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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 FOR THE FISCAL YEAR ENDED DECEMBER 31, 1996
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ______ TO ______
Commission file number 1-6981
NATIONAL EDUCATION CORPORATION
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(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C>
DELAWARE 95-2774428
(STATE OR OTHER JURISDICTION OF (I.R.S. EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
2601 MAIN STREET
IRVINE, CALIFORNIA 92614
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) (ZIP CODE)
</TABLE>
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
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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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Page 1 of ___; Exhibit Index appears on Page 36
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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 28, 1997, based on the closing
price for such Common Stock on the New York Stock Exchange on such date, was
$418,930,510.
The number of shares of registrant's Common Stock outstanding as of
February 28, 1997, was 35,647,483.
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, 1996), as part of a Proxy Statement
for the registrant's Annual Meeting of Stockholders or as an amendment to this
Form 10-K.
Cover Page 2
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PART I
ITEM 1. BUSINESS.
National Education Corporation (the "Company") is a global provider of
interactive multimedia products and services for the education and training
marketplace. 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., which
provides distance learning opportunities in vocational, degree and professional
self-studies; Steck-Vaughn Publishing Corporation, which publishes supplemental
educational materials; and National Education Training Group, Inc., which offers
interactive multimedia products to train information technology professionals
and end-users of technology.
On March 12, 1997, the Company announced that it had signed a
definitive agreement with Sylvan Learning Systems, Inc. ("Sylvan"), pursuant to
which Sylvan will acquire the Company through a stock-for-stock exchange. Sylvan
is known for its network of more than 650 Sylvan Learning Centers that provide
personalized instructional services to students of all ages and skill levels. In
addition, Sylvan delivers computer-based testing for academic admissions,
professional licensure and certification programs at more than 1,300 testing
centers through its Sylvan Prometric division. Sylvan also provides educational
services under contract to school systems through the Sylvan Contract
Educational Services division; will offer adult professional education and
training through the Caliber Learning Network, Inc.; and operates Wall Street
Institute, a international franchisor of learning centers teaching the English
language.
Under the terms of the agreement, Sylvan will issue 0.58 shares of
common stock in exchange for each share of Company common stock. The
transaction, which is expected to be completed by the end of the second quarter
1997, has been approved by the Board of Directors of both Sylvan and the
Company, but remains subject to approval by the stockholders of Sylvan and the
Company, review by federal antitrust regulators and the fulfillment of customary
terms and conditions. The transaction may be terminated under certain
circumstances, including on mutual consent of the Company and Sylvan, or by
either the Company or Sylvan if the average share price for Sylvan common stock
as reported by Nasdaq for the ten trading days prior to consummation of the
merger is less than $29.86 (unless Sylvan agrees to increase the exchange ratio
to account for the amount by which Sylvan's average share price is below
$29.86). In addition, if the transaction is not consummated because of breach of
the agreement by one party or failure of the stockholders of one party to
approve the transaction, that party may be liable to the other party for a
termination fee. For more information, see Note 17 to the Consolidated Financial
Statements, beginning on page F-29 below.
The results of the Company's operations for 1996 are set forth in Item
6, "Selected Financial Data" and Item 7, "Management's Discussion and Analysis
of Financial Condition and Results of Operations," beginning on page 16 below,
and in the Company's Consolidated Financial Statements, beginning on page F-1
below. In addition, operating results by industry segment for the Company's
operations for the past three years are described in Note 15 to the Consolidated
Financial Statements, beginning on page F-26 below. This Form 10-K contains
certain forward looking statements that are subject to risk and uncertainty.
There can be no assurance that these future results will be achieved; actual
results could differ materially from those projected in the forward-looking
statements.
The following describes the business of each of the Company's principal
operating entities, and discusses significant developments in the business of
those entities in 1996.
ICS LEARNING SYSTEMS, INC.
ICS Learning Systems, Inc. ("ICS") provides distance learning
opportunities in vocational, degree and professional self-studies to consumers
and companies throughout the world. Headquartered in Scranton, Pennsylvania, ICS
and its predecessors have provided distance education opportunities to over 11
million students since its founding in 1890. As discussed more fully below, in
1996 ICS accomplished the following:
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* ICS increased its product offerings in the professional market
through the acquisition of California College for Health
Sciences ("CCHS"), which offers distance education for
healthcare industry professionals, and through MicroMash, a
subsidiary of ICS, which increased its computer-based training
offerings for financial and legal professionals (see
"Principal Products and Product Development" below).
* In January 1997, ICS expanded its international presence
through the acquisition of Educatief, a leading provider of
distance education in the Netherlands (see "Principal Products
and Product Development" below).
* ICS improved its operating margins through, among other
methods, eliminating PC hardware from computer training
courses and reducing marketing costs by eliminating marketing
expenditures that produced the fewest enrollments and
improving the rate at which leads generated through marketing
efforts are converted to enrolled students.
* ICS increased its presence on the Internet for each of its
operations (see "Student Enrollment and Services" below).
* ICS entered into an alliance in 1996 with International
Thompson Publishing ("ITP") that provides ICS access to ITP's
vast content resources for use in ICS' 1997 product
development efforts (see "Principal Products and Product
Development" below).
PRINCIPAL PRODUCTS AND PRODUCT DEVELOPMENT.
Independent Study Programs. ICS offers more than 50
independent study programs in the United States and more than 100 programs
internationally in a wide-range of disciplines under the following names: ICS
Learning Systems, English Language Institute, International Correspondence
Schools and North American Correspondence Schools. ICS offers courses in
computer use and technology (PC Repair, PC Specialist with Multimedia, Master
Computer Programmer, Desktop Publishing & Design, and others), administrative
and office work (Computer-Assisted Bookkeeping, Legal Secretary, Medical Office
Assistant, Master Travel, and others), service and repair fields
(Air-Conditioning/Refrigeration, Auto Mechanic, Motorcycle Repair, TV/VCR
Repair, and others), security (Law Enforcement, Private Security Officer, and
others) and small business opportunities (Real Estate Appraiser, Surveying and
Mapping, Dress Making and Design, Floral Design, and others). In addition, ICS
offers students the opportunity to obtain a distance education high school
diploma through its Newport/Pacific High School program.
ICS also offers over 1,200 training products and 12,000 hours
of training in vocational and professional fields to industrial clients under
the name "ICS Business and Industrial Training". Curricula includes courses in
Personal Computing, Health and Safety, Electronics, Mechanical Maintenance,
Machine Technologies, Building Trades, Utility Industry, Engineering
Technologies, Vehicle Maintenance Technologies, and Business Management
Practices.
A majority of ICS' international revenues are derived from
foreign sales of English-language products. In January 1997, ICS expanded its
offerings of foreign language materials through the acquisition of three
subsidiaries of Educatief Holding B.V., a leading provider of distance education
in the Netherlands. The three subsidiaries consist of Eurodidakt B.V. ("Euro"),
N.T.I. Nederlands Talen Instituut B.V. ("NTI"), and Educatief B.V. ("UE"). Euro
and NTI offer distance education courses in the Dutch language in vocational,
business management, computer skills and leisure fields; UE publishes materials
for use by Dutch vocational schools and training institutes.
Degree-Granting Programs. ICS' Center for Degree Studies
awards Specialized Associate degrees in business and technology. Business
programs include Accounting, Management, Finance, Applied Computer Science,
Marketing and Hospitality Management. Technology programs include Civil
Engineering Technology,
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Electronics Technology, Electrical Engineering Technology, Industrial
Engineering Technology and Mechanical Engineering Technology.
In addition, in 1996 ICS acquired CCHS, a San Diego,
California-based provider of distance education in the healthcare industry. CCHS
offers accredited two-year, four-year and master degree distance learning
programs, including Master of Science in Wellness Promotion and Community Health
Administration, Bachelor of Science in Health Services Management, Associate of
Science in Early Childhood Education, Associate of Science in Medical
Transcription, and Associate of Science in Allied Health. In addition, CCHS
offers Associate of Science degrees in Electroencephalographic Technology and in
Respiratory Care to professionals already working in the healthcare field. In
1997 and beyond, ICS intends to expand CCHS' healthcare-related degree
offerings.
Professional Education Courses. ICS offers professional and
continuing education through MicroMash to the finance, accounting and legal
professions, and through CCHS to the healthcare industry. MicroMash offers over
100 professional exam and continuing professional education products to the
financial and accounting industries, and 30 professional exam products to the
legal industry. MicroMash offers professional examination reviews to achieve the
following certifications: Certified Public Accountant, Certified Management
Accountant, Certified Internal Auditor, Certified in Financial Management and
Enrolled Agent. In addition, MicroMash offers continuing professional education
products to finance and accounting professionals in both business and
government. In 1996, MicroMash began offering the MicroMash Bar Review(TM) to
prepare prospective attorneys to take state bar exams in 29 states. CCHS offers
professional and continuing education courses in healthcare fields such as
respiratory therapy, electroencephalographic technology and allied health.
Product Development and Revision. Curricula for ICS' courses
are designed to reflect current trends in employment opportunities, consumer
interest, professional development and industrial training needs. In 1996, ICS
entered into an alliance with ITP, a group of major publishing companies, that
provides ICS access to ITP's vast content resources for use in ICS' 1997 product
development efforts. This will shorten development time and decrease development
costs for new product offerings. In addition, many of ITP's textbooks are
published in multiple languages, which will enable ICS to more rapidly expand
its foreign language course offerings (particularly in the Netherlands).
In 1996, ICS introduced 33 new or substantially revised
products. In 1997, ICS plans to introduce over 150 new or substantially revised
products.
ACCREDITATION AND COURSE RECOGNITION. ICS' independent study courses in
the United States are accredited by the Distance Education and Training Council
("DETC"), the accrediting body for independent study schools recognized by the
U.S. Department of Education. In addition, ICS is licensed by the State of
Pennsylvania - State Board of Private Licensed Schools. Most ICS courses are
approved for veterans benefits and for DANTES (Defense Activity for
Non-Traditional Education Support). Recently, four computer programming courses
offered by ICS (C, C++, COBOL and Basic) achieved approval from the Institute
for Certification of Computing Professionals, an international organization for
professional standards in the information processing industry.
Programs offered through the ICS Center for Degree Studies are approved
for college credit by the Program on Non-Collegiate Sponsored Instruction
("PONSI"), which is administered by the American Council on Education. In
addition, the International Association for Continuing Education and Training
("IACET"), which establishes guidelines and standards defining acceptable
continuing education credits that are applied toward maintaining professional
licenses and credentials, has approved many ICS courses for continuing education
credits.
CCHS also is accredited by the DETC and is licensed as a
degree-granting institution by the State of California, Council for Private
Postsecondary and Vocational Education. Most CCHS courses are approved for
college credit by PONSI, and applicable CCHS courses are accredited by the
Commission on Accreditation for Allied Health Education Programs, the Joint
Review Committee for Respiratory Education, and the American Nurses
Credentialing Center.
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MicroMash continuing professional education 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., the Internal Revenue Service and the Institute for Certification of
Computing Professionals, among others. MicroMash continuing legal education is
recognized by various state legal professional licensing boards.
MARKETING AND DISTRIBUTION. ICS markets its independent study courses
throughout the United States and to over 150 countries utilizing direct response
advertising through print, television media and direct mail marketing. ICS has
over 200 telesales representatives in the United States who speak directly to
prospective U.S. students about enrolling in courses. ICS also has established
telemarketing operations in Canada, the United Kingdom and Australia. In
addition, with the acquisition of the Educatief operations in early 1997, ICS
has established telemarketing operations in the Netherlands. ICS also has
operations in the New Zealand and Singapore, and uses a network of foreign
distributors to reach English-speaking students in countries throughout the
world.
MicroMash and CCHS market their professional education products
throughout the United States using direct response advertising through print,
television media and direct mail marketing. ICS' Business and Industrial
Training Division markets its products through independent sales representatives
and 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
quickly create custom curricula for ICS clients. In addition, the division's
independent sales representatives generate revenue from corporate clients
through sources such as tuition assistance programs.
ICS, MicroMash and CCHS each fulfills orders and distribute products
internally. ICS, MicroMash and CCHS have multiple sources readily available to
supply raw materials and goods used to fulfill orders.
STUDENT ENROLLMENT AND SERVICES. 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, and all CCHS degree programs
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 receive refund of tuition paid for future
lessons or to cancel amounts that have not yet been paid for future lessons.
ICS' accounting treatment recognizes distance education 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 continually works to
enhance its customer service by, among other methods, increasing the
availability of instructors and to improve its attrition rates. In addition, ICS
is working to increase the number of graduates from ICS programs who enroll in
further ICS programs. ICS is not dependent on student financial aid under
federal government programs.
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 24 months, depending on the course selected. A
computerized student information/testing system permits students, through
touch-tone telephones or voice response, to obtain immediate testing and
feedback on test results. Over 95% of the 2 million exams graded by ICS during
1996 were graded electronically by either the information/testing system via
telephone or by electronic scanner. ICS utilizes a voice-activated computer
record access system that allows students to obtain key information from their
records, 24 hours a day, without operator assistance.
ICS utilizes technology to deliver products and services to its
students. ICS' Internet site at "http://www.icslearn.com" allows prospective and
current ICS students to access 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. During 1997, ICS intends to expand its Internet services
to allow students to complete examinations on-line. CCHS' Internet site at
"http://www.cchs.edu" includes student discussion areas, student-instructor
interaction, and an on-line student library.
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COMPETITION. The distance education and training industry is highly
competitive. In recent years, technological changes have increased the variety
of choices available to students in selecting the type of education and the
manner in which it is delivered, thereby increasing the number of entities with
which ICS competes for student enrollments. ICS faces competition from
U.S.-based and foreign independent study providers and, increasingly, from
community colleges, vocational and technical schools, two-year colleges and
universities. ICS also faces competition from governmental entities and other
"distance learning" companies and schools, including electronic universities.
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 Publishing Corporation ("Steck-Vaughn") publishes
supplemental educational materials used in elementary, secondary and adult
education. Headquartered in Austin, Texas, Steck-Vaughn, together with its
predecessors, has been a publisher of educational materials since 1936.
Steck-Vaughn closed its initial public offering in July 1993; currently, the
Company owns approximately 83% of Steck-Vaughn. As discussed more fully below,
in 1996 Steck-Vaughn accomplished the following:
* Steck-Vaughn achieved strong revenue growth in its three
traditional market segments: elementary/high school ("El/Hi")
education, library and adult education (see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" below).
* Steck-Vaughn expanded into educational software publishing
through, among other methods, acquiring Edunetics Ltd., a
developer and publisher of computer-based curriculum and other
educational software products (see "Principal Products and
Product Development" below).
* In September 1996, Steck-Vaughn named Anita Kopec as President
and Chief Executive Officer of Steck-Vaughn. Ms. Kopec brings
to Steck-Vaughn many years of experience in publishing
print-based and software-based educational materials.
* Steck-Vaughn entered into agreements with 99 independent sales
representatives nationwide to focus solely on Steck-Vaughn's
library segment, thereby allowing Steck-Vaughn's sales staff
to concentrate more on marketing Steck-Vaughn's expanding line
of technology-based products (see "Marketing and Distribution"
below).
* Steck-Vaughn established a new distribution channel for its
products as a result of the acquisition in December 1995 of
the assets and operations of Summit Learning, Inc., a
well-established direct response marketing company that
produces and distributes catalogs to teachers, other key site-
based decision makers and consumers (see "Marketing and
Distribution" below).
PRINCIPAL PRODUCTS AND PRODUCT DEVELOPMENT. Steck-Vaughn publishes and
distributes supplemental educational materials used in elementary, secondary and
adult education. The term "supplemental materials" refers to softcover,
curriculum-based books, workbooks and other support materials, along with
educational software, that are used in conjunction with or instead of more
traditional hardcover basal textbooks. In addition, Steck-Vaughn is a
significant publisher and distributor of reference books for the children's and
young adult library market.
Steck-Vaughn believes that the continuing success of
Steck-Vaughn's business depends, in part, on increasing its offerings of
technology-based educational products and integrating those products into its
business as educators increasingly use technology-based supplemental materials
in addition to traditional print-based materials. In 1996, Steck-Vaughn expanded
its educational software publishing through, among other methods, acquiring
Edunetics Ltd. ("Edunetics"), a developer and publisher of computer-based
curriculum and other educational software products. The Edunetics product line
consists of nearly 1,000 hours of curriculum-based computer software in the
areas of science and math for elementary and high school students. In addition,
Steck-Vaughn will use Edunetics' expertise in developing multimedia educational
products integrating both print and software formats.
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In June 1996, Edunetics launched its first eight multiple-media CD-ROM titles as
part of a 30-program series to cover the K-5 math, science and social studies
curriculum.
Elementary and Secondary Education Materials. Steck-Vaughn's
supplemental materials in the El/Hi market support the instruction of reading,
language arts, social studies, science, history, geography, mathematics,
literature, health and test preparation and assessment. Representative products
in this market include Pair-It Books(TM), a 50-book series for grade levels K-2
released in 1996 pairing fiction and nonfiction books emphasizing language and
phonics; Steck-Vaughn Spelling, an eight-book softcover series for grade levels
2-8 that teaches spelling in the context of reading, writing, and language arts;
Language Exercises, an eight-book series for grade levels 1-8 that emphasize
writing and study skills; Test Best(R), a nine-book series for grade levels K-8
to help students improve scores on tests such as the California Achievement
Tests (CAT/5)(R), the Iowa Test of Basic Skills(R), the Stanford Achievement
Test(R), the Comprehensive Tests of Basic Skills(R) and the Metropolitan
Achievement Tests (MAT 7)(R); and Strategies for Success, a multiple book series
produced by Steck-Vaughn's Berrent Publications Division for grade levels 2
through high school that offers a test preparation and skills improvement
program covering five levels in reading, writing and mathematics.
Software educational materials for the El/Hi market include Go
West! The Homesteader's Challenge(TM), an Edunetics interactive multimedia
CD-ROM product for grade levels 4-8 that simulates pioneer life and supports
curriculum objectives in the areas of social studies, language arts,
mathematics, geography, economics, science and technology, and Message in a
Fossil: Uncovering the Past(TM), an Edunetics interactive multimedia CD-ROM
product for grade levels 2-8 that simulates a paleontologist's excavation site
and supports science curriculum. In December 1996, Go West! The Homesteader's
Challenge(TM) received the Newsweek Editors' Choice(TM) award as one of the 50
best in Children's CD-ROM products. Also in 1996, Message in a Fossil:
Uncovering the Past(TM) was recognized by "Technology and Learning" magazine as
one of the top 50 software titles in the United States.
Adult Education Materials. Steck-Vaughn's extensive line of
adult education products covers a wide range of adult learning needs, including
General Education Development ("GED"), Adult Basic Education, English as a
Second Language ("ESL") and general self-improvement and job skills programs.
Steck-Vaughn's Educational Development Laboratories ("EDL") product line
(acquired in October 1995) offers computer-based instructional programs in the
areas of basic reading, vocabulary and writing complementary to Steck-Vaughn's
pre- GED and GED software products (discussed below).
Representative products in the adult education market include
a comprehensive line of print-based GED materials including pre-GED and GED test
preparation materials (Steck-Vaughn is the exclusive distributor of the official
GED Practice Tests sanctioned by the GED Testing Service of the American Council
for Education); Pre-GED 2001(TM), and GED 2000, software versions of
Steck-Vaughn's pre-GED and GED preparatory materials; Real-Life English, a
five-book ESL series for adults and young adults with limited or no English
reading skills; Learning 100(R) and Learning 100(R) On-Line, print and
interactive software materials, respectively, that teach vocabulary words and
corresponding language skills at ten reading levels; and Reading Strategies
Software, a software-based reading comprehension program covering ten reading
levels.
Library Materials. Steck-Vaughn's library product offerings
include encyclopedias, a complete atlas of the world, and over 2,000 other
titles for students in kindergarten through high school. These products cover
mostly nonfiction topics reflecting current curricula, including social studies,
science and health, as well as some fiction, classics and the arts. Many of the
library products address contemporary issues, such as the environment, social
pressures, and culture. Others provide hands-on science experiments for children
primarily in kindergarten through grade eight.
Many of Steck-Vaughn's library products are offered pursuant
to exclusive distribution agreements with other library publishers. In 1996,
Steck-Vaughn entered into an agreement with Wayland Publishers Limited
("Wayland"), one of England's largest library and reference publishers, granting
Steck-Vaughn exclusive distribution rights in the United States and, as of
January 1997, Canada for Americanized editions of 200 pre-existing Wayland
titles as well as a number of new Wayland titles that will be released each year
during the term of the agreement.
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Steck-Vaughn also is the exclusive distributor for Abdo & Daughters, which
publishes high interest/low readability books for grade levels K-8, including a
54-book animal series, many biographies and social studies titles, and a
complete series on environmental studies. Steck-Vaughn also is the exclusive
distributor to the schools and public libraries markets in the United States of
the Larousse Kingfisher Chambers, Inc. line of books, which includes several
multi-volume encyclopedias and foreign language dictionaries.
Representative products in the library market include Portrait
of America, a newly revised 53-book reference collection for grade levels 4 and
higher presenting comprehensive profiles of each of America's 50 states and
territories; Raintree Steck-Vaughn Illustrated Science Encyclopedia, a newly
revised comprehensive 24 volume resource on science, nature and technology for
ages 9-15; Remarkable World, a 16-book series published by Wayland intended for
students ages 9 through adult with limited reading skills; and Postcards From .
. ., a 24-book series describing 24 countries through "postcards" that could
have been written by children visiting those countries.
Product Development. In 1996, Steck-Vaughn introduced 69 new
products and 25 product revisions for the elementary market, 25 new products and
six product revisions for the secondary and adult education markets, 51 EDL
titles (intended for the adult market), 60 Berrent titles (intended for the
elementary and secondary education market), and 270 new titles for either new or
continuing series in the library market. Each product consists of one or more
components, including books, workbooks, software programs, maps, audio tapes,
manipulatives, teacher's manuals and other resources.
Steck-Vaughn generally develops products based upon extensive
formal quantitative and qualitative market research and feedback about
curriculum needs from teachers, school administrators, librarians and others.
Steck-Vaughn typically commissions an independent writer or outside development
house to author many of its print- based products on a fee or royalty basis,
supervised by a Steck-Vaughn project editor who is an expert in the subject
matter. The use of independent authors and development houses allows
Steck-Vaughn to develop a large number of product components each year while
maintaining a relatively small internal production staff. Steck-Vaughn's
software-based products generally are developed internally through the
coordinated efforts of the Edunetics' product development staff in Israel and
Plano, Texas, and Steck-Vaughn's product development staff in Austin, Texas.
Approximately 70% of Steck-Vaughn's new library product
offerings (other than those acquired under distribution agreements) are
developed in and imported from England. The foreign publisher typically bears
most of the development costs, with Steck-Vaughn paying a nominal contribution
to those costs, including adaptation costs, plus the cost of duplicate film and
royalties. This import/conversion procedure generally costs Steck-Vaughn less
than the cost of completely developing the same product in-house.
Revisions. Steck-Vaughn's educational materials generally have
an initial life of five to ten years. Steck-Vaughn often revises and adapts
successful products to the current market in order to extend the life of
products and generate significant additional revenue for a relatively small
investment. Wonders of Science, Steck-Vaughn GED, Steck-Vaughn Spelling, the
Portrait of America series and Steck-Vaughn's Raintree Illustrated Science
Encyclopedia, among other offerings, were recently revised and reintroduced to
the market.
MARKETING AND DISTRIBUTION. Steck-Vaughn markets its products through
its sales staff, independent sales representatives and direct market catalogs to
students, parents, teachers, administrators, elementary and high schools, school
districts, libraries, community colleges, adult learning centers, correctional
facilities, and other public and job site locations throughout the United
States.
National Sales Organization. Steck-Vaughn sells its products
primarily through its over 140-person national sales organization, of which 91
are field sales representatives who make direct personal contact with school
district personnel, teachers, principals and adult educators. The sales
organization is comprised of two distinct sales groups: one group focuses on the
elementary product line and the other group focuses on the high school and adult
education product lines. In addition, members of Steck-Vaughn's sales
organization conduct telemarketing from Steck-Vaughn's headquarters.
Steck-Vaughn believes there has been a widespread shift in purchasing decisions
from the district level to the school level, with empowerment for the buying
decisions with teachers and school-level administrators. Steck-Vaughn has
structured its sales force to enable it to reach teachers and other school-level
- 7 -
<PAGE> 10
personnel with purchasing authority. In addition, Steck-Vaughn markets to
school-level personnel increasingly through direct market catalog sales (see
"Catalog Sales and Advertisements" below).
Independent Sales Representatives. In October 1996,
Steck-Vaughn entered into agreements with 99 independent sales representatives
nationwide to represent Steck-Vaughn's library product line to school and public
libraries. Steck-Vaughn also has agreements with independent sales
representatives and/or distributors to sell Steck- Vaughn's entire product line
in Australia, New Zealand, the Caribbean, Mexico, Puerto Rico, Japan, South
Korea, Singapore and Taiwan and to schools for dependents of U.S. military
personnel in Europe, Africa and the Middle East. In Canada, substantially all of
Steck-Vaughn's El/Hi and adult education products are distributed exclusively by
Gage Educational Publishing Company, a division of Canada Publishing Corp.,
while Steck-Vaughn's library product line is distributed exclusively by Saunders
Book Co. Steck-Vaughn's independent sales representatives work on a commission
basis, receiving no salary or expense reimbursement. Distributors buy
Steck-Vaughn's products for their own account at a discount for resale to their
customers.
Catalog Sales and Advertisements. Steck-Vaughn also markets
and sells its products through direct mail, catalogs and magazine
advertisements. Steck-Vaughn produces a catalog for each market segment which
functions both as a sales tool for the field sales force and as a direct mail
solicitation document. Steck-Vaughn makes regular mailings of catalogs and
brochures to prospective customers, and places advertisements in all major trade
journals and trade magazines.
Steck-Vaughn increased its ability to market its products
directly to the classroom teacher through its December 1995 acquisition of the
assets of Summit Learning, Inc. Summit Learning is a well-established direct
response marketing company aimed at classroom teachers and other key site-based
personnel. Historically, Summit Learning's catalogs offered math and science
manipulatives and kit-based products produced by third parties. Since being
acquired by Steck-Vaughn, Summit Learning has introduced Steck-Vaughn (including
Edunetics) products in Summit Learning catalogs. In addition, Summit Learning
markets to the consumer channel through its Young Explorers catalog, which
traditionally is mailed during the winter gift-giving season.
MANUFACTURING, WAREHOUSING AND DELIVERY. The majority of Steck-Vaughn's
books and software products are manufactured by independent companies located
throughout the United States. Steck-Vaughn believes that it has sufficient
alternative sources of manufacturing services to meet its foreseeable needs.
Vendors generally are selected on the basis of competitive bidding, quality,
schedules and delivery dates. To take advantage of certain manufacturing
economies, several library series are manufactured outside the United States.
The availability and prices of paper are important to Steck-Vaughn's business.
Historically, paper prices have been volatile, and Steck- Vaughn believes that
no reasonable estimate can be made as to the potential effect of fluctuating
paper prices on Steck-Vaughn's business in the future. Notwithstanding the
foregoing, Steck-Vaughn's growing product line and substantial reprint needs
have enabled it to negotiate favorable prices and quantity discounts with key
vendors of paper, printing and binding.
Steck-Vaughn owns a 101,000-square-foot distribution center located in
Austin, Texas, which houses its inventory of El/Hi, library and adult education
materials. A new automated warehouse management system was implemented at this
facility in 1996 to improve order processing. Steck-Vaughn also leases
approximately 23,000 square feet of warehouse space in Ft. Collins, Colorado to
meet the needs of the Summit Learning distribution operation. Steck-Vaughn
generally meets or exceeds the industry standard of shipping products within one
week of receipt of a customer order. Steck-Vaughn ships its materials to
customers via common carrier and the United States Postal Service.
Many states prohibit sale of certain educational materials unless the
materials first are adopted by the state's educational authorities. Typically,
those states require that, following adoption, the publisher consign inventory
to in-state depositories; however, this requirement is more common for basal
textbooks than for supplemental materials. Less than 3% of Steck-Vaughn's
inventory currently is consigned to book depositories.
EDUCATIONAL FUNDING. Most funding for educational materials is
dependent on government support from one or more sources. The purchase of
supplemental educational materials by school districts generally is funded
- 8 -
<PAGE> 11
from state and local taxation revenues and, to a far lesser extent, from federal
funding. Steck-Vaughn's sales of materials for the special education market are
dependent to a significant extent on continued federal funding under the
Individuals with Disabilities Education Act. Sales of adult education materials
depend largely on federal funding under the Adult Education Act and the Job
Training Partnership Act of 1982.
Steck-Vaughn and other educational materials publishers are vulnerable
to reduced availability of tax revenues and resulting decreases in purchases by
school administrators. However, Steck-Vaughn believes that the supplemental
educational materials market generally has proven to be relatively resistant
during contraction of educational spending as school systems look for a less
expensive alternative to the hardcover textbook. Steck- Vaughn's library market
is affected by budget cuts as expenditures for library materials often are
considered a lower priority than expenditures for curriculum materials.
COMPETITION. The market for educational materials is both highly
competitive and highly fragmented. There are many other publishers of
supplemental texts for the El/Hi market, adult education materials and
children's library books. Steck-Vaughn believes that the ability of its field
sales organization to call on multiple categories of purchasers of supplemental
educational materials at a single location along with extensive mailings of both
Steck-Vaughn and Summit Learning catalogs allow Steck-Vaughn to remain
competitive. Steck-Vaughn and other supplemental publishers also compete with
basal publishers for shares of the same limited school budgets.
Steck-Vaughn believes that the principal competitive factors in its
industry are breadth and quality of product offerings, price, an effective sales
force, quality of support services and market responsiveness. Although
Steck-Vaughn believes it competes favorably on the basis of these factors, there
are competitors within each of Steck-Vaughn's market segments with significantly
greater financial and marketing resources than Steck-Vaughn. For example, in the
El/Hi market, Steck-Vaughn's competitors include Modern Curriculum Press, a
division of Simon and Schuster, and SRA, a subsidiary of McGraw-Hill. In the
adult education market, Contemporary Book Company, owned by the Tribune Co., and
Prentice Hall/Regents Cambridge Adult Education are major competitors of
Steck-Vaughn. Children's Press, a division of Grolier, Inc., continues to be a
major supplier of library titles for school and public libraries. Competitors to
Summit Learning include Creative Publications, J.L. Hammett, and Delta
Education, Inc.
NATIONAL EDUCATION TRAINING GROUP, INC.
Established in the late 1960s, National Education Training Group, Inc.
("NETG") 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. As discussed more fully below, in 1996 NETG
accomplished the following:
* NETG posted improved financial results, achieving positive
earnings to reverse prior years' losses (see "Management's
Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Consolidated Financial
Statements below).
* NETG significantly expanded and updated its product offerings,
adding 221 new Skill Builder(R) courses in information
technologies and end-user computing (see "Principal Products
and Product Development" below).
* NETG produced new courses to prepare information technology
personnel and end-users for certification exams offered by
Microsoft and Novell (see "Principal Products and Product
Development" below).
* NETG formed new alliances with Oracle Corporation ("Oracle"),
Novell and Netscape Communications Corporation ("Netscape") to
develop courseware for the technology, software and business
of those companies (see "Principal Products and Product
Development" below).
- 9 -
<PAGE> 12
* NETG introduced its Learning Object(TM) architecture for
deploying Precision Learning(TM) technology- based instruction
over intranets (see "Principal Products and Product
Development" below).
PRINCIPAL PRODUCTS AND PRODUCT DEVELOPMENT. NETG offers over 600
training products that provide an analytical perspective as well as practical
skills and knowledge in information technology (client/server and mainframe),
end-user computing, and management and professional development. NETG's products
primarily are delivered on various forms of technology-based media, including
CD-ROM and diskette, and may be operated 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 consumer's learning experience
effective and relevant, focusing the user on what he or she needs to learn and
not what he or she already knows.
Information Technologies Courses. Information technologies
courses train information technology personnel in all aspects of computer
programming, networking, engineering and support. Product lines include
comprehensive training curricula relative to the following: Microsoft Certified
Systems Engineer, Microsoft Certified Solution Developer, Microsoft Windows
Support, Microsoft Windows Programming, Novell Certified Network Engineer,
Novell NetWare, Internet/Intranet (including courses in HTML, Java and Web Site
Implementation), Client/Server technologies, Object Oriented Technologies,
Software Engineering, C and C++ Languages, Groupware/Workgroup Server Software,
Networking Communications, UNIX, IBM OS/390 and IBM OS/2.
The Novell Certified Network Engineer curricula were developed
pursuant to an agreement with Novell under which NETG has created a series of
courses that covers eight certification exams for NetWare 4.1 and GroupWise 4.
In addition, courses for NetWare 4.11 and GroupWise 5 are under development. The
Internet/Intranet courses are part of the Internet Masters Series(TM) developed
pursuant to NETG's agreement with Netscape. The Internet Masters Series covers
skills and knowledge required to effectively implement and support Web
technology in business environments.
The Microsoft titles are aimed at certifying information
technology professionals on Microsoft software; those titles have been approved
by Microsoft as Microsoft Certified Professional Study Guides, which must be
mastered to qualify as a Microsoft Certified Systems Engineer or Microsoft
Certified Solution Developer.
End-User Computing. End-user computing courses train computer
users in the most popular software programs available for personal and networked
computers. Product lines include comprehensive training curricula in the
following areas: Internet/Intranet (including courses in Netscape Navigator,
Microsoft Internet Explorer, HTML and Java), PC Basics and Operating Systems
(including courses in DOS, Microsoft Windows NT, Novell, IBM OS/2 and Apple
Macintosh), Word Processing Applications (including Microsoft Word 97, Word for
Windows 95 and Word for Windows 3.x, WordPerfect and Lotus WordPro),
Spreadsheets (including Microsoft Excel and Lotus 1-2-3), Desktop Publishing and
Graphics (including Microsoft Powerpoint), Databases, Groupware Communications,
Microsoft End User (covering almost all popular Microsoft end-user programs) and
SAP. NETG's Microsoft offerings support the Certified Microsoft Office User
Program. The courses prepare users for certification testing on Microsoft Office
applications.
Management and Professional Development. Product lines for
management and professional development training include comprehensive training
curricula in the following areas: Reskilling Business, Total Quality Management,
Fundamental Skills, Interpersonal Skills, Managing People, Managing People
Leadership Skills, Customer Service, and Business Skills. Management and
Professional Development courses include many video-based courses.
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. In order to
provide consistent course structure and style to customers who depend
- 10 -
<PAGE> 13
on NETG for training, NETG has refocused its development efforts so that, in
1996, NETG developed 221 courses under the direction of NETG's internal product
development organization and using NETG's proprietary Skill Builder development
engine and delivery platform. This has allowed NETG to maintain high-quality
products with a consistent structure and style to facilitate each user's ability
to train in multiple subjects supported by NETG.
Many of NETG's new course offerings arise from its
relationships with companies such as Microsoft, Novell and Oracle. These
relationships 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. For
example, under NETG's agreement with Oracle, among other provisions, Oracle will
provide source materials and subject matter expertise, and NETG will build
courses using its proprietary Skill Builder development engine and delivery
platform. This will allow NETG to quickly bring to market training products for
new Oracle software offerings.
NETG also has expanded its offering of courses translated into
foreign languages. Currently, NETG offers courses in German, Spanish, French,
Portuguese, Korean and Japanese. Many translations are undertaken by ALPNET, the
largest dedicated commercial provider of language translation, product
localization and language related services to international businesses.
NETG increasingly is developing products by organizing
training content into Learning Object(TM) structural components that can be
downloaded individually over an intranet. Each Learning Object component
consists of a topic as defined in the map for a course. Users can load one,
several or all of a course's Learning Object components to their personal
computer or workstation, allowing the user to focus on selected topics within a
course.
Product Revisions. NETG continually revises and updates its
courses to address new technology and new versions of software programs,
languages, and methods that enter the workplace. In addition, in the ordinary
course of business, NETG removes from its course offerings those courses which
no longer reflect current technology or training methods.
MARKETING AND DISTRIBUTION. 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. NETG also delivers products
through education and learning centers such as Microsoft- and Novell-authorized
education centers. In addition, NETG has a 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.
NETG maintains its international headquarters in London, England.
NETG's international operations, consisting primarily of direct sales and
marketing operations, employ 150 persons, with 110 of those in England and the
remainder in other European countries. 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's customers are supported by NETG's Customer Assistance operations
located in Naperville, Illinois, and in London, England, which provide customers
with toll-free order processing during business hours, and 24 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.
In 1996, NETG outsourced its order fulfillment and distribution. NETG
has multiple vendors available to it for order fulfillment and has multiple
sources readily available to supply raw materials and goods used to fulfill
orders.
- 11 -
<PAGE> 14
COMPETITION. The market for computer-based and multimedia materials is
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,
Oracle and Netscape), breadth of subject matter and delivery media, methods of
distribution (including intranet and Internet distribution), 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 (acquired by
Gartner Group), 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 1996, 1995 and 1994 (for more detailed information, please
see Note 15 to the Consolidated Financial Statements beginning on page F-26
below):
<TABLE>
<CAPTION>
(Dollars in thousands) 1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Net revenues outside the
United States $76,603 $70,585 $60,994
Percent of consolidated
net revenues 26.5% 27.3% 25.2%
</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 United
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 United States. In
addition, in 1996 Steck-Vaughn acquired Edunetics Ltd., which is based in
Israel, and in January 1997 ICS acquired three subsidiaries of Netherlands-based
Educatief Holding B.V.
RESEARCH AND DEVELOPMENT
Company-sponsored research and development expense during 1996, 1995
and 1994 was approximately $24 million, $23 million and $20 million,
respectively. In 1996, 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.
COPYRIGHTS AND TRADEMARKS
The Company and its subsidiaries hold copyrights in substantially all
of their respective courses, print products, software products and other
educational materials. Many of these copyrights are federally registered with
the Copyright Office of the United States Library of Congress. Certain of
Steck-Vaughn's educational materials are copyrighted in the name of independent
authors. As to copyrights held in the name of the Company or any of its
subsidiaries, the term of copyright extends for 75 years from the date of first
publication of the work or 100 years from the date of creation of the work,
whichever is shorter.
- 12 -
<PAGE> 15
Additionally, the Company and its subsidiaries own the rights to
numerous trademarks worldwide, many of which are registered on the Principal
Register with the U.S. Patent and Trademark office as well as with various
foreign governments. In the U.S., federal registration of a trademark extends
for ten years and thereafter registration may be renewed indefinitely provided
the trademark continues to be used in commerce. The Company believes that
trademark and copyright protections are important to the business and financial
condition of the Company; however, factors such as the breadth and quality of
its products, the knowledge, ability and experience of the Company's personnel,
its product development capabilities, its sales force and marketing channels,
and product loyalty from its customers are more important factors.
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 annual 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.
BACKLOG
Unearned net 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 the Consolidated Financial
Statements on page F-20 below. Due to the importance of shipping products
immediately upon receipt of a customer order, Steck-Vaughn maintains an
inventory of current products such that, at December 31, 1996 and December 31,
1995, Steck-Vaughn had virtually no orders unshipped. NETG's backlog at December
31, 1996, and December 31, 1995, respectively, was $13.6 million and $0.9
million.
ENVIRONMENTAL MATTERS
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 1996 on the Company's
capital expenditures, earnings or competitive position.
EMPLOYEES AND EXECUTIVE OFFICERS OF THE COMPANY
The Company employed approximately 2,700 persons worldwide as of
February 28, 1997. The following table provides information regarding executive
officers of the Company, including their ages as of February 28, 1997:
Name, Age and Title: Five-Year Business Experience:
- -------------------- ------------------------------
David C. Jones (75) Chairman of the Board since July 1989. Acting Chief
Chairman of the Board 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 Directors of SRA
International, Inc., an information technology
company. Chairman of the Board of Advisors of the
National Civilian Community Corps. Member of the
Board of Advisors of TF Purifiner, Inc.
- 13 -
<PAGE> 16
Sam Yau (48) President, Chief Executive Officer and a Director
President and Chief of the Company since May 1995. Chief Operating
Executive Officer 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 Powerwave,
Inc.
Philip C. Maynard (42) Vice President, Secretary and General Counsel since
Vice President, Secretary February 1994. General Counsel of Orchids Paper
and General Counsel 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 (42) Vice President, Chief Financial Officer and
Vice President, Chief Treasurer since April 1991. Vice President and
Financial Officer 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 of approximately 18,000 square feet in Irvine, California, which
lease expires in June 2006.
(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. The building, located in Austin, Texas on approximately 13 acres
of land, contains 101,000 square feet of space.
(e) The Company has approximately 59 leases for its operating units and
offices, including the following: NETG's headquarters in Naperville, Illinois -
approximately 72,000 square feet; NETG's United Kingdom headquarters in
Chiswick, London - approximately 38,000 square feet; and Steck-Vaughn's
headquarters in Austin, Texas - approximately 47,000 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 generally is 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 1996.
- 14 -
<PAGE> 17
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>
1996 1995
---- ----
High Low High Low
<S> <C> <C> <C> <C>
First Quarter $ 11 3/4 $ 7 5/8 $ 4 5/8 $ 2 1/2
Second Quarter 22 3/4 11 3/4 5 3/4 3 1/8
Third Quarter 20 3/4 13 8 3/8 4 7/8
Fourth Quarter 19 1/4 11 5/8 8 3/4 6 3/8
</TABLE>
The number of stockholders of record of the Company's Common Stock as
of February 28, 1997, was 2,270. 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 1996 or 1995. The Company has no present intent to pay cash
dividends; in addition, the Company's Credit Agreement with its lending
institutions restricts the payment of cash dividends.
- 15 -
<PAGE> 18
Item 6. Selected Financial Data
National Education Corporation and Subsidiaries
FIVE YEAR FINANCIAL HIGHLIGHTS
<TABLE>
<CAPTION>
(amounts in thousands, except per share amounts) 1996 1995 1994 1993 1992
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET REVENUES $288,801 $ 258,598 $ 241,614 $ 224,172 $ 218,269
-----------------------------------------------------------
Income 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 $ 36,411 $ 4,815 $ 7,934 $ 1,840 $ 4,409
Amortization of acquired intangible assets 2,847 1,961 2,191 4,901 6,155
Amortization of prior period deferred - 1,470 19,836 - -
marketing
Unusual items, net 4,100 81,730 - 9,232 2,506
Other nonoperating expenses, net 5,330 5,722 2,610 3,025 5,141
Gain on sale of stock - - (3,247) (21,120) -
Income tax provision (benefit) 2,236 - (555) (4,889) (3,109)
Minority interest in consolidated subsidiary 538 1,155 1,192 599 -
-----------------------------------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 21,360 (87,223) (14,093) 10,092 (6,284)
Income (loss) from discontinued operations - - (9,420) (19,757) 6,799
Loss on disposal of discontinued operations - - (40,032) - -
-----------------------------------------------------------
NET INCOME (LOSS) $ 21,360 $ (87,223) $ (63,545) $ (9,665) $ 515
===========================================================
EARNINGS (LOSS) PER SHARE FROM CONTINUING
OPERATIONS:
Primary earnings (loss) per share $ .58 $ (2.73) $ (.48) $ .34 $ (.21)
===========================================================
Fully diluted earnings (loss) per share $ .58 $ (2.73) $ (.48) $ .32 $ (.21)
===========================================================
EARNINGS (LOSS) PER SHARE $ .58 $ (2.73) $ (2.14) $ (.32) $ .02
===========================================================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Primary 36,691 31,893 29,640 29,855 30,296
Fully diluted 38,647 38,025 36,940 34,855 37,596
SELECTED FINANCIAL INFORMATION
Cash and investment securities $ 19,129 $ 23,868 $ 28,130 $ 54,846 $ 59,464
Total assets 222,089 185,262 270,245 325,005 334,881
Capital expenditures, including capital
leases 11,619 7,781 8,442 8,503 6,784
Long-term debt and capital lease obligations 87,203 66,333 83,883 80,050 80,715
Stockholders' equity 34,018 7,481 73,016 136,233 151,930
Total debt-equity ratio 2.8-1 10.5-1 1.2-1 .6-1 .5-1
</TABLE>
See Notes 2, 3 and 4 of the Notes to Consolidated Financial Statements
for discussion of the acquisitions, dispositions and gain on sale of
stock, and unusual items for 1996, 1995 and 1994. The 1993 gain on
sale of stock represents the initial public offering of 18.3% of the
common shares of stock of Steck-Vaughn. The 1993 unusual item
represents the write-off of intangible assets and the 1992 unusual
item represents severance payments to individuals and lease
termination charges.
Effective January 1, 1994, the Company changed its method of
accounting for advertising and other deferred marketing costs.
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. See Note 1 to Consolidated Financial
Statements for further discussions.
No cash dividends were declared in any of the above periods.
- 16 -
<PAGE> 19
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 operating 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) 1996 1995 1994
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET REVENUES:
ICS Learning Systems $ 143,130 $ 143,021 $ 122,815
Steck-Vaughn Publishing 85,505 58,226 53,608
NETG 57,936 54,350 61,937
Other 2,230 3,001 3,254
-----------------------------------
TOTAL NET REVENUES $ 288,801 $ 258,598 $ 241,614
===================================
OPERATING INCOME (LOSS):
ICS Learning Systems before amortization
and unusual item $ 20,260 $ 13,628 $ 15,909
Amortization of prior period deferred
marketing - (1,470) (19,836)
-----------------------------------
ICS Learning Systems before unusual item 20,260 12,158 (3,927)
Unusual item - (4,549) -
-----------------------------------
ICS Learning Systems 20,260 7,609 (3,927)
-----------------------------------
Steck-Vaughn Publishing before unusual items 11,716 10,469 10,459
Unusual items (4,100) (970) -
-----------------------------------
Steck-Vaughn Publishing 7,616 9,499 10,459
-----------------------------------
NETG before unusual items 6,290 (15,375) (13,993)
Unusual items - (74,567) -
-----------------------------------
NETG 6,290 (89,942) (13,993)
-----------------------------------
Other 535 764 (50)
-----------------------------------
TOTAL SEGMENT OPERATING INCOME (LOSS) 34,701 (72,070) (7,511)
General corporate expenses (5,237) (6,632) (6,582)
Interest expense (8,113) (8,650) (6,336)
Investment income 2,362 2,621 3,234
Unusual items - (1,644) -
Other income 421 307 3,739
-----------------------------------
INCOME (LOSS) BEFORE INCOME TAXES
(BENEFIT), MINORITY INTEREST AND
DISCONTINUED OPERATIONS 24,134 (86,068) (13,456)
Tax provision (benefit) 2,236 - (555)
-----------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST
AND DISCONTINUED OPERATIONS 21,898 (86,068) (12,901)
Minority interest 538 1,155 1,192
-----------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 21,360 (87,223) (14,093)
Discontinued operations - - (49,452)
-----------------------------------
NET INCOME (LOSS) $ 21,360 $ (87,223) $ (63,545)
===================================
</TABLE>
- 17 -
<PAGE> 20
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, 1996
- ------------------------------------------------------------------------------------------------
ICS Steck-
Learning Vaughn
Total Systems Publishing NETG Other
------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET REVENUES $288,801 $143,130 $85,505 $57,936 $2,230
COSTS AND EXPENSES:
Contract course materials and service costs 65,652 49,806 - 14,782 1,064
Publishing costs and materials 25,965 - 25,965 - -
Product development 24,239 3,711 11,820 8,708 -
Selling and marketing 110,454 57,822 28,009 24,181 442
General and administrative 20,843 10,619 6,078 3,975 171
Amortization of acquired intangible assets 2,847 912 1,917 - 18
Unusual item 4,100 - 4,100 - -
------------------------------------------------
SEGMENT OPERATING INCOME $ 34,701 $ 20,260 $ 7,616 $ 6,290 $ 535
================================================
</TABLE>
<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 marketing 111,112 63,770 18,738 28,165 439
General and administrative 25,143 9,851 4,451 10,707 134
Amortization of prior period deferred
marketing 1,470 1,470 - - -
Amortization of acquired intangible assets 1,961 473 800 669 19
Unusual items 80,086 4,549 970 74,567 -
----------------------------------------------------
SEGMENT OPERATING INCOME (LOSS) $ (72,070) $ 7,609 $ 9,499 $(89,942) $ 764
====================================================
</TABLE>
- 18 -
<PAGE> 21
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
National Education Corporation and Subsidiaries
DETAILED SEGMENT OPERATING RESULTS (CONTINUED):
<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 marketing 111,058 59,592 17,472 33,627 367
General and administrative 22,083 6,595 4,069 10,786 633
Amortization of prior period deferred
marketing 19,836 19,836 - - -
Amortization of acquired intangible assets 2,191 455 386 1,337 13
-------------------------------------------------------
SEGMENT OPERATING INCOME (LOSS) $ (7,511) $ (3,927) $10,459 $(13,993) $ (50)
=======================================================
</TABLE>
1996 COMPARED TO 1995:
CONSOLIDATED RESULTS OF OPERATIONS - 1996 COMPARED TO 1995:
Revenues of $288,801,000 for the year ended December 31, 1996, were $30,203,000
(11.7%) higher than revenues of $258,598,000 in the prior year. Net income for
the year was $21,360,000 or $.58 per share compared to a loss of $87,223,000 or
$2.73 per share in the prior year.
Revenues from Edunetics and CCHS, both acquired in the second quarter of 1996,
and the December 1995 acquisition of Summit added $18,800,000 to the increased
revenue compared to 1995. Revenues for 1995 included $1,618,000 for Spectrum
which was discontinued in the second quarter of 1995. The operating results for
the year ended December 31, 1996 were negatively impacted by the write-off of
in-process research and development of $4,100,000 related to the acquisition of
Edunetics and a nonrecurring charge of approximately $861,000 ($732,000 after
tax or $.02 per share) related to the change in CEO at Steck-Vaughn. The Company
also recorded nonrecurring interest income of $990,000 on the income tax refund
received in July 1996. Excluding unusual and nonrecurring items and the benefit
of a $2,000,000 tax refund in 1996, net income would have been $22,565,000 or
$.62 per share for the year ended December 31, 1996.
Income tax provision for the year ended December 31, 1996 reflects taxes
provided on pretax income, excluding the $4,100,000 write-off of in-process
research and development at Edunetics which is not deductible for tax purposes,
at an effective tax rate of 15%, reduced by a $2,000,000 tax benefit of a tax
refund received and recognized in the second quarter of 1996. The 15% effective
tax rate predominately relates to foreign and state taxes for which no loss
carryforwards were available.
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 ($2.56 per share)
of unusual items related to restructure charges and write-downs
- 19 -
<PAGE> 22
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
National Education Corporation and Subsidiaries
CONSOLIDATED RESULTS OF OPERATIONS - 1996 COMPARED TO 1995 (CONTINUED):
of intangible assets at NETG; severance payments 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.
General corporate expenses decreased $1,395,000 (.8% as a percent of revenues)
as a result of lower facilities costs and ongoing cost control.
Interest expense decreased due to the conversion on September 11, 1995, of all
$20,000,000 of the Company's 10% senior subordinated convertible debentures,
including accrued interest, into 5,021,000 shares of the Company's common stock,
partially offset by interest on acquisition indebtedness to acquire Edunetics
and CCHS, and additional revolving credit borrowings for general operating
purposes.
Investment income includes nonrecurring interest income of $990,000 on the IRS
tax refund received in July 1996. Excluding this item, investment income was
lower in 1996 due to fewer investment securities as the Company sold investment
securities throughout 1995 to fund working capital for operations.
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, 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.
In 1996, the Company increased its development effort in software media based
training. As a result, unamortized capitalized software development costs
increased from $631,000 at December 31, 1995 to $2,865,000 at December 31, 1996.
The Company expects that software media based training will become more
significant in the future, thus, unamortized capitalized software development
costs are expected to increase.
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) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Traditional Distance Education - Domestic $ 77,150 $ 85,224 $ 69,464
Traditional Distance Education - International 45,956 43,983 40,868
Business and Industrial 10,061 7,963 7,414
Professional 9,963 5,851 5,069
------------------------------
Total Revenues $143,130 $143,021 $122,815
==============================
Traditional Distance Education:
New Enrollments:
Domestic 255,525 276,727 249,273
International 111,370 115,226 123,616
------------------------------
Total New Enrollments 366,895 391,953 372,889
==============================
</TABLE>
- 20 -
<PAGE> 23
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
National Education Corporation and Subsidiaries
ICS LEARNING SYSTEMS (CONTINUED):
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
(dollars in thousands) 1996 1995 1994
- ----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Gross Enrollment Value (GEV), excluding
discontinued hardware associated with PC
courses:
Domestic $151,782 $175,362 $156,286
International 80,508 75,707 68,981
--------------------------------
Total GEV $232,290 $251,069 $225,267
================================
Selling and Marketing Spending:
Domestic $ 31,610 $ 39,770 $ 36,287
International 20,357 18,987 15,860
--------------------------------
Total Selling and Marketing Spending $ 51,967 $ 58,757 $ 52,147
================================
Unearned net future tuition revenue (backlog) $ 63,298 $ 70,901 $ 81,785
================================
Estimated realization of gross future tuition revenue 48% 45% 40%
</TABLE>
ICS - 1996 COMPARED TO 1995:
ICS revenues of $143,130,000 for the year ended December 31, 1996 were $109,000
(.1%) higher than the prior year. Professional revenue, which includes MicroMash
and California College for Health Sciences (CCHS), increased $4,112,000 (70.3%)
primarily due to the acquisition of CCHS which added $3,726,000 to 1996 revenue.
Business and Industrial revenue increased $2,098,000 (26.3%). Traditional
distance education domestic revenue declined $8,074,000 (9.5%) while traditional
distance education international revenue increased $1,973,000 (4.5%). Total
revenue, excluding domestic PC hardware revenue, was $136,432,000 and
$127,449,000 for 1996 and 1995, respectively, reflecting an increase of 7.0%.
Prior to September 15, 1995, ICS offered computer courses in the U.S. which
included the sale to the student of a computer which, after shipment, was
recorded as an asset and amortized over the estimated period the related course
revenue was recognized. Subsequent to September 15, 1995, ICS 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, ICS 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, in the fourth quarter of 1995 ICS 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.
Traditional domestic revenue decreased primarily due to the elimination of the
sale of computer hardware with domestic PC courses for all enrollments after
September 15, 1995. Although new enrollments were lower, revenue realization
rates improved. New enrollments, which are an indicator of future revenues,
declined 7.7% domestically, due primarily to the reduction in selling and
marketing spending. The decline in enrollments was primarily from the PC
programs which, in addition to the reduction in selling and marketing spending,
was partially impacted by eliminating the computer hardware from the PC courses.
The elimination of the computer hardware has contributed to improved margins by
8.9 percentage points for the operation.
- 21 -
<PAGE> 24
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
National Education Corporation and Subsidiaries
ICS - 1996 COMPARED TO 1995 (CONTINUED):
International 1996 revenue increased $1,973,000 (4.5%) over 1995. Revenues in
Canada increased over the prior year due to a larger mix of higher priced
courses and a slight enrollment increase. International Mail Sales (IMS) revenue
increased as a result of an increase in enrollments. These increases were
partially offset by lower revenue in Australia/New Zealand caused by lower
enrollments as a result of telesales understaffing in the first and second
quarters and lower revenue in the U.K. as a result of fewer enrollments caused
by advertising underspending and lower advertising productivity. During the
fourth quarter of 1996 and first quarter of 1997, ICS replaced certain key
managers in the Australia and the U.K. operations in order to improve the
effectiveness of the advertising and marketing efforts, increase enrollments and
improve profitability.
Course material and service costs decreased $1,861,000 (decreased 1.3% as a
percent of revenues) due to the elimination of computer hardware from domestic
computer courses, partially offset by higher course materials in Canada, the
acquisition of CCHS which added $1,618,000 to costs, volume related increases in
International and Business and Industrial, and increased customer service
initiatives.
Selling and marketing expenses decreased $5,948,000 (decreased 4.2% as a percent
of revenues) due to a reduction in media spending as a result of concentrating
on higher profit media and eliminating spending on lower yield media, partially
offset by increased expenses of $645,000 due to the acquisition of CCHS, as well
as higher International spending in all markets except the U.K. In 1996, ICS
decreased spending in selling and marketing and focused on advertising
strategies that would result in a higher productivity - i.e. higher operating
margin per enrollment. This strategy, coupled with the elimination of the PC
hardware, improved operating margins, but resulted in fewer enrollments and less
revenue. In 1997, management intends to increase the spending on selling and
marketing to grow enrollments and revenue while continuing to improve on
operating margins.
Product development expense increased $79,000 (increased .1% as a percent of
revenues) due to more courses under development in 1996 compared to 1995.
General and administrative expenses increased $768,000 (.5% as a percent of
revenues) due to higher expenses of information systems due to implementation of
a new integrated information system, the acquisition of CCHS which added
$572,000 to expenses and increased costs in the Business and Industrial
products. These increases were partially offset by lower benefit provisions of
$605,000 as a result of favorable insurance loss experience.
Domestic Gross Enrollment Value (GEV), excluding discontinued hardware
associated with PC courses, decreased 13.4% primarily due to the enrollment
decrease for the year of 7.7%.
International GEV increased 6.3% due to GEV increases in Canada, Australia/New
Zealand and IMS, partially offset by a decrease in the U.K. The increase in GEV
is a result of enrollment increases at IMS, a higher average contract price due
to a larger mix of higher priced courses in Canada, and a slight increase in
enrollments in Canada, partially offset by an enrollment decrease in the U.K.
The 1995 results include $1,470,000 of amortization of prior period deferred
marketing due to the adoption in 1994 of a new accounting pronouncement. There
was no amortization of prior period deferred marketing in 1996.
- 22 -
<PAGE> 25
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
National Education Corporation and Subsidiaries
STECK-VAUGHN PUBLISHING:
Set forth below are key indices which aid in understanding the results of
operations of Steck-Vaughn Publishing.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
(dollars in thousands) 1996 1995 1994
- ----------------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Steck-Vaughn Core Business:
Elementary and High School (El/Hi) $39,820 $34,971 $31,578
Adult Education 14,048 12,677 12,934
Library 16,563 10,578 9,096
---------------------------
70,431 58,226 53,608
Summit Learning 10,738 - -
Edunetics 4,336 - -
---------------------------
Total Revenues $85,505 $58,226 $53,608
===========================
</TABLE>
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------
(dollars in thousands 1996 1995 1994
- ------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING INCOME (LOSS) BY PRODUCT
LINE:
Steck-Vaughn Core Business $13,106 $ 9,499 $10,459
Summit Learning (276) - -
Edunetics (1,114) - -
-----------------------------
11,716 9,499 10,459
Write-off of in-process research
and development (4,100) - -
-----------------------------
Operating Income $ 7,616 $ 9,499 $10,459
=============================
</TABLE>
STECK-VAUGHN PUBLISHING - 1996 COMPARED TO 1995:
Revenues increased $27,279,000 (46.9%) for the year ended December 31, 1996
compared to 1995. Of the 46.9% increase, 25.9 percentage points is attributable
to the acquisition of Summit Learning and Edunetics and 21.0 percentage points
is attributable to the increase in revenues from Steck-Vaughn's core business
(El/Hi, adult education and library).
El/Hi sales increased $4,849,000 (13.9%), as compared to last year, as sales of
basic skills products, particularly in spelling, reading comprehension and
phonics, continued to reflect the renewed emphasis by educators on skills
training. Testing and assessment products grew significantly, as states
continued their emphasis on standardized tests to measure the performance of
schools and students.
Sales of adult education products increased $1,371,000 (10.8%) primarily due
to the acquisition of the Educational Development Laboratories, Inc. (EDL)
technology product line in October 1995.
Library sales increased $5,985,000 (56.6%) compared to the prior year. Exclusive
distribution agreements entered into with Wayland Publishers, Abdo & Daughters,
and Larousse Kingfisher Chambers, Inc., were responsible for much of the
increase. Also contributing to the increase were the release of two major
revised Steck-Vaughn series, the 53-volume Portrait of America and the 24-volume
Raintree Illustrated Science Encyclopedia.
- 23 -
<PAGE> 26
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
National Education Corporation and Subsidiaries
STECK-VAUGHN PUBLISHING - 1996 COMPARED TO 1995 (CONTINUED):
Revenue growth in the Company's core business was also supported by general
price increases of 5.1% and 10.1% effective September 1, 1996 and 1995,
respectively.
Summit Learning sales during the year of $10,738,000 were incremental to
Steck-Vaughn, following the acquisition of Summit in December 1995. Summit has a
direct response marketing channel (catalog), enabling Steck-Vaughn to
increasingly reach decision makers within the schools, as well as the consumer
market. Given the lead time in preparing a catalog for mailing, the Company's
transition management team had little impact on the spring 1996 catalog, but the
fall catalogs, particularly the Young Explorers catalog mailed for the holiday
gift season, showed significant gains over revenues in the fall of the prior
year. The Company expects to grow this business by expanding the line to include
language arts and social studies and introducing more Company developed software
product in catalogs.
Edunetics revenue was attributable primarily to its exclusive joint development
project with the Plano, Texas, Independent School District, contractual
deliveries to school districts of integrated learning systems, and sales of
modular product through distributors and the Company's direct sales force. Sales
of Edunetics' CD-ROM products began in the latter part of the year and were
introduced in retail stores in time for the holiday season. Steck-Vaughn
acquired Edunetics Ltd. in April 1996 to enter the educational software market.
Edunetics develops and sells educational software to schools principally
covering math and science for grades K-12. Steck-Vaughn intends to better
leverage the capabilities of its sales force in selling software educational
products which, together with integrating print and educational software into a
combined package, is expected to increase Edunetics' revenue in 1997.
Publishing costs increased $11,098,000 (74.6%) primarily due to the acquisitions
of Edunetics and Summit, which added costs of $746,000 and $6,431,000,
respectively, as well as the increased volume in the core business.
Publishing costs, as a percentage of revenues of 30.4%, increased from 25.5% in
the prior year due primarily to the addition of the Summit Learning catalog
business and its sales of mostly non-proprietary products. Publishing costs also
rose due to the increase in the sale of library titles acquired through
distribution agreements as opposed to internal development, as well as increased
sales of library titles to wholesalers at more deeply discounted prices. The
increase was partially offset by lower royalty costs due to the development of
several significant products with lower royalty rates, as well as the addition
of the new library lines through distribution arrangements. Fulfillment expenses
were also higher due to increases in labor costs necessary to implement the new
warehouse management system to significantly increase the order processing
capacity and eliminate the resulting excess backlog in the second and third
quarters of 1996. Summit Learning's higher product and fulfillment costs, at
59.5% of revenues, reflect the non-proprietary nature of the product line.
Inclusion of the Steck-Vaughn print and Edunetics' CD-ROM products in the Summit
catalogs should reduce product cost as a percent of revenues as sales of these
products through Summit increase in the future.
Product development expense increased $2,919,000 (decreased 1.5% as a percent of
revenues) due to increased investments in new product lines of the recently
acquired EDL and Edunetics businesses and the expansion of the library product
line. Edunetics represented $2,170,000 of the cost increase over 1995. Edunetics
is expected to continue to invest heavily in product development in 1997.
- 24 -
<PAGE> 27
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
National Education Corporation and Subsidiaries
STECK-VAUGHN PUBLISHING - 1996 COMPARED TO 1995 (CONTINUED):
Selling and marketing costs increased $9,271,000 (increased .6% as a percent of
revenues) for the year ended December 31, 1996, as compared to the prior year,
due to higher commissions resulting from increased revenues, and the expansion
of the library sales and telemarketing sales forces. Catalog expense increased
in part due to targeted mini-catalogs in the core business and the acquisition
of Summit, a catalog marketer, in December 1995. Edunetics and Summit comprised
$1,078,000 and $4,178,000, respectively, of the increase to selling and
marketing costs.
General and administrative expenses increased $1,627,000 in 1996 due to the
inclusion of $861,000 in costs attributable to the change in chief executive
officer at Steck-Vaughn. This nonrecurring expense included obligations under
the previous CEO's employment contract, as well as expenses incurred in the
employment of the new chief executive. General and administrative expenses also
increased during the year by $864,000 with the inclusion of Edunetics'
operations.
Amortization expense increased $1,117,000 due to the acquisitions of Edunetics
in April 1996, EDL in October 1995, and Summit in December 1995. The Edunetics
acquired intangible assets are being amortized over a weighted average life of
ten years.
The purchase price of Edunetics in the amount of $12 million was allocated to
assets and liabilities, including in-process research and development projects,
based on their estimated fair values as of the date of acquisition as determined
by an independent appraisal. The estimated value of the in-process research and
development projects of $4,100,000 was written-off in the second quarter of 1996
as the projects had no alternative future use.
Operating income for the year ended December 31, 1996, as compared to 1995,
increased for Steck-Vaughn's core business due to the increase in El/Hi, adult
education and library product lines, as previously explained in the discussion
on revenues. Operating income for the year was negatively impacted by the
$4,100,000 write-off of in-process research and development related to the
acquisition of Edunetics and the $861,000 nonrecurring charge for the change in
CEO at Steck-Vaughn.
NETG:
Set forth below are key indices which aid in understanding the results of
operations of NETG.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
(dollars in thousands) 1996 1995 1994
- ----------------------------------------------------------
<S> <C> <C> <C>
REVENUES:
Domestic $27,922 $26,129 $36,564
International 30,014 26,603 20,126
Spectrum - 1,618 5,247
---------------------------
Total Revenues $57,936 $54,350 $61,937
===========================
</TABLE>
-25 -
<PAGE> 28
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
National Education Corporation and Subsidiaries
NETG (CONTINUED):
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------
1996 1995 1994
- ---------------------------------------------------
<S> <C> <C> <C>
NUMBER OF INTERNALLY DEVELOPED
PRODUCTS COMPLETED:
Client/Server 144 18 2
Mainframe 21 2 9
Desktop 50 8 11
Business Skills 6 - -
---------------
Total 221 28 22
===============
NUMBER OF THIRD PARTY DEVELOPED
PRODUCTS COMPLETED:
Client/Server 29 31 25
Mainframe 8 - -
Desktop 41 15 20
Business Skills 75 209 76
---------------
Total 153 255 121
===============
</TABLE>
NETG - 1996 COMPARED TO 1995:
NETG revenues of $57,936,000 increased $3,586,000 (6.6%) for 1996 compared to
1995. Excluding Spectrum, which was discontinued in the second quarter of 1995,
revenues increased 9.9%. Domestic revenues increased $1,793,000 as revenues for
desktop and client/server processing courses, which experienced a 45.1%
increase, more than offset the decline in mainframe computer courses and certain
business skills courses. Order intake representing the total projected contract
value over the life of the contract, including backlog for future years in the
case of multi-year contracts, was as follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995 1994
- --------------------------------------------------------------------
<S> <C> <C> <C>
One year contracts $51,109 $37,622 $37,935
Multi-year contracts- second year only 8,156 650 -
Multi-year contracts- third year only 5,461 250 -
Instructor led training and other 3,488 5,147 4,742
---------------------------
Total $68,214 $43,669 $42,677
===========================
</TABLE>
As a result of the significant number of internally developed products released
in 1996, and to be released in 1997, NETG expects to improve its ability to sell
multi-year contracts and to simultaneously reduce, as a percentage of revenue,
the royalty expense on third party products.
International revenue increased $3,411,000 (12.8%) as a result of a 49.4%
increase in revenues for desktop and client/server courses, partially offset by
a decline in revenue due to a reduction in mainframe computer and business
skills courses.
- 26 -
<PAGE> 29
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
National Education Corporation and Subsidiaries
NETG - 1996 COMPARED TO 1995 (CONTINUED):
Course service costs decreased $4,909,000 (decreased 10.7% as a percent of
revenues) from 1995. In 1995 NETG recorded a $1,300,000 increase in the
allowance for doubtful accounts. The discontinuance of Spectrum reduced costs by
$2,150,000. Lower headcount in the domestic distribution and customer service
functions and lower royalties as a result of a lower mix of third party produced
courses also resulted in lower costs. The other most significant contributing
factors to the reduced expenses were a reduction in headcount and related
expenses as a result of the 1995 organizational restructuring.
Product development expense decreased $1,785,000 (decreased 4.3% as a percent of
revenues) primarily because the 1995 results included higher than normal
spending to significantly increase the development of internally developed
products which resulted in 221 products developed in 1996.
Selling and marketing expense decreased $3,984,000 (decreased 10.1% as a percent
of revenues). Most of the decrease compared to 1995 was due to reduced headcount
and related expenses in the marketing area as a result of the 1995 restructure
actions; nonrecurring expense charges of $731,000 in 1995 in the U.K. and
Germany and $626,000 of lower expenses due to the discontinuance of Spectrum.
General and administrative expense decreased $6,732,000 (decreased 12.8% as a
percent of revenues) due principally to a reduction in headcount and overhead
expenses, such as facilities costs as a result of the restructuring actions in
the second quarter of 1995 and the renegotiation of leased facilities in the
U.K.; the discontinuance of Spectrum ($259,000) and favorable outcomes of
certain legal disputes.
In the second quarter of 1995, the Company restructured NETG, which resulted in
an unusual charge of $28,652,000 ($.90 per share). In the fourth quarter of
1995, NETG further reduced its organization in Germany and recorded a
restructure charge of $1,952,000 ($.06 per share). No tax benefits were provided
on these charges. The charges included severance related payments, excess
facilities costs, the write-down of inventory and fixed assets of certain
discontinued products and other restructuring related items, such as charges
related to canceled contracts and agreements. In the second quarter of 1995, the
Company also wrote-off the goodwill balance at NETG of $42,719,000 ($1.34 per
share).
The restructuring in the second quarter of 1995 included the discontinuance of
the operations of Spectrum, a subsidiary of NETG which provided primarily custom
developed training to businesses. Also, in that quarter, the Company wrote-off
the goodwill at Spectrum of $4,790,000 ($.15 per share). 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 which was
partially offset with other minor legal settlements which involved parties
related to the third party author resulting in a net unusual credit of
$3,546,000 ($.11 per share).
OTHER - 1996 COMPARED TO 1995:
Revenues of $2,230,000 from National Education International (NEI) which
provides training services to foreign governments primarily in the Middle East,
were lower than the prior year due to completion in November 1995 of a contract
which was not replaced by new business.
- 27 -
<PAGE> 30
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
National Education Corporation and Subsidiaries
OTHER - 1996 COMPARED TO 1995 (CONTINUED):
Foreign currency gains of $357,000 were recorded during 1996 compared to
gains of $307,000 in 1995. The current year currency gains primarily
resulted from the rise in the exchange rates of the British pound and the
effect on the U.S. dollar denominated current intercompany balances at
NETG-U.K. payable to the U.S. operations.
1995 COMPARED TO 1994:
CONSOLIDATED RESULTS OF OPERATIONS - 1995 COMPARED TO 1994:
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 loss of $87,223,000 ($2.73 per share)
principally due to the $81,730,000 of unusual item charges discussed in the
earlier comparison of 1996 results to 1995. This compares with a loss from
continuing operations of $14,093,000 or $.48 per share for the year ended
December 31, 1994. Excluding the impact of unusual items in 1995 and the
amortization of prior period deferred marketing as a result of the adoption of a
new accounting statement of position in 1994, as discussed below, results in net
loss of $4,023,000 ($.13 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" at ICS. The SOP
generally requires advertising costs, other than direct-response advertising, to
be expensed as incurred. In adopting the SOP in 1994, ICS' total advertising,
selling and marketing 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
did not permit restatement of prior periods. The effect of the transition rules
was to reflect as an expense in the year of adoption (1994) both the current
year's advertising, selling and marketing 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 selling and
marketing spending above the amortization that would have been expensed in
accordance with the Company's previous accounting policy.
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.
- 28 -
<PAGE> 31
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
National Education Corporation and Subsidiaries
CONSOLIDATED RESULTS OF OPERATIONS - 1995 COMPARED TO 1994 (CONTINUED):
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
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 presentation of
supplementary earnings per share data below reflects the conversion of the
debentures 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
---------------------------------------------------------------------
<S> <C> <C>
Loss per share from continuing operations $ (2.44) $ (.38)
Loss per share (2.44) (1.80)
=================
Weighted average number of shares
outstanding 35,373 34,640
</TABLE>
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.
ICS LEARNING SYSTEMS - 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 marketing expense which yielded more
enrollments. Business and Industrial 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.
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
- 29 -
<PAGE> 32
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations (continued)
National Education Corporation and Subsidiaries
ICS LEARNING SYSTEMS - 1995 COMPARED TO 1994 (CONTINUED):
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 marketing 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 marketing
expense is principally due to increased telesales and advertising and
promotional spending, which resulted in 19,064 more enrollments, $25,802,000
increase in gross enrollment value, excluding discontinued hardware associated
with PC courses, 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.
The unusual item in the fourth quarter of 1995 represents the write-down of the
unamortized balance of computers and other related costs of $4,549,000 ($.14 per
share), which is explained in more detail in the earlier comparison of 1996
results to 1995.
Domestic gross enrollment value, excluding PC hardware, increased $19,076,000 or
12.2% due to the increase in new enrollments. International gross enrollment
value increased $6,726,000 or 9.8% due to the increased enrollments in Canada
and IMS and change in mix to higher priced PC courses. Unearned net future
tuition revenue decreased $10,884,000 or 13.3% principally because effective
September 15, 1995, the Company unbundled sales of computer hardware from the
computer courses in the U.S. and lowered the price of the course to reflect the
elimination of the computer from the course. Following this unbundling, domestic
enrollments in computer courses dropped in the fourth quarter.
STECK-VAUGHN PUBLISHING - 1995 COMPARED TO 1994:
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. Revenue from 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.
- 30 -
<PAGE> 33
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):
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
Larousse 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.
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 was 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.
Selling and marketing 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 fourth quarter of 1995 and 1994.
NETG - 1995 COMPARED TO 1994:
Revenues for NETG in 1995 were $54,350,000, a decrease of $7,587,000 or 12.2%
from $61,937,000 in 1994. Domestic revenues of $26,129,000 decreased $10,435,000
or 28.5% from the prior year due to a 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 28
internally developed products in the marketplace, most of which were in the
client/server computer 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. 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.
- 31 -
<PAGE> 34
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):
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 settlement of a favorable legal arbitration
award. These unusual items are explained in more detail in the earlier
comparison of 1996 results to 1995.
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 marketing 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 expense 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 explained above.
OTHER - 1995 COMPARED TO 1994:
Revenues from National Education International (NEI) in 1995 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.
Foreign currency gains of $307,000 were recorded during 1995 compared to gains
of $492,000 in 1994. The 1995 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.
LIQUIDITY AND CAPITAL RESOURCES:
The Company's primary sources of liquidity are cash, investment securities, cash
provided from operations and bank credit facilities. At December 31, 1996, the
Company had $19,129,000 in cash and investment securities, of which $6,274,000
was held in the account of Steck-Vaughn.
- 32 -
<PAGE> 35
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):
The Company has a revolving bank credit agreement in the amount of $50,000,000
which expires December 20, 1999. As of December 31, 1996, $21,100,000 was
outstanding under this credit agreement. Additionally, Steck-Vaughn has a
revolving bank credit agreement in the amount of $15,000,000 which expires June
1998. As of December 31, 1996, $7,000,000 was outstanding under this credit
agreement.
During July 1996, the Company terminated its credit facility with Steck-Vaughn
in the amount of $5,000,000 and repaid the $3,000,000 of outstanding loans to
Steck-Vaughn.
On April 30, 1996, Steck-Vaughn acquired all of the stock of Edunetics Ltd., a
corporation engaged in the development of educational software, for cash
consideration of $12,000,000. At closing, the purchase price was funded by cash
on hand of Steck-Vaughn and borrowings under Steck-Vaughn's bank line of credit.
Also during the second quarter of 1996, ICS acquired all of the outstanding
common stock of California College for Health Sciences (CCHS) for approximately
$833,000 cash and the issuance of $4,340,000 of notes payable bearing interest
at 7%. During July 1996, the notes were fully paid after receipt of a tax refund
from the IRS. These acquisitions increased intangible assets, primarily
goodwill, by approximately $15,294,000. The intangible assets acquired are being
amortized over a weighted average life of approximately 10 years and 15 years
for Edunetics and CCHS, respectively.
Net cash flow from operating activities for the year ended December 31, 1996 of
$4,481,000 was $3,795,000 favorable compared to the prior year due primarily to
the tax refund from the IRS of approximately $12,000,000 and improved operating
performance, partially offset by increased receivables of $19,728,000 of which
approximately $5,612,000 and $13,184,000 are attributable to Steck-Vaughn and
NETG, respectively; product development payments to develop courseware at NETG,
which were expensed in 1995 and paid in 1996; and increased inventory at
Steck-Vaughn due to the acquisitions of Edunetics and EDL (in late 1995) and as
a result of increased inventory purchases of products from third party
distributors. The increases in accounts receivable are due to increased
revenues, as compared to 1995, at Steck-Vaughn and NETG; receivables from
licensing of software at Edunetics to school districts which have a long
collection cycle, and, due to extended payment terms on certain receivables at
NETG. Restructure payments primarily represented payments on excess facilities
for a full year, compared to only six months in 1995, and severance payments to
terminated employees.
Net cash used in investing activities for the year ended December 31, 1996 of
$24,574,000 was $22,828,000 unfavorable compared to the prior year period
primarily due to acquisition payments of $12,173,000 during 1996; more additions
to fixed assets compared to 1995 for new information systems at ICS and a new
warehouse management system at Steck-Vaughn; the net change in proceeds from the
sale of securities in the amount of $8,944,000, and increased spending on
capitalized computer software development, partially offset by a favorable
variance due to the discontinuance of the Education Centers subsidiary. Net cash
flow from financing activities of $13,352,000 was favorable to the prior year
due to additional net borrowings under the revolving credit agreement of
$18,100,000 and payments received under stock option plans of $2,866,000 more
than the prior year, offset partially by net payments on acquisition
indebtedness of $4,340,000, increased payments on long-term debt of $690,000 and
retirement of convertible debentures of $500,000.
On January 23, 1997, ICS acquired, for $8,800,000 in cash, certain assets and
the common stock of three wholly-owned subsidiaries of Educatief Holding B.V., a
Netherlands company engaged in providing distance education in the Netherlands.
The acquired companies were Eurodidakt B.V., N.T.I. Nederlands Talen Instituut
B.V. and Educatief B.V. This purchase price was financed from borrowings under
the Company's revolving credit agreement. The transaction will be accounted for
as a purchase. Based on an estimated preliminary purchase price allocation, this
acquisition is expected to increase intangible assets by approximately
$7,600,000.
- 33 -
<PAGE> 36
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):
The Company expects that cash, investment securities, bank credit facilities and
cash provided from operations will be sufficient to provide for planned working
capital requirements, product development, debt service, and capital
expenditures for the foreseeable future. The Company is required to make a
payment of $2,875,000 by May 15, 1997, in order to satisfy its 1997 sinking fund
obligation under the indenture for its subordinated convertible debentures.
Alternatively, the Company may buy debentures in the open marketplace in order
to satisfy its 1997 sinking fund obligations. Through December 31, 1996, the
Company had repurchased $500,000 par value of these debentures. At the 1996
stockholders' meeting, the shareholders approved an increase in the number of
authorized common shares from 50,000,000 to 65,000,000 shares.
The Company recognizes 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. As of December 31, 1996, the Company
had a gross deferred tax asset of $73,103,000 (see Note 5 of the 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, 1996, the Company had available federal
consolidated net operating loss carryforwards of $86,600,000 (exclusive of
certain "SRLY" losses) expiring through 2010. In addition, the Company had
federal SRLY loss carryforwards totaling $20,600,000 ($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. The
Company is required to 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 $39,609,000.
The ultimate realization of deferred tax assets, net of the valuation allowance,
of $33,494,000 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 $9,532,000 reflected as
deferred tax liabilities in the financial statements. The improving operating
income throughout 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. However, in light of the Company's past
uncertain earnings history, management believes that it is more likely than not
that those deferred tax assets for which a valuation allowance is recorded will
not be realized. To the extent the Company continues its trend of profitability,
additional deferred tax assets may be realized in 1997.
During the year, the Company received approximately $12,000,000, including
interest of $990,000, of refunded taxes related to a settlement with the
Internal Revenue Service regarding its 1985 through 1988 income tax audits. In
addition, the Company received approximately $4,000,000 of income tax refund, of
which $2,000,000 was recognized as a nonrecurring tax benefit in the second
quarter of 1996, related to the carryback of certain specified liability losses.
The effect of inflation had little impact on the Company in 1996.
- 34 -
<PAGE> 37
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
The Company's consolidated financial statements at December 31, 1996
and 1995, and for each of the three years in the period ended December 31, 1996,
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-30 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, 1996) as part of a Proxy Statement for
the Company's Annual Meeting of Stockholders or as an amendment to this Form
10-K.
(b) The information required by Item 10 with respect to executive
officers of the Company is furnished in a separate item captioned "Executive
Officers of the Company" and included in Part I of this Annual Report on Form
10-K.
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated herein by reference
from material that will be filed with the Securities and Exchange Commission
within 120 days of the Company's fiscal year end (December 31, 1996) as part of
a Proxy Statement for the Company's Annual Meeting of Stockholders or as an
amendment to this Form 10-K.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by Item 12 is incorporated herein by reference
from material that will be filed with the Securities and Exchange Commission
within 120 days of the Company's fiscal year end (December 31, 1996) as part of
a Proxy Statement for the Company's Annual Meeting of Stockholders or as an
amendment to this Form 10-K.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required by Item 13 is incorporated herein by reference
from material that will be filed with the Securities and Exchange Commission
within 120 days of the Company's fiscal year end (December 31, 1996) as part of
a Proxy Statement for the Company's Annual Meeting of Stockholders or as an
amendment to this Form 10-K.
- 35 -
<PAGE> 38
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, 1996............................ F-2
Consolidated Balance Sheets at December 31, 1996 and 1995...................... F-3
Consolidated Statements of Cash Flows for each of the
three years in the period ended December 31, 1996............................ F-4
Consolidated Statements of Stockholders' Equity for each
of the three years in the period ended December 31, 1996..................... F-5
Notes to the Consolidated Financial Statements................................. F-6
(2) Financial Statement Schedules: **
II Valuation and Qualifying Accounts................................ F-30
</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>
2.1 Agreement and Plan of Reorganization dated March 12, 1997, between Sylvan
Learning Systems, Inc., and National Education Corporation (29)........................ *
3.1 Restated Certificate of Incorporation of the National Education
Corporation (1)........................................................................ *
3.2 Amendment to Restated Certificate of Incorporation of National Education
Corporation (2)........................................................................ *
3.3 By-Laws of National Education Corporation, as amended (3).............................. *
10.1 ** National Education Corporation Retirement Plan (Restated as of January 1,
1989 and as Amended through January 1, 1992) (4)....................................... *
10.2 ** 1986 Stock Option and Incentive Plan, as amended (5)................................... *
10.3 ** Amended and Restated 1990 Stock Option and Incentive Plan (6).......................... *
</TABLE>
- 36 -
<PAGE> 39
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ----
<S> <C> <C>
10.4 ** Amended and Restated 1991 Directors' Stock Option and Award Plan (7)................... *
10.5 Indenture, dated as of May 15, 1986, between National Education Corporation
and Continental Illinois National Bank and Trust Company of Chicago, as
Trustee (8)............................................................................ *
10.6 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 (9)................................................. *
10.7 ** National Education Corporation Supplemental Executive Retirement Plan, as
amended (10)........................................................................... *
10.8 ** Supplemental Benefit Plan for Non-Employee Directors (11) ............................. *
10.9 ** Executive Employment Agreement between National Education Corporation and
Sam Yau (12)........................................................................... *
10.10 Intercompany Agreement Between National Education Corporation and Steck-Vaughn
Publishing Corporation dated June 30, 1993 (the "Intercompany Agreement") (13)......... *
10.11 First Amendment to Intercompany Agreement, dated June 10, 1994 (14).................... *
10.12 Tax Sharing Agreement Between National Education Corporation and Its Direct
and Indirect Corporate Subsidiaries dated January 1, 1993 (15)......................... *
10.13 $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) (16) ........................ *
10.14 First Amendment and Limited Waiver to Credit Agreement, dated July 31,
1995 (17).............................................................................. *
10.15 Second Amendment to Credit Agreement, dated December 21, 1995 (18).....................
10.16 Revolving Line of Credit Note and Option Agreement between National Education
Corporation and Steck-Vaughn Publishing Corporation, dated February 28,
1995 (19).............................................................................. *
10.17 Renewal and Extension Agreement between National Education Corporation and
Steck-Vaughn Publishing Corporation, effective December 31, 1995 (20).................. *
10.18 First Amendment to Stock Option Agreement between National Education
Corporation and Steck-Vaughn Publishing Corporation, effective December 31,
1995 (21).............................................................................. *
10.19 Letter Amendment to Stock Option Agreement between National Education
Corporation and Steck-Vaughn Publishing Corporation, dated February 1,
1996 (22).............................................................................. *
</TABLE>
- 37 -
<PAGE> 40
<TABLE>
<CAPTION>
Exhibit Numbered
Number Description Page
- ------ ----------- ----
<S> <C> <C>
10.20 Second Renewal and Extension Agreement and Second Amendment to Stock Option
Agreement dated March 31, 1996, between National Education Corporation and
Steck-Vaughn Publishing Corporation (23)............................................... *
10.21 Third Renewal and Extension Agreement and Third Amendment to Stock Option
Agreement dated June 30, 1996, between National Education Corporation and
Steck-Vaughn Publishing Corporation (24)............................................... *
10.20 Debenture Conversion Agreement among National Education Corporation and the
Holders identified therein, dated August 31, 1995 (25)................................. *
10.21 Credit Agreement among National Education Corporation, certain banks and
BZW Division of Barclays Bank PLC, as Agent, dated January 19, 1996
(the "BZW Credit Agreement) (26)....................................................... *
10.22 Waiver and First Amendment to BZW Credit Agreement dated April 9, 1996 (27)............ *
10.23 Loan Agreement dated April 29, 1996, between Steck-Vaughn Company and
NationsBank of Texas, N.A. (28)........................................................ *
10.24 Amended and Restated Credit Agreement among National Education Corporation,
the Several Lenders from time to time parties thereto, and BZW Division of
Barclays Bank PLC, as Agent, dated December 20, 1996 (30)..............................
11.1 Calculation of Primary Earnings Per Share (30).........................................
11.2 Calculation of Fully Diluted Earnings Per Share (30)...................................
21 Subsidiaries of National Education Corporation (30)....................................
23 Consent of Price Waterhouse LLP (30)...................................................
27.1 Financial Data Schedule (31)
</TABLE>
- ------------------
* incorporated by reference from a previously filed document
** denotes management contract or compensatory plan or arrangement
(1) Incorporated by reference to Exhibit 3.1 filed with National
Education Corporation's Annual Report on Form 10-K for the year
ended December 31, 1995, filed March 19, 1996.
(2) Incorporated by reference to Exhibit "A" filed with National
Education Corporation's Proxy Statement furnished in connection
with the Annual Meeting of Stockholders held May 29, 1996, filed
April 15, 1996.
(3) 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.
(4) 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.
- 38 -
<PAGE> 41
(5) Incorporated by reference to Exhibit 10.17 filed with National
Education Corporation's Annual Report on Form 10-K for the year
ended December 31, 1990, filed April 1, 1991.
(6) Incorporated by reference to Exhibit "B" filed with National
Education Corporation's Proxy Statement furnished in connection
with the Annual Meeting of Stockholders held June 27, 1995, filed
May 22, 1995.
(7) Incorporated by reference to Exhibit "A" filed with National
Education Corporation's Proxy Statement furnished in connection
with the Annual Meeting of Stockholders held June 27, 1995, filed
May 22, 1995.
(8) 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.
(9) 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.
(10) 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.
(11) 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.
(12) 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.
(13) 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.
(14) 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.
(15) 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.
(16) 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.
(17) 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.
(18) Incorporated by reference to Exhibit 10.18 filed with National
Education Corporation's Annual Report on Form 10-K for the year
ended December 31, 1995, filed March 19, 1996.
(19) 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.
(20) Incorporated by reference to Exhibit 10.22 filed with National
Education Corporation's Annual Report on Form 10-K for the year
ended December 31, 1995, filed March 19, 1996.
(21) Incorporated by reference to Exhibit 10.23 filed with National
Education Corporation's Annual Report on Form 10-K for the year
ended December 31, 1995, filed March 19, 1996.
(22) Incorporated by reference to Exhibit 10.24 filed with National
Education Corporation's Annual Report on Form 10-K for the year
ended December 31, 1995, filed March 19, 1996.
- 39 -
<PAGE> 42
(23) Incorporated by reference to Exhibit 10.23 filed with National
Education Corporation's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996, filed May 8, 1996.
(24) Incorporated by reference to Exhibit 10.28 filed with National
Education Corporation's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1996, filed August 7, 1996.
(25) 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.
(26) Incorporated by reference to Exhibit 10.26 filed with National
Education Corporation's Annual Report on Form 10-K/A, Amendment
No. 1, for the year ended December 31, 1996, filed July 26, 1996.
(27) Incorporated by reference to Exhibit 10.26 filed with National
Education Corporation's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996, filed May 8, 1996.
(28) Incorporated by reference to Exhibit 10.27 filed with National
Education Corporation's Quarterly Report on Form 10-Q for the
quarter ended March 31, 1996, filed May 8, 1996.
(29) Incorporated by reference to Exhibit 2.1 filed with National
Education Corporation's Current Report on Form 8-K, filed March
19, 1997.
(30) Filed herewith.
(31) Filed only with the EDGAR filing of this Annual Report on Form
10-K.
(b) No reports on Form 8-K were filed during the fourth quarter of 1996.
(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).
- 40 -
<PAGE> 43
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 19, 1997
---------------------------
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 19, 1997
-------------------------------
Sam Yau
Director, President and Chief
Executive Officer
(Principal Executive Officer)
By: /s/ KEITH K. OGATA March 19, 1997
-------------------------------
Keith K. Ogata, Vice President,
Chief Financial Officer and
Treasurer (Principal Financial
Officer)
By: /s/ GLEN E. MEDWID March 19, 1997
------------------------------
Glen E. Medwid, Corporate
Controller (Principal
Accounting Officer)
- 41 -
<PAGE> 44
Date
By: /s/ RICHARD C. BLUM March 24, 1997
-----------------------------
Richard C. Blum, Director
By: /s/ DAVID BONDERMAN March 19, 1997
-----------------------------
David Bonderman, Director
By: /s/ DAVID R. DUKES March 24, 1997
-------------------------------
David R. Dukes, Director
By: /s/ LEONARD W. JAFFE March 18, 1997
----------------------------
Leonard W. Jaffe, Director
By: /s/ DAVID C. JONES March 24, 1997
--------------------------------
David C. Jones, Director
By: /s/ MICHAEL R. KLEIN March 20, 1997
-----------------------------
Michael R. Klein, Director
By: /s/ PAUL B. MACCREADY March 18, 1997
--------------------------
Paul B. MacCready, Director
By: /s/ FREDERIC V. MALEK March 18, 1997
----------------------------
Frederic V. Malek, Director
By: /s/ JOHN J. MCNAUGHTON March 18, 1997
--------------------------
John J. McNaughton, Director
By: /s/ WILLIAM D. WALSH March 19, 1997
----------------------------
William D. Walsh, Director
- 42 -
<PAGE> 45
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 36 present fairly, in all material
respects, the financial position of National Education Corporation and its
subsidiaries at December 31, 1996 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1996, 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, and changed its
method of accounting for the impairment of long-lived and intangible assets in
1995.
PRICE WATERHOUSE LLP
Costa Mesa, California
January 28, 1997, except as to Note 17,
which is as of March 12, 1997
F-1
<PAGE> 46
National Education Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Year Ended December 31,
-----------------------------------
(amounts in thousands, except per share amounts) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
TUITION AND CONTRACT REVENUES $ 203,296 $ 200,372 $ 188,006
PUBLISHING REVENUES 85,505 58,226 53,608
-----------------------------------
TOTAL NET REVENUES 288,801 258,598 241,614
COSTS AND EXPENSES:
Contract course materials and service costs 65,652 73,003 60,428
Publishing costs and materials 25,965 14,867 13,595
Product development 24,239 23,026 19,934
Selling and marketing 110,454 111,112 111,058
General and administrative 26,080 31,775 28,665
Amortization of acquired intangible assets 2,847 1,961 2,191
Amortization of prior period deferred marketing - 1,470 19,836
Unusual items, net 4,100 81,730 -
Interest expense 8,113 8,650 6,336
Investment income (2,362) (2,621) (3,234)
Other income (421) (307) (492)
Gain on sale of stock - - (3,247)
-----------------------------------
INCOME (LOSS) BEFORE INCOME TAXES (BENEFIT), MINORITY INTEREST AND
DISCONTINUED OPERATIONS 24,134 (86,068) (13,456)
Income taxes (benefit) 2,236 - (555)
-----------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST AND DISCONTINUED
OPERATIONS 21,898 (86,068) (12,901)
Minority interest in consolidated subsidiary 538 1,155 1,192
-----------------------------------
INCOME (LOSS) FROM CONTINUING OPERATIONS 21,360 (87,223) (14,093)
Loss from discontinued operations - - (9,420)
Loss on disposal of discontinued operations - - (40,032)
-----------------------------------
NET INCOME (LOSS) $ 21,360 $ (87,223) $ (63,545)
===================================
EARNINGS (LOSS) PER SHARE FROM CONTINUING OPERATIONS $ .58 $ (2.73) $ (.48)
===================================
EARNINGS (LOSS) PER SHARE $ .58 $ (2.73) $ (2.14)
===================================
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING:
Primary shares 36,691 31,893 29,640
Fully diluted shares 38,647 38,025 36,940
===================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-2
<PAGE> 47
National Education Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------
(dollars in thousands) 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents $ 17,682 $ 22,120
Investment securities 1,447 1,748
Receivables, net of allowance of $2,953 and $2,742 56,857 36,397
Inventories and supplies 35,902 31,847
Income tax receivable - 9,313
Prepaid expenses 20,188 13,440
----------------------
Total current assets 132,076 114,865
Land, buildings, and equipment, net 30,800 24,028
Acquired intangible assets, net 26,626 13,428
Deferred income taxes 24,728 24,768
Other assets 7,859 8,173
----------------------
$ 222,089 $ 185,262
======================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 10,468 $ 6,072
Accrued expenses 16,093 23,707
Accrued royalties 5,129 5,315
Accrued short-term restructuring charges 3,736 8,246
Accrued salaries and wages 6,744 5,627
Deferred contract revenues 6,024 7,421
Current portion of long-term debt and short-term borrowings 8,260 12,338
Accrued and deferred income taxes 18,955 14,446
----------------------
Total current liabilities 75,409 83,172
----------------------
LIABILITIES PAYABLE AFTER ONE YEAR
Long-term debt, less current portion 87,203 66,333
Accrued long-term restructuring charges 4,471 10,089
Other noncurrent liabilities 10,826 8,683
----------------------
102,500 85,105
----------------------
MINORITY INTEREST IN EQUITY OF CONSOLIDATED SUBSIDIARY 10,162 9,504
----------------------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock, $.10 par value; 5,000,000 shares authorized and unissued - -
Common stock, $.01 par value; 65,000,000 shares authorized; 36,336,504
and 35,834,124 shares issued 2,170 2,166
Additional paid-in capital 157,710 155,100
Accumulated deficit (115,124) (136,484)
Unrealized gain on available-for-sale securities, net of tax 60 10
Cumulative foreign exchange translation adjustment (5,317) (7,005)
Notes receivable under stock option plans (573) (1,398)
----------------------
38,926 12,389
Less common stock in treasury, at cost (4,908) (4,908)
----------------------
Total stockholders' equity 34,018 7,481
----------------------
$ 222,089 $ 185,262
======================
</TABLE>
See Notes to Consolidated Financial Statements.
F-3
<PAGE> 48
National Education Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------
(dollars in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 21,360 $(87,223) $(63,545)
Adjustments to reconcile net income (loss) to net cash provided
by (used in) operating activities:
Loss from discontinued operations - - 9,420
Income tax benefits on discontinued operations - - 1,008
Loss on disposal of discontinued operations - - 40,032
Depreciation and amortization 5,457 5,587 5,610
Amortization of acquired intangible assets 2,847 1,602 1,824
Amortization of prior period deferred marketing - 1,470 19,836
Provision for doubtful accounts 340 1,642 250
Gain on sale of stock - - (3,247)
Write-off of acquired intangible assets - 47,509 -
Write-off of course computer hardware costs - 4,549 -
Write-off of in-process research and development 4,100 - -
Gain on foreign currency exchange (357) (299) (492)
Change in assets and liabilities:
Receivables, net (19,057) 8,142 (187)
Inventories and supplies (3,690) (4,586) (353)
Income tax receivables 9,313 - -
Accounts payable and accrued expenses (5,971) (520) (10,840)
Accrued restructuring reserve (10,600) 25,695 -
Accrued and deferred income taxes 6,130 802 (4,457)
Deferred contract revenues (2,853) (4,534) 1,170
Other (2,538) 850 2,650
--------------------------------
Net cash provided by (used in) operating activities 4,481 686 (1,321)
--------------------------------
CASH FLOWS FOR INVESTING ACTIVITIES:
Additions to land, buildings and equipment (10,497) (4,527) (6,788)
Additions to capitalized computer software development costs (2,507) (697) (108)
Dispositions of land, buildings and equipment 220 (63) (171)
Proceeds from sales of investment securities 383 9,327 10,680
Purchases of investment securities - (189) (5,249)
Acquisition of businesses, net of cash acquired (12,173) (3,260) (6,430)
Discontinued operations - (2,337) (21,085)
--------------------------------
Net cash used in investing activities (24,574) (1,746) (29,151)
--------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to long-term debt 18,100 - 4,036
Reductions in long-term debt (2,399) (1,709) (703)
Changes in short-term borrowings (5,946) 4,961 5,305
Retirement of convertible debentures (500) - -
Minority interest in equity of consolidated subsidiary 658 1,081 242
Common stock, stock options and related tax benefits 2,614 573 783
Payments received on notes receivable under stock option plans 825 - -
Purchase of common stock for treasury - - (53)
--------------------------------
Net cash from financing activities 13,352 4,906 9,610
--------------------------------
EFFECT OF EXCHANGE RATE CHANGES ON CASH 2,303 977 (387)
--------------------------------
NET CHANGE IN CASH AND EQUIVALENTS (4,438) 4,823 (21,249)
CASH AND EQUIVALENTS AT THE BEGINNING OF THE YEAR 22,120 17,297 38,546
--------------------------------
CASH AND EQUIVALENTS AT THE END OF THE YEAR $ 17,682 $ 22,120 $ 17,297
================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 49
National Education Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------------------
(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 35,835 $ 157,266 30,275 $ 135,153 30,093 $ 134,370
Stock options and related tax benefits 497 2,509 94 423 182 783
Restricted stock 5 105 444 1,548 - -
Conversion of debentures - - 5,021 20,142 - -
---------------------------------------------------------------------
Balance at end of year 36,337 $ 159,880 35,834 $ 157,266 30,275 $ 135,153
=====================================================================
RETAINED EARNINGS (DEFICIT)
Balance at beginning of year $(136,484) $ (49,261) $ 14,284
Net income (loss) 21,360 (87,223) (63,545)
---------------------------------------------------------------------
Balance at end of year $(115,124) $(136,484) $(49,261)
=====================================================================
TREASURY STOCK
Balance at beginning of year 697 $ (4,908) 697 $ (4,908) 689 $ (4,855)
Purchase of common stock for treasury - - - - 8 (53)
---------------------------------------------------------------------
Balance at end of year 697 $ (4,908) 697 $ (4,908) 697 $ (4,908)
=====================================================================
CUMULATIVE TRANSLATION ADJUSTMENT
Balance at beginning of year $ (7,005) $ (7,947) $ (7,565)
Foreign currency translation adjustments 1,688 942 (382)
---------------------------------------------------------------------
Balance at end of year $ (5,317) $ (7,005) $ (7,947)
=====================================================================
UNREALIZED GAIN(LOSS) ON AVAILABLE-
FOR-SALE SECURITIES, NET OF TAX
Balance at beginning of year $ 10 $ (21) $ -
Change in net unrealized gain 82 53 (36)
Deferred taxes (32) (22) 15
---------------------------------------------------------------------
Balance at end of year $ 60 $ 10 $ (21)
=====================================================================
NOTES RECEIVABLE UNDER STOCK OPTION
PLANS
Balance at beginning of year $ (1,398) $ - $ -
Loans to officers to purchase stock - (1,398) -
Payments received from officers 825 - -
---------------------------------------------------------------------
Balance at end of year $ (573) $ (1,398) $ -
=====================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
F-5
<PAGE> 50
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, schools,
libraries, 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. Additionally, through California College for Health Sciences (CCHS),
ICS offers healthcare self-study courses and four-year and master degree
distance learning programs. ICS also offers training opportunities to businesses
and government. Steck-Vaughn Publishing Corporation ("Steck-Vaughn") is a
publisher 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 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 and subsequently were substantially sold
or otherwise disposed of 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 the 1996 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.
Actual results may differ from those estimates.
COSTS OF COMPUTER SOFTWARE TO BE SOLD, LEASED, OR OTHERWISE MARKETED
The Company follows Statement of Financial Accounting Standards No. 86 (SFAS No.
86), "Accounting for the Costs of Computer Software to be Sold, Leased, or
Otherwise Marketed", in recording and classifying the costs incurred for the
development of software products. Such costs are expensed as incurred until the
product under development reaches technological feasibility, at which point all
future costs are capitalized until the product is available for general release.
Capitalized costs are amortized over the estimated economic life of the product.
Unamortized capitalized software development costs were $2,865,000 and $631,000
at December 31, 1996 and 1995, respectively. Amortization of capitalized
software development costs were $274,000, $174,000 and $0 for the years ended
December 31, 1996, 1995 and 1994.
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.
F-6
<PAGE> 51
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
NETG revenue principally consists of fees for licensing agreements of software
training products. NETG recognizes revenue in accordance with AICPA Statement of
Position 91-1, Software Revenue Recognition. Revenues earned for the licensing
of training products are generally recognized when the products are delivered
and there are no significant obligations remaining. NETG has multi-year
contracts, but does not recognize more than twelve months of revenue in a year
because the customer typically has the right to exchange product on each twelve
month anniversary date of the contract.
SELLING AND MARKETING COSTS
The Company accounts for its advertising costs pursuant to 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 adopting the SOP in 1994, ICS' total advertising,
selling and marketing 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
consisted 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 selling and
marketing 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 1995.
Adoption of the SOP did not have a material impact on the Company's other
operations. The Company's advertising expenses, excluding the amortization of
prior period deferred marketing, were $44,423,000, $56,382,000, and $48,686,000
for the years ended December 31, 1996, 1995 and 1994, 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. 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, 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 costs to develop course content are expensed as
incurred.
INCOME TAXES
Income taxes are accounted for using an asset and liability approach which
requires the recognition of deferred tax assets and liabilities 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> 52
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 are computed based on
the assumption that the senior convertible debentures and the subordinated
convertible debentures had been converted to common stock at the beginning of
the respective periods, with a corresponding increase in net income to reflect a
reduction in related interest expense, less applicable taxes. 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 $20,000,000 of the
Company's 10% senior subordinated convertible debentures converted such
debentures, including accrued interest, into 5,021,000 shares of the Company's
common stock. The conversion had an anti-dilutive effect on loss per share for
the fourth quarter of 1995. If the conversion had not occurred, loss per share
for the fourth quarter of 1995 would have been ($.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 presentation of supplementary earnings per share data below reflects the
conversion of the senior debentures 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
- ------------------------------------------------------------------------
<S> <C> <C>
Loss per share from continuing operations $ (2.44) $ (.38)
Loss per share (2.44) (1.80)
=====================
Weighted average number of shares outstanding 35,373 34,640
=====================
</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. Inventories and supplies are
comprised of the following as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995
- ----------------------------------------------------
<S> <C> <C>
Finished goods $33,650 $29,653
Work in process 992 700
Raw materials 1,260 1,494
-----------------
Total inventories $35,902 $31,847
=================
</TABLE>
F-8
<PAGE> 53
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
The intangible assets of Edunetics Ltd. (Edunetics) and CCHS which were acquired
in 1996 (see Note 2) are being amortized over a weighted average life of
approximately 10 years and 15 years, respectively. All other acquired intangible
assets are amortized ratably over various useful lives which do not exceed ten
years.
IMPAIRMENT OF LONG-LIVED ASSETS
The Company adopted the provisions of Statement of Financial Accounting
Standards No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of" (SFAS 121) in 1995. Under the provisions of
SFAS 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. In addition, SFAS 121 requires
that assets to be disposed of be measured at the lower of cost or fair value,
less costs to sell. Adopting SFAS 121 in 1995 had no effect on the Company's
financial statements except for the write-off of goodwill at NETG 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. No shares were repurchased in 1996.
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 foreign intercompany
accounts of a long-term nature that are part of the net investment in the
foreign entity. Gains and losses on foreign currency transactions are recorded
to other income and expense.
F-9
<PAGE> 54
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
CONCENTRATION OF CREDIT RISK
The Company is subject to credit risk primarily through trade receivables.
Credit risk, with respect to trade accounts receivable, is minimized because the
accounts receivable of NETG are comprised primarily of Fortune 1000 type and
large international customers. The accounts receivable of Steck-Vaughn are
primarily from school districts throughout the country, thus mitigating the risk
of collections. At ICS, accounts receivable from student contracts have a net
value of zero as ICS only records revenue based upon cash receipts. The
remaining receivables at ICS are from large industrial customers. The
geographical diversification and broad customer base help mitigate the potential
impact of a material credit risk exposure. The Company does not require
collateral for its accounts receivable.
NOTE 2 - BUSINESS COMBINATIONS
Effective April 30, 1996, the Company, through Steck-Vaughn, acquired all of the
common stock of Edunetics, an Israel corporation engaged in the development of
educational software, for cash consideration of $12,000,000. The purchase price
was financed under Steck-Vaughn's bank credit agreement and by existing cash and
marketable securities. In the second quarter of 1996, the purchase price was
allocated to assets and liabilities, including in-process research and
development projects, based on their estimated fair values as of the date of
acquisition as determined by an independent appraisal. The estimated value of
the in-process research and development projects of $4,100,000 was written-off
in the second quarter of 1996 as the projects had no alternative future use.
This acquisition increased intangible assets, primarily goodwill, by
approximately $7,700,000.
During the second quarter of 1996, ICS acquired all of the outstanding common
stock of CCHS for approximately $833,000 cash and the issuance of $4,340,000 of
notes payable, at a 7% interest rate, due June 30, 1997. The notes payable were
paid in July 1996 after the receipt of a tax refund (see Note 5). CCHS provides
healthcare self-study courses and four-year and master degree distance learning
programs. This transaction resulted in an increase to intangible assets,
primarily goodwill, of $7,594,000.
In addition, 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, 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.
All of the above transactions were accounted for as purchases and the operating
results were included in the Company's consolidated financial statements since
the dates of acquisition. Set forth below are the unaudited pro forma results of
operations as if the acquisitions of Edunetics, Summit and CCHS had occurred
effective at the beginning of the year for each of the years presented after
giving effect to certain adjustments, including amortization expense of the
acquired intangible assets, interest expense on the acquisition debt and related
income tax effects.
<TABLE>
<CAPTION>
(dollars in thousands, except per share amounts) 1996 1995
- ---------------------------------------------------------------------------------------
<S> <C> <C>
Net revenues $291,019 $279,789
Net income (loss) 22,819 (91,990)
Earnings (loss) per share $ .62 $ (2.88)
</TABLE>
F-10
<PAGE> 55
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 2 - BUSINESS COMBINATIONS (CONTINUED)
The above pro forma information excludes the $4,100,000 unusual item
representing the write-off of in-process research and development for the
acquisition of Edunetics. Reported net income for the year ended December 31,
1996, excluding this $4,100,000 unusual item, would have been $24,761,000 ($.67
per share) compared to the pro forma net income of $22,819,000 ($.62 per share)
shown above.
The unaudited pro forma information is not necessarily indicative of the results
of operations that would have occurred had the acquisitions been made at the
beginning of the periods presented and are not necessarily indicative of the
future results of the combined operations.
The net assets and operating results of the other purchased entities were not
material to the consolidated financial statements of the Company and,
accordingly, are not included in the above pro forma results for 1996 and 1995.
NOTE 3 - BUSINESS DISPOSITIONS
In June 1994, the Company adopted a plan to discontinue the operation of its
National Education Centers, Inc. subsidiary and recorded a 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.
The Company substantially completed the disposition of operations of National
Education Centers, Inc. as of December 31, 1995. Cash proceeds received from the
sale of schools were $10,647,000 in 1995.
As of December 31, 1996 and 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 U.S. Department of Education, offset by certain notes
receivable from buyers in connection with the sale of schools. As of December
31, 1996, all of these notes were current in status. Cash received from notes
receivable in 1996 were immaterial. The net amount of these assets and
liabilities is not material to the consolidated financial statements of the
Company.
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, except per share amounts) 1994
- --------------------------------------------------------------------------------
<S> <C>
Net revenues $ 97,138
Loss before income tax benefit (10,428)
Income tax benefit (1,008)
Loss from discontinued operations (9,420)
Primary loss per share (.32)
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-11
<PAGE> 56
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - UNUSUAL AND NONRECURRING ITEMS
Unusual items, net, consist of the following items:
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995
- ---------------------------------------------------------------------
<S> <C> <C>
Write-off of in-process research and development $ 4,100 $ -
Write-off of intangible assets - 47,509
Restructuring charges - 32,248
Write-off of course computer hardware costs - 4,549
Litigation settlements, net - (2,576)
------------------
$ 4,100 $ 81,730
==================
</TABLE>
No tax benefits were reflected for the unusual items.
WRITE-OFF OF IN-PROCESS RESEARCH AND DEVELOPMENT
The unusual item for the year ended December 31, 1996 represents the $4,100,000
($.11 per share) write-off of in-process research and development projects in
connection with the acquisition of Edunetics in the second quarter of 1996 as
more fully explained in Note 2.
WRITE-OFF OF INTANGIBLE ASSETS AND RESTRUCTURING CHARGES
In the second quarter of 1995, the Company restructured NETG, which resulted in
an unusual charge of $28,652,000 ($.90 per share), and also recorded a
restructuring charge of $1,644,000 ($.05 per share) at NEC Corporate for
severance related payments to the former chief executive officer and corporate
expenses related to the restructuring of NETG. 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). The total charges included 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. Amounts related to
severance covered 168 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 2008.
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 SFAS 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 concluded NETG to have had 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.
The restructuring in the second quarter of 1995 included the discontinuance of
the operations of Spectrum, a subsidiary of NETG. In connection with this
restructuring the Company wrote-off the goodwill balance of $4,790,000 ($.15 per
share). Revenues of Spectrum were $1,618,000 and $5,247,000 and its operating
losses before amortization of intangibles and unusual items were ($1,433,000)
and ($1,125,000) for 1995 and 1994, respectively.
F-12
<PAGE> 57
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 4 - UNUSUAL AND NONRECURRING ITEMS (CONTINUED)
WRITE-OFF OF INTANGIBLE ASSETS AND RESTRUCTURING CHARGES (continued)
Cumulative payments on the 1995 corporate restructuring charge were $1,482,000
through December 31, 1996. Set forth below is a summary of the NETG
restructuring activity through December 31, 1996.
<TABLE>
<CAPTION>
Excess Severance Fixed Assets
(dollars in thousands) Facilities Payments & Inventory Other Total
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1995 restructuring charges $ 16,480 $ 4,706 $ 4,020 $ 5,398 $ 30,604
Noncash write-off - - (3,758) (3,521) (7,279)
Cash (paid) received (1,923) (2,095) 13 (1,606) (5,611)
-------------------------------------------------------------
Accrued restructuring at
December 31, 1995 14,557 2,611 275 271 17,714
Noncash write-off - - (143) 305 162
Cash paid (6,777) (2,478) - (576) (9,831)
-------------------------------------------------------------
Accrued restructuring at
December 31, 1996 $ 7,780 $ 133 $ 132 $ - $ 8,045
=============================================================
</TABLE>
WRITE-OFF OF COURSE COMPUTER HARDWARE AND RELATED COSTS
Prior to September 15, 1995, ICS offered computer courses in the U.S. which
included the sale to students of computers which, after shipment, were recorded
as assets and amortized over the estimated period related course revenue was
recognized. Subsequent to September 15, 1995, the Company no longer included 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, in the fourth quarter of 1995 the Company recorded a write-down of
the unamortized balance of computers and other related costs of $4,549,000 ($.14
per share).
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 which 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.
OTHER NONRECURRING ITEMS
The following items were nonrecurring in nature, but are not classified as
unusual items in the statements of operations. In the third quarter of 1996, the
Company recorded a nonrecurring expense of approximately $861,000 ($732,000
after tax or $.02 per share) related to a change in CEO at Steck-Vaughn. The
Company also recorded nonrecurring interest income of approximately $990,000
($842,000 after tax or $.02 per share) on an income tax refund received in July
1996 and $2,000,000 ($.05 per share) of tax benefit related to a tax refund
received and recognized in the second quarter of 1996.
F-13
<PAGE> 58
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INCOME TAXES
Income (loss) before tax from continuing operations was taxed under the
following jurisdictions:
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995 1994
- ----------------------------------------------------------------------
<S> <C> <C> <C>
Domestic $ 27,447 $(75,881) $ (5,307)
Foreign (3,313) (10,187) (8,149)
--------------------------------
Total $ 24,134 $(86,068) $(13,456)
================================
</TABLE>
Taxes (benefits) on income (loss) from continuing operations were provided as
follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995 1994
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
CURRENT:
US Federal $ 289 $ - $ -
State 525 500 1,110
Foreign 1,970 1,837 1,457
-----------------------------
Total current provision 2,784 2,337 2,567
-----------------------------
DEFERRED:
Federal 335 (2,469) 220
Foreign (883) 132 (3,498)
-----------------------------
Total deferred benefit (548) (2,337) (3,278)
-----------------------------
CURRENT TAX BENEFITS NOT TREATED AS A REDUCTION
OF INCOME TAX EXPENSE RESULTING FROM:
Exercise of stock options - - 156
-----------------------------
Total income tax provision (benefit) $ 2,236 $ - $ (555)
=============================
</TABLE>
Deferred tax liabilities and assets reflected in the balance sheet as of
December 31, 1996 and December 31, 1995 are comprised of the following:
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995
- ----------------------------------------------------------------------
<S> <C> <C>
DEFERRED TAX LIABILITIES:
Revenue recognition differences $ 1,449 $ 1,416
Advertising/commissions 220 2,393
Prepaid expenses 6,373 6,351
Other 1,490 1,501
--------------------
Gross Deferred Tax Liabilities $ 9,532 $ 11,661
====================
DEFERRED TAX ASSETS:
Property, plant and equipment $ 2,469 $ 5,590
Inventories 4,514 5,804
Allowance for doubtful accounts 1,736 1,449
Restructuring reserve 2,354 6,478
Revenue recognition differences 5,790 3,001
Loss carryforwards 43,119 48,607
Credit carryforwards 5,393 4,276
Accrued retirement 3,050 2,484
Other 4,678 6,799
--------------------
Gross Deferred Tax Assets 73,103 84,488
Deferred tax assets valuation allowance (39,609) (50,952)
--------------------
Deferred Tax Assets, Net of Valuation Allowance $ 33,494 $ 33,536
====================
</TABLE>
F-14
<PAGE> 59
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 5 - INCOME TAXES (CONTINUED)
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 1996
income tax provision includes a decrease in the valuation allowance for deferred
tax assets of $15,913,000. The valuation allowance increased during the year by
$4,570,000 due to the acquisition of Edunetics. The valuation reserve decrease
primarily relates to the utilization of loss carryforwards in the current year
and carryback years for which no tax benefits were previously recognized.
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 change in the near term if estimates of future
taxable income change.
At December 31, 1996, the Company had federal net operating loss carryforwards
of approximately $86,600,000 expiring through 2010. In addition, the Company had
available $1,568,000 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 (see Note
17), 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 $20,600,000 related to various subsidiaries
which can only be utilized against each company's respective future taxable
income. These losses expire through 2010.
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) 1996 1995 1994
- ---------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision (benefit) computed at statutory rate $ 8,206 $(29,263) $(4,575)
State taxes, net of federal benefit 347 330 733
Losses (benefited) not benefited (10,138) 5,742 2,965
Nondeductible research & development 1,394 - -
Foreign deemed dividend 785 1,274 -
Effect of foreign operations 539 5,432 354
Amortization of excess costs over acquired net assets 313 121 218
Write-off of certain intangibles - 16,153 -
Other, net 790 211 (250)
-------------------------------
Total income tax provision (benefit) $ 2,236 $ - $ (555)
===============================
</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.
During the year, the Company received approximately $12,000,000, including
interest of $990,000, for refunded taxes related to a settlement with the
Internal Revenue Service regarding its 1985 through 1988 income tax audits. In
addition, the Company received an income tax refund of approximately $4,000,000,
of which $2,000,000 was recognized as a nonrecurring tax benefit in the second
quarter of 1996, related to the carryback of certain specified liability losses.
F-15
<PAGE> 60
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 6 - INVESTMENT SECURITIES
The amortized cost and estimated fair value of the investment securities are as
follows:
<TABLE>
<CAPTION>
December 31, 1996
------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized Carrying
(dollars in thousands) Cost Gain Loss Value
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Available-for-sale:
Corporate income funds $ 909 $113 $ - $1,022
Dividend income funds 189 4 - 193
Preferred stock 250 - (18) 232
------------------------------------------------
Total investment securities $1,348 $117 $(18) $1,447
================================================
</TABLE>
<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 bonds $ 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>
Investments in debt securities classified as held-to-maturity at December 31,
1995, had various maturity dates which did 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) 1996 1995 1994
- ------------------------------------------------------------------------
<S> <C> <C> <C>
Realized gains $ - $ 18 $ 1,616
Realized losses - 5 387
</TABLE>
F-16
<PAGE> 61
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 7 - LAND, BUILDINGS AND EQUIPMENT
<TABLE>
<CAPTION>
(dollars in thousands) Depreciable Lives 1996 1995
- -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Land -- $ 1,289 $ 1,289
Buildings and improvements Not to exceed 40 years 11,574 10,414
Leaseholds and improvements Life of lease 3,308 3,327
Machinery and equipment Not to exceed 10 years 22,883 28,636
Furniture and fixtures Not to exceed 10 years 15,355 12,354
---------------------------
54,409 56,020
Less accumulated depreciation and amortization (23,609) (31,992)
---------------------------
Total $ 30,800 $ 24,028
===========================
</TABLE>
Machinery and equipment and furniture and fixtures under capital leases were
$6,007,000 and $4,908,000 with related accumulated depreciation and amortization
of $882,000 and $201,000 at December 31, 1996 and 1995, respectively.
NOTE 8 - ACQUIRED INTANGIBLE ASSETS
<TABLE>
<CAPTION>
(dollars in thousands) Lives 1996 1995
- -----------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Product and text materials, courseware, etc. 5 - 10 years $ 3,553 $ 13,758
Excess of cost over net assets of businesses acquired 5 - 40 years 22,115 6,560
Other acquired intangible assets 3 - 10 years 5,523 6,443
---------------------
31,191 26,761
Less accumulated amortization (4,565) (13,333)
---------------------
Total $ 26,626 $ 13,428
=====================
</TABLE>
See Note 2 for a discussion of acquisitions in 1996. In 1996, ICS and
Steck-Vaughn wrote-off the fully amortized balances of certain product and text
material intangibles which were deemed to have no future value.
NOTE 9 - DEBT
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995
- -------------------------------------------------------------------------------------------
<S> <C> <C>
Short-term bank borrowings $ - $ 10,000
==========================
Long-term debt:
Convertible subordinated debentures $ 56,994 $ 57,494
Loans under bank revolving credit agreements 28,100 -
Mortgage and installment notes, maturing on various dates
through 2004, with interest from 6.0% to 8.9% 7,102 7,144
Capital lease obligations 3,267 4,033
--------------------------
95,463 68,671
Less current portion of long-term debt (8,260) (2,338)
--------------------------
Total long-term debt $ 87,203 $ 66,333
==========================
</TABLE>
F-17
<PAGE> 62
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - DEBT (CONTINUED)
On December 20, 1996, the existing revolving bank credit agreement was amended
and the credit facility was increased from $20,000,000 to $50,000,000. Under the
new agreement, which expires December 20, 1999, the Company can borrow at the
bank's base rate plus 1.0%, or at the LIBOR rate plus 2.0%. The base rate is the
higher of the bank's prime rate or .5% above the Federal Funds Rate. The Company
may qualify for reductions in the interest rate beginning March 31, 1997 if
certain financial performance criteria are met. Commitment fees are paid on the
unused line of credit. Borrowings under the agreement mature every 30 days but
can be renewed. Since the Company has the intent and the ability, pursuant to
the revolving credit agreement, to maintain the principal amounts outstanding
beyond one year, the outstanding borrowings at December 31, 1996 of $21,100,000
are classified as long-term.
This credit facility is secured by stock of certain principal subsidiaries and
substantially all of the assets of the Company and certain principal
subsidiaries. This revolving credit is subject to certain restrictions on
dividend payments, indebtedness and other covenants including financial
performance and condition. The weighted average interest rates for the revolving
credit and short-term bank borrowings were 8.6% and 8.7% for 1996 and 1995,
respectively, and the average borrowings were $13,269,000 and $9,510,000 during
the years ended December 31, 1996 and 1995, respectively.
Steck-Vaughn has a revolving bank credit agreement in the amount of $15,000,000
with a maturity of June 10, 1998. The agreement provides for borrowings at prime
or, at Steck-Vaughn's option, LIBOR plus 1.5%. Steck-Vaughn can elect to have
the borrowings mature in 30, 60, 90 or 180 days, but the maturing borrowings can
be renewed. At June 10, 1997 any outstanding borrowings will convert to a
promissory note payable quarterly for three years with the first payment due
September 10, 1997. Excluding the payments due in the third and fourth quarter
of 1997 totaling $1,167,000, Steck-Vaughn has the intent and the ability to
maintain the outstanding borrowings beyond one year and, accordingly, the
remaining balance of $5,833,000 of the revolving credit borrowings is classified
as long-term at December 31, 1996. The borrowings are secured by Steck-Vaughn
accounts receivable of $18,834,000 and inventory of $21,776,000. This revolving
credit is subject to certain covenants including financial performance and
condition. No amounts were outstanding under the bank credit facility in 1994 or
1995. In April 1996, Steck-Vaughn borrowed under this agreement to acquire
Edunetics as more fully discussed in Note 2. The weighted average interest rate
for the borrowing was 7.1% in 1996 and the average borrowings were approximately
$6,474,000. Annual commitment fees are paid on the unused line of credit.
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. In February 1996, the credit facility was reduced to $5,000,000. In July
1996, the then outstanding borrowings of $3,000,000 were paid and the credit
agreement was terminated. This agreement provided that any borrowing by the
Company would bear interest at LIBOR plus 2%, and would 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 was redeemed by the Company for
$1,052,000.
At December 31, 1996, the Company had outstanding $56,994,000 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
F-18
<PAGE> 63
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 9 - DEBT (CONTINUED)
prior to maturity. In November 1996, the Company purchased and retired $500,000
of par value of the debentures on the open market to partially satisfy the
$2,875,000 sinking fund payment required in 1997. A gain of approximately
$60,000 on this purchase is reflected in other income. Based on the closing
price of the Company's convertible subordinated debentures as traded on the New
York Stock Exchange of $910 and $700 per debenture, the fair value of the
outstanding convertible subordinated debentures is $51,865,000 and $40,426,000
as of December 31, 1996 and 1995, respectively.
Mortgage notes aggregating $4,518,000 at December 31, 1996 were collateralized
by certain real and personal property having a net book value of $9,420,000. At
December 31, 1996 and 1995, the fair value of the mortgage notes approximated
their carrying value as the interest rates on the mortgage notes are variable.
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: 1998 - $7,337,000, 1999 - $27,166,000, 2000 -
$4,321,000 and 2001 - $3,154,000. The 1999 maturities include $21,100,000 of
outstanding borrowings under the revolving credit facility which expires in
December 1999.
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.
NOTE 10 - EMPLOYEE BENEFIT PLAN
The Company has a defined contribution 401(K) plan under which domestic
full-time employees can contribute up to 16% of base compensation. The Company
matches a certain percentage of the employee's first six percent of
contribution. Employees vest in the Company's contribution after one year of
participation in the plan at a rate of 25% per year over four years. Defined
contribution expense under this plan was $1,208,000, $928,000 and $1,232,000 for
the years ended December 31, 1996, 1995 and 1994, respectively.
NOTE 11 - COMMITMENTS AND CONTINGENCIES
Aggregate commitments at December 31, 1996 under noncancelable operating leases
for land, buildings and equipment, including $5,282,000 of lease payments
accrued in 1995 as restructuring charges (see Note 4), are as follows:
<TABLE>
<CAPTION>
(dollars in thousands)
- -------------------------------------------------------------------
<S> <C>
FISCAL YEAR:
1997 $ 6,476
1998 6,271
1999 5,046
2000 4,225
2001 3,726
2002 and thereafter 9,461
---------
Total $ 35,205
=========
</TABLE>
F-19
<PAGE> 64
National Education Corporation and Subsidiaries
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 $7,295,000, $7,820,000 and $10,841,000 for the years ended December
31, 1996, 1995 and 1994, respectively.
At December 31, 1996, 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, matters currently threatened or pending against the Company are not
expected to have a material adverse effect on the financial position of the
Company.
NOTE 12 - UNEARNED NET FUTURE TUITION REVENUE
Unearned net future tuition revenue represents the Company's estimate, based
upon previous experience, of the amount of remaining balance of unpaid student
contracts that ultimately will be collected in cash and recognized into revenue
in the future when services and courseware are provided as described in Note 1.
Unearned net future tuition revenue on student contracts for traditional
distance education at ICS totaled $63,298,000 and $70,901,000 at December 31,
1996 and 1995, respectively, based upon estimated revenue realization rates of
48% and 45% of the gross contract balances at December 31, 1996 and 1995,
respectively.
NOTE 13 - STOCKHOLDERS' EQUITY
At December 31, 1996, the Company and its subsidiaries have seven stock-based
compensation plans, three of which are based on the Company's common stock, two
of which are based on Steck-Vaughn's common stock, and two of which are based on
NETG's common stock; each of the plans is described below. The Company's three
plans pursuant to which options to purchase Company common stock are outstanding
consist of the following: the Amended and Restated 1990 Stock Option and
Incentive Plan (the "1990 Plan"), the 1986 Stock Option and Incentive Plan (the
"1986 Plan"), and the Amended and Restated 1991 Directors' Stock Option and
Award Plan (the "Directors' Plan"). The 1986 Plan expired February 10, 1996;
however options to acquire 398,422 shares of common stock granted prior to that
date remain outstanding as of December 31, 1996. The Company continues to award
options and other stock-based incentives under the 1990 Plan and the Directors'
Plan.
The 1990 Plan provides for the grant of options to acquire Company common stock
and the issuance of restricted stock to key employees, officers and other
persons. As of December 31, 1996, options to acquire 2,393,010 shares of common
stock are outstanding, and options to acquire up to an additional 414,209 shares
of common stock may be issued, under the 1990 Plan.
F-20
<PAGE> 65
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCKHOLDERS' EQUITY (CONTINUED)
The Compensation and Option Committee of the Company's Board of Directors
authorizes and approves the granting of stock options and awarding of restricted
stock grants under the stock option plans of the Company and of NETG, and
determines the exercise price, vesting, expiration and other terms of each grant
and award. Stock options under the 1990 Plan are granted with an exercise price
equal to the fair market value of the Company's common stock as of the date of
grant, and in most cases become vested and exercisable upon the passage of time
(e.g. pro-rata over four years subject to, in certain cases, accelerated vesting
on achievement of performance parameters), and expire ten years from the date of
grant.
The Directors' Plan, as approved by the Company's stockholders in 1991, provides
for the grant to each non-employee Director of the Company an initial option to
acquire 5,000 shares of Company common stock, and, beginning the year following
a Directors' first full calendar year as a Director of the Company, an annual
option to acquire 2,000 shares of Company common stock. Options to acquire
Company stock under the Directors' Plan become vested and exercisable one year
following the date of grant, and expire ten years from the date of grant. In
addition, the Directors' Plan provides for the issuance of restricted stock to
Directors in lieu of annual retainer fees paid to Board members. As of December
31, 1996, options to acquire 124,232 shares of common stock are outstanding, and
options to acquire up to an additional 391,949 shares of common stock may be
issued, under the Directors' Plan.
The two plans that offer options to acquire awards of Steck-Vaughn common stock
consist of the Steck-Vaughn 1993 Stock Option Plan, as Amended (the "SV 1993
Plan"), and the Steck-Vaughn 1995 Directors' Stock Option and Award Plan (the
"SV Directors' Plan"). If all outstanding options to purchase 814,000 shares
were exercised, and if the Company did not reacquire an equivalent number of
shares on the open market, then the Company's ownership interest in Steck-Vaughn
would be diluted to 78.5% from the current 83.1%.
The SV 1993 Plan provides for the grant of options to acquire Steck-Vaughn
common stock to key employees, officers and other persons associated with
Steck-Vaughn. As of December 31, 1996, options to acquire 803,125 shares of
Steck-Vaughn common stock are outstanding, and options to acquire up to an
additional 34,125 shares of common stock may be issued, under the SV 1993 Plan.
The Option Committee of Steck-Vaughn's Board of Directors authorizes and
approves the granting of stock options and awarding of restricted stock grants
under the SV 1993 Plan and determines the exercise price, vesting, expiration
and other terms of each grant and award. Stock options are granted with an
exercise price equal to the fair market value of Steck-Vaughn's common stock as
of the date of grant, and in most cases become vested and exercisable upon the
passage of time (e.g. pro-rata over three to four years), and expire ten years
from the date of grant.
The SV Directors' Plan, as approved by the Steck-Vaughn's stockholders in 1993,
provides for the grant to each Director of Steck-Vaughn who is not an employee
of Steck-Vaughn or the Company an option to acquire 1,500 shares of Steck-Vaughn
common stock, and, each year thereafter, an annual option to acquire 1,500
shares of Steck-Vaughn common stock. Options to acquire Steck-Vaughn stock under
the SV Directors' Plan are granted with an exercise price equal to the fair
market value of Steck-Vaughn's common stock as of the date of the grant, become
vested and exercisable one year following the date of grant, and expire ten
years from the date of grant. In addition, the SV Directors' Plan provides for
the issuance of restricted stock to Steck-Vaughn Directors in lieu of annual
retainer fees paid to Board members. As of December 31, 1996, options to acquire
10,500 shares of common stock are outstanding, and options to acquire up to an
additional 60,133 shares of common stock may be issued, under the Directors'
Plan.
F-21
<PAGE> 66
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCKHOLDERS' EQUITY (CONTINUED)
In April 1996, the Company adopted two stock option plans for employees of NETG:
the NETG 1996 Stock Option and Incentive Plan (the "NETG Staff Plan") and the
NETG 1996 Executive Stock Option and Incentive Plan (the "NETG Executive Plan"
and, together with the NETG Staff Plan, the "NETG Plans"). The NETG Plans
provide for the grant of options to NETG officers, management and employees to
acquire up to nine percent of NETG stock; at this time, substantially all
options available under the NETG Plans have been granted.
NETG stock options are granted with an exercise price equal to the estimated
fair market value of NETG's common stock as of the date of grant, become vested
and exercisable upon the passage of time, and expire ten years from the date of
grant. In addition, options granted under the NETG Plans will switch to an
accelerated vesting schedule in the event that the Company completes an initial
public offering of NETG common stock. Any decision to undertake an initial
public offering for NETG common stock is contingent upon NETG meeting or
exceeding certain financial targets and is subject to the approval of the
Company's Board of Directors.
Generally, optionholders under the NETG Executive Plan previously have been
granted options to acquire Company common stock under the Company's 1986 Plan or
1990 Plan ("Prior Company Grant"). In addition, concurrently with his or her
grant of options to acquire NETG common stock under the NETG Staff Plan,
optionholders under the NETG Staff Plan received a grant of options to acquire
Company common stock under the Company's 1990 Plan ("Piggyback Grant"). In the
event that an optionholder under the NETG Executive Plan exercises any Prior
Company Grant vesting on or after January 1, 1999, prior to NETG's initial
public offering, or an optionholder under the NETG Staff Plan exercises any
Piggyback Grant, the optionholders' options to acquire NETG common stock will be
terminated. In addition, Piggyback Grants terminate upon exercise by an
optionholder of options granted under the NETG Staff Plan.
In most cases, an optionholder under the NETG Plans will exercise either options
to acquire NETG common stock or options to acquire Company common stock (but not
both). The pro forma calculations set forth in this footnote do not include the
effect on earnings of the compensation costs of options granted under the NETG
Plans, but instead reflect the values of the related NEC options because the
value of these NEC options was more objectively determinable.
The Company applies APB Opinion 25 and related interpretations in accounting for
its plans. During 1996, the Company adopted the disclosure-only provisions of
Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation" (SFAS 123). Accordingly, no compensation costs have been
recognized for its fixed stock option plans. Upon exercise, proceeds from the
sale of shares under the stock option plans are credited to common stock and
additional paid-in capital. Had compensation costs for the stock option plans
for the Company and Steck-Vaughn been determined based on the fair value at the
grant dates for awards in 1996 and 1995, consistent with the method of SFAS 123,
the Company's net income (loss) and earnings (loss) per share would have been
reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
(dollars in thousands, except per share amounts) 1996 1995
- ----------------------------------------------------------------------------------------------
<S> <C> <C>
Net income (loss) - as reported $21,360 $(87,223)
Net income (loss) - pro forma 19,395 (89,500)
Earnings (loss) per share - as reported .58 (2.73)
Earnings (loss) per share - pro forma .53 (2.81)
</TABLE>
F-22
<PAGE> 67
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCKHOLDERS' EQUITY (CONTINUED)
The Company uses the straight-line method of amortizing the pro forma
compensation expense. Because SFAS 123 does not require retroactive application
of the pro forma disclosure requirements, the pro forma results for 1995 include
only the amortization related to stock options and restricted stock granted in
1995. The remaining amortization for stock options and restricted stock granted
in 1995 will be reflected in subsequent years. Thus, the pro forma results for
1996 include $1,654,000 of compensation expense for options and restricted stock
granted in 1995 and $734,000 of compensation expense of options and restricted
stock granted in 1996. The table set forth below reflects the pro forma
compensation expense, before income tax benefits, recognized in the pro forma
net income (loss) for 1995 and 1996, and the pro forma compensation expense to
be recognized in periods subsequent to December 31, 1996.
<TABLE>
<CAPTION>
Pro Forma Compensation Expense
--------------------------------------
(dollars in thousands) 1995 1996 Thereafter
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Related to options and restricted stock granted in:
1995 $2,316 $1,654 $1,376
1996 - 734 3,352
------------------------------------
$2,316 $2,388 $4,728
====================================
</TABLE>
For purposes of determining the compensation costs of options to acquire Company
and Steck-Vaughn stock, the fair value of each option grant is estimated on the
date of grant using the Black-Scholes option-pricing model. For the Company the
following weighted-average assumptions were used for grants in 1996 and 1995:
expected volatility of 57%, risk-free interest rates of 5.55% (1996) and 6.67%
(1995), and expected lives of five years. For Steck-Vaughn the expected
volatility was 60%, the risk-free interest rates were 6.26% and 7.48% for 1996
and 1995, respectively, and the expected option lives were five years. Neither
company pays dividends; accordingly, the dividend rates used were zero.
F-23
<PAGE> 68
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 13 - STOCKHOLDERS' EQUITY (CONTINUED)
Information regarding the Company's 1990 Plan, 1986 Plan and Directors' Plan
(aggregated) for the years ended December 31, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>
1996 1995 1994
---------------------------------------------------------------------------------------
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
(shares in thousands) Shares Price Shares Price Shares Price
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Options outstanding, beginning of year 3,221 $ 4.22 1,312 $5.91 1,254 $5.61
Options granted 302 11.99 2,800 3.62 407 6.28
Options exercised (502) 5.11 (538) 3.66 (183) 3.44
Options forfeited (104) 5.43 (353) 6.58 (166) 7.28
---------------------------------------------------------------------------------------
Options outstanding, end of year 2,917 $ 4.83 3,221 $4.22 1,312 $5.91
---------------------------------------------------------------------------------------
Option price range at end of year $3.00 to $20.15 $3.00 to $12.92 $2.25 to $14.44
Option price range for exercised shares $3.19 to $12.92 $2.25 to $ 7.81 $3.21 to $ 5.73
Options available for grant at end of year 806 832 1,391
Weighted-average fair value of options,
granted during the year $6.61 $1.99 -
</TABLE>
The following table summarizes information about fixed-price stock options
outstanding under the Company's 1990 Plan, 1986 Plan and Directors' Plan at
December 31, 1996:
<TABLE>
<CAPTION>
(shares in thousands) Options Outstanding Options Exercisable
- -------------------------------------------------------------------------------------------------------------
Weighted
Average Weighted- Weighted-
Remaining Average Average
Number Contractual Exercise Exercise
Range of Exercise Prices Outstanding Life Price Number Exercisable Price
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$ 3.00 1,100 8.3 $ 3.00 864 $ 3.00
3.19 - $ 3.80 607 6.7 3.36 414 3.44
3.85 - 5.73 550 7.3 4.64 323 4.92
5.75 - 10.38 550 7.9 8.37 207 7.62
10.66 - 18.56 108 5.8 14.24 - -
20.15 2 9.4 20.15 2 20.15
--------------------------------------------------------------------------------
$ 3.00 - $20.15 2,917 7.6 $ 4.83 1,810 $ 3.99
</TABLE>
F-24
<PAGE> 69
National Education Corporation and Subsidiaries
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 Company stock
under the 1990 Plan. During 1996, two subsidiary Presidents and one Executive
Officer paid their loans in full. These loans were issued at market rates of
interest and 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. The outstanding loan balance is reflected as a reduction in
equity in the accompanying balance sheet. In 1995, the Company granted to the
new CEO an option to acquire 500,000 shares of Company common 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. In addition, the CEO was granted the right to acquire 240,000
shares of restricted common stock of the Company at $3.00 per share (which he
exercised in 1995, using the proceeds of the loan discussed above); in
connection with that acquisition, the Company granted to him an additional
option to acquire 600,000 shares of Company common stock at $3.00 per share,
which vests in November 2004, subject to accelerated vesting if the Company's
common stock achieved and maintained certain price levels, and expires ten years
after the date of grant.
In October 1986, the Company adopted its stockholder rights plan, pursuant to
which the Company declared a dividend of one preferred stock purchase right for
each share of common stock. The purchase rights vested upon the occurrence of
certain events relating to a potential change in control of the Company. Each
purchase right, upon vesting, allowed the holder to acquire 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 stockholder rights plan, along with
the purchase rights, expired in November 1996 in accordance with its terms,
without the purchase rights vesting.
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. Cash
equivalents include time deposits of $8,516,000 and $17,546,000 at December 31,
1996 and 1995, respectively, placed with a high credit quality financial
institution.
Supplementary information excluding Education Centers:
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CASH PAID (RECEIVED) DURING THE YEAR FOR:
Interest expense $ 7,760 $ 9,304 $ 6,531
Income tax (refunds) payments, net (14,013) (75) 2,634
DETAIL OF NONCASH INVESTING AND FINANCING ACTIVITIES:
Sale of land, building and equipment in exchange for note
receivable $ 165 $ - $ 583
Assets acquired through capital leases 1,122 3,254 1,654
Notes receivable under stock option plans - 1,398 -
Acquisition of businesses:
Working capital, other than cash $ (6,346) $ (1,999) $(1,291)
Property, plant and equipment (959) (161) (373)
Other assets (17,503) (4,311) (5,833)
Liabilities assumed in acquisition, including $4,340,000 of notes
payable to sellers in 1996 12,635 3,211 1,067
-------------------------------------------
Net cash used to acquire businesses $(12,173) $ (3,260) $(6,430)
Conversion of senior subordinated debentures and related interest
into shares of common stock - $ 20,142 -
</TABLE>
F-25
<PAGE> 70
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 15 - INDUSTRY SEGMENT DATA
Information about the Company's operations in different industries is as
follows:
<TABLE>
<CAPTION>
(dollars in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET REVENUES:
ICS Learning Systems $ 143,130 $ 143,021 $ 122,815
Steck-Vaughn Publishing Corporation 85,505 58,226 53,608
National Education Training Group 57,936 54,350 61,937
Other 2,230 3,001 3,254
-------------------------------------------
Total Net Revenues $ 288,801 $ 258,598 $ 241,614
===========================================
OPERATING INCOME (LOSS):
ICS Learning Systems operating income (loss) before amortization
of prior period deferred marketing and unusual items $ 20,260 $ 13,628 $ 15,909
Amortization of prior period deferred marketing - (1,470) (19,836)
Unusual item - (4,549) -
-------------------------------------------
ICS Learning Systems 20,260 7,609 (3,927)
-------------------------------------------
Steck-Vaughn Publishing Corporation operating income before unusual items 11,716 10,469 10,459
Unusual items (4,100) (970) -
-------------------------------------------
Steck-Vaughn Publishing Corporation 7,616 9,499 10,459
-------------------------------------------
National Education Training Group operating income (loss) before unusual items 6,290 (15,375) (13,993)
Unusual items - (74,567) -
-------------------------------------------
National Education Training Group 6,290 (89,942) (13,993)
-------------------------------------------
Other 535 764 (50)
-------------------------------------------
Total segment operating income (loss) 34,701 (72,070) (7,511)
General corporate expenses (5,237) (6,632) (6,582)
Interest (expense) and investment income, net (5,751) (6,029) (3,102)
Other income 421 307 492
Unusual items - (1,644) -
Gain on sale of stock - - 3,247
-------------------------------------------
Income (Loss) Before Income Taxes (Benefit) and Minority Interest $ 24,134 $ (86,068) $ (13,456)
===========================================
IDENTIFIABLE ASSETS:
ICS Learning Systems $ 57,891 $ 44,180 $ 48,194
Steck-Vaughn Publishing Corporation 84,868 65,529 58,922
National Education Training Group 44,567 27,748 84,918
Other 773 1,298 1,756
-------------------------------------------
Segments subtotal 188,099 138,755 193,790
Corporate assets 33,990 46,507 50,588
Education Centers assets held for disposition - - 25,867
-------------------------------------------
Total Assets $ 222,089 $ 185,262 $ 270,245
===========================================
TOTAL DEPRECIATION AND AMORTIZATION (INCLUDING AMORTIZATION OF PRIOR PERIOD
DEFERRED MARKETING):
ICS Learning Systems $ 2,817 $ 3,196 $ 21,055
Steck-Vaughn Publishing Corporation 3,449 2,001 1,564
National Education Training Group 1,601 2,857 3,999
Other 7 11 63
-------------------------------------------
Total Segments $ 7,874 $ 8,065 $ 26,681
===========================================
CAPITAL EXPENDITURES, INCLUDING CAPITAL LEASES:
ICS Learning Systems $ 5,525 $ 5,510 $ 4,887
Steck-Vaughn Publishing Corporation 3,865 939 890
National Education Training Group 1,919 1,118 1,929
Other 12 13 249
-------------------------------------------
Total Segments $ 11,321 $ 7,580 $ 7,955
===========================================
</TABLE>
F-26
<PAGE> 71
National Education Corporation and Subsidiaries
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>
(dollars in thousands) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
NET REVENUES:
United States $ 212,198 $ 188,013 $ 180,620
Europe 34,553 34,324 26,815
Canada 20,841 18,115 16,579
Other foreign 21,209 18,146 17,600
-----------------------------------------------
Total Net Revenues $ 288,801 $ 258,598 $ 241,614
===============================================
OPERATING INCOME(LOSS):
United States operating income (loss) before amortization of
prior period deferred marketing and unusual items $ 34,924 $ 9,686 $ 12,284
Amortization of prior period deferred marketing - (1,164) (14,949)
Unusual items (4,100) (72,723) -
-----------------------------------------------
United States 30,824 (64,201) (2,665)
-----------------------------------------------
European operating income (loss) before amortization of
prior period deferred marketing and unusual items 2,022 (3,617) (4,029)
Amortization of prior period deferred marketing - - (822)
Unusual items - (8,692) -
-----------------------------------------------
Europe 2,022 (12,309) (4,851)
-----------------------------------------------
Canada operating income (loss) before amortization of prior
period deferred marketing (862) 99 258
Amortization of prior period deferred marketing - (306) (3,456)
-----------------------------------------------
Canada (862) (207) (3,198)
-----------------------------------------------
Other foreign operating income before amortization of prior
period deferred marketing and unusual items 2,717 4,962 3,812
Amortization of prior period deferred marketing - - (609)
Unusual items - (315) -
-----------------------------------------------
Other foreign 2,717 4,647 3,203
-----------------------------------------------
Total Segment Operating Income (Loss) $ 34,701 $ (72,070) $ (7,511)
===============================================
IDENTIFIABLE ASSETS:
United States $ 148,553 $ 109,769 $ 163,428
Europe 22,760 17,546 18,968
Canada 6,258 6,452 7,422
Other foreign 10,528 4,988 3,972
-----------------------------------------------
Total Segment Assets $ 188,099 $ 138,755 $ 193,790
===============================================
</TABLE>
The Company's operations are conducted in the United States, Canada, United
Kingdom, Germany, Australia, New Zealand, Singapore, Israel and the Netherlands.
Operating income (loss) by segment and geographic area includes net revenues
less operating expenses. The operating income (loss) by segment and geographic
area excludes general corporate expenses (except for general corporate expenses
allocated to Steck-Vaughn of $630,000, $700,000 and $720,000 for the years ended
December 31, 1996, 1995 and 1994, respectively), 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-27
<PAGE> 72
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
Summarized quarterly financial data for 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
First Second Third Fourth
(dollars in thousands, except per share amounts) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1996
NET REVENUES $59,369 $ 66,584 $82,298 $80,550
Income before amortization of acquired intangible
assets, unusual item, nonoperating items, income
taxes (benefit) and minority interest 3,071 6,715 13,369 13,256
Amortization of acquired intangible assets 460 736 828 823
Unusual item, net - 4,100 - -
Other nonoperating expenses 1,670 1,543 726 1,391
Income taxes (benefit) 141 (1,334) 1,772 1,657
Minority interest 135 (504) 736 171
--------------------------------------------------
NET INCOME $ 665 $ 2,174 $ 9,307 $ 9,214
==================================================
Earnings per share $ .02 $ .06 $ .25 $ .25
==================================================
</TABLE>
<TABLE>
<CAPTION>
First Second Third Fourth
(dollars in thousands, except per share amounts) Quarter Quarter Quarter Quarter
- --------------------------------------------------------------------------------------------------------------------
<S> <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 (2,769) (3,494) 8,243 2,835
Amortization of acquired intangible assets 655 650 295 361
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)
===================================================
Primary earnings (loss) per share $ (.21) $ (2.79) $ .18 $ (.08)
===================================================
Fully diluted earnings (loss) per share $ (.21) $ (2.79) $ .17 $ (.08)
===================================================
</TABLE>
See Note 2 and Note 4 for discussions of acquisitions,
and unusual and nonrecurring items.
F-28
<PAGE> 73
National Education Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 17 - SUBSEQUENT EVENTS
During January 1997, ICS acquired, for $8,800,000 in cash, certain assets and
the common stock of three wholly-owned subsidiaries of Educatief Holding B.V., a
Netherlands company engaged in providing distance education in the Netherlands.
The acquired companies were Eurodidakt B.V., N.T.I. Nederlands Talen Instituut
B.V. and Educatief B.V. This purchase price was financed from borrowings under
the Company's revolving credit agreement. The transaction will be accounted for
as a purchase. Based on an estimated preliminary purchase price allocation, this
transaction will increase intangible assets by $7,600,000.
On March 12, 1997, the Company announced that it had signed a definitive
agreement under which Sylvan Learning Systems, Inc. (Sylvan) would acquire the
Company in a stock-for-stock transaction. Under the terms of the agreement,
Sylvan would issue .58 shares of common stock for each share of the Company's
common stock. Following the transaction, which is expected to be accounted for
as a pooling-of-interests, shareholders of the Company would hold approximately
47% of the fully diluted common stock of the combined company. The transaction,
which is expected to be completed by the end of the second quarter 1997, has
been approved by the Board of Directors of both Sylvan and the Company, but
remains subject to approval by the stockholders of each of Sylvan and the
Company, review by federal antitrust regulators and the fulfillment of customary
terms and conditions. The transaction may be terminated under certain
circumstances, including on mutual consent of the Company and Sylvan, or by
either the Company or Sylvan if the average share price for Sylvan common stock
as reported by Nasdaq for the ten trading days prior to consummation of the
merger is less than $29.86 (unless Sylvan agrees to increase the exchange ratio
to account for the amount by which Sylvan's average share price is below
$29.86). In addition, if the transaction is not consummated because of breach of
the agreement by one party or failure of the stockholders of one party to
approve the transaction, that party may be liable to the other party for a
termination fee which could range from $10 million to $30 million.
F-29
<PAGE> 74
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 1996:
Allowance for doubtful receivables $ 2,742 $ 340 $ (129) $ 2,953
Reserve for inventories 3,856 914 (2,116) 2,654
Deferred tax asset valuation allowance 50,952 (15,913) 4,570 39,609
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
Deferred tax asset valuation allowance 30,613 20,339 - 50,952
YEAR END 1994:
Allowance for doubtful receivables $ 10,437 $ (1,304) $ (6,346) $ 2,787
Reserve for inventories 2,437 (98) (194) 2,145
Deferred tax asset valuation allowance 9,941 20,525 147 30,613
</TABLE>
F-30
<PAGE> 75
EXHIBITS FILED HEREIN
<TABLE>
<CAPTION>
Sequentially
Exhibit Numbered
Number Description Page
- ------ ----------- ----
<S> <C> <C>
10.24 Amended and Restated Credit Agreement among National Education Corporation,
the Several Lenders from time to time parties thereto, and BZW Division of
Barclays Bank PLC, as Agent, dated December 20, 1996 ..................................
11.1 Calculation of Primary Earnings Per Share .............................................
11.2 Calculation of Fully Diluted Earnings Per Share .......................................
21 Subsidiaries of National Education Corporation ........................................
23 Consent of Price Waterhouse LLP .......................................................
27.1 Financial Data Schedule ............................................................... *
* Filed with EDGAR version only.
</TABLE>
<PAGE> 1
EXHIBIT 10.24
AMENDED AND RESTATED CREDIT AGREEMENT
AMENDED AND RESTATED CREDIT AGREEMENT, dated as of December
20, 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.
W I T N E S S E T H:
WHEREAS, the Borrower and the Agent are parties to the Credit
Agreement, dated as of January 19, 1996 (as amended and waived to the date
hereof, the "Existing Credit Agreement"), pursuant to which the Lenders have
made loans to the Borrower under the terms provided for therein;
WHEREAS, the Borrower has informed the Agent that it intends
to refinance certain of its existing indebtedness and to make acquisitions and
has requested that the Existing Credit Agreement be amended and restated to,
inter alia, provide for a $50,000,000 senior secured revolving credit facility,
which facility will be utilized by the Borrower to refinance certain of its
existing indebtedness and to provide for acquisition financing, general
corporate purposes and working capital requirements of the Borrower; and
WHEREAS, the Agent and the Lenders are willing so to amend and
restate the Existing Credit Agreement, but only on the terms and conditions
hereof;
NOW, THEREFORE, in consideration of the mutual covenants and
premises hereinafter set forth, effective as of the Closing Date, the parties
hereto hereby amend and restate the Existing Credit Agreement 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.
- 1 -
<PAGE> 2
"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 Amended and Restated 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>
1.00% 2.00%
</TABLE>
provided, that commencing with the fiscal quarter ending March 31,
1997, 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 0.00% 1.00%
Greater than or equal
to 6.0:1.0 but less
than 7.0:1.0 0.00% 1.25%
Greater than or equal
to 5.0:1.0 but less
than 6.0:1.0 0.25% 1.50%
Greater than or equal
to 4.0 to 1.0 but
less than 5.0 to 1.0 0.50% 1.625%
Less than 4.0 to 1.0 1.00% 2.00%
</TABLE>
- 2 -
<PAGE> 3
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 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 executed and delivered by the Borrower, substantially in the
form of Exhibit B to the Existing Credit Agreement, 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.
- 3 -
<PAGE> 4
"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.
"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.
"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.
"Commitment": as to any Lender, the obligation of such Lender
to make Extensions of Credit to the Borrower hereunder in an aggregate
outstanding principal
- 4 -
<PAGE> 5
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 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).
"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
- 5 -
<PAGE> 6
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) 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
- 6 -
<PAGE> 7
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).
"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.
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<PAGE> 8
"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 Consent Affirmation": the Global Consent Affirmation
to be executed and delivered to the Borrower and each other Loan
Party, substantially in the form of Exhibit B, as the same may be
amended, supplemented or otherwise modified from time to time.
"Global Security Agreement": the Guarantee and Collateral
Agreement executed and delivered by the Borrower and each other Loan
Party, substantially in the form of Exhibit C to the Existing Credit
Agreement, 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 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.
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<PAGE> 9
"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.
"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;
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<PAGE> 10
(2) any Interest Period that would otherwise extend
beyond the Termination Date shall end on the Termination Date;
(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": $5,000,000.
"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 and the Security Documents.
"Loan Parties": the Borrower and each Subsidiary of the
Borrower which is a party to a Loan Document.
"Majority Lenders": at any time, Lenders the Commitment
Percentages of which aggregate more than 50%.
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<PAGE> 11
"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 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
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<PAGE> 12
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.
"Pledge Agreement": the Amended and Restated Pledge and
Security Agreement, to be executed and delivered by the Borrower
substantially in the form of Exhibit F, as the same may be amended,
supplemented or otherwise modified from time to time.
"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).
"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.
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<PAGE> 13
"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 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 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
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<PAGE> 14
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.
"Termination Date": December 20, 1999.
"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 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 provision of 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
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<PAGE> 15
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 Commitments shall be in an amount equal to
$1,000,000 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
$250,000 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. Upon receipt by the Borrower or
the applicable Subsidiary of the Net Cash Proceeds of the sale of any of the
assets described in subsection 8.6(e), the Borrower shall prepay the Loans by
an amount equal to 50% of such Net Cash Proceeds. 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
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giving the Agent at least three Business Days' prior irrevocable notice of such
election. Any such notice of 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 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 $1,000,000 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
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<PAGE> 17
(b) below) and such other certificates, documents and other papers and
information as the Issuing Bank may reasonably request.
(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.
(c) No more than twenty Letters of Credit may be issued and
outstanding at any one time.
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 the
issuance 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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<PAGE> 18
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 2.00% per annum from time to time; provided
that, when the Applicable Margin for Eurodollar Loans is equal to or less than
2.00%, 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 in arrears, on the last day of each March, June, September
and December and on the expiry date of the Letter of Credit to which such fees
are applicable. Fees will be based on the actual number of days elapsed in a
360-day year, and will be payable quarterly in arrears or at the expiry of each
Letter of Credit, if earlier. In addition to the foregoing commissions and
fees, the Borrower shall pay or reimburse the Issuing Bank for such normal and
customary costs and expenses as are incurred or charged by the Issuing Bank in
issuing, effecting payment under, amending or otherwise administering any
Letter of Credit.
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 Letter of Credit (or any
Persons for whom any such beneficiary or any such transferee may be
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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 1/4 of 1% per annum on the average daily amount of the Available
Commitment of such Lender during the period for which payment is made, payable
quarterly in arrears from the Closing Date and on the Termination Date or such
earlier date as the Commitments shall terminate as provided herein, 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 3, 1996 from the Agent to the Borrower.
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<PAGE> 20
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, 1/2 of 1% or (ii) if such termination or
reduction occurs during the period from the first anniversary of the Closing
Date until the second anniversary of the Closing Date, 1/4 of 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 and each 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.
(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").
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<PAGE> 21
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 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
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<PAGE> 22
(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 be made 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 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's Commitment 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
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<PAGE> 23
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.
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
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<PAGE> 24
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 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 Agreement and 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.
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<PAGE> 25
(b) Each Lender that is not incorporated under the laws of
the United States of America or a state thereof shall:
(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
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
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<PAGE> 26
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, 1995 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 Subsidiaries as
at September 30, 1996 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 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, 1996
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, 1996 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)
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<PAGE> 27
material in relation to the consolidated financial condition of the Borrower
and its consolidated Subsidiaries at September 30, 1996.
5.2 No Change. (a) Since September 30, 1996 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, 1996 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 corporate power 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 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.
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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.
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 other taxes, 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
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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 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
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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 not involve 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, 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 failure
to be so true and correct is not reasonably likely to result in the payment of
a Material Environmental Amount.
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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.
SECTION 6. CONDITIONS PRECEDENT
6.1 Conditions to Effectiveness. The effectiveness of this
Agreement is subject to the satisfaction of the following conditions precedent
on or before December 20, 1996:
(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 (ii) the Global Consent
Affirmation, 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 and (iii) the Pledge
Agreement, executed and delivered by a duly authorized officer of the
Borrower and SV.
(b) 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.
(c) 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.
(d) 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 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
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that the resolutions thereby certified have not been amended,
modified, revoked or rescinded.
(e) 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.
(f) 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 or, in lieu
thereof, a certificate of the Secretary or an Assistant Secretary of
such Loan Party confirming that there has been no change in the
certificate of incorporation and by-laws of such Loan Party since the
delivery thereof on the Closing Date (as defined in the Existing
Credit Agreement).
(g) Fees. The Agent shall have received the fees to be
received on the Closing Date referred to in subsection 4.1.
(h) 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 C; and
(ii) the executed legal opinion of Philip C.
Maynard, general counsel of the Borrower, substantially in the
form of Exhibit D.
Each such legal opinion shall cover such other matters incident to the
transactions contemplated by this Agreement as the Agent may
reasonably require.
(i) Revolving Credit Note. The Agent shall have received
from the Borrower a Revolving Credit Note payable to the order of
Barclays Bank PLC meeting the requirements of subsection 4.3(e),
Barclays Bank PLC agreeing to promptly return to the Borrower the
Revolving Credit Note delivered to Barclays Bank PLC pursuant to the
Existing Credit 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
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<PAGE> 33
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 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);
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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).
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, (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 and (iii)
setting forth in reasonable detail information with respect to the
Borrower's compliance with the provisions of subsections 7.5 and 7.9
of this Agreement and subsection 5.2 of the Global Security Agreement;
(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
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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.
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;
(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
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<PAGE> 36
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 with and 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. Maintain in full force and effect
key man insurance on the life of Mr. Sam Yau in an aggregate amount of
$5,000,000 as assigned to the Agent pursuant to the Assignment of Life
Insurance.
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 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.
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 assets described 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
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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 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 such amendments 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.
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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 1.50:1.0.
(b) Maintenance of Net Worth. Permit Consolidated Net Worth
at any time during any fiscal quarter, commencing with the fiscal quarter
ending on March 31, 1997, to be less than the sum of (i) 85% of Consolidated
Net Worth on December 31, 1996 plus (ii) 75% of cumulative Consolidated Net
Income (without deduction for losses for any fiscal quarter) for the period
from January 1, 1997 to the beginning of such fiscal quarter; 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 to Consolidated EBITDA for the period of four consecutive fiscal
quarters then ending to be greater than 3.0:1.0.
(d) Interest Coverage. Permit for any period of four
consecutive fiscal quarters ending at the end of any fiscal quarter 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 2.50:1.0.
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).
(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
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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);
(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 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
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<PAGE> 40
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
(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;
(c) issuances of options and/or shares pursuant to employee
stock option and incentive award plans;
(d) as permitted by subsection 8.5(b); and
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<PAGE> 41
(e) the sale of the Arizona Automotive Institute referred to
in item 4 of Schedule 5.14 and the sale of the real property located
at 850 East Commercial Boulevard, Oakland Park, Florida referred to in
item 2 of Schedule 5.19, provided that, in each case, the provisions
of subsection 2.4 are complied with in connection therewith.
8.7 Limitation on Leases. Permit Consolidated Lease Expense
for any fiscal year of the Borrower to exceed $15,000,000.
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 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) $10,000,000
in the aggregate for the Borrower and its Subsidiaries during each of 1997 and
1998 or (b) $12,000,000 in the aggregate for the Borrower and its Subsidiaries
during 1999.
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 consideration for any of which acquisitions does not
exceed $25,000,000 and the aggregate consideration for all of which
acquisitions does not exceed $40,000,000 in any calendar year,
provided that no such acquisition shall be permitted unless: (i) on
each day during the period commencing on the closing of such
acquisition and ending on the date which is 30 days thereafter, the
sum of the aggregate amount of cash, Cash Equivalents and marketable
securities then held by the Borrower plus the then aggregate Available
Commitments of all the Lenders shall be equal to at least $20,000,000;
(ii) the Borrower shall have delivered to each Lender, not later than
10 Business Days prior to the closing of such acquisition, 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 then most recently available quarterly
consolidated financial statements; (iii) the acquired Person or
business unit shall be engaged in the same general line of business
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<PAGE> 42
as that in which the Borrower and its Subsidiaries are engaged as of
December 31, 1996; (iv) the Agent shall have received at least 15
Business Days notice of the Borrower's intention to make such
acquisition; (v) any Loans to finance such acquisition shall be in
compliance with Regulation U; and (vi) not later than 45 days
subsequent to the closing of such acquisition, the Borrower shall have
delivered to the Agent a certificate showing compliance with the
provisions of this paragraph.
(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);
and
(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.
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 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.
8.15 Limitation on Repayment of Debt. Purchase, redeem,
pay or otherwise acquire for value or retire any of the Subordinated Notes of
the Borrower due May 14, 2011
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<PAGE> 43
issued under the Trust Indenture dated May 15, 1986 except: (a) as and when the
same became due and payable in accordance with the terms and conditions thereof
in effect on the date hereof; and (b) if (x) on each day during the period
commencing after such repurchase, redemption, payment, acquisition or
retirement and ending on the date which is 30 days thereafter, the sum of the
aggregate amount of cash, Cash Equivalents and marketable securities then held
by the Borrower plus the then aggregate Available Commitments of all the
Lenders shall be equal to at least $20,000,000; (y) the Borrower shall have
delivered to each Lender, not later than 10 Business Days after such
repurchase, redemption, payment, acquisition or retirement, a certificate
showing compliance with the provisions of subsections 8.1, 8.7 and 8.9 after
giving pro-forma effect to such repurchase, redemption, payment, acquisition or
retirement as of the date of the Borrower's then most recently available
quarterly consolidated financial statements; and (z) not later than 45 days
subsequent to such repurchase, redemption, payment, acquisition or retirement,
the Borrower shall have delivered to the Agent a certificate showing compliance
with the provisions of this paragraph.
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
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<PAGE> 44
$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 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 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
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<PAGE> 45
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 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
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<PAGE> 46
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 Agent may
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
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
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<PAGE> 47
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 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 such
action, 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
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<PAGE> 48
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 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 payment of 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
- 48 -
<PAGE> 49
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.
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 the Collateral, 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.
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:
- 49 -
<PAGE> 50
The Borrower: National Education Corporation
2601 Main Street, 7th Floor
Irvine, California 92614
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 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
- 50 -
<PAGE> 51
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, any Environmental 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 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 be
entitled to the benefits of subsections 4.9, 4.10 and 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
- 51 -
<PAGE> 52
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 E to this Agreement, 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 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
- 52 -
<PAGE> 53
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.
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.
- 53 -
<PAGE> 54
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 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:
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<PAGE> 55
(a) it has been advised by counsel in the negotiation,
execution and delivery of this Agreement and the other Loan Documents;
(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.
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: /s/
------------------------------
Title:
BZW DIVISION OF BARCLAYS BANK PLC
as Agent and as a Lender
By: /s/
------------------------------
Title:
** NOTE: SCHEDULES AND EXHIBITS TO
THIS AMENDED AND RESTATED CREDIT
AGREEMENT HAVE BEEN INTENTIONALLY
OMITTED AND WILL BE FURNISHED TO
THE COMMISSION UPON REQUEST
- 55 -
<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
----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME (LOSS) FROM
CONTINUING OPERATIONS $21,360 $(87,223) $(14,093) $10,092 $(6,284)
======= ========= ========= ======= ========
NET INCOME (LOSS) $21,360 $(87,223) $(63,545) $(9,665) $ 515
======= ========= ========= ======== =======
COMMON STOCK:
Shares outstanding from beginning
of period 35,137 29,578 29,405 29,968 29,822
Pro rata shares:
Stock options exercised 277 31 134 41 136
Shares purchased for treasury,
from date of purchase -- -- (7) (380) (6)
Assumed exercise of stock options
using treasury stock method 1,276 465 108 226 344
Shares issued for restricted stock 1 292 -- -- --
Conversion of Sub. Debentures -- 1,527 -- -- --
-------- ------- -------- --------- ---------
Weighted average number of shares
outstanding 36,691 31,893 29,640 29,855 30,296
====== ====== ====== ====== ======
PRIMARY EARNINGS (LOSS) PER SHARE
FROM CONTINUING OPERATIONS $0.58 $(2.73) $(.48) $.34 $(.21)
===== ====== ===== ==== =====
PRIMARY EARNINGS (LOSS) PER SHARE $0.58 $(2.73) $(2.14) $(.32) $.02
===== ====== ====== ===== ====
</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
----------------------------------------------------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
INCOME (LOSS) FROM
CONTINUING OPERATIONS $21,360 $(87,223) $(14,093) $10,092 $(6,284)
Add back debenture interest, debt
discount and expense amortization,
less applicable taxes 2,276 3,116 3,325 964 3,111
-------- -------- -------- ------- --------
INCOME (LOSS) FROM CONTINUING
OPERATIONS FOR FULLY DILUTED
COMPUTATION $23,636 $(84,107) $(10,768) $11,056 $(3,173)
======= ========= ========= ======= ========
NET INCOME (LOSS) $21,360 $(87,223) $(63,545) $(9,665) $ 515
Add back debenture interest, debt
discount and expense amortization,
less applicable taxes 2,276 3,116 3,325 964 3,111
-------- -------- -------- ------- --------
NET INCOME (LOSS) FOR FULLY
DILUTED COMPUTATION $23,636 $(84,107) $(60,220) $(8,701) $ 3,626
======= ========= ========= ======== =======
COMMON STOCK:
Shares outstanding from beginning
of period 35,137 29,578 29,405 29,968 29,822
Stock options exercised 277 31 134 41 136
Shares purchased for treasury,
from date of purchase -- -- (7) (380) (6)
Assumed exercise of stock options,
using treasury stock method 935 803 108 226 344
Shares issued for restricted stock 1 292 -- -- --
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 2,297 2,300 7,300 5,000 7,300
-------- ------ ----- ------ ------
Weighted average number of
shares outstanding 38,647 38,025 36,940 34,855 37,596
====== ====== ====== ====== ======
FULLY DILUTED EARNINGS (LOSS)
PER SHARE FROM CONTINUING
OPERATIONS $0.58 $(2.73) $(.48) $.32 $(.21)
===== ====== ===== ==== =====
FULLY DILUTED EARNINGS
(LOSS) PER SHARE $0.58 $(2.73) $(2.14) $(.32) $.02
===== ====== ====== ===== ====
</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, the subordinated convertible debentures are
not included in the 1993 calculation.
<PAGE> 1
EXHIBIT 21
ACTIVE SUBSIDIARIES OF NATIONAL EDUCATION CORPORATION
<TABLE>
<CAPTION>
Country or State
NATIONAL EDUCATION CORPORATION DELAWARE
- ------------------------------ --------
<S> <C>
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
NETG Direct, Inc. Delaware
NETG Applied Learning GmbH (Austria) Austria
A.S.I. (UK) Limited United Kingdom
Spectrum Interactive Incorporated Delaware
ICS Learning Systems, Inc. Delaware
Its Subsidiaries:
California College for Health Sciences California
English Language Institute, Inc. Delaware
Eurodidakt Holding B.V. Netherlands
Its Subsidiaries:
Educatief B.V. Netherlands
Eurodidakt B.V. Netherlands
N.T.I. Nederlands Talen Instituut B.V. Netherlands
ICS Acquisition Company Florida
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
Kentucky School of Technology, Inc. Delaware
M-Mash, Inc. Colorado
National Learning Systems, Inc. Delaware
NBD Incorporated Delaware
National Education Centers, Inc. California
</TABLE>
- 1 -
<PAGE> 2
<TABLE>
<S> <C>
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:
Edunetics Corporation Delaware
Edunetics Limited Israel
Its Subsidiary:
Edunetics International B.V. Netherlands
SV Distribution Company Delaware
Steck-Vaughn Company Delaware
</TABLE>
- 2 -
<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 January 28, 1997, except as to Note 17, which is as of March
12, 1997, appearing on page F-1 of this Form 10-K.
PRICE WATERHOUSE LLP
Costa Mesa, California
March 24, 1997
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<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 17,682
<SECURITIES> 1,447
<RECEIVABLES> 59,810
<ALLOWANCES> 2,953
<INVENTORY> 35,902
<CURRENT-ASSETS> 132,076
<PP&E> 54,409
<DEPRECIATION> 23,609
<TOTAL-ASSETS> 222,089
<CURRENT-LIABILITIES> 75,409
<BONDS> 87,203
0
0
<COMMON> 2,170
<OTHER-SE> 31,848
<TOTAL-LIABILITY-AND-EQUITY> 222,089
<SALES> 85,505
<TOTAL-REVENUES> 288,801
<CGS> 25,875
<TOTAL-COSTS> 91,277
<OTHER-EXPENSES> 31,186
<LOSS-PROVISION> 340
<INTEREST-EXPENSE> 8,113
<INCOME-PRETAX> 24,134
<INCOME-TAX> 2,236
<INCOME-CONTINUING> 21,360
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 21,360
<EPS-PRIMARY> .58
<EPS-DILUTED> .58
</TABLE>
