege hereunder preclude any other or further
exercise thereof or the exercise of any other right, remedy, power or
privilege. The rights, remedies, powers and privileges herein provided are
cumulative and not exclusive of any rights, remedies, powers and privileges
provided by law.
11.4 Survival of Representations and Warranties. All
representations and warranties made hereunder, in the other Loan Documents and
in any document, certificate or statement delivered pursuant hereto or in
connection herewith shall survive the execution and delivery of this Agreement
and the making of the Loans hereunder.
11.5 Payment of Expenses and Taxes. The Borrower agrees (a)
to pay or reimburse the Agent for all its out-of-pocket costs and expenses
incurred in connection with the development, preparation and execution of, and
any amendment, supplement or modification to, this Agreement and the other Loan
Documents and any other documents prepared in connection
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herewith or therewith, and the consummation and administration of the
transactions contemplated hereby and thereby, including, without limitation,
the reasonable fees and disbursements of counsel to the Agent, (b) to pay or
reimburse each Lender and the Agent for all its costs and expenses incurred
in connection with the enforcement or preservation of any rights under this
Agreement, the other Loan Documents and any such other documents, including,
without limitation, the fees and disbursements of counsel (including the
allocated fees and expenses of in-house counsel) to each Lender and of counsel
to the Agent, (c) to pay, indemnify, and hold each Lender and the Agent
harmless from, any and all recording and filing fees and any and all
liabilities with respect to, or resulting from any delay in paying, stamp,
excise and other taxes, if any, which may be payable or determined to be
payable in connection with the execution and delivery of, or consummation or
administration of any of the transactions contemplated by, or any amendment,
supplement or modification of, or any waiver or consent under or in respect
of, this Agreement, the other Loan Documents and any such other documents,
and (d) to pay, indemnify, and hold each Lender and the Agent harmless from
and against any and all other liabilities, obligations, losses, damages,
penalties, actions, judgments, suits, costs, expenses or disbursements of
any kind or nature whatsoever with respect to the execution, delivery,
enforcement, performance and administration of this Agreement, the other
Loan Documents and any such other documents, including, without limitation,
any of the foregoing relating to the violation of, noncompliance with or
liability under, anyEnvironmental Law applicable to the operations of the
Borrower, any of its Subsidiaries or any of the Properties (all the foregoing
in this clause (d), collectively, the "indemnified liabilities"), provided,
that the Borrower shall have no obligation hereunder to the Agent or any Lender
with respect to indemnified liabilities arising from (i) the gross negligence
or willful misconduct of the Agent or any such Lender or (ii) legal proceedings
commenced against the Agent or any such Lender by any security holder or
creditor thereof arising out of and based upon rights afforded any such
security holder or creditor solely in its capacity as such. The agreements
in this subsection shall survive repayment of the Loans and all other amounts
payable hereunder.
11.6 Successors and Assigns; Participations and Assignments.
(a) This Agreement shall be binding upon and inure to the benefit of the
Borrower, the Lenders, the Agent and their respective successors and assigns,
except that the Borrower may not assign or transfer any of its rights or
obligations under this Agreement without the prior written consent of each
Lender.
(b) Any Lender may, in the ordinary course of its commercial
banking business and in accordance with applicable law, at any time sell to one
or more banks or other entities ("Participants") participating interests in any
Loan owing to such Lender, any Commitment of such Lender or any other interest
of such Lender hereunder and under the other Loan Documents. In the event of
any such sale by a Lender of a participating interest to a Participant, such
Lender's obligations under this Agreement to the other parties to this
Agreement shall remain unchanged, such Lender shall remain solely responsible
for the performance thereof, such Lender shall remain the holder of any such
Loan for all purposes under this Agreement and the other Loan Documents, and
the Borrower and the Agent shall continue to deal solely and
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directly with such Lender in connection with such Lender's rights and
obligations under this Agreement and the other Loan Documents. The Borrower
agrees that if amounts outstanding under this Agreement are due or unpaid, or
shall have been declared or shall have become due and payable upon the
occurrence of an Event of Default, each Participant shall, to the maximum
extent permitted by applicable law, be deemed to have the right of setoff in
respect of its participating interest in amounts owing under this Agreement
to the same extent as if the amount of its participating interest were owing
directly to it as a Lender under this Agreement, provided that, in purchasing
such participating interest, such Participant shall be deemed to have agreed
to share with the Lenders the proceeds thereof as provided in subsection
11.7(a) as fully as if it were a Lender hereunder. The Borrower also agrees
that each Participant shall been titled to the benefits of subsections 4.9,
4.10, 4.11 with respect to its participation in the Commitments and the Loans
outstanding from time to time as if it was a Lender; provided that, in the
case of subsection 4.10, such Participant shall have complied with the
requirements of said subsection and provided, further, that no Participant
shall be entitled to receive any greater amount pursuant to any such
subsection than the transferor Lender would have been entitled to receive in
respect of the amount of the participation transferred by such transferor
Lender to such Participant had no such transfer occurred.
(c) Any Lender may, in the ordinary course of its commercial
banking business and in accordance with applicable law, at any time and from
time to time assign to any Lender or any affiliate thereof or, with the consent
of the Borrower and the Agent (which in each case shall not be unreasonably
withheld), to an additional bank or financial institution ("an Assignee") all
or any part of its rights and obligations under this Agreement and the other
Loan Documents pursuant to an Assignment and Acceptance, substantially in the
form of Exhibit J, executed by such Assignee, such assigning Lender (and, in
the case of an Assignee that is not then a Lender or an affiliate thereof, by
the Borrower and the Agent) and delivered to the Agent for its acceptance and
recording in the Register, provided that, in the case of any such assignment to
an additional bank or financial institution, the sum of the aggregate principal
amount of the Loans, the aggregate amount of the L/C Obligations and the
aggregate amount of the Available Commitment being assigned and, if such
assignment is of less than all of the rights and obligations of the assigning
Lender, the sum of the aggregate principal amount of the Loans, the aggregate
amount of the L/C Obligations and the aggregate amount of the Available
Commitment remaining with the assigning Lender are each not less than 10% of
the aggregate principal amount of the Loans, the aggregate amount of the L/C
Obligations and the aggregate amount of the Available Commitment of all the
Lenders then outstanding (or such lesser amount as may be agreed to by the
Borrower and the Agent). Upon such execution, delivery, acceptance and
recording, from and after the effective date determined pursuant to such
Assignment and Acceptance, (x) the Assignee thereunder shall be a party hereto
and, to the extent provided in such Assignment and Acceptance, have the rights
and obligations of a Lender hereunder with a Commitment as set forth therein,
and (y) the assigning Lender thereunder shall, to the extent provided in such
Assignment and Acceptance, be released from its obligations under this
Agreement (and, in the case of an Assignment and Acceptance covering all or
the remaining portion of an assigning Lender's rights and obligations under
this Agreement, such
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assigning Lender shall cease to be a party hereto). Notwithstanding any
provision of this paragraph (c) and paragraph (e) of this subsection, the
consent of the Borrower shall not be required, and, unless requested by the
Assignee and/or the assigning Lender, new Notes shall not be required to be
executed and delivered by the Borrower, for any assignment which occurs at
any time when any of the events described in Section 9(f) shall have occurred
and be continuing.
(d) The Agent, on behalf of the Borrower, shall maintain at
the address of the Agent referred to in subsection 11.2 a copy of each
Assignment and Acceptance delivered to it and a register (the "Register") for
the recordation of the names and addresses of the Lenders and the Commitment
of, and principal amount of the Loans owing to, each Lender from time to time.
The entries in the Register shall be conclusive, in the absence of manifest
error, and the Borrower, the Agent and the Lenders may (and, in the case of any
Loan or other obligation hereunder not evidenced by a Note, shall) treat each
Person whose name is recorded in the Register as the owner of a Loan or other
obligation hereunder as the owner thereof for all purposes of this Agreement
and the other Loan Documents, notwithstanding any notice to the contrary. Any
assignment of any Loan or other obligation hereunder not evidenced by a Note
shall be effective only upon appropriate entries with respect thereto being
made in the Register. The Register shall be available for inspection by the
Borrower or any Lender at any reasonable time and from time to time upon
reasonable prior notice.
(e) Upon its receipt of an Assignment and Acceptance executed
by an assigning Lender and an Assignee (and, in the case of an Assignee that is
not then a Lender or an affiliate thereof, by the Borrower and the Agent)
together with payment to the Agent of a registration and processing fee of
$3,000, the Agent shall (i) promptly accept such Assignment and Acceptance and
(ii) on the effective date determined pursuant thereto record the information
contained therein in the Register and give notice of such acceptance and
recordation to the Lenders and the Borrower.
(f) The Borrower authorizes each Lender to disclose to any
Participant or Assignee (each, a "Transferee") and any prospective Transferee
any and all financial information in such Lender's possession concerning the
Borrower and its Affiliates which has been delivered to such Lender by or on
behalf of the Borrower pursuant to this Agreement or which has been delivered
to such Lender by or on behalf of the Borrower in connection with such Lender's
credit evaluation of the Borrower and its Affiliates prior to becoming a party
to this Agreement.
(g) For avoidance of doubt, the parties to this Agreement
acknowledge that the provisions of this subsection concerning assignments of
Loans and Notes relate only to absolute assignments and that such provisions do
not prohibit assignments creating security interests, including, without
limitation, any pledge or assignment by a Lender of any Loan or Note to any
Federal Reserve Bank in accordance with applicable law.
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11.7 Adjustments; Set-off. (a) If any Lender (a "benefitted
Lender") shall at any time receive any payment of all or part of its Loans, or
interest thereon, or receive any collateral in respect thereof (whether
voluntarily or involuntarily, by set-off, pursuant to events or proceedings of
the nature referred to in Section 9(f), or otherwise), in a greater proportion
than any such payment to or collateral received by any other Lender, if any, in
respect of such other Lender's Loans or the Reimbursement Obligations owing to
it, or interest thereon, such benefitted Lender shall purchase for cash from
the other Lenders a participating interest in such portion of each such other
Lender's Loan or the Reimbursement Obligations owing to it, or shall provide
such other Lenders with the benefits of any such collateral, or the proceeds
thereof, as shall be necessary to cause such benefitted Lender to share the
excess payment or benefits of such collateral or proceeds ratably with each of
the Lenders; provided, however, that if all or any portion of such excess
payment or benefits is thereafter recovered from such benefitted Lender, such
purchase shall be rescinded, and the purchase price and benefits returned, to
the extent of such recovery, but without interest.
(b) In addition to any rights and remedies of the Lenders
provided by law, each Lender shall have the right, without prior notice to the
Borrower, any such notice being expressly waived by the Borrower to the extent
permitted by applicable law, upon any amount becoming due and payable by the
Borrower hereunder (whether at the stated maturity, by acceleration or
otherwise) to set-off and appropriate and apply against such amount any and all
deposits (general or special, time or demand, provisional or final), in any
currency, and any other credits, indebtedness or claims, in any currency, in
each case whether direct or indirect, absolute or contingent, matured or
unmatured, at any time held or owing by such Lender or any branch or agency
thereof to or for the credit or the account of the Borrower. Each Lender
agrees promptly to notify the Borrower and the Agent after any such set-off and
application made by such Lender, provided that the failure to give such notice
shall not affect the validity of such set-off and application.
11.8 Counterparts. This Agreement may be executed by one or
more of the parties to this Agreement on any number of separate counterparts
(including by facsimile transmission), and all of said counterparts taken
together shall be deemed to constitute one and the same instrument. A set of
the copies of this Agreement signed by all the parties shall be lodged with the
Borrower and the Agent.
11.9 Severability. Any provision of this Agreement which is
prohibited or unenforceable in any jurisdiction shall, as to such jurisdiction,
be ineffective to the extent of such prohibition or unenforceability without
invalidating the remaining provisions hereof, and any such prohibition or
unenforceability in any jurisdiction shall not invalidate or render
unenforceable such provision in any other jurisdiction.
11.10 Integration. This Agreement and the other Loan
Documents represent the agreement of the Borrower, the Agent and the Lenders
with respect to the subject matter hereof, and there are no promises,
undertakings, representations or warranties by the Agent or any
<PAGE> 64
64
Lender relative to subject matter hereof not expressly set forth or referred
to herein or in the other Loan Documents.
11.11 GOVERNING LAW. THIS AGREEMENT AND THE RIGHTS AND
OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND CONSTRUED AND
INTERPRETED IN ACCORDANCE WITH, THE LAW OF THE STATE OF NEW YORK.
11.12 Submission To Jurisdiction; Waivers. The Borrower
hereby irrevocably and unconditionally:
(a) submits for itself and its property in any legal action
or proceeding relating to this Agreement and the other Loan Documents
to which it is a party, or for recognition and enforcement of any
judgement in respect thereof, to the non-exclusive general
jurisdiction of the Courts of the State of New York, the courts of the
United States of America for the Southern District of New York, and
appellate courts from any thereof;
(b) consents that any such action or proceeding may be
brought in such courts and waives any objection that it may now or
hereafter have to the venue of any such action or proceeding in any
such court or that such action or proceeding was brought in an
inconvenient court and agrees not to plead or claim the same;
(c) agrees that service of process in any such action or
proceeding may be effected by mailing a copy thereof by registered or
certified mail (or any substantially similar form of mail), postage
prepaid, to the Borrower at its address set forth in subsection 11.2
or at such other address of which the Agent shall have been notified
pursuant thereto;
(d) agrees that nothing herein shall affect the right to
effect service of process in any other manner permitted by law or
shall limit the right to sue in any other jurisdiction; and
(e) waives, to the maximum extent not prohibited by law, any
right it may have to claim or recover in any legal action or
proceeding referred to in this subsection any special, exemplary,
punitive or consequential damages.
11.13 Acknowledgements. The Borrower hereby acknowledges
that:
(a) it has been advised by counsel in the negotiation,
execution and delivery of this Agreement and the other Loan Documents;
<PAGE> 65
65
(b) neither the Agent nor any Lender has any fiduciary
relationship with or duty to the Borrower arising out of or in
connection with this Agreement or any of the other Loan Documents, and
the relationship between Agent and Lenders, on one hand, and the
Borrower, on the other hand, in connection herewith or therewith is
solely that of debtor and creditor; and
(c) no joint venture is created hereby or by the other Loan
Documents or otherwise exists by virtue of the transactions
contemplated hereby among the Lenders or among the Borrower and the
Lenders.
11.14 WAIVERS OF JURY TRIAL. THE BORROWER, THE AGENT AND THE
LENDERS HEREBY IRREVOCABLY AND UNCONDITIONALLY WAIVE TRIAL BY JURY IN ANY LEGAL
ACTION OR PROCEEDING RELATING TO THIS AGREEMENT OR ANY OTHER LOAN DOCUMENT AND
FOR ANY COUNTERCLAIM THEREIN.
<PAGE> 66
66
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be duly executed and delivered by their proper and duly authorized officers as
of the day and year first above written.
NATIONAL EDUCATION CORPORATION
By:
---------------------------------
Title:
BZW DIVISION OF BARCLAYS BANK PLC
as Agent and as a Lender
By:
---------------------------------
Title:
<PAGE> 1
EXHIBIT 11.1
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CALCULATION OF PRIMARY EARNINGS PER SHARE
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended
----------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME (LOSS) FROM
CONTINUING OPERATIONS $(87,223) $(14,093) $10,092 $(6,284) $ (498)
======== ======== ======= ======= ========
NET INCOME (LOSS) $(87,223) $(63,545) $(9,665) $ 515 $ 5,490
======== ======== ======= ======= ========
COMMON STOCK:
Shares outstanding from beginning
of period 29,578 29,405 29,968 29,822 29,718
Pro rata shares:
Stock options exercised 31 134 41 136 12
Shares purchased for treasury,
from date of purchase -- (7) (380) (6) --
Assumed exercise of stock options
using treasury stock method 465 108 226 344 386
Shares issued for restricted stock 292 -- -- -- --
Conversion of Sub. Debentures 1,527 -- -- -- --
-------- -------- ------- ------- --------
Weighted average number of shares
outstanding 31,893 29,640 29,855 30,296 30,116
======== ======== ======= ======= ========
PRIMARY EARNINGS (LOSS) PER SHARE
FROM CONTINUING OPERATIONS $ (2.73) $ (.48) $ .34 $ (.21) $ (.02)
======== ======== ======= ======= ========
PRIMARY EARNINGS (LOSS) PER SHARE $ (2.73) $ (2.14) $ (.32) $.02 $ .18
======== ======== ======= ======= ========
</TABLE>
<PAGE> 1
EXHIBIT 11.2
NATIONAL EDUCATION CORPORATION AND SUBSIDIARIES
CALCULATION OF FULLY DILUTED EARNINGS PER SHARE
(Amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended
-----------------------------------------------------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME (LOSS) FROM
CONTINUING OPERATIONS $(87,223) $(14,093) $10,092 $(6,284) $ (498)
Add back debenture interest, debt
discount and expense amortization,
less applicable taxes 3,116 3,325 964 3,111 3,394
-------- -------- ------- ------- ------
INCOME (LOSS) FROM CONTINUING
OPERATIONS FOR FULLY DILUTED
COMPUTATION $(84,107) $(10,768) $11,056 $(3,173) $2,896
========= ========= ======= ======== ======
NET INCOME (LOSS) $(87,223) $(63,545) $(9,665) $ 515 $5,490
Add back debenture interest, debt
discount and expense amortization,
less applicable taxes 3,116 3,325 964 3,111 3,394
-------- -------- ------- ------- ------
NET INCOME (LOSS) FOR FULLY
DILUTED COMPUTATION $(84,107) $(60,220) $(8,701) $ 3,626 $8,884
========= ========= ======== ======= ======
COMMON STOCK:
Shares outstanding from beginning
of period 29,578 29,405 29,968 29,822 29,718
Stock options exercised 31 134 41 136 12
Shares purchased for treasury,
from date of purchase -- (7) (380) (6) --
Assumed exercise of stock options,
using treasury stock method 803 108 226 344 500
Shares issued for restricted stock 292 -- -- -- --
Conversion of Senior Sub. Debentures 5,021 -- -- -- --
Assumed conversion of subordinated
debentures, from the latter of the
beginning of the period or the
date of issue 2,300 7,300 5,000 7,300 6,588
------ ----- ------ ------- ------
Weighted average number of
shares outstanding 38,025 36,940 34,855 37,596 36,818
====== ====== ====== ======= ======
FULLY DILUTED EARNINGS (LOSS)
PER SHARE FROM CONTINUING
OPERATIONS $(2.73) $(.48) $.32 $(.21) $(.02)
====== ===== ==== ===== =====
FULLY DILUTED EARNINGS
(LOSS) PER SHARE $(2.73) $(2.14) $(.32) $.02 $.18
====== ====== ===== ==== ====
</TABLE>
Fully diluted earnings (loss) per share is the same as primary earnings (loss)
per share for all periods except 1993 because inclusion of the convertible
debentures is antidilutive. The above calculations reflect inclusion of both the
senior convertible debentures and the subordinated convertible debentures for
all periods except 1993. In 1993, inclusion of the senior convertible debentures
is dilutive, however, inclusion of the subordinated convertible debentures would
be antidilutive and, accordingly, they are not included in the 1993 calculation.
<PAGE> 1
EXHIBIT 18
February 5, 1996
To the Board of Directors of
National Education Corporation
Dear Directors:
We have audited the consolidated financial statements included in the Company's
Annual Report on Form 10-K for the year ended December 31, 1995 and issued our
report thereon dated February 5, 1996. Note 1 to the consolidated financial
statements describes a change in the Company's method of determining the cost of
inventories from the last-in, first-out to the first-in, first-out method. It
should be understood that the preferability of one acceptable method of
inventory accounting over another has not been addressed in any authoritative
accounting literature and in arriving at our opinion expressed below, we have
relied on management's business planning and judgment. Based upon our
discussions with management and the stated reasons for the change, we believe
that such change represents, in your circumstances, the adoption of a preferable
alternative accounting principle for inventories in conformity with Accounting
Principles Board Opinion No. 20.
Very truly yours,
Price Waterhouse LLP
<PAGE> 1
EXHIBIT 21
ACTIVE SUBSIDIARIES OF NATIONAL EDUCATION CORPORATION
<TABLE>
<CAPTION>
Country or State
Subsidiaries: of Incorporation
- ------------ ----------------
<S> <C>
NATIONAL EDUCATION CORPORATION DELAWARE
NETG Holding, Inc. Delaware
Its Subsidiaries:
National Education Training Group, Inc. Nevada
Its Subsidiary:
James Martin Insight, Inc. Illinois
NETG Limited United Kingdom
NETG Applied Learning GmbH Germany
Its Subsidiary:
NETG Direct GmbH Germany
NETG Direct, Inc. Delaware
Applied Learning Lernsysteme GesmbH Austria
A.S.I. (Computer Training) Netherlands B.V. Netherlands
A.S.I. (UK) Limited United Kingdom
Spectrum Interactive Incorporated Delaware
ICS Learning Systems, Inc. Delaware
Its Subsidiaries:
International Correspondence Schools Canadian, Limited Canada
International Correspondence Schools, Inc. Pennsylvania
Its Subsidiary:
ICS Intangibles Holding Company California
Intertext Group Limited England
Its Subsidiaries:
The School of Accountancy Limited Scotland
International Correspondence Schools Limited England
International Correspondence Schools (Overseas) Limited England
International Correspondence Schools (Australasia) Limited Australia
Its Subsidiary:
International Correspondence Schools (New Zealand) Limited New Zealand
M-Mash, Inc. Colorado
National Learning Systems, Inc. Delaware
NBD Incorporated Delaware
National Education Centers, Inc. California
National Education Credit Corporation California
National Education Enterprises, Inc. California
National Education International Corp. California
National Education Payroll Corp. California
Steck-Vaughn Publishing Corporation Delaware
Its Subsidiaries:
SV Distribution Company Delaware
Steck-Vaughn Company Delaware
</TABLE>
<PAGE> 1
EXHIBIT 23
NATIONAL EDUCATION CORPORATION
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statements on Form S-8 (Nos. 2-67273, 2-71650, 2-83454, 2-86904, 33-18086,
33-5658, 33-25056, 33-43850 and 33-62977) of National Education Corporation of
our report dated February 5, 1996, except as to Note 4, which is as of March 1,
1996, appearing on page F-1 of this Form 10-K.
Price Waterhouse LLP
Costa Mesa, California
March 18, 1996
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
COMPANY'S AUDITED CONSOLIDATED FINANCIAL STATEMENTS INCLUDED IN THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1995, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH CONSOLIDATED FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<CASH> 22,120
<SECURITIES> 1,748
<RECEIVABLES> 39,139
<ALLOWANCES> 2,742
<INVENTORY> 31,847
<CURRENT-ASSETS> 114,865
<PP&E> 56,020
<DEPRECIATION> 31,992
<TOTAL-ASSETS> 185,262
<CURRENT-LIABILITIES> 83,172
<BONDS> 66,333
0
0
<COMMON> 2,166
<OTHER-SE> 5,315
<TOTAL-LIABILITY-AND-EQUITY> 185,262
<SALES> 258,598
<TOTAL-REVENUES> 258,598
<CGS> 87,870
<TOTAL-COSTS> 338,944
<OTHER-EXPENSES> 5,722
<LOSS-PROVISION> 1,642
<INTEREST-EXPENSE> 8,650
<INCOME-PRETAX> (86,068)
<INCOME-TAX> 0
<INCOME-CONTINUING> (87,223)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (87,223)
<EPS-PRIMARY> (2.73)
<EPS-DILUTED> (2.73)
</TABLE>
